<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
April 4, 1996
-------------------------------------------------
Lucent Technologies Inc.
------------------------
(Exact name of registrant as specified in its charter)
Delaware
------------------------------------------------
(State or other jurisdiction of incorporation)
1-11639 22-3408857
- ----------------------------------- -----------------------------------
(Commission File Number) (IRS Employer Identification No.)
600 Mountain Avenue, Murray Hill, New Jersey 07974
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(908) 582-8500
-----------------------------------------
(Registrant's Telephone Number)
<PAGE> 2
ITEM 5. OTHER EVENTS.
On April 4, 1996, Lucent Technologies Inc., a Delaware corporation
(the "Company"), filed a prospectus (the "Prospectus") relating to the
Company's common stock, $.01 par value, and related Preferred Share Purchase
Rights with the Securities and Exchange Commission pursuant to Rule 424(b)(1)
under the Securities Act of 1933, as amended. The Prospectus forms a part
of the Company's Registration Statement on Form S-1 (No. 333-00703). A copy
of the Prospectus is attached hereto as Exhibit 99.1 and is hereby incorpor-
ated herein by reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA
FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits.
Exhibit No. Description
99.1 Prospectus of the Company, dated
April 3, 1996.
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Date: April 4, 1996
LUCENT TECHNOLOGIES INC.
By: /s/ Errol Harris
----------------------
Errol Harris
Assistant Treasurer
<PAGE> 4
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
99.1 Prospectus of the Company, dated
April 3, 1996.
<PAGE> 1
PROSPECTUS
112,037,037 Shares
LUCENT TECHNOLOGIES
COMMON STOCK
------------------------
LOGO
OF THE 112,037,037 SHARES OF COMMON STOCK BEING OFFERED, 98,037,037 SHARES ARE
BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS AND 14,000,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE
UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. ALL OF THE
SHARES OF COMMON STOCK ARE BEING OFFERED BY LUCENT TECHNOLOGIES
INC., WHICH IS CURRENTLY A WHOLLY OWNED SUBSIDIARY OF AT&T CORP.
EACH SHARE WILL HAVE ATTACHED ONE PREFERRED SHARE PURCHASE RIGHT
WHICH WILL INITIALLY TRADE TOGETHER WITH THE SHARE. PRIOR TO
THE OFFERINGS, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON
STOCK. SEE "UNDERWRITING" FOR A DISCUSSION OF THE FACTORS
CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING
PRICE.
AFTER THE OFFERINGS, AT&T WILL OWN APPROXIMATELY 82.4% OF THE COMMON STOCK. AT&T
HAS ANNOUNCED ITS INTENTION, SUBJECT TO SATISFACTION OF CERTAIN
CONDITIONS, TO DIVEST ITS OWNERSHIP INTEREST IN THE COMPANY BY
DECEMBER 31, 1996 BY MEANS OF A TAX-FREE DISTRIBUTION
TO ITS SHAREHOLDERS. SEE "ARRANGEMENTS BETWEEN
THE COMPANY AND AT&T."
------------------------
THE COMMON STOCK HAS BEEN APPROVED FOR LISTING, SUBJECT TO OFFICIAL NOTICE OF
ISSUANCE, ON THE NEW YORK STOCK EXCHANGE
UNDER THE SYMBOL "LU."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR INFORMATION CONCERNING CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
--------------------------------------------------------------------------
PRICE $27 A SHARE
----------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) THE COMPANY(2)
---------------- ---------------- ----------------
<S> <C> <C> <C>
Per Share..................... $27.00 $1.05 $25.95
Total......................... $3,024,999,999 $117,638,889 $2,907,361,110
</TABLE>
- ------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Company estimated at
$12,000,000.
------------------------
The shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the shares will be made on or about April 10, 1996 at the office of
Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in
immediately available funds.
------------------------
Joint Global Coordinators
MORGAN STANLEY & CO. GOLDMAN, SACHS & CO.
Incorporated
------------------------
MORGAN STANLEY & CO. GOLDMAN, SACHS & CO.
Incorporated
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
CS FIRST BOSTON
J.P. MORGAN & CO.
PAINEWEBBER INCORPORATED
April 3, 1996
<PAGE> 2
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
UNTIL APRIL 29, 1996 (25 DAYS AFTER COMMENCEMENT OF THE OFFERINGS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------
For investors outside the United States: No action has been or will be
taken in any jurisdiction by the Company or by any Underwriter that would permit
a public offering of the Common Stock or possession or distribution of this
Prospectus in any jurisdiction where action for that purpose is required, other
than in the United States. Persons into whose possession this Prospectus comes
are required by the Company and the Underwriters to inform themselves about and
to observe any restrictions as to the offering of the Common Stock and the
distribution of this Prospectus.
In this Prospectus references to "dollars" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 9
The Company........................... 16
Use of Proceeds....................... 18
Dividend Policy....................... 18
Certain Transactions in Connection
with the Offerings.................. 19
Capitalization........................ 21
Selected Financial Data............... 22
Pro Forma Condensed Financial
Statements.......................... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
<CAPTION>
PAGE
-----
<S> <C>
Business.............................. 38
Management............................ 54
Arrangements Between the Company and
AT&T................................ 73
Principal Stockholder................. 88
Description of Capital Stock.......... 89
Shares Eligible for Future Sale....... 95
Underwriting.......................... 97
Legal Matters......................... 101
Experts............................... 101
Available Information................. 101
Index to Financial Statements......... F-1
</TABLE>
------------------------
IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME. DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH
PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR
OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO
EXEMPTIONS FROM RULE 10B-6, 10B-7 AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF
1934.
------------------------
This Prospectus contains trademarks, service marks or registered marks of
the Company, AT&T Corp. ("AT&T"), their respective subsidiaries, and other
companies, as indicated.
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information set forth elsewhere in this
Prospectus. As used herein, references to the "Company" include the historical
operating results and activities of, and assets and liabilities assigned to, the
businesses and operations which comprise the Company as of the date hereof.
------------------------
THE COMPANY
Lucent Technologies Inc. (the "Company") is one of the world's leading
designers, developers and manufacturers of telecommunications systems, software
and products. The Company is a global market leader in the sale of public
telecommunications systems, and is a supplier of systems or software to 23 of
the world's 25 largest network operators. The Company is also a global market
leader in the sale of business communications systems and in the sale of
microelectronic components for communications applications to manufacturers of
communications systems and computers. Further, the Company is the largest
supplier in the United States of telecommunications products for consumers. In
addition, the Company has provided engineering, installation, maintenance or
operations support services to over 250 network operators in 75 countries, over
1.4 million business locations in the United States, and approximately 100,000
business locations in over 90 other countries. The Company's research and
development activities are conducted through Bell Laboratories ("Bell Labs"),
which consists of approximately three-quarters of the total resources of AT&T's
former Bell Laboratories division, one of the world's foremost industrial
research and development organizations.
The Company's revenues of $21,413 million for the year ended December 31,
1995, were generated from the sale of systems for network operators (54% of
total revenues), business communications systems (24%), microelectronic products
(9%), consumer products (8%), and other systems and products, including
integrated systems for the United States government (5%). In 1995, approximately
77% of the Company's revenue was generated from sales in the United States and
approximately 23% internationally (including exports). For the year ended
December 31, 1995, the Company recorded a net loss of $867 million, including
restructuring and other charges of $2,801 million before taxes (or $1,847
million after taxes.)
Systems for Network Operators. The Company's systems and software enable
network operators to provide wireline and wireless local, long distance and
international voice, data and video communications services. The Company's
switching, transmission and cable systems are packaged and customized with
application software, operations support systems and associated professional
services, and range in size from small rural telephone systems to some of the
world's largest wireline and wireless networks. The Company's network operator
customers include local, long distance and international telecommunications
companies and cable television companies. The Company has a wireline local
access installed base (the number of access lines serviced by switches
manufactured by the Company) of approximately 110 million lines, representing
approximately 58% of the United States and 13% of the worldwide installed base.
The Company's wireless systems are in operation in nine of the top ten United
States Metropolitan Statistical Areas ("MSAs").
Business Communications Systems. The Company's business systems are
primarily customer premises-based telecommunications systems which are used in
networks that enable businesses to communicate within and between locations. The
Company has the largest installed base in the United States of private branch
exchanges ("PBXs"), key systems, structured cabling systems and voice processing
systems. In addition, the Company's direct sales, installation and maintenance
force works with business customers to integrate the Company's hardware and
software into customized applications such as call centers, which support such
customer services as banking by telephone and airline reservations.
Microelectronics. The Company's microelectronic components include
high-performance integrated circuits ("ICs"), electronic power systems and
optoelectronic components for communications applications. These microelectronic
products are important components of many of the Company's own systems and
products. The Company also supplies these components to other manufacturers of
communications systems and computers. The Company is a market leader in several
IC product areas critical to communications
3
<PAGE> 4
applications, including digital signal processors ("DSPs") for digital cellular
telephones and standard-cell application specific integrated circuits ("ASICs").
The Company's DSPs were included in more than half of the world's digital
cellular telephones shipped in the year ended December 31, 1995.
Consumer Products. The Company offers a wide range of corded, cordless and
cellular telephones, telephone answering systems and related accessories in the
United States for consumers and small businesses. In 1995, the Company sold 31%
of the corded telephones, 28% of the cordless telephones and 35% of the
telephone answering systems sold in the United States, approximately double the
market share of any single competitor in each of these categories.
INDUSTRY OVERVIEW
The global telecommunications networking industry includes systems,
software and products used for voice, data and video communications. This
industry has undergone significant transformation and growth since the
mid-1980's as a result of changes in domestic and international public policy,
technological innovations and economic factors. The Company believes that these
forces will intensify, and that the number of customers and the complexity of
the networks they demand will increase. In addition, the Company believes that
these networks will increasingly become multifunctional in nature, supporting
simultaneous wireline or wireless access to any combination of voice, data and
video communications services, thus reducing the operating costs associated with
separate networks. The Company further believes that the traditionally distinct
technology platforms supporting voice and data will converge, as will those
platforms for the traditionally separate wireline and wireless networks. In the
Company's view, significant industry growth areas will include wireless access,
multifunctional systems and networking software. The Company further believes
that the principal building blocks of the industry are and will continue to be
software, microelectronics and product innovation in advanced digital switching
and transmission platforms, supported by a competency in and a knowledge of
telecommunications networking.
STRATEGY
The Company believes that the global public policy, technological and
economic forces transforming the telecommunications industry are creating
opportunities for the Company to capitalize on its competency in and knowledge
of networking, software and microelectronics. The Company intends to utilize the
research and development capabilities of Bell Labs, its broad and well
established product lines and its strong global customer relationships with
leading network operators and major businesses to remain a leader in
telecommunications networking and to capitalize on the growing convergence of
voice and data and of wireline and wireless networks. Further, the Company is
increasing its focus on customers in the United States and internationally who
consider AT&T as a competitor or potential competitor and therefore have been
reluctant to rely on AT&T as a strategic supplier. The Company believes that
growth opportunities will be available in both developed and developing
countries, and that a significant portion of its growth will derive from the
sale of telecommunications networking systems outside the United States. The
Company intends to focus its efforts globally on wireless networks,
multifunctional systems and networking software.
Wireless Networks. The Company's strategy is to provide network operators
and businesses with complete, flexible wireless networks which will complement
or, in the case of systems for network operators, compete over time with
wireline networks. The Company's sales of wireless infrastructure systems have
grown as a percent of total revenues from 6.1% in 1993 to 10.3% in 1995. The
Company's wireless infrastructure systems for mobile and fixed access are
designed to support leading air interface standards around the world. The
Company believes that its recent advances and innovations in microelectronics
and software will produce further enhancements to its wireless communications
systems.
Multifunctional Systems. The Company's strategy is to provide network
operators and businesses with flexible integrated multifunctional systems that
will enable them to enhance their networks to support simultaneously wireline or
wireless access to any combination of voice, data and video communications. The
4
<PAGE> 5
Company intends to continue to utilize its expertise in digital switching,
digital transmission, optical technologies and telecommunications networking
software to provide these systems.
Networking Software. The Company's strategy is to use its software
expertise to enable network operators and businesses to continue to offer their
customers new and differentiating services. Further, the Company intends to
continue to offer telecommunications networking software that simplifies the
operation of networks and automates labor intensive network management and
provisioning tasks to reduce operating expenses and improve network efficiency.
The Company is pursuing these objectives through its research and development
activities at Bell Labs, where, in 1995, approximately two-thirds of the
technical staff were engaged in software-related activities.
The Company intends to pursue the above strategies globally through a
strong management emphasis on the rapid commercialization of customer-focused
technological innovations. The Company believes that, as an independent entity,
it will have a greater ability to pursue these strategies by defining its own
priorities and maintaining a focus on its customers. In response to its
establishment as a stand-alone entity, the Company has undertaken a
comprehensive review of all of its operations, including its organizational
structure, products and markets, with a view toward maximizing its return on
investments. In connection with this review, the Company adopted a strategic
reorganization plan and recorded pre-tax restructuring charges of $2,613
million, and other charges for asset impairments and other items of $188
million, in the fourth quarter of 1995. See "The Company -- Strategic
Reorganization" and "Business -- Strategy."
SEPARATION FROM AT&T
The Company is currently a wholly owned subsidiary of AT&T. On September
20, 1995, AT&T announced its intention to create a separate company composed of
the AT&T businesses and operations that now comprise the Company, and the
associated assets and liabilities of such businesses and operations (the
"Separation"). AT&T also announced its intention to distribute to its
shareholders by December 31, 1996, subject to certain conditions, all of its
interest in the Company following the Offerings (the "Distribution"). See "The
Company -- Conditions to the Distribution." After the completion of the
Offerings and prior to the Distribution, AT&T will own approximately 82.4% of
the outstanding shares of common stock, par value $.01 per share (the "Common
Stock"), of the Company. The Company, AT&T and, in certain cases, NCR
Corporation ("NCR"), a wholly owned subsidiary of AT&T, have entered into or
will, on or prior to the consummation of the Offerings (the "Closing Date"),
enter into certain agreements providing for the Separation and governing various
interim and ongoing relationships between and among the three companies,
including an agreement between the Company and AT&T providing for the purchase
of products, licensed materials and services from the Company. See "Arrangements
Between the Company and AT&T."
5
<PAGE> 6
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock Offered
U.S. Offering......................... 98,037,037 shares
International Offering................ 14,000,000 shares
Total Offerings.................... 112,037,037 shares
Common Stock to be outstanding
immediately after the Offerings....... 636,661,931 shares(1)
Common Stock to be held by AT&T
immediately after the Offerings....... 524,624,894 shares
Use of Proceeds......................... The net proceeds to the Company from the Offerings
are estimated to be approximately $2,895 million
after deducting underwriting discounts and
commissions and estimated offering expenses. Such
net proceeds will be used to repay approximately
$2,000 million of indebtedness expected to be
outstanding under the Working Capital Facility (as
defined herein) and the remainder will be used for
general corporate purposes. See "Use of Proceeds."
Dividend Policy......................... It is anticipated that, subject to the Company's
financial results and declaration by the Company's
Board of Directors (the "Company Board"), the
Company initially will pay a quarterly dividend of
$.075 per share of Common Stock, beginning with a
dividend payable in the third quarter of 1996 in
respect of the operations of the Company in the
second quarter of 1996. If the Company does not
have sufficient earnings and profits for federal
income tax purposes prior to the Distribution,
dividends paid on the Common Stock prior to the
Distribution would be treated for federal income
tax purposes as non-taxable return of capital to
the extent of the holder's basis in the Common
Stock and as a capital gain to the extent of any
excess over such basis. See "Dividend Policy."
NYSE Symbol............................. LU
Rights.................................. One Right (as defined herein) will be attached to
each share of Common Stock sold in the Offerings.
See "Description of Capital Stock -- Antitakeover
Effects of Certain Provisions of the Certificate
and By-Laws."
</TABLE>
- ---------------
(1) Does not include shares of Common Stock that will be issuable upon exercise
of employee stock options, (not all of which will be immediately
exercisable) and other Common Stock-based employee benefit awards that will
be issued at the time of the Distribution under the Company's 1996 Long Term
Incentive Plan (the "1996 LTIP") in substitution for AT&T Stock Awards (as
defined herein). See "Management -- Executive Compensation" and
"Arrangements Between the Company and AT&T -- Employee Benefits Agreement."
6
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SUMMARY FINANCIAL DATA
The following table presents summary selected historical financial data of
the Company. The information set forth below should be read in conjunction with
"Pro Forma Condensed Financial Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
financial statements and notes thereto included elsewhere in this Prospectus.
The consolidated statement of operations data set forth below for each of the
three years ended December 31, 1995 and the consolidated balance sheet data at
December 31, 1995 and 1994 are derived from, and are qualified by reference to,
the audited consolidated financial statements included elsewhere in this
Prospectus, and should be read in conjunction with those financial statements
and the notes thereto. The consolidated balance sheet data at December 31, 1993
are derived from the audited consolidated balance sheet of the Company at
December 31, 1993, which is not included in this Prospectus. The consolidated
statement of operations data for each of the two years ended December 31, 1992
and the consolidated balance sheet data at December 31, 1992 and 1991 are
derived from unaudited consolidated financial statements not included in this
Prospectus.
The historical financial information may not be indicative of the Company's
future performance and does not necessarily reflect what the financial position
and results of operations of the Company would have been had the Company
operated as a separate, stand-alone entity during the periods covered. Per share
data for net income and dividends have not been presented because the Company's
business was operated through divisions of AT&T for the periods presented. See
"Risk Factors -- Limited Relevance of Historical Financial Information."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues.................................. $ 21,413 $ 19,765 $ 17,734 $ 17,312 $ 16,312
Costs(1).................................. 12,945 11,337 10,088 10,383 9,385
Gross margin........................... 8,468 8,428 7,646 6,929 6,927
Operating expenses
Selling, general and administrative
expenses(1)(2)....................... 7,083 5,360 5,016 4,814 6,241
Research and development expenses(1)... 2,385 2,097 1,961 1,711 1,996
Operating income (loss)................... (1,000) 971 669 404 (1,310)
Income (loss) before income taxes and
cumulative effects of accounting
changes................................ (1,138) 784 619 278 (1,522)
Income (loss) before cumulative effects of
accounting changes..................... (867) 482 430 179 (971)
Cumulative effects of accounting
changes................................ -- -- (4,208) -- --
Net income (loss)(1)...................... (867) 482 (3,778) 179 (971)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets.............................. $ 19,722 $ 17,340 $ 17,109 $ 14,466 $ 14,840
Total debt................................ 4,014 3,164 3,195 3,942 4,871
Stockholder's equity...................... 1,434 2,476 2,580 3,098 3,827
</TABLE>
- ---------------
(1) 1995 includes pre-tax restructuring and other charges of $2,801 ($1,847
after taxes) recorded as $892 of costs, $1,645 of selling, general and
administrative expenses and $264 of research and development expenses. (See
Note 5 of Notes to Consolidated Financial Statements.)
(2) 1991 includes pre-tax restructuring and other charges of $1,006 ($612 after
taxes).
7
<PAGE> 8
SUMMARY PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma condensed financial statement data for
the Company as of and for the year ended December 31, 1995 give effect to (i)
the Offerings at the initial public offering price set forth on the cover page
of this Prospectus, (ii) the retention by AT&T of accounts receivable having a
face amount estimated for pro forma purposes at approximately $2,000 million,
(iii) borrowings by the Company under the Working Capital Facility estimated for
pro forma purposes at $2,000 million and the repayment of the entire $2,000
million thereof with proceeds from the Offerings, and (iv) the prepayment by
AT&T of $500 million to be applied to accounts receivable from AT&T that are due
and payable on or after January 1, 1997 for the purchase of products, licensed
materials and services from the Company (such retention of accounts receivable,
borrowings and repayment under the Working Capital Facility and prepayment are
referred to herein as the "Related Transactions"). See "Certain Transactions in
Connection with the Offerings" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview." The unaudited pro
forma adjustments were prepared assuming that the Offerings and the Related
Transactions had occurred on December 31, 1995 for balance sheet data and
January 1, 1995 for statement of operations data.
The unaudited pro forma financial data presented below do not purport to
represent what the financial position actually would have been had the Offerings
and the Related Transactions occurred on the date referred to above or to
project the Company's financial position for any future date. The unaudited pro
forma data and adjustments should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical financial statements of the Company and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
--------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
BALANCE SHEET DATA
Total assets................................................ $ 19,722 $ 1,395 $21,117
Working capital............................................. (384) 895 511
Total debt.................................................. 4,014 4,014
Stockholders' equity........................................ 1,434 895 2,329
STATEMENT OF OPERATIONS DATA
Revenues.................................................... $ 21,413 $ -- $21,413
Net loss.................................................... (867) (867)
Pro forma net loss per share................................ (1.65) (1.36)
</TABLE>
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<PAGE> 9
RISK FACTORS
Purchasers of shares of Common Stock should carefully consider and evaluate
all of the information set forth in this Prospectus, including the risk factors
listed below. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and "Arrangements Between the Company and
AT&T" for a description of other factors generally affecting the Company's
business.
RISK OF NONCOMPLETION OF THE DISTRIBUTION
AT&T has announced that, subject to certain conditions, AT&T intends to
distribute to its shareholders by December 31, 1996 all of the Common Stock
owned by AT&T following the Offerings. See "The Company -- Conditions to the
Distribution" and "Arrangements Between the Company and AT&T -- Separation and
Distribution Agreement." No assurance can be given that such conditions will be
satisfied or waived, or that the Distribution will occur. As described herein,
one of AT&T's principal reasons for deciding to effect the Distribution was to
eliminate what AT&T perceived as a growing adverse impact on the Company's
relationship with its customers and potential customers as a result of the
Company's affiliation with AT&T. Although AT&T expects to effect the
Distribution, it is likely that the failure of the Distribution to occur in the
time frame contemplated or at all would materially adversely affect the Company.
See "The Company -- Background of the Separation and Distribution."
CONTROL BY AT&T PENDING THE DISTRIBUTION; ONGOING RELATIONSHIP WITH AT&T
Prior to the Distribution, AT&T will control the Company and will continue
to be able to elect the entire Company Board and to determine the outcome of
corporate actions requiring stockholder approval. After the completion of the
Offerings and prior to the Distribution, AT&T will own approximately 82.4% of
the outstanding shares of Common Stock. See "Principal Stockholder."
The Company currently has, and after the Offerings and the Distribution
will continue to have, a variety of contractual relationships with AT&T and its
affiliates, including a multi-year purchase agreement, under which AT&T will
remain one of the Company's largest customers. There can be no assurance that
existing and potential customers will not be deterred by the existence of these
relationships or by the historical ties between the Company and AT&T. See
"Arrangements Between the Company and AT&T."
POSSIBILITY OF SUBSTANTIAL SALES OF COMMON STOCK
The planned Distribution would involve the distribution of an aggregate of
524,624,894 shares of Common Stock to the shareholders of AT&T by December 31,
1996. Substantially all of such shares would be eligible for immediate resale in
the public market. The Company is unable to predict whether substantial amounts
of Common Stock will be sold in the open market in anticipation of, or
following, the Distribution. Any sales of substantial amounts of Common Stock in
the public market, or the perception that such sales might occur, whether as a
result of the Distribution or otherwise, could materially adversely affect the
market price of the Common Stock. See "Shares Eligible for Future Sale."
COMPETITION
The Company currently faces significant competition in its markets and
expects that the level of price and product competition will increase. In
addition, as a result of both the trend toward global expansion by foreign and
domestic competitors and technological and public policy changes, the Company
anticipates that new and different competitors will enter its markets. These
competitors may include entrants from the telecommunications, software and data
networking industries. Existing competitors have, and new competitors may have,
strong financial capability, technological expertise and well-recognized brand
names. Depending on the continuing pace of global expansion by domestic and
foreign competitors, the nature of their product offerings and prices, and the
extent to which they benefit from foreign market subsidies, as well as the new
types of product offerings from companies in other industries and the timing and
circumstances of the entry of these competitors into the Company's markets, the
Company's future revenues and net income could be materially adversely affected.
See "Business."
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In addition, the Regional Bell Operating Companies (the "RBOCs")
historically have been prohibited from manufacturing telecommunications
equipment by the terms of the Modification of Final Judgment (the "MFJ") entered
into in connection with the divestiture of the RBOCs by AT&T in 1984. The RBOCs
are major customers of the Company. The recently enacted Telecommunications Act
of 1996 (the "Telecommunications Act") contains provisions that permit the
RBOCs, subject to satisfying certain conditions designed to facilitate local
exchange competition, to manufacture telecommunications equipment. In light of
these provisions, it is possible that one or more RBOCs may decide to
manufacture telecommunications equipment, to design and provide
telecommunications software, or to form alliances with other manufacturers. Any
of these developments could result in increased competition for the Company and
reduce the RBOCs' purchases from the Company.
DEPENDENCE ON NEW PRODUCT DEVELOPMENT
The markets for the Company's principal products are characterized by
rapidly changing technology, evolving industry standards, frequent new product
introductions and evolving methods of building and operating telecommunications
systems for network operators and business customers. The Company's operating
results will depend to a significant extent on its ability to continue to
introduce new systems, software and services successfully on a timely basis and
to reduce costs of existing systems, software and services. The success of these
and other new offerings is dependent on several factors, including proper
identification of customer needs, cost, timely completion and introduction,
differentiation from offerings of the Company's competitors and market
acceptance. There can be no assurance that the Company will successfully
identify new product or service opportunities and develop and bring new systems,
software and services to market in a timely manner, or that products or
technologies developed by others will not render the Company's offerings
obsolete or noncompetitive. Any such development could have a material adverse
effect on the Company's future competitive position and results of operations.
In addition, new technological innovations generally require a substantial
investment before any assurance is available as to their commercial viability,
including, in some cases, certification by international and domestic
standards-setting bodies. See "Business." There can be no assurance that any of
the technologies in which the Company is focusing its research and development
investments will achieve broad acceptance in the marketplace, and the lack of
such market acceptance could have a material adverse effect on the Company's
future competitive position and results of operations.
In addition, there can be no assurance that the Company will be able to
attract and retain the highly skilled technical personnel necessary to enable
the Company to develop new products, systems and software successfully.
POTENTIAL ENVIRONMENTAL LIABILITIES
The Company's current and historical manufacturing and research operations
are subject to a wide range of environmental protection laws in the United
States and other countries. In the United States, these laws often require
parties to fund remedial action regardless of fault. The Company has remedial
and investigatory activities, including assessment and cleanup work, underway at
46 current and former manufacturing, laboratory and recycling facilities to
comply, or to determine compliance, with applicable environmental protection
laws. AT&T and its subsidiaries have been listed as potentially responsible
parties ("PRPs") at numerous "Superfund" sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or
comparable state statutes, either by a government agency (which may have either
sought information concerning AT&T's connection to the site, or may have sought
from AT&T participation in site cleanup work or contribution toward the cost of
site cleanup), or by a private party seeking contribution to site cleanup costs.
Under the terms of the Separation and Distribution Agreement (as defined
herein), the Company will assume or indemnify AT&T for all liabilities primarily
relating to, arising out of or resulting from (i) the operation of the Company
Business (as defined herein) as conducted at any time prior to, on or after the
Closing Date or (ii) any Company Assets (as defined herein), including, without
limitation, those associated with these sites. It is often difficult to estimate
the future impact of environmental matters, including potential liabilities. The
Company records an environmental reserve when it is probable that a liability
has been incurred and the amount of the liability is reasonably estimable. This
practice is followed
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whether the claims are asserted or unasserted. Management expects that the
amounts reserved for will be paid out over the period of remediation for the
applicable site which ranges from 5 to 30 years. Reserves for estimated losses
from environmental remediation are, depending on the site, based primarily upon
internal or third party environmental studies, and estimates as to the number,
participation level and financial viability of any other PRPs, the extent of the
contamination and the nature of required remedial actions. Accruals are adjusted
as further information develops or circumstances change. The amounts provided
for in the Company's consolidated financial statements in respect of
environmental reserves are the gross undiscounted amount of such reserves,
without deductions for insurance or third party indemnity claims. In those cases
where insurance carriers or third party indemnitors have agreed to pay any
amounts and management believes that collectibility of such amounts is probable,
the amounts are reflected as receivables in the financial statements. Although
the Company believes that its reserves are adequate, there can be no assurance
that the amount of capital expenditures and other expenses which will be
required to complete remedial actions and to comply with applicable
environmental laws will not exceed the amounts reflected in the Company's
reserves or will not have a material adverse effect on the financial condition
of the Company or on the Company's results of operations or cash flows. Any
amounts of environmental costs that may be incurred in excess of those provided
for at December 31, 1995 cannot be determined.
RISK OF INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS
The Company relies on patent, trademark, trade secret and copyright laws
both to protect its proprietary technology and to protect the Company against
claims from others. The Company believes that it has direct intellectual
property rights or rights under cross-licensing arrangements covering
substantially all of its material technologies and has not received notice of
any claims against it which it believes are valid. Given the technological
complexity of the Company's systems and products, however, there can be no
assurance that claims of infringement will not be asserted against the Company
or against the Company's customers in connection with their use of the Company's
systems and products, nor can there be any assurance as to the outcome of any
such claims. The Company has been assigned ownership of the substantial majority
of the current AT&T patents. Pursuant to the patent license agreement entered
into among the Company, AT&T and NCR, the Company has been given rights, subject
to specified limitations, to pass through to its customers certain rights under
the approximately 400 patents retained by AT&T. There can be no assurance that
the Company's customers and potential customers will be satisfied with the
pass-through rights available to them under the patents retained by AT&T or with
any indemnification commitments the Company may be willing to provide in
connection therewith. See "Arrangements Between the Company and AT&T -- Patent
Licenses and Related Matters" and "-- Technology Licenses and Related Matters."
RELIANCE ON MAJOR CUSTOMERS
Historically, the Company has relied on a limited number of customers for a
substantial portion of its total revenues. In terms of total revenues, the
Company's largest customer has been AT&T, although other large customers may
purchase more of any particular system or product line. The contribution of AT&T
to the Company's total revenues and percentage of total revenues for the years
ended December 31, 1995, 1994 and 1993 was $2,119 million (9.9%), $2,137 million
(10.8%) and $1,967 million (11.1%), respectively. Except as set forth in the
General Purchase Agreement and the Supplemental Agreements (each as defined
herein) entered into between the Company and AT&T, following the Offerings AT&T
is not obligated to make any minimum level of future purchases from the Company
or to provide the Company with binding forecasts of product purchases for any
future period. Pursuant to the General Purchase Agreement, AT&T and its
designated affiliates have committed to purchase an aggregate of at least $3,000
million of products, licensed materials and services from the Company during the
three-year period ending December 31, 1998. If AT&T does not meet this purchase
commitment by December 31, 1998, AT&T will be required thereafter to pay
interest based on the shortfall until the $3,000 million purchase commitment is
met. See "Arrangements Between the Company and AT&T -- Purchase Agreements."
In addition, sales to approximately ten network operators (including AT&T),
some of which may vary from year to year, constituted approximately 38%, 41% and
42% of total revenues in the years ended
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December 31, 1995, 1994 and 1993, respectively. The Company has diversified its
customer base in the past several years and expects this trend to continue.
Nevertheless, the Company expects that a significant portion of its future
revenues will continue to be generated by a limited number of customers. See
"Business." The loss of any of these customers or any substantial reduction in
orders by any of these customers could materially adversely affect the Company's
operating results. The United States government is, in the aggregate, also a
large customer of the Company. Given the current pressures on the government to
reduce its overall level of spending, there can be no assurance that government
purchases from the Company will not decrease in the future.
MULTI-YEAR CONTRACTS
The Company has several significant contracts for the sale of
infrastructure systems to network operators which extend over a multi-year
period. In certain cases, these contracts relate to new technologies which may
not have been deployed previously on a large scale commercial basis, and there
can be no assurance that these contracts can be completed on a timely basis, in
accordance with the customer's technical specifications or without significant
cost overruns. Certain of the Company's multi-year contracts also contain
demanding installation and maintenance requirements, in addition to other
performance criteria relating to timing, unit cost requirements and compliance
with government regulations, which, if not satisfied, could subject the Company
to substantial penalties, damages or non-payment, or could result in contract
termination. There can be no assurance of the Company's ability to satisfy these
requirements completely, without losses. In addition, specific terms of such
contracts may cause revenues under these agreements to fluctuate. The Company
expects that multi-year contracts it may enter into in the future may give rise
to similar uncertainties.
One of the Company's multi-year contracts is with Pacific Bell for the
provision of a broadband network based on hybrid fiber-coaxial cable technology.
Implementation difficulties and cost overruns have arisen under this contract,
which may result in claims being made by the parties under the contract. The
Company and Pacific Bell are conducting negotiations in an effort to resolve
outstanding issues and potential claims. The Company's historical financial
statements reflect a reserve relating to this contract. Based on the future
negotiations with Pacific Bell, the Company will continue to assess the adequacy
of this reserve.
SEASONALITY; ANTICIPATED LOSS FOR FIRST HALF OF 1996
The Company's business is highly seasonal, with revenue and net income
concentrated in the fourth quarter of the year. Consequently, during the three
quarters ending in March, June and September, the Company historically has not
been as profitable as in the quarter ending in December, and the Company
traditionally incurs losses in the first quarter. Such seasonality also causes
the Company's cash flow requirements to vary greatly from quarter to quarter.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Variability in the Company's Business."
In the first quarter of 1996, the Company expects to incur a net loss
before cumulative effects of accounting changes, net of taxes in the range of
$100 million to $140 million as compared to a net loss of $22 million in the
first quarter of 1995. For the second quarter of 1996, the Company expects that
it may earn substantially less than the $159 million earned in the second
quarter of 1995, resulting in a loss for the first half of 1996. There are
several factors influencing the significantly lower operating results
anticipated for the first half of 1996: (i) one-time expenses associated with
the Company's transition to operation as an independent publicly held company,
including replication and modification of information, payroll and financial
systems, and development of corporate identity programs; (ii) increased selling,
general and administrative expenses associated with plans that pre-date the
Company's restructuring decisions; (iii) the planned increase in expenditure by
the Company for research and development; and (iv) one-time costs associated
with the integration of the businesses purchased from Philips Electronics NV
("Philips") in February 1996. The impact on selling, general and administrative
expenses of the actions taken in connection with the Company's strategic
reorganization is not expected to be realized until the second quarter of 1996
and subsequent periods.
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ABSENCE OF HISTORY AS A STAND-ALONE COMPANY
The Company has never operated as a stand-alone company. After the
Offerings and prior to the Distribution, the Company will continue to be a
subsidiary of AT&T, but will operate as a stand-alone company, and AT&T will
have no obligation to provide assistance to the Company or any of its
subsidiaries except as described in "Arrangements Between the Company and AT&T."
In anticipation of being established as a stand-alone entity, the Company
has reviewed its business and operations and is implementing certain
organizational changes. See "The Company -- Strategic Reorganization." The
Company believes that these changes, when implemented, will have a positive
impact. However, there can be no assurance that this positive impact will be
realized or that these changes will not have an adverse impact on the Company's
future revenues and net income.
LIMITED RELEVANCE OF HISTORICAL FINANCIAL INFORMATION
The financial information included herein may not necessarily reflect the
results of operations, financial position and cash flows of the Company in the
future or what the results of operations, financial position and cash flows
would have been had the Company been a separate, stand-alone entity during the
periods presented. The financial information included herein does not reflect
many significant changes that will occur in the funding and operations of the
Company as a result of the Separation and the Offerings. In addition, the
consolidated financial statements of the Company include certain assets,
liabilities, revenues and expenses which were not historically recorded at the
level of, but are associated with, the businesses transferred to the Company.
See "Certain Transactions in Connection with the Offerings," "Pro Forma
Condensed Financial Statements," including the discussion of the assumptions
reflected therein, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
CHANGE OF COMPANY BRAND NAME
In connection with the Separation, the Company will, rapidly in the case of
some products and over specified periods of time in the case of other products,
change the trademarks and trade names under which it conducts its business. The
Company believes that its sale of business communications systems to small
businesses and sales of consumer products have benefitted from the use of the
"AT&T" brand name. The impact of the change in trademarks and trade names and
other changes (including, without limitation, restrictions on the use of the
"AT&T" brand name and related trade dress) on the Company's business and
operations cannot be fully predicted. See "Arrangements Between the Company and
AT&T -- Brand License and Related Matters."
FUTURE CAPITAL REQUIREMENTS; ABSENCE OF AT&T FUNDING
The Company's working capital requirements and cash flow provided by
operating activities can vary greatly from quarter to quarter, depending on the
volume of production, the timing of deliveries, the build-up of inventories, and
the payment terms offered to customers. In the past, the Company's working
capital needs have been satisfied pursuant to AT&T's corporate-wide cash
management policies. However, AT&T is no longer providing funds to finance the
Company's operations.
The Company believes that the proceeds of the Offerings, along with the
Working Capital Facility, cash flow from operations and long- and short-term
debt financings, will be sufficient to satisfy its future working capital,
capital expenditure, research and development and debt service requirements,
including debt service requirements on the Commercial Paper Program (as defined
herein). On February 26, 1996, the Company filed a shelf registration statement
on Form S-3 (Registration No. 333-01223) (as it may be amended, the "Shelf
Registration Statement") to register the offering from time to time of up to
$3,500 million of long-term debt. Although the Company believes that it will be
able to access the capital markets on terms and in amounts that will be
satisfactory to it, there can be no assurance that the Company will be
successful in this regard. The historical financial statements of the Company
reflect a blend of AT&T's short-term and long-term weighted average interest
rates. The Company expects that it will incur long-term debt as well as short-
term debt, and that it may not be able to obtain financing with interest rates
as favorable as those historically enjoyed by AT&T, with the result that its
cost of capital will be higher than that reflected in the Company's
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historical financial statements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financial Condition, Liquidity
and Capital Resources."
Network operators, domestically and internationally, increasingly have
required their suppliers to arrange or provide long-term financing for them as a
condition to obtaining or bidding on infrastructure projects. These projects may
require financing in amounts ranging from modest sums to over a billion dollars.
In this regard, in February 1996, the Company entered into an agreement with
MajorCo L.P., an affiliate of Sprint Spectrum LP ("SSLP"), to supply and install
approximately 60% of SSLP's market areas over a five-year period. This agreement
is conditioned, among other things, upon the Company providing (or guaranteeing)
long-term financing to SSLP for its purchase of equipment and services from the
Company. The Company has entered into discussions with SSLP with respect to such
financing and has proposed providing (or guaranteeing) $1,000 million of
long-term financing for SSLP's purchases from the Company. These discussions are
ongoing. The ability of the Company to arrange or provide financing for network
operators generally, without AT&T's support, will depend on a number of factors,
including the Company's capital structure and level of available credit. There
can be no assurance that the Company will be able to continue to arrange or
provide such financing following the Offerings on terms and conditions, and in
amounts, that will be satisfactory to such network operators. Any such inability
of the Company to arrange or provide financing in accordance with its past
practices could have a material adverse effect on the Company's financial
condition and results of operations.
RISK OF INTERNATIONAL GROWTH AND FOREIGN EXCHANGE
The Company intends to continue to pursue growth opportunities in
international markets. In many international markets, long-standing
relationships between potential customers of the Company and their local
providers, and protective regulations, including local content requirements and
type approvals, create barriers to entry. In addition, pursuit of such
international growth opportunities may require significant investments for an
extended period before returns on such investments, if any, are realized. Such
projects and investments could be adversely affected by reversals or delays in
the opening of foreign markets to new competitors, exchange controls, currency
fluctuations, investment policies, repatriation of cash, nationalization, social
and political risks, taxation, and other factors, depending on the country in
which such opportunity arises. In addition, the laws and policies of the United
States affecting foreign trade, investment and taxation could also adversely
affect such projects and investments. There can be no assurance that the Company
will be able to overcome these barriers.
A significant change in the value of the dollar against the currency of one
or more countries where the Company recognizes substantial revenue or earnings
may materially adversely affect the Company's results. The Company attempts to
mitigate any such effects through the use of foreign currency contracts,
although there can be no assurances that such attempts will be successful.
CERTAIN ANTITAKEOVER EFFECTS
The Restated Certificate of Incorporation of the Company (the
"Certificate") and the By-Laws of the Company (the "By-Laws"), the Rights, and
applicable provisions of the Delaware General Corporation Law (the "DGCL"),
contain several provisions that may make more difficult the acquisition of
control of the Company without the approval of the Company Board. Certain
provisions of the Certificate and the By-Laws, among other things, (i) classify
the Company Board into three classes, each of which (after an initial transition
period) will serve for staggered three-year periods; (ii) provide that a
director of the Company may be removed by the stockholders only for cause; (iii)
provide that only the Company Board or the Chairman of the Board of the Company
may call special meetings of the stockholders; (iv) provide that the
stockholders may take action only at a meeting of the stockholders; (v) provide
that stockholders must comply with certain advance notice procedures in order to
nominate candidates for election to the Company Board or to place stockholders'
proposals on the agenda for consideration at meetings of the stockholders; and
(vi) provide that the stockholders may amend or repeal any of the foregoing
provisions of the Certificate or the By-Laws only by a vote of 80% of the stock
entitled to vote generally in the election of directors (the "Voting Stock").
The Rights would cause substantial dilution to a person or group that attempts
to acquire the Company on terms not approved in advance by the Company Board.
With certain exceptions, Section 203 of the DGCL
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("Section 203") imposes certain restrictions on mergers and other business
combinations between the Company and any holder of 15% or more of the Common
Stock. Some of the provisions described above do not apply to, or otherwise
contain exceptions for, AT&T as long as AT&T beneficially owns a majority of the
Common Stock. See "Description of Capital Stock -- Antitakeover Effects of
Certain Provisions of the Certificate and By-Laws" and " -- Delaware Business
Combination Statute."
ABSENCE OF A PUBLIC MARKET FOR THE COMMON STOCK
Prior to the Offerings, there has been no public market for the Common
Stock. Although the Common Stock has been approved for listing, subject to
official notice of issuance, on The New York Stock Exchange, Inc. (the "NYSE"),
there can be no assurance that an active public market for the Common Stock will
develop or that the price at which the Common Stock will trade will not be lower
than the initial public offering price. The initial public offering price was
determined through negotiations between the Company and the Underwriters. See
"Underwriting."
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THE COMPANY
The Company is one of the world's leading designers, developers and
manufacturers of telecommunications systems, software and products. The Company
is a global market leader in the sale of public telecommunications systems, and
is a supplier of systems or software to 23 of the world's 25 largest network
operators. The Company is also a global market leader in the sale of business
communications systems and in the sale of microelectronic components for
communications applications to manufacturers of communications systems and
computers. Further, the Company is the largest supplier in the United States of
telecommunications products for consumers. In addition, the Company has provided
engineering, installation, maintenance or operations support services to over
250 network operators in 75 countries, over 1.4 million business locations in
the United States and approximately 100,000 business locations in over 90 other
countries. The Company's research and development activities are conducted
through Bell Labs, which consists of approximately three-quarters of the total
resources of AT&T's former Bell Laboratories division, one of the world's
foremost industrial research and development organizations.
The Company's revenues of $21,413 million for the year ended December 31,
1995 were generated from the sale of systems for network operators (54% of total
revenues), business communications systems (24%), microelectronic products (9%),
consumer products (8%) and other systems and products, including integrated
systems for the United States government (5%). In 1995, approximately 77% of the
Company's revenue was generated from sales in the United States and
approximately 23% internationally (including exports). For the year ended
December 31, 1995, the Company recorded a net loss of $867 million, including
restructuring and other charges of $2,801 million before taxes (or $1,847
million after taxes).
The Company was incorporated in Delaware in November 1995. The Company has
its principal executive offices at 600 Mountain Avenue, Murray Hill, New Jersey
07974. Its telephone number at such offices is (908) 582-8500. The Company is
currently a wholly owned subsidiary of AT&T. Prior to February 1, 1996, AT&T
conducted the Company's businesses through various divisions and subsidiaries.
For the year ended December 31, 1995, the Company's revenues excluding sales to
AT&T were $19,294 million, which accounted for 24.2% of AT&T's total external
revenues.
BACKGROUND OF THE SEPARATION AND DISTRIBUTION
Historically, AT&T has viewed its strategy of vertical integration,
combining communications equipment, communications services and other
businesses, as a source of strength in addressing the challenges and
opportunities presented by the environment in which it has done business.
However, changes in customer needs and demands, public policy and technology are
creating a new industry structure in which, increasingly, the advantages of this
vertical integration strategy are outweighed by its costs and disadvantages. As
a result of the industry restructuring over the past decade, new actual and
potential competitors of AT&T have been created by the growth of companies
formerly affiliated with AT&T and by the expansion of other domestic and
international companies, both geographically and in terms of scope of services
provided. These changes have resulted in a situation in which many of the actual
and potential customers of the Company are or will be competitors of AT&T's
communications services business. As a result, the obstacles currently faced by
the Company in marketing its products to competitors and potential competitors
of AT&T's communications services business have become severe and are expected
to continue to intensify. For these reasons, AT&T has announced that, subject to
certain conditions, AT&T intends to distribute to its shareholders by December
31, 1996 all of the Common Stock owned by AT&T after the Offerings. See "Risk
Factors -- Risk of Noncompletion of the Distribution."
After the completion of the Offerings and prior to the Distribution, AT&T
will own approximately 82.4% of the outstanding shares of Common Stock. The
Company and AT&T have entered into certain agreements providing for the
Separation and the provision by AT&T of certain interim services to the Company.
See "Arrangements Between the Company and AT&T."
CONDITIONS TO THE DISTRIBUTION
The Distribution is subject to the satisfaction, or waiver by the Board of
Directors of AT&T (the "AT&T Board"), in its sole discretion, of the following
conditions: (i) a private letter ruling from the Internal Revenue
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Service (the "IRS") shall have been obtained, and shall continue in effect, to
the effect that, among other things, the Distribution will qualify as a tax-free
distribution for federal income tax purposes under Section 355 of the Internal
Revenue Code of 1986, as amended (the "Code"), and the transfer to the Company
of assets and the assumption by the Company of liabilities in connection with
the Separation will not result in recognition of any gain or loss for federal
income tax purposes to AT&T, the Company or AT&T's or the Company's
shareholders, and such ruling shall be in form and substance satisfactory to
AT&T, in its sole discretion; (ii) any material Governmental Approvals and
Consents (as such terms are defined in the Separation and Distribution
Agreement) necessary to consummate the Distribution shall have been obtained and
shall be in full force and effect; (iii) no order, injunction or decree issued
by any court or agency of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the Distribution shall be in effect,
and no other event outside the control of AT&T shall have occurred or failed to
occur that prevents the consummation of the Distribution; and (iv) no other
events or developments shall have occurred subsequent to the Closing Date that,
in the judgment of the AT&T Board, would result in the Distribution having a
material adverse effect on AT&T or on the shareholders of AT&T. On March 21,
1996, the Company received a private letter ruling from the IRS to the effect
described in clause (i) above. The AT&T Board will have the sole discretion to
determine the date of consummation of the Distribution (the "Distribution Date")
at any time after the Closing Date and on or prior to December 31, 1996. AT&T
has agreed to consummate the Distribution no later than December 31, 1996,
subject to the satisfaction, or waiver by the AT&T Board, in its sole
discretion, of the conditions set forth above. In the event that any such
condition shall not have been satisfied or waived on or before December 31,
1996, AT&T has agreed to consummate the Distribution as promptly as practicable
following the satisfaction or waiver of all such conditions. AT&T may terminate
the obligation to consummate the Distribution if the Distribution has not
occurred by December 31, 1997. In addition, with the consent of the Company and
AT&T, the Separation and Distribution Agreement may be amended or terminated at
any time prior to the Distribution Date. See "Risk Factors -- Risk of
Noncompletion of the Distribution" and "Arrangements Between the Company and
AT&T -- Separation and Distribution Agreement."
STRATEGIC REORGANIZATION
The Company historically has operated as part of AT&T. The Separation will
establish the Company as a stand-alone entity with objectives separate from
those of AT&T. The Company intends to focus its resources and management
emphasis on the technologies and markets it views as critical to its long-term
success as a stand-alone entity. The Company therefore has undertaken a
comprehensive review of all of its operations, including its organizational
structure, products and markets, with a view toward maximizing its return on
investments. In connection with this review, the Company adopted a strategic
reorganization plan and recorded a pre-tax restructuring charge of $2,613
million in the fourth quarter of 1995. In addition, in the fourth quarter of
1995, the Company recorded a charge of $188 million for asset impairments and
other items.
As part of these efforts, and as announced January 2, 1996, the Company
will eliminate approximately 22,000 positions, of which approximately 11,000 are
management positions and 11,000 occupational positions. Approximately 1,000
additional management employees are employed by businesses that the Company has
announced plans to sell. As of December 31, 1995, approximately 4,100 management
employees have accepted a voluntary severance package, the majority of whom will
leave the Company in early 1996. The Company expects approximately 70% of all
separations to be completed by the end of 1996 and the majority of the remaining
separations to be completed during 1997. These reductions are the result of the
Company's decisions to form a single corporate structure that eliminated
duplicative management and streamlined administrative functions, and to
outsource certain corporate functions.
The Company's reorganization efforts also include a plan to close all of
the Company's 338 retail stores (the "Phone Center Stores"), most of which are
expected to be closed by May 1996. In addition, the Company plans to consolidate
certain international facilities and functions for international customers that
previously were performed in the United States. In conjunction with these work
force reduction and consolidation efforts, the Company intends to reduce its
leased space from approximately 19 million square feet to approximately 14
million square feet and to reduce its owned space from approximately 37 million
square feet to approximately 28 million square feet.
17
<PAGE> 18
As part of the redefinition of its objectives, the Company intends to focus
its investments on its core technologies, primarily through expanded and
targeted research and development efforts. Consequently, the Company has decided
to sell and exit tangential product lines and markets, including the
manufacturing of certain data communications equipment, backplanes and printed
circuit boards. In 1995, revenues associated with operations that the Company
has exited or expects to exit in connection with these reorganization efforts
accounted for approximately 4.6% of the Company's total revenues. Where
appropriate, the Company will pursue core technologies through strategic
acquisitions, partnerships or joint ventures. For example, on February 7, 1996,
the Company completed the acquisition of several manufacturing and other
operations of certain subsidiaries of Philips, primarily in France and Germany
(the "Philips Businesses"), for approximately $260 million in cash, plus the
assumption of certain liabilities relating to those operations. The acquired
operations relate to synchronous digital hierarchy ("SDH") technology, global
systems for mobile communications ("GSM") technology, and Philips' fixed
wireless system technology, which is based on the DECT (digital enhanced
cordless telephone) standard. This acquisition is designed to permit the Company
to expand its global line of systems which support non-United States standards
for mobile and fixed wireless access and digital optical transport.
Finally, in addition to seeking to control expenses, the Company is
instituting processes designed to reduce the costs and time required to develop
and bring to market new systems, software and products. The Company intends to
create product realization centers at which it will locate Bell Labs developers
with product managers and manufacturing teams. The Company's development efforts
will be oriented toward scaleable and reusable software and microelectronic
technologies that it intends to incorporate into products addressing multiple
marketplaces.
USE OF PROCEEDS
The net proceeds to the Company from the Offerings are estimated to be
approximately $2,895 million after deducting underwriting discounts and
commissions and estimated offering expenses. Such proceeds will be used to repay
the approximately $2,000 million of indebtedness expected to be outstanding
under the Working Capital Facility at the Closing Date and the remainder will be
used for general corporate purposes. As of April 2, 1996, the Company had
borrowed $1,954 million under the Working Capital Facility, all of which was
used for general working capital purposes. Such borrowings bear interest at a
variable rate (approximately 5.55% per annum at April 2, 1996). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition, Liquidity and Capital Resources."
DIVIDEND POLICY
It is anticipated that, following the Offerings, the Company initially will
declare and pay cash dividends at the quarterly rate of $.075 per share of
Common Stock, beginning with a dividend payable in the third quarter of 1996 in
respect of the operations of the Company in the second quarter of 1996. The
declaration of dividends by the Company and the amount thereof will, however, be
in the discretion of the Company Board and will depend upon the Company's
results of operations, financial condition, cash requirements, future prospects
and other factors deemed relevant by the Company Board.
There is no assurance that the Company will have earnings and profits for
federal income tax purposes until the Distribution. To the extent the Company
does not have sufficient earnings and profits, dividends paid on the Common
Stock prior to the Distribution would be treated for federal income tax purposes
as a non-taxable return of capital to the extent of the holder's basis in the
Common Stock and as a capital gain to the extent of any excess over such basis.
Dividends paid to corporate holders that are treated as return of capital or
capital gains would not qualify for the intercorporate dividends-received
deduction. See "Risk Factors -- Risk of Noncompletion of the Distribution."
18
<PAGE> 19
CERTAIN TRANSACTIONS IN CONNECTION WITH THE OFFERINGS
The Company is currently a wholly owned subsidiary of AT&T. Prior to
February 1, 1996, AT&T conducted the Company's businesses through various
divisions and subsidiaries. Beginning February 1, 1996, AT&T began effectuating
the Separation by transferring to the Company the assets and liabilities related
to such businesses, except that AT&T is retaining accounts receivable having a
face amount estimated for pro forma purposes at approximately $2,000 million.
The Company believes that the Separation will be substantially completed,
including the transfer of substantially all of such assets and liabilities, by
the Closing Date. Certain international assets relating primarily to the
communications services business of AT&T or to the computer business of NCR
which are not material to the Company in the aggregate may be held by the
Company or its subsidiaries at the Closing Date pending receipt of consents or
approvals or satisfaction of other applicable foreign requirements necessary for
the transfer of such assets to AT&T or NCR. In addition, certain international
assets relating primarily to the business of the Company which are not material
to the Company in the aggregate may be held by AT&T or its subsidiaries at the
Closing Date pending receipt of consents or approvals or satisfaction of other
applicable foreign requirements necessary for the transfer of such assets to the
Company. The Company's financial statements assume the consummation of all such
transactions. In addition, employee benefits assets will be held by AT&T or
employee benefit trusts subject to agreements to transfer these assets to the
Company or trusts established by the Company following the Distribution. See
"Arrangements Between the Company and AT&T -- Separation and Distribution
Agreement" and "-- Employee Benefits Agreement."
The Separation and the transactions being undertaken in connection
therewith, including the Offerings and the Distribution, are being effected
pursuant to a Separation and Distribution Agreement, dated as of February 1,
1996, by and among the Company, AT&T and NCR (the "Separation and Distribution
Agreement"). AT&T has announced that, subject to certain conditions, AT&T
intends to distribute to its shareholders by December 31, 1996 all of the Common
Stock of the Company owned by AT&T following the Offerings. See "Arrangements
Between the Company and AT&T -- Separation and Distribution Agreement."
In addition, as contemplated by the Separation and Distribution Agreement,
the Company, AT&T and, in certain cases, NCR have entered into certain ancillary
agreements which govern various interim and ongoing relationships between and
among the three companies (the "Ancillary Agreements"). The Ancillary Agreements
include agreements with respect to employee benefit arrangements, intellectual
property arrangements, the provision of interim services, tax sharing and
various commercial arrangements, including the sale of equipment by the Company
to AT&T. Pursuant to the General Purchase Agreement, AT&T and its designated
affiliates have committed to purchase an aggregate of at least $3,000 million of
products, licensed materials and services from the Company during the three-year
period ending December 31, 1998. If AT&T does not meet this purchase commitment
by December 31, 1998, AT&T will be required thereafter to pay interest based on
the shortfall until the $3,000 million purchase commitment is met. AT&T has also
agreed to prepay $500 million to the Company, on or prior to the Closing Date,
to be applied to accounts receivable from AT&T that are due and payable on or
after January 1, 1997 for the purchase of products, licensed materials and
services from the Company. See "Arrangements Between the Company and AT&T."
As reflected in the audited consolidated balance sheets for the Company at
December 31, 1995 and 1994, the Company has had limited direct third-party
indebtedness and historically has relied on internally generated funds and funds
provided by AT&T to finance its operations. However, AT&T is no longer providing
funds to finance the Company's operations. The Company has entered into a
Competitive Advance and Revolving Credit Facility Agreement, dated as of March
4, 1996, with Chemical Bank, as Agent (the "Working Capital Facility"), pursuant
to which the Company may borrow up to $4,000 million, subject to the terms and
conditions thereof. For a summary of certain provisions of the Working Capital
Facility, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition, Liquidity and Capital Resources."
The Company plans to repay the approximately $2,000 million expected to be
outstanding under the Working Capital Facility at the Closing Date with the
proceeds of the Offerings.
19
<PAGE> 20
In addition, AT&T has commenced issuance of up to $4,000 million of
short-term debt under a commercial paper facility (the "Commercial Paper
Program") which will be assumed by the Company, subject to certain conditions,
at the Closing Date. The Commercial Paper Program will be comprised of short-
term borrowings in the commercial paper market at market interest rates. It is
contemplated that AT&T will retain as of the Closing Date the proceeds of all
borrowings under the Commercial Paper Program and that AT&T will be released
from all of its obligations thereunder, with the result that the Company will
become the obligor thereunder. The Commercial Paper Program will be supported by
a back-up credit facility with third-party financial institutions initially
entered into by AT&T but which will be assumed by the Company, subject to
certain conditions, at the Closing Date. Neither AT&T nor the Company expects to
make any borrowings under the back-up credit facility. The Company expects that,
over time, the Company may refinance all or part of the Commercial Paper Program
from the proceeds of short- or long-term borrowings. In this regard, the Company
has filed the Shelf Registration Statement to register the offering from time to
time of up to $3,500 million of long-term debt. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview" and
"-- Financial Condition, Liquidity and Capital Resources."
The assumption by the Company of the Commercial Paper Program and the
retention by AT&T of accounts receivable are part of the establishment of the
initial capitalization of the Company. The factors considered in determining the
amount of this capitalization include the Company's prospective financing
requirements, the Company's working capital expenditure requirements, the
Company's desired credit rating, the Company's pro forma debt to capital ratio,
and the Company's need to procure bid and performance bonds, to arrange or
provide customer financing, to engage in hedging transactions and to attain
required self-insurance levels. In reviewing these factors, the capitalizations
and credit ratings of comparable companies in the Company's industry were also
considered. The Commercial Paper Program was developed to permit the assumption
by the Company of part of AT&T's debt in light of the fact that AT&T's
preexisting debt was not assumable by the Company. The retention of accounts
receivable by AT&T was designed to permit AT&T to retain approximately $2,000
million of cash equivalents as part of balancing the capitalizations of the two
companies.
The Company believes that the proceeds of the Offerings, as well as the
Working Capital Facility, cash flow from operations and short- and long-term
debt financings, will be sufficient to satisfy its future working capital,
capital expenditure, research and development and debt service requirements,
including debt service requirements on the Commercial Paper Program. The Company
also believes that it will be able to procure bid and performance bonds, to
arrange or provide customer financing as necessary, and to engage in hedging
transactions, on commercially acceptable terms. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition, Liquidity and Capital Resources" and "Risk Factors -- Future Capital
Requirements; Absence of AT&T Funding."
20
<PAGE> 21
CAPITALIZATION
Set forth below is the historical capitalization of the Company at December
31, 1995 and on a pro forma basis to give effect to the Offerings at the initial
public offering price set forth on the cover page of this Prospectus and the
Related Transactions. The unaudited pro forma balance sheet set forth below
should be read in conjunction with the unaudited pro forma condensed financial
statements of the Company and the historical financial statements of the Company
appearing elsewhere in this Prospectus. For an explanation of the adjustments
made in order to derive the unaudited pro forma information below, see "Certain
Transactions in Connection with the Offerings" and "Pro Forma Condensed
Financial Statements."
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
---------------------------
PRO FORMA
HISTORICAL (UNAUDITED)
----------- ---------
(IN MILLIONS)
<S> <C> <C>
SHORT-TERM DEBT:
Debt maturing within one year................................... $ 49 $ 49
Debt sharing amount in anticipation of assumption of the
Commercial Paper Program..................................... 3,842 --
Commercial Paper Program........................................ -- 3,842
Working Capital Facility........................................ -- --
-------- ------- -
Total short-term debt................................... $ 3,891 $ 3,891
======== ========
LONG-TERM DEBT.................................................... $ 123 $ 123
STOCKHOLDERS' EQUITY:
Common stock.................................................... -- 6
Preferred stock (authorized but unissued)....................... -- --
Additional paid-in capital...................................... 1,406 2,295
Foreign currency translation.................................... 28 28
-------- ------- -
Total stockholders' equity.............................. 1,434 2,329
-------- ------- -
TOTAL CAPITALIZATION.............................................. $ 1,557 $ 2,452
======== ========
</TABLE>
21
<PAGE> 22
SELECTED FINANCIAL DATA
The following table presents selected historical financial data of the
Company. The information set forth below should be read in conjunction with "Pro
Forma Condensed Financial Statements," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical financial
statements and notes thereto included elsewhere in this Prospectus. The
consolidated statement of operations data set forth below for each of the three
years ended December 31, 1995 and the consolidated balance sheet data at
December 31, 1995 and 1994 are derived from, and are qualified by reference to,
the audited consolidated financial statements included elsewhere in this
Prospectus, and should be read in conjunction with those financial statements
and the notes thereto. The consolidated balance sheet data at December 31, 1993
are derived from the audited consolidated balance sheet of the Company at
December 31, 1993, which is not included in this Prospectus. The consolidated
statement of operations data for each of the two years ended December 31, 1992
and the consolidated balance sheet data at December 31, 1992 and 1991 are
derived from unaudited consolidated financial statements not included in this
Prospectus.
The historical financial information may not be indicative of the Company's
future performance and does not necessarily reflect what the financial position
and results of operations of the Company would have been had the Company
operated as a separate, stand-alone entity during the periods covered. Per share
data for net income and dividends have not been presented because the Company's
businesses were operated through various divisions and subsidiaries of AT&T for
the periods presented. See "Risk Factors -- Limited Relevance of Historical
Financial Information."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues................................ $ 21,413 $ 19,765 $ 17,734 $ 17,312 $ 16,312
Costs(1)................................ 12,945 11,337 10,088 10,383 9,385
Gross margin......................... 8,468 8,428 7,646 6,929 6,927
Operating expenses
Selling, general and administrative
expenses(1)(2)..................... 7,083 5,360 5,016 4,814 6,241
Research and development
expenses(1)........................ 2,385 2,097 1,961 1,711 1,996
Operating income (loss)................. (1,000) 971 669 404 (1,310)
Income (loss) before income taxes and
cumulative effects of accounting
changes.............................. (1,138) 784 619 278 (1,522)
Income (loss) before cumulative effects
of accounting changes................ (867) 482 430 179 (971)
Cumulative effects of accounting
changes.............................. -- -- (4,208) -- --
Net income (loss)(1).................... (867) 482 (3,778) 179 (971)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets............................ $ 19,722 $ 17,340 $ 17,109 $ 14,466 $ 14,840
Total debt.............................. 4,014 3,164 3,195 3,942 4,871
Stockholder's equity.................... 1,434 2,476 2,580 3,098 3,827
</TABLE>
- ---------------
(1) 1995 includes pre-tax restructuring and other charges of $2,801 ($1,847
after taxes) recorded as $892 of costs, $1,645 of selling, general and
administrative expenses and $264 of research and development expenses. (See
Note 5 of Notes to Consolidated Financial Statements).
(2) 1991 includes pre-tax restructuring and other charges of $1,006 ($612 after
taxes).
22
<PAGE> 23
PRO FORMA CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma condensed financial statements set forth below have
been prepared assuming that the Offerings and the Related Transactions occurred
on December 31, 1995 for pro forma condensed balance sheet purposes and January
1, 1995 for pro forma condensed statement of operations purposes. THE UNAUDITED
PRO FORMA BALANCE SHEET PRESENTED BELOW DOES NOT PURPORT TO REPRESENT WHAT THE
COMPANY'S FINANCIAL POSITION ACTUALLY WOULD HAVE BEEN HAD THE OFFERINGS AND THE
RELATED TRANSACTIONS OCCURRED ON THE DATE INDICATED OR TO PROJECT THE COMPANY'S
FINANCIAL POSITION FOR ANY FUTURE DATE. THE UNAUDITED PRO FORMA CONDENSED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995, SET FORTH BELOW,
DOES NOT PURPORT TO REPRESENT WHAT THE COMPANY'S OPERATIONS ACTUALLY WOULD HAVE
BEEN HAD THE OFFERINGS AND THE RELATED TRANSACTIONS OCCURRED ON THE DATE
INDICATED OR TO PROJECT THE COMPANY'S OPERATING RESULTS FOR ANY FUTURE PERIOD.
The unaudited pro forma adjustments are based upon available information and
certain assumptions that the Company believes are reasonable. The unaudited pro
forma balance sheet should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and the
historical financial statements of the Company and the notes thereto appearing
elsewhere in this Prospectus.
PRO FORMA CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
----------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.................................. $ 448 $ 3,395(2)(5) $ 3,843
Accounts receivable -- net................................. 5,354 (2,000)(3) 3,354
Inventories................................................ 3,222 3,222
Deferred income taxes -- net............................... 1,482 1,482
Other current assets....................................... 173 173
---------- ----------- ---------
Total current assets.................................. 10,679 1,395 12,074
Property, plant and equipment -- net....................... 4,338 4,338
Prepaid pension costs...................................... 2,522 2,522
Deferred income taxes -- net............................... 872 872
Capitalized software....................................... 387 387
Other assets............................................... 924 924
---------- ----------- ---------
Total assets.......................................... $ 19,722 $ 1,395 $21,117
======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................................... $ 1,229 $ 1,229
Payroll and benefit-related liabilities.................... 3,026 3,026
Postretirement and postemployment benefit liabilities...... 227 227
Debt sharing amount in anticipation of assumption of the
Commercial Paper Program................................. 3,842 $(3,842)(4) --
Commercial Paper Program................................... 3,842(4) 3,842
Working Capital Facility................................... --(1)(5) --
Debt maturing within one year.............................. 49 49
Other current liabilities.................................. 2,690 500(2) 3,190
---------- ----------- ---------
Total current liabilities................................ 11,063 500 11,563
Postretirement and postemployment benefit liabilities...... 5,569 5,569
Long-term debt............................................. 123 123
Other liabilities.......................................... 1,533 1,533
---------- ----------- ---------
Total liabilities........................................ 18,288 500 18,788
Stockholders' equity
Common Stock............................................. -- 6(1) 6
Preferred stock (authorized but unissued)................ -- -- --
Additional paid-in capital............................... 1,406 889(1)(3) 2,295
Foreign currency translation............................. 28 28
---------- ----------- ---------
Total stockholders' equity................................. 1,434 895 2,329
---------- ----------- ---------
Total liabilities and stockholders' equity....... $ 19,722 $ 1,395 $21,117
======= ========= ========
</TABLE>
- ---------------
(1) Reflects the sale of 112,037,037 shares in the Offerings at the initial
public offering price set forth on the cover page of this Prospectus. As set
forth under "Use of Proceeds," the Company plans to use the
23
<PAGE> 24
proceeds of the Offerings to repay the approximately $2,000 of indebtedness
expected to be outstanding under the Working Capital Facility as of the
Closing Date and the remainder for general corporate purposes. Also reflects
the stock split or other issuance resulting in the ownership by AT&T of
524,624,894 shares of Common Stock.
(2) Gives effect to the prepayment by AT&T of $500 to be applied to accounts
receivable from AT&T that are due and payable on or after January 1, 1997
for the purchase of products, licensed materials and services from the
Company.
(3) Reflects the retention by AT&T of customer accounts receivable having a face
amount estimated for pro forma purposes at approximately $2,000.
(4) As described in Note 7 of Notes to Consolidated Financial Statements,
amounts shown as outstanding under the Debt Sharing Agreement at December
31, 1995 will be replaced with Commercial Paper issued by AT&T and assumed
by the Company on the Closing Date.
(5) The Company has entered into a $4,000 Working Capital Facility to fund
working capital subsequent to February 1, 1996. The Company expects to
borrow $2,000 under the Working Capital Facility prior to the Closing Date.
For purposes of the Pro Forma Condensed Balance Sheet, the Company has
assumed that the entire $2,000 will be repaid from the proceeds of the
Offerings.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
----------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues................................................... $ 21,413 $21,413
Costs...................................................... 12,945 12,943
Gross margin............................................. 8,468 8,468
Operating expenses
Selling, general and administrative expenses............. 7,083 7,083
Research and development expenses........................ 2,385 2,385
Operating income (loss).................................... (1,000) (1,000)
Other income -- net........................................ 164 164
Interest expense........................................... 302 302
Income (loss) before income taxes and cumulative effects of
accounting changes....................................... (1,138) (1,138)
Cumulative effects of accounting changes................... -- --
Net income (loss).......................................... (867) (867)
Loss per share
(Historical -- based on 524,624,894 shares
outstanding).......................................... (1.65)
(Pro forma -- based on 636,661,931 shares outstanding)... (1.36)(1)
</TABLE>
- ---------------
(1) Reflects the sale of an additional 112,037,037 shares of Common Stock in the
Offerings.
24
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is currently a wholly owned subsidiary of AT&T. Prior to
February 1, 1996, AT&T conducted the Company's businesses through various
divisions and subsidiaries. Beginning February 1, 1996, AT&T began effectuating
the Separation by transferring to the Company the assets and liabilities related
to such businesses, except that AT&T is retaining accounts receivable having a
face amount estimated for pro forma purposes at approximately $2,000 million.
The Company believes that the Separation will be substantially completed,
including the transfer of substantially all of such assets and liabilities, by
the Closing Date. Certain international assets relating primarily to the
communications services business of AT&T or to the computer business of NCR
which are not material to the Company in the aggregate may be held by the
Company or its subsidiaries at the Closing Date pending receipt of consents or
approvals or satisfaction of other applicable foreign requirements necessary for
the transfer of such assets to AT&T or NCR. In addition, certain international
assets relating primarily to the business of the Company which are not material
to the Company in the aggregate may be held by AT&T or its subsidiaries at the
Closing Date pending receipt of consents or approvals or satisfaction of other
applicable foreign requirements necessary for the transfer of such assets to the
Company. The Company's financial statements assume the consummation of all such
transactions. In addition, employee benefits assets will be held by AT&T or
employee benefit trusts subject to agreements to transfer these assets to the
Company or trusts established by the Company following the Distribution. See
"Arrangements Between the Company and AT&T -- Separation and Distribution
Agreement" and "-- Employee Benefits Agreement."
The Separation and the transactions being undertaken in connection
therewith, including the Offerings and the Distribution, are being effected
pursuant to the Separation and Distribution Agreement. AT&T has announced that,
subject to certain conditions, AT&T intends to distribute to its shareholders by
December 31, 1996 all of the Common Stock of the Company owned by AT&T following
the Offerings. See "Arrangements Between the Company and AT&T -- Separation and
Distribution Agreement."
After the completion of the Offerings and prior to the Distribution, AT&T
will own approximately 82.4% of the outstanding shares of Common Stock. The
Company and AT&T and, in certain cases, NCR have entered into certain agreements
providing for the Separation and governing various interim and ongoing
relationships between and among the three companies, including an agreement
between the Company and AT&T providing for the purchase of products, licensed
materials and services from the Company. See "Arrangements Between the Company
and AT&T."
The consolidated financial statements of the Company, which are discussed
below, reflect the results of operations, financial position and cash flows of
the businesses transferred to the Company from AT&T in the Separation. As a
result, the consolidated financial statements of the Company have been carved
out from the financial statements of AT&T using the historical results of
operations and historical basis of the assets and liabilities of such
businesses. Additionally, the consolidated financial statements of the Company
include certain assets, liabilities, revenues and expenses which were not
historically recorded at the level of, but are primarily associated with, such
businesses. Management believes the assumptions underlying the Company's
financial statements to be reasonable.
The financial information included herein, however, may not necessarily
reflect the results of operations, financial position and cash flows of the
Company in the future or what the results of operations, financial position and
cash flows would have been had the Company been a separate, stand-alone entity
during the periods presented. This is due to the historical operation of the
Company as part of the larger AT&T enterprise. The financial information
included herein does not reflect the many significant changes that will occur in
the funding and operations of the Company as a result of the Separation and the
Offerings.
As set forth in the financial information included herein, interest expense
reflects interest associated with the aggregate borrowings for each period
presented primarily using a blend of AT&T's short-term and long-term weighted
average interest rates. The average borrowings assumed to be outstanding for
1995, 1994, and
25
<PAGE> 26
1993 were $3,589 million, $3,179 million and $3,568 million, respectively. The
associated average interest rates were 7.3%, 7.4% and 6.3% per annum,
respectively. In the future, the Company may not be able to obtain financing
with interest rates as favorable as those enjoyed by AT&T with the result that
the Company's cost of capital will be higher than that reflected in its
historical financial statements. General corporate overhead related to AT&T's
corporate headquarters and common support divisions has been allocated to the
Company based on the ratio of the Company's external costs and expenses to
AT&T's external costs and expenses. This allocation of AT&T's general corporate
overhead expense may not reflect the Company's actual general corporate overhead
expense as a separate entity. Also, certain expenses incurred by the Company
were for services received from AT&T under direct contracting arrangements.
Although management believes the allocations and the charges for such services
to be reasonable, the costs of these services charged to the Company are not
necessarily indicative of the costs that would have been incurred if the Company
had been an independent entity and had otherwise contracted for or managed these
functions. Subsequent to the Separation, the Company will manage these functions
using its own resources or contract with third parties to perform these services
and, in addition, will be responsible for the costs and expenses associated with
the management of a public corporation. In addition, income taxes were
calculated as if the Company filed separate tax returns. However, AT&T was
managing its tax position for the benefit of its entire portfolio of businesses,
and its tax strategies are not necessarily reflective of the tax strategies that
the Company would have followed or will follow as a stand-alone entity.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the period reported. Actual results
could differ from those estimates. In addition, there are certain risks and
uncertainties inherent in operating the business, including the matters
discussed below under "-- Variability in the Company's Business" and
"-- Environmental." Other areas where estimates and judgments are required are
discussed in the Notes to Consolidated Financial Statements included elsewhere
in this Prospectus.
Prior to the Separation, the businesses transferred to the Company were
funded through AT&T and the Company had limited indebtedness to third parties.
The Company plans to assume, as of the Closing Date, up to $4,000 million of
direct short-term debt under the Commercial Paper Program. To the extent that
the aggregate amount of indebtedness of the Company shown in the consolidated
financial statements exceeds the direct third-party indebtedness of the
businesses transferred to the Company, such amount is reflected in the
consolidated financial statements as debt and shown as "Debt sharing amount in
anticipation of assumption of the Commercial Paper Program." This debt is
classified as short-term debt, consistent with the expectation that the Company
will assume, at the Closing Date, the commercial paper issued under the
Commercial Paper Program.
STRATEGIC REORGANIZATION
The Company historically has operated as part of AT&T. The Separation will
establish the Company as a stand-alone entity with objectives separate from
those of AT&T. The Company intends to focus its resources on the technologies
and markets it views as critical to its long-term success as a stand-alone
entity. The Company therefore has undertaken a comprehensive review of all of
its operations, including its organizational structure, products and markets,
with a view toward maximizing its return on investments. In connection with this
review, the Company adopted a strategic reorganization plan and recorded a
pre-tax restructuring charge of $2,613 million in the fourth quarter of 1995, in
addition to charges of $188 million for asset impairments and other items.
The total restructuring and other charges of $2,801 million ($1,847 million
after taxes) for 1995 was recorded as $892 million of costs, $1,645 million of
selling, general and administrative expenses, and $264 million of research and
development expenses. The charges included $1,509 million for employee
separation and other related items, $627 million for asset write-downs, $202
million for closing, selling and consolidating facilities and $463 million for
other items. Of the total charges, $1,788 million will result in future cash
payments and $1,013 million of the charges related to noncash items.
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<PAGE> 27
As part of these efforts, and as announced January 2, 1996, the Company
will eliminate approximately 22,000 positions, of which approximately 11,000 are
management positions and 11,000 are occupational positions. Approximately 1,000
additional management employees are employed by operations that the Company has
announced plans to sell. As of December 31, 1995, approximately 4,100 management
employees have accepted a voluntary severance package, the majority of whom will
leave the Company in early 1996. The Company expects approximately 70% of all
separations to be completed by the end of 1996 and the majority of the remaining
separations to be completed during 1997. These reductions are the result of the
Company's decisions to form a single corporate structure that eliminates
duplicative management and streamlines administrative functions, and to
outsource certain corporate functions.
The Company's reorganization efforts also include a plan to close all of
the Company's 338 Phone Center Stores, most of which are expected to be closed
by May 1996, and to distribute its consumer products only through national,
regional and catalog retailers and network operators. In addition, the Company
plans to consolidate certain international facilities.
As part of the redefinition of its objectives, the Company intends to focus
its investments on its core technologies, primarily through expanded and
targeted research and development efforts. Consequently, the Company has decided
to sell and exit tangential product lines and markets, including its Paradyne
subsidiary which manufactures certain data communications equipment, and its
microelectronics interconnect products business which manufactures backplanes
and printed circuit boards. In 1995, revenues associated with operations that
the Company has exited or expects to exit in connection with these
reorganization efforts accounted for approximately 4.6% of the Company's total
revenues. When appropriate, the Company will pursue core technologies through
strategic acquisitions, partnerships or joint ventures. For example, the Company
recently acquired certain telecommunications assets of the Philips Businesses to
expand its global line of systems which support non-United States standards for
mobile and fixed wireless access and digital optical transport.
The restructuring charges also included costs associated with early
termination of building leases, the closing, sale or consolidation of certain
owned facilities and asset write-downs as part of the plan to sell certain
businesses and to restructure certain operations.
VARIABILITY IN THE COMPANY'S BUSINESS
There are a number of factors that contribute to variability in the
Company's business. This variability can produce wide fluctuations in revenues
and earnings quarter to quarter, and in some cases year to year. Variability is
not a new trend and the Company expects it to continue, and possibly intensify.
Notwithstanding this variability, the Company has increased both revenues and
earnings (absent restructuring and other charges). The factors contributing to
variability include seasonality, multi-year contracts and associated revenue
recognition.
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Seasonality
The following table sets forth the unaudited total revenues, gross margin
and net income of the Company on a quarterly basis for each of the two years
ended December 31, 1995:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
------ ------ ------ ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1995
Total revenues.................... $4,159 $5,083 $4,744 $ 7,427 $21,413
Gross margin...................... 1,850 2,251 2,042 2,325(1) 8,468(1)
Net income (loss)................. (22) 159 13 (1,017)(2) (867)(2)
1994
Total revenues.................... 4,052 4,665 4,776 6,272 19,765
Gross margin...................... 1,740 2,028 2,006 2,654 8,428
Net income (loss)................. (43) 78 44 403 482
</TABLE>
- ---------------
(1) Includes restructuring charges of $892 of costs.
(2) Includes restructuring and other charges of $2,801 ($1,847 after taxes).
Like most telecommunications systems manufacturers, the Company's sales are
highly seasonal. Most of the Company's large customers delay a large and growing
percentage of their capital expenditures until the fourth quarter due to
cautious capital spending against budgets, while still seeking year-end tax
benefits. A focus on project completion by year-end also supports this buying
behavior. The Company has responded to this customer capital spending trend in
various ways that assure product availability and the necessary sales focus
during a critical quarterly period. Further, the Company has placed an increased
focus on the completion of software releases by mid-year to allow for commercial
availability and delivery in the fourth quarter. These software releases require
significant research and development expenditures early in the year, with
minimal offsetting revenues, but are key contributors to the Company's profits
during the fourth quarter. The Company's promotional and sales incentive
programs also tend to focus on the fourth quarter to sustain marketing support
during this period. Additionally, sales of consumer products in the retail
markets are generally stronger in the fourth quarter, corresponding to holiday
buying. In contrast, adverse weather conditions and incomplete customer budget
plans, as well as the impact of customer vacation schedules on deployment and
purchasing plans, tend particularly to depress Company revenues during the first
and third quarters, respectively.
As a result of growing competitive pressures among network operators (which
have led to an increasing emphasis on return on investment and the budgeting
process), along with the increasing prominence of software as a percentage of
the Company's revenues, the trend toward seasonality has been increasing over
the past three years.
Due to the foregoing factors, the Company's revenues and net income are
strongest in the fourth quarter of each year, representing 34.7% and 31.7% of
consolidated revenues and 84.7% (before restructuring and other charges) and
83.6% of net income in 1995 and 1994, respectively. Software sales were higher
in the fourth quarter of 1995 than those in the comparable quarter in 1994.
Consequently, the Company's results of operations for the first three quarters
of each year have in the aggregate been significantly less profitable than the
fourth quarter and the Company has frequently experienced net losses in the
first quarter. For a discussion of the expected significantly lower operating
results for the first and second quarters of 1996 as compared to the
corresponding 1995 periods, see "Risk Factors -- Seasonality; Anticipated Loss
for First Half of 1996."
Multi-Year Contracts and Associated Revenue Recognition
In recent years, the purchasing behavior of the Company's large customers
has increasingly been characterized by the use of fewer, larger contracts. This
trend is expected to intensify, and contributes to the variability of the
Company's results. Such larger purchase contracts typically involve longer
negotiating cycles, require the dedication of substantial amounts of working
capital and other Company resources, and in general
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<PAGE> 29
require investments which may substantially precede recognition of associated
revenues. Moreover, in return for larger, longer-term purchase commitments,
customers often demand more stringent acceptance criteria, which can also cause
revenue recognition delays. Certain multi-year contracts may relate to new
technologies which may not have been previously deployed on a large-scale
commercial basis. The Company may incur significant initial cost overruns and
losses on such contracts which would be recognized in the quarter in which they
became ascertainable. Further profit estimates on such contracts are revised
periodically over the lives of the contracts, and such revisions can have a
significant impact on reported earnings in any one quarter.
The Company has managed this particular aspect of variability by
significantly reducing its product development, manufacturing and system
deployment intervals. The Company has also invested in project management tools
and disciplines to enhance its ability to execute successfully. Additionally,
the Company has worked to deploy its resources against the highest-value
projects. In part to manage the fluctuations produced by this buying behavior,
the Company has diversified its customer base, both in the United States and
internationally, and has developed relationships with other sets of customers
(including, for example, competitive access providers ("CAPs"), cable television
network operators and computer manufacturers).
Revenue recognition for work on multi-year contracts is based upon the
specific terms and conditions of each contract. These terms and conditions may
vary markedly depending upon the nature of the technology being purchased and
the development cycles of such technology, the specific requirements of the
customer, delivery, deployment schedules and acceptance criteria. Therefore, the
amount of purchases actually contracted for or deployed in a period may differ
substantially from the revenues realized for the same period.
One of the Company's multi-year contracts is with Pacific Bell for the
provision of a broadband network based on hybrid fiber-coaxial cable technology.
Implementation difficulties and cost overruns have arisen under this contract,
which may result in claims being made by the parties under the contract. The
Company and Pacific Bell are conducting negotiations in an effort to resolve
outstanding issues and potential claims. The Company's historical financial
statements reflect a reserve relating to this contract. Based on the future
negotiations with Pacific Bell, the Company will continue to assess the adequacy
of this reserve.
GENERAL
The following table sets forth the Company's revenues by product line, and
the approximate percentage of total revenues represented thereby, for each of
the three years ended December 31, 1995:
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS)
Systems for Network Operators.......... $11,459 54% $10,841 55% $ 9,367 53%
Business Communications Systems........ 5,144 24 4,557 23 3,982 22
Microelectronic Products............... 1,864 9 1,461 7 1,323 8
Consumer Products...................... 1,787 8 1,924 10 1,816 10
Other Systems and Products............. 1,159 5 982 5 1,246 7
------- --- ------- --- ------- ---
Total............................... $21,413 100% $19,765 100% $17,734 100%
======= === ======= === ======= ===
</TABLE>
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<PAGE> 30
The following table sets forth a summary of costs and expenses as a
percentage of revenues for each of the three years ended December 31, 1995, and
for the year ended December 31, 1995 as adjusted to exclude the restructuring
and other charges:
<TABLE>
<CAPTION>
1995 1995 1994 1993
------------- ----- ----- -----
(AS ADJUSTED)
<S> <C> <C> <C> <C>
Revenues............................................... 100.0% 100.0% 100.0% 100.0%
Costs.................................................. 56.3 60.5 57.4 56.9
------- ---- ------ ----
Gross margin......................................... 43.7 39.5 42.6 43.1
Operating expenses
Selling, general and administrative
expenses.......................................... 25.4 33.1 27.1 28.3
Research and development expenses.................... 9.9 11.1 10.6 11.0
------- ---- ------- ----
Operating income (loss)................................ 8.4% (4.7%) 4.9% 3.8%
======= ==== ======= ====
</TABLE>
1995 VERSUS 1994
Revenues grew in the Company's three largest product lines in 1995 compared
with 1994, causing total revenues to increase $1,648 million or 8.3%. Growth in
revenues from customers outside the United States (international and export)
provided 74.5% of the increase in revenues. International revenues (which
include export revenues) represented 23.3% of total revenues in 1995 compared to
19.1% of total revenues in 1994.
Revenues from systems for network operators were $11,459 million, an
increase of $618 million or 5.7% in 1995 compared with 1994. Sales of wireless
infrastructure to network operators accounted for approximately 15% of total
sales to network operators. Sales in the United States were essentially flat,
which the Company attributes to delays in spending by network operators and
their growing reluctance to purchase from a potential competitor. However,
domestic sales of wireless infrastructure increased approximately 19%. Revenues
from systems for network operators outside the United States increased
approximately 28% in 1995 compared with 1994. These increases were due primarily
to increases in sales of wireless infrastructure of approximately 14%, to
increases in sales of switching and transmission systems, including software, of
approximately 22%, and to revenues under a $4,000 million multi-year contract
awarded in 1994 to design and build a fully digital telecommunications network
in Saudi Arabia.
Revenues from business communications systems of $5,144 million increased
$587 million or 12.9% in 1995 compared with 1994, primarily due to strong United
States and international product sales growth. Service revenues increased due to
growth in maintenance contracts and higher installation revenues associated with
the increased sales. United States revenues grew approximately 10%, primarily
due to increased sales of DEFINITY(R) products, including upgrades, and sales of
INTUITY(TM) voice messaging products. This increase was offset in part by the
continuing decline in the rental base of approximately $84 million, reflecting
the Company's emphasis on the sale rather than rental of its products.
International revenues grew approximately 36%, primarily due to sales of the
Company's SYSTIMAX(R) structured cabling systems and higher sales through
international distributors.
Sales of microelectronic products of $1,864 million increased $403 million
or 27.6% in 1995 compared with 1994, due to higher sales of ICs both inside and
outside the United States. Most of this growth derived from sales to customers
outside the United States. Included in microelectronic products are $50 million
in sales of the Company's interconnect products business which the Company plans
to sell.
Revenues from consumer product sales (including $425 million in sales
through the Phone Center Stores, which the Company plans to close) were $1,787
million, a decline of $137 million or 7.1% in 1995 compared with 1994. The
decrease in 1995 revenues was primarily due to the expected continuing decline
in the customer base for rental revenues for telephones and declines in product
sales related to discontinued product lines, partially offset by strong consumer
demand for cordless telephones.
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<PAGE> 31
Revenues from sales of other systems and products of $1,159 million in 1995
increased $177 million or 18.0% compared with 1994, due to higher royalties.
Sales of other systems and products include $388 million in revenues from the
Company's Paradyne subsidiary, which the Company plans to sell.
Costs of $12,945 million increased $1,608 million or 14.2% in 1995 compared
with 1994. Excluding the restructuring and other charges of $892 million, costs
grew $716 million or 6.3%, reflecting the higher volume of sales and services.
Gross margin decreased to 39.5% in 1995 from 42.6% in 1994, due to restructuring
and other charges. Excluding these charges, gross margin increased to 43.7% in
1995 from 1994, due to increased sales of higher margin software products to
network operators, offset in part by the erosion of high margin rental revenues.
Research and development expenses of $2,385 million increased $288 million
or 13.7% in 1995 compared with 1994. This increase was due to restructuring
charges of $264 million (which were principally related to the reduction in
administrative support functions at Bell Labs and disposal of research and
development assets related to changing technologies), as well as development
work associated with software, wireless access and type approval and
certification of products for local markets. Research and development expenses
represented 11.1% of revenues in 1995 compared with 10.6% of revenues in 1994.
Excluding the charges, research and development expenses represented 9.9% of
revenues in 1995. Consistent with the Company's strategy, the Company expects
that research and development expenses, as an absolute amount and as a
percentage of revenues, will increase in 1996.
Selling, general and administrative expenses of $7,083 million increased
$1,723 million or 32.1% in 1995 compared with 1994. This increase was due to
$1,645 million in restructuring and other charges and increased spending on
sales and sales support efforts, including expenses relating to growth in
international revenues. Selling, general and administrative expenses were 33.1%
of revenues in 1995, an increase from 27.1% of revenues in 1994, reflecting the
restructuring charges (which were principally related to the reduction in
personnel in administrative and corporate support functions and at Phone Center
Stores). Excluding the charges, selling general and administrative expenses were
25.4% of revenues in 1995, reflecting cost containment efforts.
Interest expense in 1995 was $302 million, an increase of $32 million or
12% compared with 1994. The increase was due to higher average debt levels in
1995 compared with 1994. The average borrowings assumed to be outstanding in
1995 increased to approximately $3,589 million from approximately $3,179 million
in 1994. The associated average interest rates were 7.3% per annum in 1995
compared with 7.4% per annum in 1994.
Other income -- net increased $81 million to $164 million in 1995 compared
with 1994, primarily due to gains on investments in 1995.
The effective income tax rate of 23.8% in 1995 decreased from 38.5% in
1994, primarily due to the nondeductibility of certain of the 1995 restructuring
and other charges, which resulted in a net loss for 1995.
For 1995, the Company had a net loss of $867 million, reflecting $2,801
million ($1,847 million after taxes) of restructuring and other charges.
Excluding the charges, net income was $980 million, an increase of $498 million
compared to 1994.
1994 VERSUS 1993
Revenues grew in each of the Company's four main product lines in 1994
compared with 1993, causing revenue to increase $2,031 million or 11.5%. Growth
in revenues from customers outside of the United States provided 38.4% of the
increase. International revenues represented 19.1% of total revenues in 1994
compared with 16.9% in 1993.
Revenues from systems for network operators rose $1,474 million or 15.7% to
$10,841 million in 1994 compared with 1993. Approximately 16% of the revenue
growth was the result of AG Communications Systems Corporation being accounted
for on a consolidated basis after the Company increased its ownership to 80%
from 49%. Sales of wireless infrastructure to network operators accounted for
approximately 14% of
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<PAGE> 32
total sales to network operators. Sales in the United States increased
approximately 15%. The increases also resulted from an increase in wireless
sales of approximately 55%, and an increase in sales of switching and
transmission systems, including software, of approximately 13%. Revenues from
systems for network operators outside the United States increased approximately
19%. These increases were due primarily to increases in wireless sales of
approximately 49% and to increases in sales of switching and transmission
systems, including software, of approximately 7%.
Revenues from business communications systems were $4,557 million, an
increase of $575 million or 14.4% in 1994 compared with 1993 due to strong
United States and international product sales growth. Service revenues increased
due to growth in maintenance contracts and higher installation revenues
associated with the increased sales. Partially offsetting these increases was
the erosion of the rental base of approximately $96 million which continued to
drive rental revenues down. United States revenues grew approximately 10%
primarily due to increased sales of DEFINITY products, including upgrades to
accommodate expansion in the number of area codes, sales of INTUITY
CONVERSANT(R) voice processing products and sales of INTUITY AUDIX(R) voice
messaging products. International revenues grew approximately 53% primarily due
to the implementation of the Company's global growth strategy which included
acquisitions in Europe.
Revenues from microelectronic products of $1,461 million increased $138
million or 10.4% in 1994 compared with 1993 due to higher sales of ICs and
electronic power systems to customers outside of the United States.
Revenues from consumer products were $1,924 million, an increase of $108
million or 5.9% in 1994 compared with 1993. The increase in 1994 sales was due
primarily to strong consumer sales of cellular and cordless phones, partially
offset by the continuing decline in rental revenues for telephones.
Revenues from sales of other systems and products were $982 million in
1994, a decrease of $264 million or 21.2% compared with 1993. The decrease
results from a decline in sales of special design products for the United States
government due to reductions in defense spending.
Costs of $11,337 million increased $1,249 million, or 12.4% in 1994
compared with 1993. The increase is due to the higher volume of sales and
services. The gross margin percentage declined to 42.6% in 1994 from 43.1% in
1993. Increases in gross margins for most major product lines were more than
offset by a lower gross margin for consumer products due to the erosion of the
rental base.
Research and development expenses of $2,097 million increased $136 million
or 6.9% in 1994 compared with 1993, as a result of work related to wireless
system technology and type approval and certification of products for local
standards. Research and development expenses represented 10.6% of 1994 revenues,
as compared with 11.0% of revenues in 1993.
Selling, general and administrative expenses of $5,360 million increased
$344 million, or 6.9% in 1994 compared with 1993. The increase was largely due
to increased spending on sales and sales support efforts, as well as for
expenses related to global growth. Selling, general and administrative expenses
as a percentage of revenues decreased to 27.1% in 1994 from 28.3% in 1993,
reflecting cost containment efforts.
Other income -- net in 1994 was $83 million compared to $193 million in
1993. The decrease of $110 million in 1994 compared with 1993 relates primarily
to a charge of $38 million in 1994 for the write-down of the Company's
investment in a hand-held tablet communication device business and an increase
in losses on foreign currency transactions of $35 million. See Note 4 of Notes
to Consolidated Financial Statements.
Interest expense of $270 million in 1994 was approximately $27 million
greater than 1993, due to higher interest rates offset by a decrease in average
borrowings in 1994 compared to 1993. The average borrowings assumed to be
outstanding in 1994 decreased to approximately $3,179 million from approximately
$3,568 million in 1993. The decrease in average borrowings was offset by a
higher associated average interest rate of 7.4% per annum in 1994 compared with
6.3% per annum in 1993.
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<PAGE> 33
The effective income tax rate was 38.5% in 1994, compared with 30.5% in
1993. The lower effective tax rate in 1993 relates primarily to a net tax
benefit recorded in 1993 to increase the Company's net deferred tax assets to
reflect the increase in the federal income tax rate from 34% to 35%.
The adoption of three accounting standards, effective January 1, 1993,
issued by the Financial Standards Accounting Board resulted in an after-tax
charge of $4,208 million in 1993, representing the cumulative effect of these
accounting changes.
Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers
Accounting for Postretirement Benefits Other Than Pensions," requires accrual of
estimated future retiree benefits during the years in which employees are
working and accumulating these benefits. Previously, health care benefits were
expensed as claims were incurred and life insurance benefits were expensed as
plans were funded. A one-time after-tax charge for the unfunded portions of
these liabilities of $3,722 million was recorded in 1993 as a cumulative effect
of accounting change upon adoption of this standard.
SFAS No. 112, "Employers' Accounting for Postemployment Benefits," requires
the Company to accrue for estimated future postemployment benefits, including
separation payments, during the years in which employees are working and
accumulating these benefits, and for disability payments when the disabilities
occur. Previously, costs for separations were recognized when approved and
disability benefits were recognized when paid. The Company recognized a $530
million after-tax charge upon adoption of this standard.
SFAS No. 109, "Accounting for Income Taxes," requires, among other
provisions, the computation of deferred tax amounts using the enacted corporate
income tax rates for the years in which the taxes will be paid or refunds
received. A cumulative effect of accounting change benefit of $44 million was
recognized in 1993 related to adopting this standard.
Reported net income increased $4,260 million for the year ended December
31, 1994 compared with the year ended December 31, 1993, primarily due to the
$4,208 million net charge for the accounting changes discussed above. Excluding
the cumulative effect of the accounting changes in 1993, net income increased
$52 million, or 12.1% for the year ended December 31, 1994 compared with the
year ended December 31, 1993.
ENVIRONMENTAL
The Company's current and historical operations are subject to a wide range
of environmental protection laws. The Company has remedial and investigatory
activities underway at 46 current and former facilities. In addition, AT&T and
its subsidiaries have been named a PRP at numerous "Superfund" sites pursuant to
CERCLA or comparable state statutes. Under the Separation and Distribution
Agreement, the Company will assume or indemnify AT&T for all liabilities
primarily relating to, arising out of or resulting from (i) the operation of the
Company Business as conducted at any time prior to, on or after the Closing Date
or (ii) any Company Assets including, without limitation, those associated with
these sites. It is often difficult to estimate the future impact of
environmental matters, including potential liabilities. The Company records an
environmental reserve when it is probable that a liability has been incurred and
the amount of the liability is reasonably estimable. This practice is followed
whether the claims are asserted or unasserted. Management expects that the
amounts reserved for will be paid out over the period of remediation for the
applicable site which ranges from 5 to 30 years. Reserves for estimated losses
from environmental remediation are, depending on the site, based primarily upon
internal or third party environmental studies, and estimates as to the number,
participation level and financial viability of any other PRPs, the extent of the
contamination and the nature of required remedial actions. Accruals are adjusted
as further information develops or circumstances change. The amounts provided
for in the Company's consolidated financial statements in respect of
environmental reserves are the gross undiscounted amount of such reserves,
without deductions for insurance or third party indemnity claims. In those cases
where insurance carriers or third party indemnitors have agreed to pay any
amounts and management believes that collectibility of such amounts is probable,
the amounts are reflected as receivables in the financial statements. Although
the Company believes that its reserves are adequate, there can be no assurance
that the amount of capital expenditures and other expenses which will be
required relating to remedial actions and compliance with applicable
environmental laws will not exceed the amounts reflected in the Company's
reserves or will not have a material adverse effect on the financial condition
of the Company or
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<PAGE> 34
the Company's results of operations or cash flows. Any amounts of environmental
costs that may be incurred in excess of those provided for at December 31, 1995
cannot be determined.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company generated (used) cash flow from operations of $478 million,
$1,579 million and $(1,268) million for the years ended 1995, 1994 and 1993,
respectively. The decline in cash flow provided by operations in 1995 compared
to 1994 was primarily due to the higher accounts receivable balance at year-end
1995, reflecting significantly higher fourth quarter sales, and higher inventory
balances, as work in process for long-term contracts increased. The improvement
in cash flow from operations in 1994 compared with 1993 was due to lower levels
of contributions to trusts for retiree benefits in 1994.
Fluctuations in the amount of inventories, accounts receivable and accounts
payable are principally associated with the level and timing of business
volumes. In 1995, the Company's inventory turnover ratio decreased slightly to
3.4 times from 3.5 times in 1994. Accounts receivable were outstanding an
average of 81 days in 1995, compared with 76 days in 1994, reflecting the
increase in fourth quarter revenues in 1995.
Cash flow used in investing activities was $1,342 million, $567 million and
$1,087 million in 1995, 1994 and 1993, respectively. Capital expenditures, the
largest component, were $1,277 million, $878 million and $577 million for the
years ended 1995, 1994 and 1993, respectively. Capital expenditures generally
relate to expenditures for equipment and facilities used in manufacturing and
research and development, including expansion of manufacturing capacity, and
expenditures for cost reduction efforts and international growth. For example,
in 1995 capital expenditures included construction of a new facility to
consolidate the Company's operations relating to systems for network operators
and expansion of manufacturing capacity for ICs and wireless equipment.
Net cash provided by (used in) financing activities was $724 million,
$(741) million, and $2,510 million for the years ended 1995, 1994 and 1993,
respectively. The Company historically has relied on AT&T to provide financing
for its operations. The cash flows from financing activities reflected herein
principally reflect changes in the Company's assumed capital structure. These
cash flows are not necessarily indicative of the cash flows that would have
resulted if the Company were a stand-alone entity.
The Company leases land, buildings and equipment through contracts that
expire in various years, through 2004. Rental expense under operating leases was
$209 million in 1995, $183 million in 1994 and $202 million in 1993. Future
minimum lease payments due under noncancelable operating leases at December 31,
1995 total $245 million. The Company expects to fund such commitments through
its working capital and funds generated from operations.
In February 1996, the Company entered into an agreement with MajorCo L.P.,
an affiliate of Sprint Spectrum LP, to supply and install approximately 60% of
SSLP's market areas over a five-year period. This agreement is conditioned,
among other things, upon the Company providing (or guaranteeing) long-term
financing to SSLP for its purchase of equipment and services from the Company.
The Company has entered into discussions with SSLP with respect to such
financing and has proposed providing (or guaranteeing) $1,000 million of
long-term financing for SSLP's purchases from the Company. These discussions are
ongoing.
Prepaid pension costs are increasing as returns on pension plan assets
exceed pension benefits earned during the year plus interest cost on the
projected benefit obligation.
In the normal course of business the Company uses various financial
instruments, including derivative financial instruments, for purposes other than
trading. The Company does not use derivative financial instruments for
speculative purposes. These instruments include commitments to extend credit,
letters of credit, guarantees of debt, interest rate swap and cap agreements,
and foreign currency exchange contracts. Foreign currency exchange contracts are
used to mitigate foreign currency exposure. As is customary for these types of
instruments, collateral is generally not required to support these financial
instruments. The Separation and Distribution Agreement provides that, as between
the Company and AT&T, the Company has assumed all liabilities under or otherwise
relating to derivatives and similar obligations primarily related to the
Company's business. Initially, AT&T may continue to perform obligations under
such derivatives and similar
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<PAGE> 35
obligations on behalf of the Company but all amounts paid to or received from
third parties will be charged to, or paid over or credited to, the Company, as
the case may be.
By their nature all such instruments involve risk including the credit risk
of nonperformance by counterparties, and the Company's maximum potential loss
may exceed the amount recognized in the Company's balance sheet. However, at
both December 31, 1995 and 1994, in management's opinion there was no
significant risk of loss in the event of nonperformance of the counterparties to
these financial instruments. The Company controls its exposure to credit risk
through credit approvals, credit limits and monitoring procedures, and
management believes that reserves for losses are adequate. The Company does not
have any significant exposure to any individual customer or counterparty nor any
major concentration of credit risk related to any financial instruments.
The ratio of total debt to total capital (debt plus equity) was 73.7% at
December 31, 1995, compared to 56.1% at December 31, 1994. The increase reflects
the lower level of equity due to the restructuring and other charges taken in
1995. The Offerings and the other Related Transactions result in a pro forma
debt to capital ratio for the Company as of December 31, 1995 of approximately
63.3%.
For the reasons described under "-- Variability in the Company's Business,"
the Company's working capital requirements and cash flow provided by operating
activities can vary greatly from quarter to quarter, depending on the volume of
production, the timing of deliveries and the payment terms offered to customers.
In the past, the Company's working capital needs have been satisfied as part of
AT&T's corporate-wide cash management policies. However, AT&T is no longer
providing funds to finance the Company's operations.
The Company estimates that the future cash expenditures to implement the
restructuring programs will be approximately $1,788 million and will be paid
primarily in 1996. Such expenditures are expected to be funded through cash
flows from operations and working capital. As part of the Separation, AT&T is
retaining accounts receivable that arose in the business of the Company having a
face amount estimated for pro forma purposes at approximately $2,000 million.
To meet its working capital needs, the Company has entered into the Working
Capital Facility. The Working Capital Facility provides that, subject to the
terms and conditions thereof, the Company may borrow on a revolving credit basis
at any time and from time to time prior to March 3, 1997 a principal amount not
in excess of $4,000 million at any time outstanding. The Company may use the
proceeds of the Working Capital Facility for capital expenditures, refunding of
debt and general corporate purposes, including working capital. The Working
Capital Facility also provides that the Company may invite the lenders party
thereto to bid on an uncommitted basis on short-term borrowings (which would
reduce the availability of the $4,000 million commitment) by the Company
maturing on or prior to such date. The final maturity of all loans under the
Working Capital Facility is March 3, 1997. The Working Capital Facility contains
certain representations and warranties, conditions to borrowing, affirmative and
negative covenants (including covenants imposing limitations on liens and on
sale and leaseback transactions) and events of default.
Each standby borrowing will be comprised entirely of Eurodollar standby
loans, certificate of deposit ("CD") loans or Alternate Base Rate ("ABR") loans,
as the Company may request. Eurodollar standby loans and CD loans will bear
interest at a rate per annum equal to the London Interbank Offered ("LIBO") rate
or the adjusted CD rate, plus the respective spreads determined pursuant to the
Applicable Percentage (as defined below), in each case as in effect from time to
time. ABR loans will bear interest at the alternate base rate (determined by
reference to federal funds or prime rates) in effect from time to time. After
the Closing Date, ABR loans will bear interest at a rate equal to the greater of
(i) the prime rate or (ii) the federal funds rate plus 1/2 of 1% per annum. Each
competitive borrowing will be comprised entirely of Eurodollar competitive loans
or fixed rate loans with interest rates established pursuant to the competitive
bid process. In addition to certain administrative fees, the Working Capital
Facility provides for a facility fee equal to the Applicable Percentage per
annum in effect from time to time on the average daily amount of the commitments
whether used or unused.
The Working Capital Facility provides that the "Applicable Percentage" will
be determined by reference to the ratings applicable at the time of
determination to the long-term debt of the Company. Subject to certain
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<PAGE> 36
exceptions and adjustments, the Eurodollar standby loan spread, the CD loan
spread and the facility fee components of the Applicable Percentage will range,
respectively, from .11%, .235% and .04% for ratings AA-or higher by S&P and Aa3
or higher by Moody's to .275%, .40%, and .10% for ratings BBB or lower by S&P
and Baa2 or lower by Moody's.
As of April 2, 1996, the Company had borrowed $1,954 million under the
Working Capital Facility, all of which was used for general working capital
purposes. Such borrowings bear interest at a daily variable rate. The Company
plans to repay the approximately $2,000 million expected to be outstanding under
the Working Capital Facility at the Closing Date with proceeds of the Offerings.
In addition, AT&T has commenced issuance of up to $4,000 million of
short-term debt under the Commercial Paper Program, which will be assumed by the
Company, subject to certain conditions, at the Closing Date. The Commercial
Paper Program will be comprised of short-term borrowings in the commercial paper
market at market interest rates. It is contemplated that AT&T will retain the
proceeds of all borrowings under the Commercial Paper Program and that, on the
Closing Date, AT&T will be released from all of its obligations thereunder, with
the result that the Company will become the obligor thereunder. The Commercial
Paper Program will be supported by a back-up credit facility with third-party
financial institutions initially entered into by AT&T but which will be assumed
by the Company, subject to certain conditions, at the Closing Date. Neither AT&T
nor the Company expects to make any borrowings under the back-up credit
facility. The Company expects that, over time, the Company may refinance all or
part of the Commercial Paper Program from the proceeds of short- or long-term
borrowings. In this regard, the Company has filed the Shelf Registration
Statement to register the offering from time to time of up to $3,500 million of
long-term debt.
Pursuant to the General Purchase Agreement, AT&T has agreed to prepay $500
million to the Company, on or prior to the Closing Date, to be applied to
accounts receivable from AT&T that are due and payable on or after January 1,
1997 for the purchase of products, licensed materials and services from the
Company. See "Certain Transactions in Connection with the Offerings."
The assumption by the Company of the Commercial Paper Program and the
retention by AT&T of accounts receivable are part of the establishment of the
initial capitalization of the Company. The factors considered in determining the
amount of this capitalization include the Company's prospective financing
requirements, the Company's working capital and capital expenditure
requirements, the Company's desired credit rating, the Company's pro forma debt
to capital ratio, and the Company's need to procure bid and performance bonds,
to arrange or provide customer financing, to engage in hedging transactions and
to attain required self-insurance levels. In reviewing these factors, the
capitalizations and credit ratings of comparable companies in the Company's
industry were also considered. The Commercial Paper Program was developed to
permit the assumption by the Company of part of AT&T's debt in light of the fact
that AT&T's preexisting debt was not assumable by the Company. The retention of
accounts receivable by AT&T was designed to permit AT&T to retain approximately
$2,000 million of cash equivalents as part of balancing the capitalizations of
the two companies.
The Company believes that the proceeds of the Offerings, as well as the
Working Capital Facility, cash flow from operations and short- and long-term
debt financings, will be sufficient to satisfy its future working capital,
capital expenditure, research and development, and debt service requirements,
including debt service requirements on the Commercial Paper Program. The Company
further believes that it will be able to access the capital markets on terms and
in amounts that will be satisfactory to it, although there can be no assurance
that will be the case. The Company believes that it will be able to obtain bid
and performance bonds, to arrange or provide customer financing as necessary,
and to engage in hedging transactions on commercially acceptable terms.
RECENT PRONOUNCEMENTS
Effective on October 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of ." This standard requires the Company to review long-lived assets and certain
identifiable intangibles held and used for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption
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<PAGE> 37
of this standard did not have a material impact on the Company's results of
operations, financial condition or cash flows because this was essentially the
method the Company used in the past to measure and record asset impairments. The
1995 restructuring and other charges did include recognition of asset
impairments.
In 1996, SFAS No. 123, "Accounting for Stock-Based Compensation," will be
adopted. This standard establishes a fair value method for accounting for or
disclosing stock-based compensation plans. This standard will be adopted in 1996
by disclosing the pro forma consolidated net income and earnings per share
amounts assuming the fair value method was effective on January 1, 1995. The
adoption of this standard will not affect the Company's results of operations,
financial position or cash flows.
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BUSINESS
The Company is one of the world's leading designers, developers and
manufacturers of telecommunications systems, software and products. The Company
is a global market leader in the sale of public telecommunications systems, and
is a supplier of systems and software to 23 of the world's 25 largest network
operators. The Company is also a global market leader in the sale of business
communications systems and in the sale of microelectronic components for
communications applications to manufacturers of communications systems and
computers. Further, the Company is the largest supplier in the United States of
telecommunications products for consumers. In addition, the Company has provided
engineering, installation, maintenance or operation support services to over 250
network operators in 75 countries, over 1.4 million business locations in the
United States and approximately 100,000 business locations in over 90 other
countries. The Company's research and development activities are conducted
through Bell Labs, which consists of approximately three-quarters of the total
resources of AT&T's former Bell Laboratories division, one of the world's
foremost industrial research and development organizations.
The Company's revenues of $21,413 million for the year ended December 31,
1995, were generated from the sale of systems for network operators (54% of
total revenues), business communications systems (24%), microelectronic products
(9%), consumer products (8%), and other systems and products, including
integrated systems for the United States government (5%). In 1995, approximately
77% of the Company's revenue was generated from sales in the United States and
approximately 23% internationally (including exports). See Note 10 to
Consolidated Financial Statements. For the year ended December 31, 1995, the
Company recorded a net loss of $867 million, including restructuring and other
charges of $2,801 million before taxes (or $1,847 million after taxes).
The following table sets forth the revenues by product line for each of the
five years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Systems for Network Operators.................. $11,459 $10,841 $ 9,367 $ 9,616 $ 9,028
Business Communications Systems................ 5,144 4,557 3,982 3,689 3,610
Microelectronic Products....................... 1,864 1,461 1,323 1,167 781
Consumer Products.............................. 1,787 1,924 1,816 1,934 1,934
Other Systems and Products..................... 1,159 982 1,246 906 959
------- ------- ------- ------- -------
Total....................................... $21,413 $19,765 $17,734 $17,312 $16,312
======= ======= ======= ======= =======
</TABLE>
INDUSTRY OVERVIEW
The global telecommunications networking industry includes systems,
software and products used for voice, data and video communications. This
industry has undergone significant transformation and growth since the
mid-1980's as a result of changes in domestic and international public policy,
technological innovations and economic factors. The Company believes that these
forces will intensify, and that the number of customers and the complexity of
the networks they demand will increase. In addition, the Company believes that
these networks will increasingly become multifunctional in nature, supporting
simultaneous wireline or wireless access to any combination of voice, data and
video communications services, thus reducing the operating costs associated with
separate networks. The Company further believes that the traditionally distinct
technology platforms supporting voice and data will converge, as will those
platforms for the traditionally separate wireline and wireless networks. In the
Company's view, significant industry growth areas will include wireless access,
multifunctional systems and networking software. The Company further believes
that the principal building blocks of the industry are and will continue to be
software, microelectronics and product innovation in advanced digital switching
and transmission platforms, supported by a competency in and a knowledge of
telecommunications networking.
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Public Policy Changes
Changes in the public policy affecting telecommunications services have
increased, and are expected to further increase, the number of network operators
and, therefore, the demand for telecommunications network systems and products
worldwide. In the United States, changes in federal and state regulations have
created a number of new network operators and fostered competition between both
new and established network operators. For example, in 1995, the Federal
Communications Commission (the "FCC") auctioned additional spectrum for wireless
communications, thus potentially doubling the number of operators licensed to
compete in each MSA from two to four. The FCC has also announced plans to
auction additional spectrum in 1996. Changes in FCC regulations governing
interconnections have created the opportunity for CAPs to enter the market. Over
the past several years, certain state public utility commissions have removed
the prohibition on competition in intra-LATA long distance services, thereby
opening these markets to a number of competitors.
More broadly, the recently enacted Telecommunications Act permits local and
long distance telecommunications companies, cable television companies and
electric utility companies, subject to certain conditions designed to facilitate
local exchange competition, to compete with each other to provide local and long
distance telephony and video services. The Company believes that the
Telecommunications Act, together with these other government initiatives, will
increase the demand for systems, software and services as network operators
respond to the changing competitive environment by constructing new or enhancing
existing networks.
Over the last few years, the governments of a number of developed and
developing countries have privatized their state-owned telecommunications
monopolies. In most instances, as part of the privatization, such governments
have imposed service requirements on the newly privatized network operators
resulting in an acceleration of capital expenditures on networking systems,
software and services. In addition, certain governments have granted licenses to
new network operators to compete with the traditional network operators in their
countries. The Company expects the trend toward telecommunications service
competition to continue.
Technological Innovation
Telecommunications networking has undergone several technological
transformations, including the ongoing evolution from voice-centric to
multifunctional applications of any combination of voice, data and video, from
hardware-enabled to software-enabled and from wireline-only to an environment
where wireline and wireless interoperate. In addition, technological platforms
that support telecommunications networking and data networking have begun to
converge. To support the changing demands occasioned by these transformations,
networks are becoming more software intensive and the microelectronic content of
networking systems and end-user products is increasing.
These changes have added significantly to the number of services that
network operators can offer. Increasingly, network operators and business
customers are demanding multifunctional networks that can simultaneously support
any combination of voice, data and video services accessible from wireline and
wireless terminal devices. For example, telecommunications service providers are
beginning to offer multifunctional services, such as integrated services digital
network ("ISDN") which allows for the dynamic allocation of bandwidth between,
and the simultaneous transmission of any combination of voice, data and video,
and individual call routing, which permits the user to easily designate and
change the wireline or wireless telephone number to which their calls should be
directed. In addition, cable television operators are beginning to expand beyond
one-way broadcast to provide interactive services, and have announced their
intent to provide telephony and high speed data services.
The Company believes that traditionally distinct telecommunications
networks and data networks increasingly will be built on the same technological
platforms. The Company further believes that the convergence between voice and
data networking will continue as a result of the further adoption of common
technologies such as optical transmission and asynchronous transfer mode ("ATM")
switching.
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International Growth
The Company believes that the opportunities described above will be
available in both developed and developing countries and that a significant
portion of its growth will derive from the sale of telecommunications networking
systems, software and services outside the United States. Many of the network
operators and businesses that are pursuing international opportunities are well
established and well capitalized companies with whom the Company has strong
relations. The Company intends to pursue global opportunities in a focused and
disciplined approach to build upon the successes the Company has achieved and
will involve the withdrawal from areas where future profitability is deemed
questionable. The Company intends to utilize a combination of joint ventures and
direct investments to achieve its goals in this area.
SYSTEMS FOR NETWORK OPERATORS
The Company designs, develops, manufactures and services systems and
software which enable network operators to provide wireline and wireless local,
long distance and international voice, data and video services and cable
television service. The Company's networks, which include switching,
transmission and cable systems, are packaged and customized with application
software, operations support systems and associated professional services.
Systems and Services
Telecommunications Networking Systems. The Company designs, develops,
manufactures and services advanced telecommunications networking systems, which
include equipment, software and associated professional services. These systems
connect, route, manage and store voice, data and video in any combination, and
are used for: wireline access; local and long distance switching; intelligent
network services and signaling; wireless communications, including both cellular
and personal communications services ("PCS"); and high-speed, broadband
multifunctional communications.
The Company is one of the world's largest suppliers in each of the five
broad elements that comprise telecommunications networks: switching systems,
which route information through the network; transmission systems, which provide
the communications path through the network that carries information between
points in the network; operation support systems, which enable service providers
to manage the work flow, planning, surveillance, management, provisioning and
continuous testing of their networks; intelligent network/ application software,
which enables service providers to offer a broad array of enhanced and
differentiated services; and cable systems, which provide the transport media
between points in a network. These systems collectively comprise the
infrastructure that enables telecommunications network operators to provide
traditional narrowband voice and data services and that enables both new and
traditional network operators to offer broadband multifunctional services.
The Company has a wireline local access installed base (the number of
access lines serviced by switches manufactured by the Company) of approximately
110 million lines, representing approximately 58% of the United States and 13%
of the total worldwide installed base. The Company's primary switching products
are the 5ESS switch for local and long distance switching and international
gateways, and the 4ESS(TM) Digital Switch (the "4ESS switch") for long distance
and international switching.
The 5ESS switch is the most reliable switch in the industry, with an
average supplier-attributable time out of service of less than two minutes per
year. The 5ESS switch is in service in 49 countries with more than 72 million
access lines sold. In recent years, substantially all of the newly installed
access lines have been digital, providing the base for the evolution to ISDN and
other multifunctional services. From 1988 to 1994, the 5ESS switch was installed
by United States network operators to service over 40% of their new central
office lines, many to replace older analog installations.
The 5ESS switch is used throughout the world to provide a combination of
network applications, including local and long distance switching and
international gateways, operator services, network signaling, intelligent
networking and wireless switching. As of September 1995, the 5ESS switch, with
the Company's
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5E10 software, has enabled network operators to offer simultaneous wireline and
wireless, local, long distance and international services as well as any
combination of voice, data and video.
The 4ESS switch, which was developed for and is primarily deployed in
AT&T's network, is used to provide domestic and international long distance
switching. The 4ESS switch can handle over 775,000 peak hour calls.
The Company designs, develops, manufactures and services a broad range of
transmission access and transport systems. Network operators use these systems
to transport any combination of voice, data and video between subscribers and
the central office or between points within a network engaged in local, national
or international communications. In 1992, the Company's transmission systems
business was awarded the Malcolm Baldrige National Quality Award.
World standards for transmission systems have undergone rapid technological
progress in recent years. The new standards, known as Synchronous Optical
Network ("SONET") in North America and SDH in other markets, maximize
transmission capability and simplify network management for network operators.
The Company markets systems supporting both standards and is one of the largest
suppliers of SONET-based systems. As part of the acquisition of the Philips
Businesses, the Company broadened its SDH product catalog by acquiring Philips'
SDH transmission product line.
The Company offers a broad line of transmission access systems for the
provision of a wide range of services, including traditional telecommunications
service and broadband multifunctional services, in which it was the first
supplier. Transmission access systems transport information between the
subscriber and the central office. The Company's products include SLC(R)-2000, a
hybrid fiber/copper pair system, and HFC-2000(TM), a hybrid fiber/coaxial
system, both of which extend fiber-based optical transmission into the local
loop. The Company's products also include the SDV-2000, a switched digital video
system which extends fiber to the curb, and ASOS, one of the first operations
support system which enables network operators to manage the work flow,
planning, surveillance, provisioning and continuous testing of their
multifunctional networks.
The Company's transmission transport systems are utilized for high capacity
communications between points within a communications network. These products
are primarily digital and provide for the movement of any combination of voice,
data, and video across fiber, coaxial and microwave based media. The Company's
products include fiber transport systems (FT 2000), digital multiplexer systems
(DDM 2000) and the digital access and cross connect systems (DACS(TM) family of
products).
The Company's operation support systems enhance a network operator's
ability to activate, manage and maintain its networks. These systems
continuously monitor network performance and activity level, and allow for rapid
trouble identification, load balancing and planning for network utilization. The
Company's systems support the efforts of network operators to reduce operating
costs and minimize labor by automating previously labor intensive tasks.
The Company's network management systems offer a broad array of modular
software, including element managers designed for traditional telephony, video
and wireless; network managers that monitor, test and optimize the utilization
of a network; service managers that manage work flow; and business managers that
include customer service systems. For example, the Company's NetMinder system is
an advanced network management routing system that mitigates network congestion
through efficient call routing and completion which is utilized by 30 network
operators in 15 countries.
The Company's A-I-NET(R) intelligent network products enable network
operators to offer new services that can be created, deployed or managed by
themselves, the Company, or third parties. Services created with A-I-NET
products include toll free calling (800 and 888 service in the United States),
call forwarding, call waiting, voice dialing and messaging.
The Company has recently introduced products to address the growing demand
for emerging broadband multifunctional services which permit the simultaneous
transmission of any combination of voice, data and video. In 1994, the Company
introduced its GLOBEVIEW-2000 Broadband System, which is one of the
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highest capacity ATM switches offered for use in public networks. More than 100
GLOBEVIEW-2000 Broadband Systems are currently installed at more than 30
customers in nine countries, including local network operators such as Ameritech
Corporation, GTE Corporation and BellSouth Corporation; long distance network
operators such as AT&T; cable television operators such as Time Warner Inc. and
Cablevision Systems Corporation; and foreign network operators such as British
Telecommunications plc, Kokushin Denshin Denwa Co. Ltd. of Japan and the network
operator that is currently the sole broadband service provider in China.
In addition, the Company designs, develops, manufactures and services cable
systems, which include optical fiber, fiber optic cable, electronic wire and
cable and apparatus for both fiber and copper cable systems. The Company's cable
systems are used to connect various devices in a network and terminal devices to
public and private networks. These cable systems are deployed for outside plant
and central office wiring, and for traditional telephony, cable television,
wireless networks and broadband applications.
The Company is one of the world's largest suppliers of fiber optic cable
systems, high strength, high performance fiber for underseas cablers and outside
plant turnkey systems, which are generally large capital projects in emerging
markets for the engineering and construction of telecommunications
infrastructure. The Company's TRUEWAVE(TM) optical fiber enables network
operators to reduce their costs by increasing the distance between optical
amplifiers. In addition, the Company offers customers their choice of any
combination of fiber and cable design.
Wireless Network Systems. The Company designs, develops, manufactures and
services wireless network infrastructure systems, which include the 5ESS switch,
base stations, wireless network software and operation support systems. These
systems provide network operators with the capability to offer a wide range of
cellular and other wireless communications services, including PCS, wireless
data and fixed wireless access. The Company's sales of wireless infrastructure
systems have grown as a percent of total revenues from 6.1% in 1993 to 10.3% in
1995.
The Company's wireless systems are in operation in nine of the top ten
United States MSAs. The Company's primary wireless system is the AUTOPLEX(R)
System 1000 product family, which includes the Series II base station, which has
a higher call handling capacity per single control complex than any other base
station on the market. The base station contains the radio transceiver that
establishes wireless communications with a mobile telephone. Base stations are
arranged geographically so that mobile customers can be "handed off " seamlessly
from one base station to the next as they travel. The network intelligence to
accomplish this is housed in the Company's Mobile Switching Center, which
includes the 5ESS switch and which connects the base stations to the public
telephone network. The Company also offers base stations for start-up
applications and smaller markets, a minicell product for rural and international
markets and a microcell for congested, high traffic areas.
Wireless technology is evolving from analog to digital. The Company
provides networks based on a variety of the leading air interface standards:
AMPS, CDMA, TDMA and GSM. The Company believes that its implementation of CDMA
technology provides superior digital voice quality and greater capacity
utilization, and allows for the utilization of lower power handsets than other
wireless technologies. As part of the acquisition of the Philips Businesses and
in furtherance of its goal to enhance its international operations in this area,
the Company acquired Philips' GSM research, design, development, manufacturing,
marketing and sales capabilities. The Company is deploying what will be the
first and second national CDMA networks in the United States, one of the world's
largest AMPS networks in Korea, and one of the world's largest GSM-based
networks in Saudi Arabia.
In addition, the Company designs, develops, manufactures and services fixed
wireless access systems. The Company offers Wireless Subscriber Systems, which
support the AMPS standard, and the new AIRLOOP(R) Wireless Local Loop system,
which utilizes CDMA technology. Also, as part of the acquisition of the Philips
Businesses, the Company acquired Philips' fixed wireless system, which is based
on the DECT (digital enhanced cordless telephone) standard. All three systems
enable network operators to expand their networks in markets where traditional
wireline systems are not cost justified, and to provide telephone services as an
alternative to traditional network operators.
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The Company designs, develops, manufactures, and services CDPD-based
wireless data systems which enable wireless network operators to offer data
services as an overlay to their existing analog voice infrastructure without
acquiring additional spectrum or upgrading to a digital network. These systems
offer the increased reliability and efficiency of switched digital packet data
systems.
Due to the complexity of wireless systems, the Company also offers a broad
range of professional services, which include project management, site
acquisition, radio frequency engineering, microwave relocation, construction
management, cellular optimization and wireless data support.
Markets
The principal customers for the Company's systems are network operators
that provide wireline and wireless local, long distance and international
telecommunications services. The Company's systems for network operators are
installed to expand the capacity and features offered by existing networks, to
replace older technology in existing networks and to establish new networks for
entrants into deregulated or previously unserved markets. See "Risk
Factors -- Reliance on Major Customers."
As a result of structural, public policy and technological changes, since
the mid-1980's the telecommunications industry has undergone a period of
significant growth in the number of lines in service and applications offered.
In developed markets, deregulation has permitted new market entrants to
construct networks in previously monopolistic markets. In response, existing
network operators have expanded beyond traditional franchises and are offering
new services. In emerging markets, privatization, competition and economic
expansion have increased demand for networking systems. At the same time,
technological advances also have increased demand by reducing operating costs
and facilitating new applications, including multifunctional services.
Changes in customer needs and demands, public policy and technology are
creating a new industry structure in which many of the actual and potential
customers of the Company are or will be competitors of AT&T's communications
services business. As a result, the obstacles currently faced by the Company in
marketing its products to competitors and potential competitors of AT&T's
communications services business have become severe and are expected to continue
to intensify. For these reasons, AT&T has announced that, subject to certain
conditions, it intends to effect the Distribution.
The Company markets and sells its products worldwide primarily through a
direct sales force due to the complexity of these systems. Most of the Company's
sales of systems for network operators are made pursuant to general purchase
agreements, which establish the terms and conditions and provide for price
determination to be made on a contract bid basis. In addition, certain of the
large infrastructure projects are conducted under long-term, fixed-price
contracts. See "Risk Factors -- Multi-Year Contracts" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Variability in the Company's Business."
As a result of the increased complexity of systems for network operators
and the high cost of developing and maintaining in-house expertise, network
operators demand complete, integrated and turn-key projects. Network operators
increasingly are seeking overall network or systems solutions that require an
increased software content which would enable them to deploy rapidly new and
differentiable services. In response, the Company has formed an organization
focused on turn-key network engineering projects for both public and private
sector customers. The Company markets integrated solutions whereby the Company
assumes full responsibility for the project, and engineers, designs and installs
the network, including equipment and software manufactured by both the Company
and third parties. In certain cases, operation of the network through contract
also may be included in the project.
Increasingly, as a result of the financial demands of major network
deployments, network operators are looking to their suppliers to arrange for
financing. The ability to provide financing is a requirement to conduct business
in certain emerging markets. As a result, the Company works with its customers
to structure and place financing packages. See "Risk Factors -- Future Capital
Requirements; Absence of AT&T Funding."
In order to market its product line worldwide, the Company has established
wholly owned subsidiaries and joint ventures with local companies in 16
countries. This approach also helps the Company meet local content regulations,
reduce its foreign exchange exposure and establish a local identity and employee
base.
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Competition
The Company believes that it enjoys a strong competitive position due to
its broad product line, large installed base, strong relationship with key
customers, technological expertise and new product development capabilities. The
primary competitors in the market for telecommunications systems, in addition to
the Company, are four very large European and North American companies which
have substantial technological and financial resources and which offer similar
broad product catalogs. These competitors are Alcatel Alsthom, Northern Telecom
Limited, Siemens AG and Telefonaktiebolaget LM Ericsson. In 1994, the Company
and these four competitors collectively accounted for over 35% of the world's
public network systems sales, of which the Company's sales of systems for
network operators accounted for 8%.
In addition, in all of the Company's product areas other than switching,
the Company faces significant competition from companies which do business in
one or a number of such product areas. For example, in wireless systems,
Motorola, Inc. and Nokia Corporation, both of which are very large companies
with substantial technological and financial resources, are significant
competitors. In transmission and cable systems, the markets are highly
fragmented and include hundreds of smaller competitors.
BUSINESS COMMUNICATIONS SYSTEMS
The Company designs, develops, manufactures and services telecommunications
systems and products for large and small business customers, home offices and
government agencies. The Company's business communications systems can be
upgraded regularly with new software releases, can support local and wide area
voice and data networking and are often integral components of global enterprise
networks. The Company's systems primarily are customer premises-based private
switching systems and products, call center systems, voice processing systems,
which include voice messaging and voice response systems, and the associated
application software and professional support services.
The Company is the market leader in customer premises-based
telecommunication systems in the United States with the largest aggregate
installed base of PBXs, key systems, structured cabling systems and voice
processing systems. The Company serves over 1.4 million business locations in
the United States and approximately 100,000 business locations in over 90 other
countries.
Systems and Services
The Company's core business communications system products are private
switching systems, generally PBXs and key systems, usually located at the
customer's premises, that permit a number of local telephones or terminals to
communicate with one another, with or without use of the public telephone
network. The Company offers the DEFINITY communications system family of
products for large customers and the wired and wireless MERLIN LEGEND(R) and
PARTNER(R) systems for smaller businesses and home offices. The DEFINITY
Enterprise Communication Server provides real-time voice and mixed-media call
processing. The recently announced FREEWORKS family of business mobility
solutions includes the DEFINITY Cellular Business System, which enables in- and
out-of-building mobility with standard cellular phones.
The Company's messaging and response systems store and forward voice, data
and images and conduct initial call processing, which integrates PBX and
computer functions. In addition, the Company is a technological leader in the
development of speech recognition algorithms, which have been incorporated into
both public and private call processing applications, such as operator services.
The Company's principal systems include the INTUITY AUDIX and DEFINITY AUDIX
voice messaging systems for use with the Company's or a competitor's PBX;
INTUITY CONVERSANT, a multi-lingual interactive voice response system which can
recognize speech in nine languages/dialects; and the INTUITY Multimedia
Messaging System, a system that combines voice messaging and voice-response
technology into a single desktop application.
The Company is the United States market leader in the sale of call center
systems, integrating the hardware and software associated with computing,
telephony, and multifunctional messaging and response applications. Call centers
are the initial entry point for customers to access a business' telephone sales
and
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support operation. The Company's systems permit the routing and administration
of a large volume of incoming calls, and the integration with business databases
of customer and product information. The Company's call center systems are used
by companies in diverse industries such as financial services, retailing and
transportation. The call center environment in which these companies operate is
characterized by hundreds of telephone service agents located in geographically
dispersed networked sites, processing tens of thousands of calls per hour. For
example, using these systems, businesses can provide their customers with the
ability to check balances or order status, to place orders, and to receive
additional information and support. The Company has the ability to build
customized systems integrating a variety of products, including both newly
purchased equipment and equipment manufactured by third parties.
In October 1995, the Company introduced the MMCX, the industry's first
multifunctional product to deliver real-time business calling features such as
conferencing, transfer, call coverage, and add/drop to switched voice or data
networking. The MMCX allows customers to migrate their existing network to
multifunction capabilities. This enables the customer to support new
applications and transport technologies, such as ATM.
In addition, subsequent to its introduction in 1989, the Company's SYSTIMAX
structured wiring system for business customers, which provides broadband
multifunctional LAN interconnections within a building or campus, has grown into
the global market leader. These systems are comprised of fiber optic and copper
cable and associated apparatus.
The Company offers a wide range of professional service options, including
remote diagnostics, a variety of on-demand services and dedicated on-site
technicians. Their on-demand services involve routine testing and diagnostics,
maintenance and repair, moves and rearrangements, and software and hardware
upgrade installations.
The Company believes that a key competitive advantage is its remote
diagnostics and repair capability, which permits the Company to monitor, test,
maintain and resolve problems from its regional service centers. Many of the
Company's systems are designed with intelligent software which establishes a
real-time link between the customer premises and a regional service center's
expert system. This permits the customer to reduce its system down-time and
enables the Company to automate many maintenance and repair tasks.
Markets
The Company markets its systems to large and small businesses and
government agencies. In the United States, the Company markets its systems
through the industry's largest direct sales force. Outside the United States,
the Company markets its systems directly and through a network of dealers and
distributors. The Company's systems are deployed in applications for customer
sales and service, conferencing and collaboration, mobility and distributed work
force, messaging and enterprise networking. The Company fields a large group of
application specialists to design call center, distance learning and other
customized applications.
The Company considers its close working relationships with its customers
and its knowledge of their individual business needs to be important
contributors to its success. The Company's sales historically have been
facilitated by system upgrades, which provide a migration path to new
applications, and new system sales to its existing customer base.
The Company believes that the premises-based communications market is
transforming from distinct voice and data networks to single multifunctional
networks that will be able to support any combination of voice, video and data
communications simultaneously. The Company is designing certain business
communications systems to enable its customers to simplify their premises
networks by combining separate voice, video and data networks into a single
architecture. The Company's development efforts are being focused on extending
the ubiquity and ease of use of today's voice calls to multifunctional
communications, and on reducing the costs associated with the administration and
maintenance of the customer's network.
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The Company has entered into alliances with Lotus Development Corporation,
to enable multimedia messaging in the Lotus Notes* environment, and with Novell,
Inc. to extend multimedia messaging and computer/telephony integration, and was
one of the founders with International Business Machines Corporation, Apple
Computer, Inc., and Siemens AG of VERSIT*, an industry consortium organized to
ensure the interoperability of multivendor multimedia applications.
Competition
The Company competes principally with three other large companies with
substantial technological and financial resources in the sale of business
communication systems. These competitors are Northern Telecom Limited, Siemens
AG (through its subsidiary Siemens Rolm Communications, Inc.) and Alcatel
Alsthom. Together with the Company, in 1994 these four competitors accounted for
approximately 40% of the sales of business communications systems globally, with
the Company accounting for approximately 8%. In addition, as the market
transforms to multifunctional systems, the Company expects that it also may
encounter competition from companies that design and manufacture data network
equipment.
The Company believes that key competitive factors in this market are
service support, the ability to upgrade existing systems for new applications,
price and reliability.
MICROELECTRONICS PRODUCTS
The Company designs, manufactures and sells ICs, electronic power systems
and optoelectronic components for communications applications. These
microelectronic products are important components of many of the Company's own
systems and products. The Company also supplies these components to other
manufacturers of communications systems and computers. The Company is a market
leader in several IC product areas critical to communications applications,
including DSPs for digital cellular phones and standard-cell ASICs. The
Company's DSPs were included in more than half of the world's digital cellular
telephones shipped in the year ended December 31, 1995.
Products
The Company's ICs are designed to provide advanced communications and
control functions for a wide variety of electronic products and systems. The
Company focuses on IC products that are used in communications and computing and
that require high-performance and low power chip architectures; complex
large-scale chip design in digital, analog and mixed-signal technologies; DSP
architectures and algorithms; high-frequency and high-voltage technologies; and
high speed data and signal processing. The Company offers a wide variety of
standard, semi-custom and custom products for cellular equipment, communications
networks, computers and computer peripherals, modems and consumer communications
products. Products include DSPs, ASICs, field programmable gate arrays and
communications ICs. The Company's products are manufactured using a variety of
technologies, from low-power, low-voltage submicron CMOS (complementary metal
oxide semiconductors) to high-frequency and high-voltage bipolar processes. The
Company's Orlando IC factory was awarded the Shingo Prize for excellence in
manufacturing in 1994.
The Company designs, develops and manufactures energy systems, electronic
power supplies and associated magnetic components for the telecommunications and
electronic data processing industries. These products serve applications ranging
from modems for personal computers to large telephone central offices. Products
include DC/DC converters, AC/DC switching power supplies, transformers,
inductors and energy systems that provide alarm, control, and backup power
management. The Company's Dallas electronic power systems factory was awarded
the Shingo Prize in 1992. In 1994, the Company was the first United States
manufacturer to be awarded the Deming Prize for quality for its electronic power
systems business.
- ---------------
* Lotus Notes is a registered trademark of Lotus Development Corporation; VERSIT
is a trademark of the consortium's founders.
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The Company designs, develops and manufactures optoelectronic products
which convert electricity to light (emitters) and light to electricity
(detectors), thereby facilitating optical transmission of information. These
products include semiconductor lasers, photodetectors, integrated transmitters
and receivers, and advanced-technology erbium-doped fiber amplifiers. The
Company provides these products worldwide to manufacturers serving the
telecommunications, cable television and network computing markets.
Optoelectronic products extend the transmission capacity of fiber to meet the
requirements of such applications as video-on-demand, interactive video,
teleconferencing, image transmission and remote database searching. The Company
markets a number of advanced products, including critical optoelectronic
components that support telecommunication transmission; long-wavelength optical
data modules for data networking; and analog lasers for use in cable television
fiber optic transmission. The Company believes that its optoelectronic products
have higher photonics reliability than those of its competitors due to their low
field failure rate and the Company's evaluation methodologies in manufacturing
that allow the detection and elimination of early failures.
The Company seeks to respond to the pace of technological change by
improving its manufacturing process technologies and developing advanced design
tools and low-cost assembly and test capabilities. In addition to using the
capabilities of Bell Labs, the Company has established close working
relationships with customers to conceive, research, develop and design new
products jointly. To support these relationships, the Company maintains a
presence in the form of research, design, manufacturing and sales offices in
over 15 countries. As a result of these relationships, the Company has been able
to develop a number of technological innovations for its customers. For example,
in order to help reduce customers' time to market, in 1994 the Company developed
the first DSP products with on-chip flash memory. These products allow customers
to load, test, and reload development software in actual prototype systems.
The Company also designs and manufactures printed circuit boards and
backplanes. The Company expects to exit this business and has offered these
operations for sale.
Markets
The Company's microelectronic products are sold globally to manufacturers
of communications systems and computers. In addition, the Company's energy power
systems are sold directly to U.S. and foreign telephone companies. The Company's
customers are competing in markets characterized by rapid technological changes,
decreasing product life cycles, price competition and increased user
applications. These markets have experienced significant expansion in the number
and types of products they offer to end-users, particularly in personal
computing and portable access communication devices. As a result, the Company's
customers continue to demand components which are smaller, require less power,
are more complex, provide greater functionality, and are produced with shorter
design cycles and less manufacturing lead time.
In 1995, the Company also introduced a GSM hardware platform based upon a
highly integrated multiple-chip design for digital cellular phones that performs
all the key handset functions between the microphone and the antenna in both
voice and data services. The Company also sells the associated software product
elements necessary to support the GSM standard.
In 1995, more than half of the Company's microelectronic production was
sold to customers other than the Company. The Company's microelectronic products
are also key components of its systems for network operators, business
communications systems, and consumer products. The Company's microelectronics
products compete with products of third-party manufacturers for inclusion in the
Company's systems and products.
Competition
The Company believes that its success is due to technological leadership,
product leadership, and close relationships with key customers. The market for
microelectronic products is global and generally highly fragmented. The
Company's competitors differ widely among product categories. The Company's
competitors in certain IC product categories include Motorola, Inc. and Texas
Instruments Incorporated; in electronic power systems include Astec Industries,
Inc. and Unitech plc (through its subsidiary, NEMEC-Lambda); and in
optoelectronics include Fujitsu Limited and Northern Telecom Limited.
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The Company believes that key competitive factors in the microelectronics
marketplace are the early involvement in customers' future application
requirements, the speed of product and technological innovation, price, customer
service, and manufacturing capacity. Other important competitive factors include
quality, reliability and local manufacturing presence.
CONSUMER PRODUCTS
The Company designs, manufactures, services and leases communications
products for consumer, small office and home office use. In 1995, the Company
sold 31% of the corded telephones, 28% of the cordless telephones and 35% of the
telephone answering systems sold in the United States, approximately double the
market share of any single competitor in each of these categories.
Products
The Company has a broad catalog of telephone products for the consumer
market. Cordless telephones are the Company's primary consumer product line, to
which the Company has continued to make improvements and innovations. The
Company was the first in the industry to introduce cordless telephones with 25
channel capability, which reduces interference. The Company also offers a broad
line of analog, digital, stand-alone and integrated telephone answering systems,
which are offered in corded and cordless versions. The Company's main corded
product is the TRIMLINE(R) telephone, with more than 88 million units sold over
the last 30 years. The Company sold over 2.5 million TRIMLINE telephones in
1995.
The Company offers a broad range of cellular products which support all of
the major United States cellular standards. The Company has captured
approximately 5% of the United States market for cellular products since
entering the market in 1992. The Company's product development efforts are
focused on developing flexible, digital wireless handsets capable of supporting
all of the major standards for cellular and PCS service in the United States.
The Company is implementing a common design for its consumer products,
which includes a common look, feel, feature placement and feature use. As part
of this process, the Company expects to reduce the number of different
components and casings used in its product line. The Company believes this
uniformity will reduce costs, reinforce its brand identity, and increase
manufacturing flexibility. Under the Brand License Agreement (as defined
herein), the Company has the right to market certain consumer products under the
"AT&T" name alone, and in combination with the Company's name, each for certain
specified periods. See "Arrangements Between the Company and AT&T -- Brand
License and Related Matters."
Markets
The Company distributes its products in the United States through
approximately 900 retailers representing over 17,000 retail outlets, including
such national retailers as Wal-Mart Stores, Inc., Sears, Roebuck and Co.,
Circuit City Stores, Inc., Best Buy Co., Inc. and Service Merchandise Company.
The Company also sells its products through the Phone Center Stores. As part of
the Company's reorganization efforts, the Company plans to close all 338 of the
Phone Center Stores by May 1996. See "The Company -- Strategic Reorganization."
The Company also offers consumers a rental option for selected products, and
currently serves over five million rental customers.
Competition
The Company believes that its position in the consumer communications
products industry is due to the quality and reliability of its products, the
"AT&T" brand name, its strong distribution channels and its broad product line.
The Company's competitors in consumer products are traditional consumer
electronic manufacturers. The industry is characterized by significant
consolidation within each product category, although the principal competitors
in each are different. In traditional telephone products, the Company's
principal competitors are Thomson Consumer Electronics (marketing under the GE
brand), U.S. Electronics, Inc. (marketing under the BellSouth brand), Panasonic
Co., USA and Sony Corporation which, together with the
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Company, accounted for over 70% of market sales in the first three quarters of
1995, of which the Company accounted for 31%.
OTHER SYSTEMS AND PRODUCTS
The Company designs, develops and manufactures advanced technology systems
which support the United States federal government's need for specially designed
integrated systems for military and civilian use. The Company offers a full
range of products on a direct funding basis from the United States government.
These systems focus on undersea sensor systems, information processing and
secure communications. The funded research has generated commercial by-products
in lightwave transmission equipment, wireless communications systems and
multifunctional compression algorithms.
The Company, through its subsidiary, Paradyne, also designs and
manufactures modems and other data communications equipment for communications
and computing. The Company has offered for sale this subsidiary.
BELL LABORATORIES
The Company has been and will continue to be supported by the technological
expertise provided by Bell Labs, one of the world's foremost industrial research
and development organizations. Bell Labs consists of all of the operations of
AT&T's former Bell Laboratories division which support the businesses of the
Company, and basic research capability, which together comprise approximately
three quarters of the total resources of AT&T's former Bell Laboratories
division. The remaining approximately one quarter of the resources of AT&T's
former Bell Laboratories division, that historically have supported AT&T's
communications services business, will be retained by AT&T. Bell Labs has made
significant discoveries and advances in communications science and technology,
software design and engineering, and networking. These contributions include the
invention of the transistor and the design and development of ICs and many types
of lasers. Areas of Bell Labs research and development work in recent years
include: networking software; lightwave transmission, which offers greater
transmission capacity than other transmission systems; electronic switching
technology, which enables rapid call processing, increased reliability and
reduced network costs; and microelectronics components, which bring the latest
advantages of very large scale integration to the full range of products offered
by the Company.
Since its founding in 1925, on average, one patent has been issued per
business day to Bell Labs. Further, seven Bell Labs scientists have received the
Nobel Prize for physics, seven have received the United States National Medal of
Science, and five have received the National Medal of Technology. In addition,
Bell Labs was the first institution to be awarded the National Medal of
Technology.
Bell Labs is thoroughly integrated with the Company's operating units in
design, development and manufacturing engineering. In general, substantially all
of Bell Labs' development staff are aligned with specific operating units. In
addition, its research, standards, architecture work and software consulting are
core functions structured to support all of the Company's operating units.
Bell Labs' research and development activities continue to focus on the
core technologies critical to the Company's success, which are software, network
design and engineering, microelectronics and photonics.
Bell Labs is a leader in software research, development and engineering for
communications applications. In 1969, it produced the UNIX* operating system, in
1972, the C and, in 1983, the C++ programming languages, and, recently, PLAN
9(TM), a distributed operating system that advances client/server applications
over public as well as private networks. In addition, since the early 1980's
Bell Labs' innovations in fault-tolerant software have enabled the Company to
achieve a level of system reliability with off-the-shelf commercial processors
that allows the Company to reduce its reliance on custom microprocessors.
- ---------------
* UNIX is a registered trademark licensed exclusively by Novell, Inc.
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Bell Labs has contributed many innovations in voice quality, and is a
leader in the development of digital signal processing. In the 1990's Bell Labs
has developed a number of innovative algorithms for high-quality speech and
audio at low-bit rates, for high-definition television, and for data, image, and
video compression in multifunctional communications. These innovations have
contributed to the Company's implementation of speech processing applications
which include text-to-speech synthesis, speech recognition and automatic
translation of speech from one language to another.
Bell Labs has led in the development of software-based networking
technologies that support the Company's systems and products. Since the 1970's,
Bell Labs' inventions have included automated network management and cellular
mobile communications. Recently, it has developed systems for digital cellular,
PCS, mobile computing and wireless LANs. Bell Labs' research in ATM led to the
Company's offering of the first large ATM switch in 1993, and is presently
focusing on ATM offerings for office and home applications.
The microelectronics industry began with Bell Labs' invention of the
transistor. Bell Labs' innovations in IC design and manufacturing include
molecular beam epitaxy in 1968, which is the technique used to build
semiconductors one atomic layer at a time.
Similarly, Bell Labs' advances extended from the first semiconductor lasers
that could operate at room temperature to the microlasers used in today's
broadband multifunctional transmission systems, and from early optical fiber
research to today's optical amplifiers and TRUEWAVE fiber. Current photonic
research includes work on passive optical networks, photonic switching and
quantum wire lasers.
RESEARCH AND DEVELOPMENT
The Company's research and product development costs charged to expense
were $2,121 million (excluding the 1995 restructuring and other charges), $2,097
million and $1,961 million for the years ended December 31, 1995, 1994 and 1993,
respectively. Historically, the Company has targeted approximately 1% of its
revenues to fund basic research activities.
MFJ AGREEMENTS
Certain agreements associated with the implementation of the MFJ impose
obligations concerning AT&T's manufacturing support of RBOC equipment needs,
including advance notice of AT&T's discontinuance of support for certain
equipment, and, in that event, the transfer to the RBOCs of necessary technical
resources, including, under certain circumstances, software source codes, to
enable the RBOCs to obtain the necessary equipment support elsewhere. The
Company would remain obligated to comply with these agreements.
BACKLOG
The Company's backlog, calculated as the aggregate of the sales price of
orders received from customers less revenue recognized, was approximately $4,100
million and $3,700 million on December 31, 1995 and December 31, 1994,
respectively (approximately 7% and 1% of which, respectively, represented
backlog of orders from AT&T). Approximately $200 million of orders included in
the December 31, 1995 backlog are scheduled for delivery after December 31,
1996. However, all orders are subject to possible rescheduling by customers.
Although the Company believes that the orders included in the backlog are firm,
some orders may be canceled by the customer without penalty, and the Company may
elect to permit cancellation of orders without penalty where management believes
that it is in the Company's best interest to do so. Not included in backlog at
December 31, 1995 is approximately $3,400 million for a long-term contract with
the Ministry of Post and Telecommunications of Saudi Arabia. Although this
contract is considered firm, it is excluded from backlog due to the annual
appropriations of the Saudi Arabian government.
In recent years the Company's backlog as a percentage of revenues has
decreased principally as a result of reduced manufacturing cycle times and the
increased software content of orders allowing for the faster delivery and
installation of new systems. The Company believes that these advances have
allowed customers
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to deploy networks more rapidly than in the past and have resulted in a
reduction in the time between customer order and system implementation, which
has also affected the Company's backlog.
SOURCES AND AVAILABILITY OF MATERIALS
The Company makes significant purchases of electronic components, copper,
silicon, precious metals, aluminum, and other materials and components from many
domestic and foreign sources. The Company has been able to obtain sufficient
materials and components from sources around the world to meet its needs. The
Company also develops and maintains alternative sources for essential materials
and components. Occasionally, special inventories of components are maintained
to minimize the effects of shortages. The Company does not have a concentration
of sources of supply of materials, labor, services or other rights that, if
suddenly eliminated, could severely impact its operations.
PATENTS AND TRADEMARKS
The Company owns approximately 8,000 patents in the United States and
11,000 in foreign countries. These foreign patents are counterparts of the
Company's United States patents. Many of the patents owned by the Company are
licensed to others and the Company is licensed to use certain patents owned by
others. In connection with the Separation, the Company has entered into an
extensive cross-licensing agreement with AT&T and NCR. See "Arrangements Between
the Company and AT&T -- Patent Licenses and Related Matters."
The Company intends to market its products under its own name and mark,
except with respect to certain consumer products and business communications
systems, which may be marketed under the "AT&T" name alone for one year after
the Closing Date or in combination with the Company's name for a period of up to
four years after the Closing Date. In addition, certain leased products or
maintenance contracts may be marketed under the "AT&T" name for 66 months after
the Closing Date. See "Arrangements Between the Company and AT&T -- Brand
License and Related Matters."
The Company considers its many trademarks to be valuable assets. Most of
its trademarks are registered throughout the world.
EMPLOYEES
At December 31, 1995, the Company employed approximately 131,000 persons,
of whom 82% were located in the United States. Of these domestic employees, 47%
are represented by unions, primarily the Communications Workers of America and
the International Brotherhood of Electrical Workers. The Company's labor
agreements with these unions expire on May 30, 1998. Such unions have filed
grievances on behalf of Company employees they represent asserting claims for
severance pay as a result of the Distribution and related transactions. The
Company has continued to honor its labor agreements with these unions and
believes that such claims are without merit. The Company intends to oppose such
grievances vigorously.
As part of the Company's restructuring efforts, and as announced January 2,
1996, the Company will eliminate approximately 22,000 positions, of which
approximately 11,000 are management positions and 11,000 are occupational
positions. Approximately 1,000 additional management employees are employed by
businesses that the Company has announced plans to sell. As of December 31,
1995, approximately 4,100 management employees have accepted a voluntary
severance package, the majority of whom will leave the Company in early 1996.
The Company expects approximately 70% of all separations to be completed by the
end of 1996 and the majority of the remaining separations to be completed during
1997. See "The Company -- Strategic Reorganization" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Strategic
Reorganization." The Company considers its relationships with its employees to
be satisfactory.
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LEGAL PROCEEDINGS
In the normal course of business, the Company is subject to proceedings,
lawsuits and other claims, including proceedings under laws and regulations
related to environmental and other matters. Such matters are subject to many
uncertainties and outcomes are not predictable with assurance. Consequently, the
Company is unable to ascertain the ultimate aggregate amount of monetary
liability or financial impact with respect to these matters at December 31,
1995. While these matters could affect operating results of any one quarter when
resolved in future periods and, while there can be no assurance with respect
thereto, it is management's opinion that after final disposition, any monetary
liability or financial impact to the Company beyond that provided in the
consolidated balance sheet at December 31, 1995 would not be material to the
Company's annual consolidated financial statements.
On February 14, 1996, Bell Atlantic Corporation and DSC Communications
Corporation filed a complaint against AT&T and the Company in the United States
District Court for the Eastern District of Texas. The complaint alleges, among
other things, that AT&T or the Company has monopolized or attempted to
monopolize alleged markets for communications transmission equipment, related
software and caller identification services. The complaint seeks injunctive
relief and damages, after trebling, in excess of $3,500 million. AT&T and the
Company do not believe that the complaint has merit and intend to defend the
lawsuit vigorously.
ENVIRONMENTAL MATTERS
The Company's current and historical manufacturing and research operations
are subject to a wide range of environmental protection laws in the United
States and other countries. In the United States these laws often require
parties to fund remedial action regardless of fault. The Company has remedial
and investigatory activities, including assessment and cleanup work, underway at
46 current and former manufacturing, laboratory and recycling facilities to
comply, or to determine compliance with, applicable environmental protection
laws. AT&T and its subsidiaries have been listed as PRPs at numerous "Superfund"
sites pursuant to CERCLA or comparable state statutes, either by a government
agency (which may have either sought information concerning AT&T's connection to
the site, or may have sought from AT&T participation in site cleanup work or
contribution toward the cost of site cleanup), or by a private party seeking
contribution to site cleanup costs. Under the terms of the Separation and
Distribution Agreement, the Company will assume or indemnify AT&T for all
liabilities primarily relating to, arising out of or resulting from (i) the
operation of the Company Business as conducted at any time prior to, on or after
the Closing Date or (ii) any Company Assets including, without limitation, those
associated with these sites.
It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. The Company records an environmental
reserve when it is probable that a liability has been incurred and the amount of
the liability is reasonably estimable. This practice is followed whether the
claims are asserted or unasserted. Management expects that the amounts reserved
for will be paid out over the period of remediation for the applicable site
which ranges from 5 to 30 years. Reserves for estimated losses from
environmental remediation are, depending on the site, based primarily upon
internal or third party environmental studies, and estimates as to the number,
participation level and financial viability of any other PRPs, the extent of the
contamination and the nature of required remedial actions. Accruals are adjusted
as further information develops or circumstances change. The amounts provided
for in the Company's consolidated financial statements in respect of
environmental reserves are the gross undiscounted amount of such reserves,
without deductions for insurance or third party indemnity claims. In those cases
where insurance carriers or third party indemnitors have agreed to pay any
amounts and management believes that collectibility of such amounts is probable,
the amounts are reflected as receivables in the financial statements. Although
the Company believes that its reserves are adequate, there can be no assurance
that the amount of capital expenditures and other expenses which will be
required to complete remedial actions and to comply with applicable
environmental laws will not exceed the amounts reflected in the Company's
reserves or will not have a material adverse effect on the financial condition
of the Company or the Company's results of operations or cash flows. Any amounts
of environmental costs that may be incurred in excess of those provided for at
December 31, 1995 cannot be determined.
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On July 31, 1991, the United States Environmental Protection Agency Region
III issued a complaint pursuant to Section 3008a of the Resource Conservation
and Recovery Act of 1976 alleging violations of various waste management
regulations at the Company's Richmond Works in Richmond, Virginia. The complaint
alleges violations relating to training, solder dross management, the facility's
waste analysis plan and the handling of gold ion exchange resins. The complaint
seeks a total of $4.2 million in penalties. The Company is contesting both
liability and the penalties.
In addition, on July 31, 1991, the United States Environmental Protection
Agency filed a civil complaint in the U.S. District Court for the Southern
District of Illinois against AT&T (with respect to the Company's businesses) and
nine other parties seeking enforcement of its CERCLA Section 106 cleanup order,
issued in November 1990 for the NL Granite City Superfund site in Granite,
Illinois. This complaint seeks past costs, civil penalties of $25,000 per day
and treble damages related to certain United States costs. While the
Environmental Protection Agency has not stated the costs for which it seeks
treble damages, its contractors, the Army Corps of Engineers, estimated that
$4.3 million of costs have been incurred as of November 15, 1995. The Company is
contesting liability.
During 1994, AT&T Nassau Metals Corporation ("Nassau"), a wholly owned
subsidiary of the Company, and the New York State Department of Environmental
Conservation (the "NYSDEC") were engaged in negotiations over a study and
cleanup of the Nassau plant located on Richmond Valley Road in Staten Island,
New York. During these negotiations, in June 1994, NYSDEC presented Nassau with
a draft consent order which included not only provisions for site investigation
and remediation but also a provision for payment of a $3.5 million penalty for
alleged violations of hazardous waste management regulations. NYSDEC claims that
Nassau improperly engaged in landfilling and storing of lead dust. No formal
proceeding has been commenced by NYSDEC. Negotiations and discussions regarding
the matter are continuing.
PROPERTIES
At December 31, 1995, the Company operated 46 manufacturing and repair
sites, of which 26 were located in the United States, occupying in excess of
20.0 million square feet, of which approximately 1.1 million square feet were
leased. These sites were located in 19 countries. In 1995, the Company closed,
relocated or sold three manufacturing and repair sites in the United States
occupying in excess of 800,000 square feet, of which none were leased. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Strategic Reorganization."
At December 31, 1995, the Company operated 106 warehouse sites, of which 80
were located in the United States, occupying in excess of 4.0 million square
feet, substantially all of which were leased. These sites were located in 19
countries.
At December 31, 1995, the Company operated 718 office sites
(administration, sales, field service), of which 639 were located in the United
States, occupying in excess of 17.0 million square feet, substantially all of
which were leased. These sites were located in 47 countries.
At December 31, 1995, the Company operated additional sites in 15 cities,
of which 14 were located in the United States, with significant research and
development activities, occupying in excess of 9.0 million square feet, of which
approximately 1.4 million square feet were leased.
In addition, the Company has plans to close or to discontinue the lease of
certain facilities. See "The Company -- Strategic Reorganization."
For a summary of certain leases and subleases to be entered into in
connection with the Separation, see "Arrangements Between the Company and
AT&T -- Real Estate Agreements."
The Company believes its plants and facilities are suitable and adequate,
and have sufficient productive capacity, to meet its current needs.
53
<PAGE> 54
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is certain information concerning the directors and
executive officers of the Company. Seven of such directors who are officers or
employees but not directors of AT&T will only serve as directors of the Company
until the Distribution. The Company Board is divided into three classes.
Commencing with the annual meeting of stockholders to be held in April 1997,
directors for each class will be elected at the annual meeting of stockholders
held in the year in which the term for such class expires and thereafter will
serve for a term of three years. See "Description of Capital
Stock -- Antitakeover Effects of Certain Provisions of the Certificate and
By-Laws."
<TABLE>
<CAPTION>
NAME AGE(1) POSITION AND OFFICES HELD
- ----------------------------------- --------- --------------------------------------------
<S> <C> <C>
Henry B. Schacht................... 61 Chairman of the Board and Chief Executive
Officer
Richard A. McGinn.................. 49 President and Chief Operating Officer, and a
Director
Carla A. Hills..................... 61 Director
Drew Lewis......................... 64 Director
Donald S. Perkins.................. 68 Director
Franklin A. Thomas................. 61 Director
Ephraim M. Brecher*................ 49 Director
Jim G. Kilpatric*.................. 57 Director
Marc E. Manly*..................... 44 Director
S. Lawrence Prendergast*........... 54 Director
Maureen B. Tart*................... 40 Director
Florence L. Walsh*................. 34 Director
Paul J. Wondrasch*................. 52 Director
Curtis R. Artis.................... 48 Senior Vice President, Human Resources
Gerald J. Butters.................. 52 President, North American Region, Network
Systems
Joseph S. Colson, Jr. ............. 48 President, AT&T Customer Business Unit,
Network Systems
Curtis J. Crawford................. 48 President, Microelectronics
Carleton S. Fiorina................ 41 Executive Vice President, Corporate
Operations
Homayoun Firouztash................ 52 Vice President, Consumer Products
William B. Marx, Jr. .............. 57 Senior Executive Vice President
William T. O'Shea.................. 48 President, International, Network Systems
Donald K. Peterson................. 46 Executive Vice President and Chief Financial
Officer
Richard J. Rawson.................. 43 Senior Vice President, General Counsel and
Secretary
Patricia F. Russo.................. 43 President, Business Communications Systems
Daniel C. Stanzione................ 51 President, Network Systems; President, Bell
Laboratories
</TABLE>
- ---------------
* Indicates an AT&T officer or employee.
(1) As of March 1, 1996.
Mr. Schacht was named Chief Executive Officer of the Company effective
February 1, 1996 and Chairman of the Board of the Company effective April 3,
1996. He has been a member of the AT&T Board since 1981 but will resign from the
AT&T Board effective no later than the Closing Date. Mr. Schacht is a
54
<PAGE> 55
director of Cummins Engine Company, Inc. ("Cummins"), a position he has held
since 1977. He was Chief Executive Officer of Cummins from 1973 to 1994 and
Chairman of the Board of Cummins from 1977 to 1995. In addition, Mr. Schacht is
a director of Aluminum Company of America and of each of The Chase Manhattan
Corp. and its subsidiary, The Chase Manhattan Bank, N.A. Mr. Schacht's initial
term will expire at the annual meeting of stockholders to be held in 1999.
Mr. McGinn was named President and Chief Operating Officer of the Company
effective February 1, 1996 and became a director effective April 3, 1996.
Previously, he was Executive Vice President and Chief Executive Officer of the
AT&T Network Systems Group, a position to which he was named in October 1994.
From August 1993 to October 1994, Mr. McGinn was President and Chief Operating
Officer, AT&T Network Systems Group, and, from August 1991 to August 1993, he
was Senior Vice President, AT&T Network Systems Group. Prior to that time, Mr.
McGinn held various senior management positions within AT&T. Mr. McGinn's
initial term will expire at the annual meeting of stockholders of the Company to
be held in 1998.
Ms. Hills became a director effective April 3, 1996. Ms. Hills has been a
director of AT&T since 1993 but will resign from the AT&T Board effective no
later than the Closing Date. She has been Chairman and Chief Executive Officer
of Hills & Company (international consultants) since 1993. Hills & Company
assists U.S. businesses with their trade and investment interests abroad,
particularly in the emerging markets. She was the United States Trade
Representative, Executive Office of the President, from 1989 to 1993. In
addition, she is a director of American International Group, Inc., Chevron
Corporation and Time Warner Inc. Ms. Hills' initial term will expire at the
annual meeting of stockholders of the Company to be held in 1997.
Mr. Lewis became a director effective April 3, 1996. Mr. Lewis has been a
director of AT&T since 1989, but will resign from the AT&T Board effective no
later than the Closing Date. He has been Chairman and Chief Executive Officer of
Union Pacific Corporation since 1987. He is also a director of American Express
Company, FPL Group., Inc., Ford Motor Company, and Gannett Co., Inc. Mr. Lewis'
initial term will expire at the annual meeting of stockholders of the Company to
be held in 1997.
Mr. Perkins became a director effective April 3, 1996. Mr. Perkins has been
a director of AT&T since 1979, but will resign from the AT&T Board effective no
later than the Closing Date. From 1970 to 1980, Mr. Perkins served as the
Chairman and Chief Executive Officer of Jewel Companies, Inc., a diversified
retailer. From January through June 1995, Mr. Perkins served as Non-Executive
Chairman of Kmart Corp. In addition, Mr. Perkins is a director of Aon Corp.,
Cummins, Current Assets L.L.C., Illinova Corporation and its subsidiary,
Illinois Power Corporation, Inland Steel Industries, LaSalle Street Fund, The
Putnam Funds, Springs Industries, Inc. and Time Warner Inc. Mr. Perkins' initial
term will expire at the annual meeting of stockholders of the Company to be held
in 1997.
Mr. Thomas became a director effective April 3, 1996. Mr. Thomas has been a
director of AT&T since 1988, but will resign from the AT&T Board effective no
later than the Closing Date. He has been President of The Ford Foundation since
1979. He also is a director of the Aluminum Company of America, CBS Inc.,
Citicorp and its subsidiary, Citibank, N.A., Cummins and Pepsico, Inc. Mr.
Thomas' initial term will expire at the annual meeting of stockholders of the
Company to be held in 1998.
Mr. Brecher became a director of the Company effective April 3, 1996. Mr.
Brecher joined AT&T as Vice President -- Law in July 1990. In this position, he
was responsible for the leadership of the AT&T Law Division Tax Group. Since
December 1991, Mr. Brecher has held the position of President -- Taxes and Tax
Counsel of AT&T. Mr. Brecher's initial term will expire at the annual meeting of
stockholders of the Company to be held in 1997.
Mr. Kilpatric became a director of the Company effective April 3, 1996. Mr.
Kilpatric has held the position of Senior Vice President -- Law of AT&T since
1989. Mr. Kilpatric's initial term will expire at the annual meeting of
stockholders of the Company to be held in 1998.
Mr. Manly became a director of the Company effective April 3, 1996. Mr.
Manly has held the position of Vice President -- Law & Solicitor General of AT&T
since January 1995. Prior to that time, Mr. Manly was a
55
<PAGE> 56
partner with the firm of Sidley & Austin, representing AT&T in litigation and
regulatory matters. Mr. Manly's initial term will expire at the annual meeting
of stockholders of the Company to be held in 1998.
Mr. Prendergast became a director of the Company effective April 3, 1996.
Mr. Prendergast has held the position of Vice President and Treasurer of AT&T
since 1983. Mr. Prendergast's initial term will expire at the annual meeting of
stockholders of the Company to be held in 1999.
Ms. Tart was appointed as a director of the Company effective February 1,
1996. Ms. Tart has been Vice President and Controller of AT&T since March 1994.
Prior to her current position, Ms. Tart was the Chief Financial Officer of AT&T
Capital Corporation, a position to which she was named in 1990. Ms. Tart's
initial term will expire at the annual meeting of stockholders of the Company to
be held in 1999.
Ms. Walsh became a director of the Company effective April 3, 1996. Ms.
Walsh has been Assistant Treasurer of AT&T since November 1994. From May 1993
until November 1994, she was Director, Domestic Finance at General Motors
Corporation. Prior to that time, Ms. Walsh held a variety of management
positions at General Motors Corporation. Ms. Walsh has been nominated as a
director of the LIN Television Corporation Board of Directors. Ms. Walsh's
initial term will expire at the annual meeting of stockholders of the Company to
be held in 1999.
Mr. Wondrasch became a director of the Company effective April 3, 1996.
Since December 1995, Mr. Wondrasch has held the position of Senior Vice
President of AT&T International Inc. and Chief Executive Officer of AT&T
Caribbean/Latin America Inc. He held a senior management position with AT&T from
1993 to 1995. From 1989 to 1993, Mr. Wondrasch held the position of President,
AT&T General Business Systems. Mr. Wondrasch's initial term will expire at the
annual meeting of stockholders of the Company to be held in 1999.
Mr. Artis became Senior Vice President, Human Resources of the Company
effective February 1, 1996. Mr. Artis held the position of Vice President, Human
Resources for the AT&T Network Systems Group since August 1994. From December
1993 to August 1994, Mr. Artis was a Vice President of Corporate Human
Resources, AT&T. Prior to that time, Mr. Artis held various senior management
positions within AT&T.
Mr. Butters became President, North American Region, Network Systems, of
the Company effective February 1, 1996. Since January 1994, Mr. Butters has held
various positions within the AT&T Network Systems Group, including President,
North American Region (since January 1996), President, Global Public Networks,
Offer Business Unit (from January 1995 to January 1996), President, North
American Region, Customer Business Unit (from July 1994 to January 1995), and
Vice President, Strategic Business Development (from January 1994 to July 1994).
From January 1993 to January 1994, Mr. Butters held the position of President,
Northern Telecom, Inc. Mr. Butters was Executive Vice President, Sales and
Service, from February 1992 to January 1993 and Executive Vice President, Public
Networks, both of Northern Telecom, Inc., from January 1991 to February 1992.
Mr. Colson became President, AT&T Customer Business Unit, Network Systems
of the Company effective February 1, 1996. Since April 1993, Mr. Colson has held
the position of President, AT&T Customer Business Unit for the AT&T Network
Systems Group. From July 1990 to April 1993, Mr. Colson was the Switching
Systems Vice President, United States, AT&T Network Systems Group.
Mr. Crawford became President, Microelectronics of the Company effective
February 1, 1996. Mr. Crawford held the position of President, AT&T
Microelectronics since July 1993. From August 1991 to July 1993, Mr. Crawford
was Vice President, AT&T Microelectronics.
Ms. Fiorina became Executive Vice President, Corporate Operations of the
Company effective February 1, 1996. Previously, Ms. Fiorina held the positions
of President, North America (from January 1995 to January 1996) and President,
Atlantic and Canadian Region (from July 1994 to January 1995) within the AT&T
Network Systems Group. From February 1993 to July 1994, Ms. Fiorina was Vice
President, Strategy and Marketing Development for the AT&T Network Systems
Group. Prior to that time, Ms. Fiorina held various senior positions with AT&T
in business development and marketing.
56
<PAGE> 57
Mr. Firouztash became Vice President, Consumer Products, of the Company
effective February 1, 1996. From October 1995, Mr. Firouztash was Vice
President, Marketing, Sales and Product Management of the Consumer Products
Group of AT&T. From August 1994 to October 1995, Mr. Firouztash held the
position of Global Marketing and Sales Vice President of AT&T Consumer Products
Group. From September 1993 to August 1994, Mr. Firouztash held the position of
Group Vice President, Global Sales/Customer Service for the Consumer Products
Group. Prior to that time, Mr. Firouztash was Vice President -- America's Region
of Control Data Systems Inc., a position he held from January 1991 to January
1992, and Vice President -- Western Europe Region of Control Data Systems Inc.,
a position he held from January 1990 to January 1992.
Mr. Marx became Senior Executive Vice President of the Company effective
February 1, 1996. Since July 1989, Mr. Marx has held a number of senior
management positions within AT&T, most recently as Executive Vice President and
Chief Executive Officer, AT&T Multimedia Products Group, beginning October 1994
and, previously, as Executive Vice President and Chief Executive Officer, AT&T
Network Systems Group (from August 1993) and Group Executive, AT&T Network
Systems Group (from July 1989 to August 1993).
Mr. O'Shea became President, International, Network Systems of the Company
effective February 1, 1996. Since July 1995 Mr. O'Shea has held the position of
President, International Regions and Professional Services of the AT&T Network
Systems Group. Previously, in 1995, Mr. O'Shea held the position of acting Chief
Executive Officer of AT&T Global Information Solutions Company (renamed NCR)
("AT&T GIS"). Mr. O'Shea was named Senior Vice President, Worldwide Marketing of
AT&T GIS in 1993. Prior to that time, Mr. O'Shea held the position of Senior
Vice President of the AT&T GIS Network Products Group.
Mr. Peterson became Executive Vice President and Chief Financial Officer of
the Company effective February 1, 1996. Mr. Peterson has held the positions of
Vice President and Chief Financial Officer of the AT&T Communications Services
Group since September 1995. Prior to that time, Mr. Peterson held various senior
executive positions at Northern Telecom, Inc. which included President of Nortel
Communications Systems, Inc. (from January 1993 to September 1995), Vice
President of Finance of Northern Telecom, Inc. (from January 1991 to January
1993) and Group Vice President of Northern Telecom, Inc. (from September 1987 to
January 1991).
Mr. Rawson became Senior Vice President, General Counsel and Secretary of
the Company effective February 1, 1996. Previously, Mr. Rawson was Vice
President, Law -- AT&T Network Systems Group, a position to which he was named
in September 1992. From July 1984 to September 1992, Mr. Rawson was legal
counsel for various business units within AT&T.
Ms. Russo became President, Business Communications Systems of the Company
effective February 1, 1996. From May 1993 through January 1996, Ms. Russo held
the position of President, Global Business Communications Systems of AT&T. From
January 1992 to May 1993, Ms. Russo was Vice President, National Sales and
Service of AT&T Global Business Communications Systems. Prior to that time, Ms.
Russo held various senior positions in Marketing, Sales, and Customer Service
Operations within AT&T.
Mr. Stanzione became President, Network Systems Group and President, Bell
Laboratories effective February 1, 1996. Mr. Stanzione had held the position of
President, AT&T Bell Laboratories since January 1995. Previously, Mr. Stanzione
held the positions of President, Global Public Networks (from July 1994 to
January 1995) and President, Switching Systems (from November 1993 to July 1994)
both units of the AT&T Network Systems Group. From April 1992 to November 1993,
Mr. Stanzione held the position of Group Technical Officer and Corporate
Information Officer, AT&T Network Systems Group and from January 1989 to April
1992 Mr. Stanzione was President, Operations Systems of the AT&T Network Systems
Group.
Effective as of the Distribution, the seven directors who are officers or
employees but not directors of AT&T will resign from the Company Board. Prior to
the Distribution, the Corporate Governance and Compensation Committee of the
Company Board expects to identify a number of additional candidates not
affiliated with the Company or AT&T for election by the Company Board.
57
<PAGE> 58
ANNUAL MEETING
The By-Laws provide that annual meetings of stockholders will be held at
the Company's principal office or at such other place and on such date as may be
fixed from time to time by resolution of the Company Board. The first annual
meeting for which proxies will be solicited from stockholders will be held on
April 16, 1997.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company Board has established four committees: an Audit and Finance
Committee, a Corporate Governance and Compensation Committee, a Public Policy
Committee and a Development Committee. Each of Ms. Hills, Mr. Lewis, Mr. Perkins
and Mr. Thomas will serve on each of the four Committees.
The Audit and Finance Committee meets with management to consider the
adequacy of the internal controls and the objectivity of financial reporting.
The Audit and Finance Committee also meets with the independent auditors and
with appropriate financial personnel and internal auditors of the Company
regarding these matters. The Audit and Finance Committee recommends to the
Company Board the appointment of the independent auditors, subject to
ratification by the stockholders at the annual meeting. Both the internal
auditors and the independent auditors periodically will meet alone with the
Audit and Finance Committee and will have unrestricted access to the Audit and
Finance Committee. The Audit and Finance Committee also reviews the Company's
long-term plans and financings, and reports its recommendations to the full
Company Board for approval and to authorize action. The Audit and Finance
Committee will consist of directors who are not employees of the Company or
employees or directors of AT&T ("Non-Employee Directors"), together with the
Chief Executive Officer and the Chief Operating Officer, ex officio, neither of
whom will participate in Audit and Finance Committee meetings when audit matters
are discussed.
The Corporate Governance and Compensation Committee's functions include
recommending to the full Company Board nominees for election as directors of the
Company, making recommendations from time to time to the Company Board as to
matters of corporate governance, administering management incentive compensation
plans, including the 1996 LTIP, and making recommendations to the Company Board
with respect to the compensation of directors and officers of the Company. The
Corporate Governance and Compensation Committee also supervises the Company's
employee benefit plans. The Corporate Governance and Compensation Committee will
consist of Non-Employee Directors. It is expected that following the
Distribution, the Corporate Governance and Compensation Committee will be
reconstituted as the Executive, Corporate Governance and Compensation Committee,
which, between meetings of the Company Board, will be authorized to exercise all
the powers and authority of the Company Board in the management of the business
and affairs of the Company, except for powers reserved to the full board of
directors by the DGCL. At that time, it is expected that the Chief Executive
Officer and the Chief Operating Officer will become ex officio members of such
committee, but will not participate in Executive, Corporate Governance and
Compensation Committee meetings where compensation or benefit matters are
discussed.
The Development Committee is responsible for evaluating plans to develop
the overall strategic direction of the Company and for assessing the merits of
potential business ventures, plans and opportunities in order to make
recommendations to the Company Board in connection therewith.
The Public Policy Committee reviews matters concerning the policies,
practices and procedures of the Company that relate to public policy issues
facing the Company and its industry in general.
COMPENSATION OF DIRECTORS
As of the Closing Date, all Non-Employee Directors will receive an annual
retainer of $55,000. The chair of each committee will receive an additional
annual retainer of $10,000. Directors will not receive separate meeting fees.
One-half of the annual retainer and of the additional annual retainer for
committee chairs will be paid in Common Stock.
Pursuant to the Company's Deferred Compensation Plan for Directors,
Non-Employee Directors may defer all or a portion of their compensation to a
deferred compensation account (the "Account"). Directors
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<PAGE> 59
may elect to defer all or part of the receipt of such compensation payable in
cash into a portion of the Account, the value of which is measured from time to
time by the value of the Common Stock (the "Company Shares Portion") or into a
cash portion of the Account (the "Cash Portion") and to defer all or part of the
receipt of such compensation payable in Common Stock into the Company Shares
Portion of the Account. The Company Shares Portion is credited on each dividend
payment date for Common Stock with a number of deferred shares of Common Stock
equivalent in market value to the amount of the quarterly dividend on the shares
then credited in the Account. The Cash Portion of the Account earns interest,
compounded quarterly, at an annual rate equal to the average interest rate for
ten-year United States Treasury notes for the previous quarter, plus 5%. All
distributions in respect of the Company Shares Portion are payable solely in
cash. For this purpose, the value of the deferred shares of Common Stock will be
equal to the average of the closing prices of the Common Stock on the five
consecutive trading days immediately prior to the payment date. In the event of
a potential change in control, the Company's Deferred Compensation Plan for
Directors will be supported by a benefits protection grantor trust, the assets
of which will be subject to the claims of the Company's creditors.
The Company also provides Non-Employee Directors with travel accident
insurance when on Company business. A Non-Employee Director may purchase life
insurance sponsored by the Company. The Company will share the premium expense
with the director; however, all the Company contributions will be returned to
the Company at the earlier of (a) the director's death or (b) the later of age
70 or 10 years from the policy's inception. This benefit will continue after the
Non-Employee Director's retirement from the Company Board.
The current Non-Employee Directors of the Company who formerly were
directors of AT&T are eligible for an annual retirement benefit under the AT&T
Retirement Plan for Outside Directors, equal to their annual retainer at
retirement from the AT&T Board, provided they attain five years of service. Such
Plan will be assumed by the Company with respect to such directors. The
directors' years of service as directors of both AT&T and the Company will be
credited in the determination of years of service. The benefit begins at the
later of age 70 or retirement and is payable for life. Except as set forth
herein, the Company does not have a retirement plan for Non-Employee Directors.
59
<PAGE> 60
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
No present or future officer or director currently owns any shares of
Common Stock, all of which are currently owned by AT&T. Such directors and
officers will receive shares of Common Stock in the Distribution in respect of
shares of AT&T common stock, $1.00 par value ("AT&T Common Stock"), held by them
on the record date for the Distribution. In addition, AT&T Stock Awards will be
converted into comparable awards based on Common Stock under the 1996 LTIP as
described below. See "-- 1996 Company Long Term Incentive Plan" and
"Arrangements Between the Company and AT&T -- Employee Benefits Agreement." The
following table sets forth the number of shares of AT&T Common Stock
beneficially owned on March 1, 1996 by each of the Company's directors and
director nominees, the executive officers named in the Summary Compensation
Table below and all directors and executive officers of the Company as a group.
Except as otherwise noted, the individual director, director nominee or
executive officer or their family members had sole voting and investment power
with respect to such securities.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY DEFERRAL
NAME OWNED(1)(2) PLANS(3) TOTAL
- --------------------------------------------------------- ------------ ---------- ---------
<S> <C> <C> <C>
Henry B. Schacht......................................... 1,055 0 1,055
Richard A. McGinn........................................ 79,170 0 79,170
William B. Marx, Jr. .................................... 150,396 16,808 167,204
Daniel C. Stanzione...................................... 61,296 0 61,296
Patricia F. Russo........................................ 46,781 856 47,637
Carla A. Hills........................................... 400 3,061 3,461
Drew Lewis............................................... 4,000 0 4,000
Donald S. Perkins........................................ 3,251,450(4) 252 3,251,702
Franklin A. Thomas....................................... 1,115 2,511 3,626
Ephraim M. Brecher....................................... 36,459 0 36,459
Jim G. Kilpatric......................................... 62,499 12,526 75,025
Marc E. Manly............................................ 1,650 0 1,650
S. Lawrence Prendergast.................................. 27,637 0 27,637
Maureen B. Tart.......................................... 17,833 0 17,833
Florence L. Walsh........................................ 1,000 0 1,000
Paul J. Wondrasch........................................ 77,102 0 77,102
Directors and Executive Officers as a Group (25
persons)............................................... 4,061,541(5) 43,288 4,104,829
</TABLE>
- ---------------
(1) No individual director, director nominee or named executive officer
beneficially owns 1% or more of the AT&T Common Stock, nor do the directors
and executive officers as a group.
(2) Includes beneficial ownership of the following number of shares of AT&T
Common Stock which may be acquired within 60 days of March 1, 1996 pursuant
to stock options awarded under employee incentive compensation plans of
AT&T: Mr. Schacht - 0; Mr. McGinn - 69,653; Mr. Marx - 147,238; Mr.
Stanzione - 58,541; Ms. Russo - 44,075; Mr. Brecher - 34,059; Mr.
Kilpatric - 57,707; Mr. Manly -- 1,550; Mr. Prendergast - 25,827; Ms.
Tart - 17,697; Ms. Walsh - 1,000; Mr. Wondrasch - 61,673; and all other
executive officers as a group - 214,024.
(3) Reflects share units representing AT&T Common Stock held in elective
deferred compensation accounts.
(4) Mr. Perkins as an investment company trustee has shared voting and
investment power over 3,251,450 shares of AT&T Common Stock reflected
above.
(5) Includes beneficial ownership of 733,044 shares of AT&T Common Stock which
may be acquired within 60 days of March 1, 1996 pursuant to stock options
awarded under employee incentive compensation plans as well as 3,251,450
shares over which they have sole or shared voting and investment power as
trustees.
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<PAGE> 61
Options to purchase Common Stock and other stock-based awards may be
granted to directors, officers and other key employees of the Company in the
future under the 1996 LTIP. See "-- 1996 Company Long Term Incentive Plan."
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
chief executive officer and the four other executive officers of the Company as
of February 1, 1996 who, based on employment with AT&T and its subsidiaries,
were the most highly compensated for the year ended December 31, 1995. All of
the information set forth in this table reflects compensation earned by such
individuals for services with AT&T and its subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION(2)
ANNUAL COMPENSATION(2) AWARDS PAYOUTS
------------------------------------------------------------------------------------------------------------------
AT&T ALL
OTHER RESTRICTED AT&T OTHER
ANNUAL STOCK AT&T LTIP COMPEN-
NAME AND SALARY BONUS COMPEN- AWARD(S) OPTIONS/ PAYOUTS SATION
PRINCIPAL POSITION(1) YEAR ($) ($) SATION($)(3) ($)(4)(C) SARS(#) ($)(5) ($)(6)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Henry B. Schacht(7) 1995 0 0 0 0 0 0 0
Chairman of the Board 1994 0 0 0 0 0 0 0
and Chief Executive 1993 0 0 0 0 0 0 0
Officer
Richard A. McGinn 1995 469,400 517,200 70,637 501,897(4)(a) 36,504 158,712 31,991
President and Chief 1994 373,525 562,300 49,450 0 28,654 152,302 23,659
Operating Officer 1993 304,167 224,800 31,351 0 16,241 61,367 17,653
William B. Marx, Jr. 1995 659,000 440,500 176,782 530,389(4)(a) 138,484 523,783 62,500
571,500(4)(b)
Senior Executive 1994 598,000 830,400 134,662 0 30,220 502,640 51,408
Vice President 1993 545,000 452,067 96,130 0 30,220 226,725 51,378
Daniel C. Stanzione 1995 336,000 314,000 57,551 280,445(4)(a) 219,692 108,450 28,169
1,079,500(4)(b)
President -- Bell Labs; 1994 278,000 283,500 39,410 0 9,165 104,071 22,717
President -- Network
Systems 1993 246,000 142,500 28,336 0 9,165 62,942 25,356
Patricia F. Russo 1995 301,000 339,000 44,617 155,222(4)(a) 70,330 92,598 23,985
844,800(4)(b)
President, Business 1994 273,000 293,000 28,709 0 9,165 88,856 18,670
Communications Systems 1993 238,667 103,200 19,088 0 9,165 51,550 21,915
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Includes Chairman of the Board and Chief Executive Officer and the four
other most highly compensated executive officers as measured by salary and
bonus.
(2) Compensation deferred at the election of named officers is included in the
category (e.g., bonus, LTIP payouts) and year it would have otherwise been
reported had it not been deferred.
(3) Includes (a) payments of above-market interest on deferred compensation, (b)
dividend equivalents paid with respect to long-term performance shares prior
to end of three-year performance period, and other earnings on long-term
incentive compensation paid during the year, (c) tax payment reimbursements,
and (d) the value of personal benefits and perquisites.
(4) (a) On January 1, 1995, awards classified as performance share awards under
the 1987 Plan (the "Three Year Awards") were granted to Messrs. McGinn, Marx
and Stanzione and to Ms. Russo. At the time of such grant, the payout of
such awards was tied to achieving specific levels of return-to-equity
("RTE"). The target amount would be earned if 100% of the targeted RTE rate
is achieved. At its December 1995 meeting, the Compensation Committee of the
AT&T Board of Directors recommended and approved that the performance
amounts for the 1995-1997 performance cycle be deemed to have been met at
the target level. This action was taken in acknowledgment that AT&T's
restructuring had rendered the original performance criteria inapplicable
and of the difficulty of establishing revised criteria while the
restructuring was in progress. Awards will be distributed as common stock,
or as cash in such an amount equal to the value of these shares, or partly
in common stock and partly in cash. As a result of such action, such Three
Year Awards will vest in one installment and be payable in the first quarter
of 1998 if
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the holder remains in the employ of the Company for the three full years
ending December 31, 1997, with certain exceptions in the case of death,
disability or retirement. Dividend equivalents on such awards are paid in
cash to holders thereof. The number of shares of AT&T Common Stock
represented by Three Year Awards for the 1995-1997 cycle for Messrs. McGinn,
Marx and Stanzione and Ms. Russo, respectively, were 9,988, 10,555, 5,581
and 3,089. The value of such awards at the date of grant is reflected in the
Table above. In addition, on December 31, 1995, Mr. McGinn held an
outstanding grant of restricted stock of 5,000 shares.
A similar determination was made by such Compensation Committee with
respect to the 1994-1996 cycle Three Year Awards with the result that such
awards will vest in one installment and be payable in the first quarter of
1997 if the holder remains in the employ of the Company for the three full
years ending December 31, 1996, subject to the same exceptions. The number
of shares of AT&T Common Stock represented by the 1994-1996 Three Year
Awards for Messrs. McGinn, Marx and Stanzione and Ms. Russo, respectively,
were 8,317, 8,783, 2,661 and 2,661.
(b) On September 25, 1995, an award of restricted stock units was granted to
Messrs. Marx and Stanzione and on October 31, 1995 to Ms. Russo as part of
an AT&T special equity incentive/retention program in amounts of 9,000
units, 17,000 units and 13,200 units, respectively. The value at the
respective date of grant of these restricted stock units is reflected in the
Table above. These grants vest four years after the date of grant and carry
stringent penalties for competition and other specified adverse activities.
Dividends on such shares are paid in cash to holders thereof.
(c) The aggregate value at December 31, 1995 of the Three Year Awards for
the 1994-1996 cycle and the 1995-1997 cycle and for outstanding restricted
stock awards for Messrs. McGinn, Marx and Stanzione and Ms. Russo,
respectively was $1,508,999, $1,834,886, $1,634,420 and $1,227,013.
(5) Includes distribution in 1995 to Messrs. McGinn, Marx and Stanzione, and Ms.
Russo of performance shares where three-year performance period ended
December 31, 1994.
(6) In 1995, includes (a) Company contributions to savings plans (Mr. McGinn
$6,000, Mr. Marx $6,000, Mr. Stanzione $6,000 and Ms. Russo $6,000, (b)
dollar value of the benefit of premiums paid for split-dollar life insurance
policies (unrelated to term life insurance coverage) projected on an
actuarial basis (Mr. McGinn $17,409, Mr. Marx $38,756, Mr. Stanzione
$17,088, and Ms. Russo $13,151), and (c) payments equal to lost AT&T savings
match caused by IRS limitations (Mr. McGinn $8,582, Mr. Marx $17,744, Mr.
Stanzione $5,081, and Ms. Russo $4,834).
(7) Mr. Schacht became Chief Executive Officer of the Company on February 1,
1996. The Company did not have a Chief Executive Officer prior to Mr.
Schacht's appointment. For a description of Mr. Schacht's 1995 and 1996
compensation arrangements, see "-- Other Employment Arrangements."
OPTION AND SAR GRANTS OF AT&T COMMON STOCK TO EXECUTIVE OFFICERS
The following tables disclose information regarding stock options and stock
appreciation rights granted to the executive officers named in the above Summary
Compensation Table in respect of shares of AT&T Common Stock under the AT&T 1987
Long Term Incentive Plan (the "1987 Plan").
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AGGREGATED OPTION/STOCK APPRECIATION RIGHTS
EXERCISES IN 1995 AND YEAR-END VALUES
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT YEAR END AT YEAR END
(#)(2) ($)(2)
SHARES ACQUIRED VALUE REALIZED ------------------------- -------------------------
NAME(1) ON EXERCISE(#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -------------------------- --------------- -------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Henry B. Schacht.......... 0 0 0 0
0 0
Richard A. McGinn......... 0 0 57,485 752,896
55,254 780,683
William B. Marx, Jr....... 84,046 1,983,425 134,410 2,352,580
225,984 1,593,198
Daniel C. Stanzione....... 1,350 52,023 51,977 1,217,027
242,192 807,663
Patricia F. Russo......... 0 0 40,465 857,003
70,330 226,003
</TABLE>
- ---------------
(1) Includes Chairman of the Board and Chief Executive Officer and the four
other most highly compensated executives officers as measured by salary and
bonus. Sets forth information regarding options/stock appreciation rights
regardless of year of grant.
(2) None of the options set forth in the table above have stock appreciation
rights.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------
NUMBER OF
SHARES GRANT
UNDERLYING % OF TOTAL DATE
OPTIONS OPTIONS EXERCISE PRESENT
GRANTED GRANTED TO PRICE EXPIRATION VALUE
NAME(1) #(2) EMPLOYEES(3) ($/SH) DATE ($)(4)
- ---------------------------------------- ---------- ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Henry B. Schacht........................ 0 0 0 0 0
Richard A. McGinn....................... 36,504 .28% 49.9375 1/3/05 384,752
William B. Marx, Jr..................... 38,484 1.04% 49.9375 1/3/05 405,621
100,000 63.5000 9/25/05 1,294,000
Daniel C. Stanzione..................... 19,692 1.65% 49.9375 1/3/05 207,554
200,000 63.5000 9/25/05 2,588,000
Patricia F. Russo....................... 10,830 0.53% 49.9375 1/3/05 114,148
59,500 63.5000 10/31/05 769,930
</TABLE>
- ---------------
(1) Includes Chairman of the Board and Chief Executive Officer and the four
other most highly compensated executive officers as measured by salary and
bonus.
(2) Includes the regular annual grant of options as well as a special equity
incentive/retention grant following the announcement of AT&T intended
restructuring. Options granted January 3, 1995, become exercisable to the
extent of one-third of the grant on January 3, 1996, January 3, 1997, and
January 3, 1998, respectively. Options granted September 25, 1995 and
October 31, 1995, become exercisable four years after the date of grant
provided that applicable price performance criteria have been satisfied.
Irrespective of price performance, all options granted on September 25, 1995
and October 31, 1995 will vest 6 years after the date of grant.
(3) Percent of total options granted based on total options granted to AT&T
employees.
(4) In accordance with Securities and Exchange Commission rules, the
Black-Scholes option pricing model was chosen to estimate the grant date
present value of the options set forth in this table. The Company's use of
this model should not be construed as an endorsement of its accuracy at
valuing options. All stock option valuation models, including the
Black-Scholes model, require a prediction about the future
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movement of the stock price. The following assumptions were made for
purposes of calculating the Grant Date Present Value: for the January grant,
an option term of 7 years, volatility at .1769, dividend yield at 2.77%,
interest rate at 7.83%, and a 3% per year discount for each year in the
vesting period for risk of forfeiture over the 3-year vesting schedule, and
for the September and October grants, an option term of 7 years, volatility
at .1572, dividend yield at 2.66%, interest rate at 6.40%, and a 3% per year
discount for each year in the vesting period for risk of forfeiture over the
4-year vesting schedule. The real value of the options in this table depends
upon the actual performance of the Company's stock and, after the
Distribution, the Common Stock, during the applicable period.
PENSION PLANS
Prior to the Distribution, the Company's management employees will be
participants in AT&T's Management Pension Plan (the "AT&T Management Pension
Plan"). Effective at the time of the Distribution, the Company will adopt a
management pension plan (the "Company Management Pension Plan") that will
replicate, in all material respects, the AT&T Management Pension Plan and that
will be a non-contributory pension plan which covers all management employees,
including Mr. McGinn, Mr. Marx, Mr. Stanzione and Ms. Russo. The Company also
will adopt non-contributory supplementary pension plans which will replicate in
all material respects AT&T's supplementary pension plans. The following is a
summary description of the expected terms of the Company Management Pension
Plan. Participants will be given full credit under the Company Management
Pension Plan for service and compensation accrued under the AT&T Management
Pension Plan. The normal retirement age under the Company Management Pension
Plan is 65; however, retirement before age 65 can be elected under certain
conditions.
Under the Company Management Pension Plan, annual pensions will be computed
on an adjusted career average pay basis. The adjusted career average pay formula
will be the sum of (a) 1.6% of the average annual pay for the six years ending
December 31, 1992, times the number of years of service prior to January 1,
1993, plus (b) 1.6% of pay subsequent to December 31, 1992. Only the basic
salary will be taken into account in the formula used to compute pension
amounts.
Federal laws place limitations on pensions that may be paid from the
pension trust related to the Company Management Pension Plan. Pension amounts
based on the Company Management Pension Plan formula which exceed the applicable
limitations will be paid under the Company's supplemental pension plans (the
"Supplemental Plans") rather than under the Company Management Pension Plan.
Such amounts will be treated for accounting purposes as an operating expense of
the Company.
Prior to the Distribution, certain of the Company's employees will be
participants in AT&T's Non-Qualified Pension Plan (the "AT&T Non-Qualified
Plan"). Effective at the time of the Distribution, the Company will adopt a
non-qualified pension plan (the "Company Non-Qualified Plan") that will
replicate, in all material respects, the AT&T Non-Qualified Plan, and under
which annual pensions for Mr. McGinn, Mr. Marx, Mr. Stanzione, Ms. Russo and
other senior managers will be computed based primarily on actual annual bonus
awards under the Company's short-term incentive plan. Participants will be given
full credit under the Company Non-Qualified Plan for service and compensation
under the AT&T Non-Qualified Plan.
Under the Company Non-Qualified Plan, pension benefits generally will
commence at the same time as benefits under the Company Management Pension Plan.
The annual pension amounts payable under the Company Non-Qualified Plan will be
equal to the greater of the amounts computed under the Basic or Alternate
Formula described below.
Basic Formula:
The sum of (a) 1.5% of the average of the actual annual bonus awards for
the three-year period ending December 31, 1989, times the number of years
of service prior to January 1, 1990, plus (b) 1.6% of the actual annual
bonus awards subsequent to December 31, 1989.
Alternate Formula:
The excess of (a) 1.7% of the adjusted career average pay, over (b) 0.8% of
the covered compensation base, times years of service to retirement, minus
the benefit calculated under the Company Management Pension Plan formula
(without regard to limitations imposed by the IRS). For purposes of this
formula,
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<PAGE> 65
adjusted career average pay will be determined by dividing the sum of the
employee's total adjusted career income by the employee's actual term of
employment at retirement. Total adjusted career income is the sum of (A)
and (B), where (A) is the sum of (i) employee's years of service prior to
January 1, 1993, multiplied by the employee's average annual compensation
(within the meaning of the Company Management Pension Plan) for the
three-year period ending December 31, 1992, without regard to the
limitations imposed by the Code, plus (ii) the employee's years of service
prior to January 1, 1990, multiplied by the average of the employee's
actual annual bonus awards for the three-year period ending December 31,
1989, and (B) is the sum of the employee's actual compensation (within the
meaning of the Company Management Pension Plan) after December 31, 1992,
without regard to the limitations imposed by the Code, and actual annual
bonus awards subsequent to December 31, 1989. The covered compensation base
used in this formula is the average of the maximum wage amount on which an
employee was liable for social security tax for each year beginning with
1961 and ending with 1995. In 1995, the covered compensation base was
$25,800.
An Alternative Minimum Formula ("AMF") will apply to active senior managers
with five years of service who were participants in the predecessor to the AT&T
Non-Qualified Plan as of December 31, 1993. The annual pension amount payable
under the AMF will be equal to the greater of the amounts computed under
Formulas A and B plus an additional percent increase factor as described below:
Formula A:
The sum of (a) 1.5% of the average of the total compensation for the
three-year period ending December 31, 1992, times the number of years of
service prior to January 1, 1993, plus (b) 1.6% of the total compensation
from January 1, 1993, to December 31, 1993. For purposes of this Formula A,
total compensation will be basic salary plus actual annual bonus awards.
The pension amounts resulting from this Formula A will be reduced to
reflect retirements prior to age 55.
Formula B:
The excess of (a) 1.7% of the adjusted career average pay, over (b) 0.8% of
the covered compensation base, times years of service to December 31, 1993.
For purposes of this Formula B, adjusted career average pay is determined
by dividing the sum of the employee's total adjusted career income used for
purposes of Formula A, by the employee's actual term of employment to
December 31, 1993. The covered compensation base used in this Formula B is
the average of the maximum wage amounts on which an employee was liable for
social security tax for each year beginning with 1959 and ending with 1993.
In 1993, the covered compensation base was $22,800. The pension amounts
resulting from this Formula B will be reduced to reflect retirements prior
to age 60.
An additional percent increase factor based on age and service is applied
to the pension amount resulting from the higher of Formula A or B. The total AMF
pension results in a fixed benefit and such amount will be reduced by the amount
payable under the Company Management Pension Plan. It is anticipated that after
1997, a senior manager's normal pension increases resulting from additional age
and service as well as possible future pension plan amendments could cause the
regular accrued pension benefit (under the Basic or Alternative Formulas above)
to exceed the fixed AMF benefit. Pensions resulting from the AMF will be payable
under the Company Non-Qualified Plan.
Pension amounts under either the Company Management Pension Plan formula or
the Company Non-Qualified Plan are not subject to reductions for social security
benefits or other offset amounts. If Mr. McGinn, Mr. Marx, Mr. Stanzione and Ms.
Russo continue in the positions above and retire at normal retirement age, the
estimated annual pension amounts payable under the Company Management Pension
Plan formula and the Company Non-Qualified Plan (including any amounts that may
be payable pursuant to the Supplemental Plans) would be $305,400, $228,900;
$314,800, $256,800; $219,800, $114,200; and $287,600, $152,000, respectively.
Amounts shown are straight-life annuity amounts not reduced by a joint and
survivorship provision which is available to the officers named. Mr. Schacht,
based on age at hire and current mandatory retirement age practices, would have
insufficient service to vest in any Company qualified or non-qualified pension
plans.
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<PAGE> 66
The Company has reserved the right to purchase annuity contracts to satisfy
its unfunded obligations to any of these officers under the Company
Non-Qualified Plan. In the event the Company purchases an annuity contract for
any officer, the pension payments for such officer will vary from those set
forth above. In such event, there would be a tax gross-up payment to the officer
and annuity benefits paid by the annuity provider will be reduced to offset the
tax gross-up payment. The after-tax pension benefit will be the same as the
after-tax benefit the participant would otherwise have received under the
Company Non-Qualified Plan.
Certain of the Company's non-qualified executive benefit plans will be
supported by a benefits protection grantor trust, the assets of which are
subject to the claims of the Company's creditors. In the event of a "Change in
Control" or "Potential Change in Control" of the Company (as such terms are
defined therein), certain additional funds might be required to be contributed
to such trust to support benefits under such plans.
OTHER EMPLOYMENT ARRANGEMENTS
Mr. Schacht became Chief Executive Officer of the Company on February 1,
1996. During 1995, Mr. Schacht did not receive any compensation as an employee
of either the Company or AT&T. However, he received $264,516 for consulting
services rendered from October 12, 1995 through December 31, 1995. It is
expected that Mr. Schacht will receive a salary for 1996 equal to $900,000. He
will also be eligible for an incentive bonus award, which, assuming achievement
of target levels, would result in a payment of an additional $1,118,000. In
addition, in January 1996, the Compensation Committee of the AT&T Board of
Directors awarded Mr. Schacht stock units representing 20,090 shares of AT&T
Common Stock and options to acquire 72,672 shares of AT&T Common Stock under the
1987 Plan. Such stock units vest in one installment at the end of three years.
Such options have an exercise price of $66.8125 per share of AT&T Common Stock,
vest in equal installments over three years, and have a term of 10 years from
the date of grant. At the time of the Distribution, such stock units and stock
options will be converted into Awards based on shares of Common Stock, as more
fully set forth below under "Arrangements Between the Company and
AT&T -- Employee Benefits Agreement."
1996 COMPANY LONG TERM INCENTIVE PLAN
The Company intends to adopt, with the approval of AT&T in its capacity as
the sole stockholder of the Company, the 1996 LTIP. After the Distribution, the
1996 LTIP will be administered by the Compensation Subcommittee of the
Executive, Corporate Governance and Compensation Committee of the Company Board
(the "Compensation Committee"). In order to ensure that compensation paid
pursuant to the 1996 LTIP can qualify as "performance-based compensation" not
subject to the limitation on deductibility of certain executive compensation in
excess of $1 million, the Company intends to seek stockholder approval of the
1996 LTIP at either its 1997 or 1998 annual meeting of stockholders. Such
stockholder approval is not required for any other purpose. The following
description of the 1996 LTIP is qualified by reference to the full text thereof,
a copy of which will be filed as an exhibit to the Registration Statement. See
"Available Information."
Awards
The 1996 LTIP provides for the grant of incentive stock options that
qualify under Section 422 of the Code ("ISOs") and non-statutory stock Options,
SARs, Restricted Stock Awards, Performance Awards, Other Stock Unit Awards (as
such terms are defined herein), and any other right, interest, or option
relating to shares of Common Stock or other securities of the Company
(collectively, "Awards"). No determination has yet been made as to the number of
employees of the Company who will be eligible to participate in the 1996 LTIP.
However, as described under "Arrangements Between the Company and
AT&T -- Employee Benefits Agreement," employees of the Company who hold AT&T
Stock Awards (approximately 1,400 persons as of March 1, 1996) are expected to
receive in substitution therefor, following consummation of the Distribution,
Awards under the 1996 LTIP (the "Substitute Awards"). Although the Company
expects that, in addition to the Substitute Awards, Awards will be made from
time to time after the Distribution under the 1996 LTIP, no determinations have
yet been made in that regard.
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<PAGE> 67
Shares Available
The 1996 LTIP contains a formula for establishing an annual limit on the
number of shares of Common Stock which may be awarded (or with respect to which
non-stock Awards may be made) in any given calendar year, except that Substitute
Awards will not be counted against such limit. Subject to customary
anti-dilution adjustments, the total number of shares of Common Stock available
for grant under the 1996 LTIP in each calendar year is 1.2% of the total
outstanding shares of Common Stock as of the first day of such year for which
the 1996 LTIP is in effect (except that for 1996, the number of shares of Common
Stock outstanding immediately after the Offerings will be used); provided that
such number will be increased in any year by the number of shares of Common
Stock available for grant under the 1996 LTIP in previous years but not covered
by Awards granted thereunder in such years; provided, further; that no more than
50 million shares of Common Stock will be cumulatively available for the grant
of ISOs. Any shares of Common Stock issued by the Company through the assumption
or substitution of outstanding grants from an acquired company ("Rollover
Awards") will not reduce the number of shares of Common Stock available for
grants thereunder. In addition, no one individual may be granted Awards with
respect to more than 1,000,000 shares of Common Stock in any one year (not
including Substitute Awards). Any shares of Common Stock issued under the 1996
LTIP (including in connection with Substitute Awards) may consist, in whole or
in part, of authorized and unissued shares or treasury shares or shares
purchased in the open market. If any shares of Common Stock subject to any Award
are forfeited or such Award otherwise terminates without the issuance of such
shares of Common Stock or of other consideration in lieu of such shares, the
shares subject to such Award, to the extent of any such forfeiture or
termination, will again be available for grant under the 1996 LTIP. In the event
of any merger, reorganization, consolidation, recapitalization, stock dividend,
stock split, reverse stock split, spin off or similar transaction or other
change in corporate structure affecting the shares of Common Stock, such
adjustments and other substitutions will be made to the 1996 LTIP and to Awards
as the Compensation Committee in its sole discretion deems equitable or
appropriate, including without limitation such adjustments in the aggregate
number, class and kind of shares of Common Stock which may be delivered under
the 1996 LTIP, in the aggregate or to any one Participant, in the number, class,
kind and option or exercise price of shares of Common Stock subject to
outstanding Options, SARs or other Awards granted under the 1996 LTIP, and in
the number, class and kind of shares of Common Stock subject to Awards granted
under the 1996 LTIP (including, if the Compensation Committee deems appropriate,
the substitution of similar options to purchase the shares of, or other awards
denominated in the shares of, another company), as the Compensation Committee
may determine to be appropriate in its sole discretion, provided that the number
of shares of Common Stock or other securities subject to any Award shall always
be a whole number.
Corporate Governance and Compensation Committee
The Compensation Committee, which is comprised of Non-Employee Directors,
none of whom may receive any Awards under the 1996 LTIP, will administer the
1996 LTIP after the Distribution. See "-- Committees of the Board of Directors."
The Compensation Committee will have full power and authority, subject to such
orders or resolutions not inconsistent with the provisions of the 1996 LTIP as
may from time to time be adopted by the Company Board, (i) to select the
employees of the Company and its affiliates to whom Awards may from time to time
be granted (the "Participants"); (ii) to determine the type or types of Award to
be granted to each Participant; (iii) to determine the number of shares of
Common Stock to be covered by each Award; (iv) to determine the terms and
conditions, not inconsistent with the provisions of the 1996 LTIP of any Award;
(v) to determine whether, to what extent and under what circumstances Awards may
be settled in cash, shares of Common Stock or other property or canceled or
suspended; (vi) to determine whether, to what extent and under what
circumstances cash, shares of Common Stock and other property and other amounts
payable with respect to an Award will be deferred either automatically or at the
election of the Participant; (vii) to interpret and administer the 1996 LTIP and
any instrument or agreement entered into thereunder; (viii) to establish such
rules and regulations and appoint such agents as it may deem appropriate for the
proper administration thereof; and (ix) to make any other determination and take
any other action that the Compensation Committee deems necessary or desirable
for administration of the 1996 LTIP.
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<PAGE> 68
Substitute Awards
Pursuant to the Employee Benefits Agreement, Substitute Awards will be
issued to employees of the Company following the Distribution in exchange for
AT&T Stock Awards. The terms and conditions of each Substitute Award, including,
without limitation, the time or times when, and the manner in which, each Option
or SAR constituting a Substitute Award will be exercisable, the duration of the
exercise period, the permitted method of exercise, settlement and payment, the
rules that will apply in the event of the termination of employment of the
employee, the events, if any, that may give rise to an employee's right to
accelerate the vesting or the time of exercise thereof and the vesting
provisions of any Restricted Stock Award or Performance Award constituting
Substitute Awards, will be the same as those of the surrendered or forfeited
AT&T Stock Award. See "Arrangements Between the Company and AT&T -- Employee
Benefits Agreement."
Options; Stock Appreciation Rights
Options to purchase Common Stock ("Options") may be granted under the 1996
LTIP, either alone or in addition to other Awards. Except in the case of
Substitute Awards and Rollover Awards, the purchase price per share of Common
Stock purchasable under an Option will be determined by the Compensation
Committee, in its sole discretion; provided that such purchase price will not be
less than the Fair Market Value (as defined in the 1996 LTIP) of a share of
Common Stock on the date of the grant of the Option. The term of each Option
will be fixed by the Compensation Committee in its sole discretion; provided
that no ISO will be exercisable after the expiration of 10 years from the date
the Option is granted. Options will be exercisable at such time or times as
determined by the Compensation Committee at or subsequent to grant. Unless
otherwise determined by the Compensation Committee at or subsequent to grant, no
ISO will be exercisable during the year ending on the day before the first
anniversary date of the granting of the ISO. Subject to the other provisions of
the 1996 LTIP and any applicable Award agreement, any Option may be exercised by
the Participant, in whole or in part, at such time or times, and the Participant
may make payment of the option price in such form or forms, including, without
limitation, payment by delivery of cash, shares of Common Stock or other
consideration (including, where permitted by law and the Compensation Committee,
Awards) having a Fair Market Value on the exercise date equal to the total
option price, or by any combination of cash, shares of Common Stock and other
consideration as the Compensation Committee may specify in the applicable Award
agreement.
In accordance with rules and procedures established by the Compensation
Committee, the aggregate Fair Market Value (determined as of the time of grant)
of the shares of Common Stock with respect to which ISOs held by any Participant
and exercisable for the first time by such Participant during any calendar year
under the 1996 LTIP (and under any other benefit plans of the Company or of any
parent or subsidiary corporation of the Company) will not exceed $100,000 or, if
different, the maximum limitation in effect at the time of grant under Section
422 of the Code, or any successor provision, and any regulations promulgated
thereunder. In its sole discretion, the Compensation Committee may provide, at
the time of grant, that the shares to be issued upon an Option's exercise will
be in the form of restricted stock or other similar securities, or may reserve
the right so to provide after the time of grant. SARs may be granted to
Participants either alone or in addition to other Awards and may, but need not,
relate to a specific Option. The provisions of SARs need not be the same with
respect to each recipient. Any SAR related to an Option other than an ISO may be
granted at the same time such Option is granted or at any time thereafter before
exercise or expiration of such Option. Any SAR related to an ISO must be granted
at the same time such Option is granted. In the case of any SAR related to any
Option, the SAR or applicable portion thereof will terminate and no longer be
exercisable upon the termination or exercise of the related Option, except that
any SAR granted with respect to less than the full number of shares of Common
Stock covered by a related Option will not be reduced except to the extent that
the number of shares affected by the exercise or termination of the related
Option exceeds the number of shares not covered by the SAR. Any Option related
to any SAR will no longer be exercisable to the extent the related SAR has been
exercised. The Compensation Committee may impose such conditions or restrictions
on the exercise of any SAR as it may deem appropriate.
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Performance Shares
Performance-based equity awards ("Performance Awards") may be issued to
Participants, for no cash consideration or for such minimum consideration as may
be required by applicable law, either alone or in addition to other Awards
granted under the 1996 LTIP. The performance criteria to be achieved during any
Performance Period (as defined in the 1996 LTIP) and the length of the
Performance Period will be determined by the Compensation Committee upon the
grant of each Performance Award. With certain exceptions, Performance Awards
will be distributed only after the end of the relevant Performance Period.
Performance Awards may be paid in cash, shares of Common Stock, other property
or any combination thereof, in the sole discretion of the Compensation Committee
at the time of payment. The performance levels to be achieved for each
Performance Period and the amount of the Performance Award to be distributed
will be conclusively determined by the Compensation Committee. Performance
Awards may be paid in a lump sum or in installments following the close of the
Performance Period or, in accordance with procedures established by the
Compensation Committee, on a deferred basis.
Other Stock Unit Awards
Other Awards of shares of Common Stock and other Awards that are valued in
whole or in part by reference to, or are otherwise based on, shares of Common
Stock or other property ("Other Stock Unit Awards") may be granted to
Participants, either alone or in addition to other Awards. Other Stock Unit
Awards may be paid in shares of Common Stock, other securities of the Company,
cash or any other form of property as the Compensation Committee may determine.
Subject to the provisions of the 1996 LTIP, the Compensation Committee will have
sole and complete authority to determine the employees of the Company and its
affiliates to whom, and the time or times at which, such Awards will be made,
the number of shares of Common Stock to be granted pursuant to such Awards, and
all other conditions of the Awards. The provisions of Other Stock Unit Awards
need not be the same with respect to each recipient.
Shares of Common Stock (including securities convertible into shares of
Common Stock) granted as Other Stock Unit Awards may be issued for no cash
consideration or for such minimum consideration as may be required by applicable
law; shares of Common Stock (including securities convertible into such shares)
purchased pursuant to a purchase right granted as an Other Stock Unit Award will
be purchased for such consideration as the Compensation Committee may, in its
sole discretion, determine, which (other than in the case of Substitute Awards
or Rollover Awards) will not be less than the Fair Market Value of such shares
of Common Stock or other securities as of the date such purchase right is
awarded.
Restricted Shares
Restricted stock awards ("Restricted Stock Awards") may be issued to
Participants, for no cash consideration or for such minimum consideration as may
be required by applicable law, either alone or in addition to other Awards
granted under the 1996 LTIP. The provisions of Restricted Stock Awards need not
be the same with respect to each recipient. Except as otherwise determined by
the Compensation Committee at the time of grant, upon termination of employment
for any reason during the restriction period, all Restricted Stock Awards still
subject to restriction will be forfeited by the Participant and reacquired by
the Company; provided that, in the event of a Participant's retirement,
permanent disability, other termination of employment or death, or in cases of
special circumstances, the Compensation Committee may, in its sole discretion,
when it finds that a waiver would be in the best interests of the Company,
waive, in whole or in part, any or all remaining restrictions with respect to
such Participant's Restricted Stock Awards.
Change in Control
The 1996 LTIP provides, that unless the Compensation Committee determines
otherwise at the time of grant with respect to a particular Award, in the event
of a Change in Control (as defined below), with certain exceptions, (i) any
Options and SARs outstanding as of the date such Change in Control will become
fully exercisable and vested to the full extent of the original grant; (ii) the
restrictions and deferral limitations applicable to any Restricted Stock Awards
will lapse; (iii) all Performance Awards will be considered to be
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earned and payable in full, and any deferral or other restriction will lapse and
such Performance Awards will be immediately settled or distributed; and (iv) the
restrictions and deferral limitations and other conditions applicable to any
Other Stock Awards or any other Awards will lapse, and such Other Stock Awards
or such other Awards will become free of all restrictions, limitations or
conditions and become fully vested and transferable to the full extent of the
original grant.
The 1996 LTIP also provides, with certain exceptions, that, if determined
by the Compensation Committee at or after the time of grant, during the 60-day
period from and after a Change in Control (the "Exercise Period"), a Participant
holding an Option will have the right, whether or not the Option is fully
exercisable and in lieu of the payment of the purchase price for the shares of
Common Stock being purchased under the Option and by giving notice to the
Company, to elect (within the Exercise Period) to surrender all or part of the
Option to the Company and to receive cash, within 30 days of such notice, in an
amount equal to the amount by which the Change in Control Price (as defined
below) per share of the Common Stock on the date of such election exceeds the
purchase price per share under the Option multiplied by the number of Shares
granted under the Option as to which such right has been exercised.
The 1996 LTIP defines "Change in Control" to mean, with certain exceptions,
the happening of any of the following events: (i) an acquisition by any
individual, entity or group of beneficial ownership of 20% or more of either (A)
the then outstanding shares of Common Stock or (B) the combined voting power of
the then outstanding voting securities of the Company entitled to vote generally
in the election of directors; or (ii) a change in the composition of the Board
such that the individuals who, as of the Distribution, constitute the Board
cease for any reason to constitute at least a majority of the Board; or (iii)
the approval by the stockholders of the Company of a merger, reorganization or
consolidation or sale of other disposition of all or substantially all of the
assets of the Company (each, a "Corporate Transaction") or, if consummation of
such Corporate Transaction is subject, at the time of such approval by
stockholders, to the consent of any government or governmental agency, the
obtaining of such consent (either explicitly or implicitly by consummation); or
(iv) the approval of the stockholders of the Company of a complete liquidation
or dissolution of the Company.
The 1996 LTIP defines "Change in Control Price", with certain exceptions,
as the higher of (i) the highest price of a share of Common Stock during the
60-day period prior to and including the date of a Change in Control or (ii) if
the Change in Control is the result of a tender or exchange offer or a Corporate
Transaction, the highest price per share of Common Stock paid in such tender or
exchange offer or Corporate Transaction.
Other Provisions
The Company Board may amend, alter or discontinue the 1996 LTIP, but no
amendment, alteration, or discontinuation may be made that would impair rights
under an Award theretofore granted without the Participant's consent, or that,
without the approval of the stockholders, would (a) except pursuant to the
provisions providing for anti-dilution adjustments, increase the total number of
shares of Common Stock reserved thereunder; (b) change the employees or class of
employees eligible to participate therein; or (c) prevent the Company from
fulfilling its obligations with respect to Substitute Awards pursuant to the
Employee Benefits Agreement. The Compensation Committee may amend the terms of
any Award theretofore granted, prospectively or retroactively, but no such
amendment may impair the rights of any Participant without his or her consent.
The Compensation Committee may also substitute new Awards for previously granted
Awards, including, without limitation, previously granted Options having higher
Option prices.
The Compensation Committee will be authorized to make adjustments in
Performance Award criteria or in the terms and conditions of other Awards in
recognition of unusual or nonrecurring events affecting the Company or its
financial statements or changes in applicable laws, regulations or accounting
principles. The Compensation Committee may also establish certain procedures
providing for the deferral of the payment of any Award and the delivery of
shares of Common Stock in satisfaction of withholding tax obligations.
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Subject to the provisions of the 1996 LTIP and any Award agreement, the
recipient of an Award (including, without limitation, any deferred Award) may,
if so determined by the Compensation Committee, be entitled to receive,
currently or on a deferred basis, interest or dividends, or interest or dividend
equivalents, with respect to the number of shares of Common Stock covered by the
Award, as determined by the Compensation Committee, in its sole discretion, and
the Compensation Committee may provide that such amounts (if any) will be deemed
to have been reinvested in additional shares of Common Stock or otherwise
reinvested.
The 1996 LTIP also provides that, if the Compensation Committee determines
at the time Restricted Stock, a Performance Award or an Other Stock Unit Award
is granted to a Participant that such Participant is, or is likely to be at the
time he or she recognizes income for federal income tax purposes in connection
with such Award, a covered employee within the meaning of Section 162(m) of the
Code, then the Compensation Committee may impose certain performance goals and
impose certain other restrictions with respect to such Award.
The Company's Other Benefit Plans
Pursuant to the Employee Benefits Agreement, the Company will create plans
for management and occupational employees of the Company that replicate in all
material respects AT&T's benefit plans. Except as provided therein, the Employee
Benefits Agreement does not preclude the Company from discontinuing any plan,
changing any plan or benefit or adopting any new plan. See "Arrangements Between
the Company and AT&T -- Employee Benefits Agreement."
In addition, the Company plans to investigate other programs for more
broad-based ownership of Common Stock by the Company's employees following the
Distribution.
RELATED TRANSACTIONS
AT&T owns over 80% of the outstanding common stock of AT&T Capital Corp.
("AT&T Capital"). In 1993, AT&T and AT&T Capital entered into an operating
agreement (the "Operating Agreement"), pursuant to which AT&T provides AT&T
Capital with the right to be the preferred provider of leasing and financing
services for AT&T's products on a basis consistent with past practice. The
Operating Agreement expires in August 2000. The Company, as a subsidiary of
AT&T, has operated under the Operating Agreement and, pursuant to the terms
thereof, has entered into a comparable operating agreement with AT&T Capital
having the same term. In connection therewith, the Company has also agreed that
AT&T Capital and certain subsidiaries will be entitled to use certain of the
Company's marks for use in connection with the provision of financing services
under the operating agreement in accordance with the existing license agreement
between AT&T and AT&T Capital. The Company has further agreed that it will
continue to be bound by the provisions of an intercompany agreement between AT&T
and AT&T Capital to the extent the Company is currently bound thereby, under
which the Company will continue to give AT&T Capital the right to bid for the
provision of leasing and financing services in connection with the Company's
internal equipment purchasing and leasing. In addition, right, title and
interest in certain lease receivables for business communication equipment are
sold at a discount to AT&T Capital. The Company acts as an agent to bill and
collect such receivables. The Company has agreed to repurchase certain of these
lease receivables in the event of a default thereon. At December 31, 1995, $206
million of such receivables had recourse to the Company in the event of default.
As described under "Risk Factors -- Reliance on Major Customers," the
Company's largest customer in terms of total revenue has been AT&T. For the year
1995, the Company had $2,119 million of revenues from AT&T. At December 31,
1995, the related receivables amounted to $291 million.
In addition, the Company has engaged, and expects to continue to engage,
with AT&T and with affiliates of AT&T, in certain ordinary course business
transactions. For a summary of such transactions, see "Arrangements Between the
Company and AT&T" and Note 12 of Notes to Consolidated Financial Statements
included elsewhere in this Prospectus.
During 1995, the Company had outstanding two loans to Mr. Butters,
President, North American Region, Network Systems. The largest aggregate
principal amounts of such loans during such year were $120,000 and $95,000,
although $12,000 and $28,000, respectively, of such amounts were voluntarily
repaid
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during such year. The loans carry rates of 5.19% and 5.21% per annum,
respectively, payable annually, and mature in 1999.
As described under "-- Other Employment Arrangements," Mr. Schacht received
$264,516 for consulting services rendered from October 12, 1995 to December 31,
1995. Such services included advising in connection with the structuring and
organization of the Company and assisting in the Company's transition from a
division of AT&T to a publicly held company.
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ARRANGEMENTS BETWEEN THE COMPANY AND AT&T
For the purposes of governing certain of the relationships between the
Company and AT&T (including NCR) following the Separation, the Offerings and the
Distribution, the Company, AT&T and NCR have entered into the Separation and
Distribution Agreement, and have entered into the Ancillary Agreements to which
they are parties (collectively, the "Transaction Agreements"). The Ancillary
Agreements include the Interim Services and Systems Replication Agreement; the
General Purchase Agreement and the supplemental agreements related thereto; the
Employee Benefits Agreement; the Brand License Agreement; the Patent License
Agreement and other patent-related agreements; the Technology License Agreement
and other technology-related agreements; the Tax Sharing Agreement and other
tax-related agreements; certain agreements providing for the assignment of, and
the establishment of transitional arrangements with respect to, real property;
and agreements pursuant to which AT&T will provide communications services to
the Company and NCR will sell certain products to the Company. Certain of the
Transaction Agreements summarized below have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part and the summaries
of such agreements are qualified in their entirety by reference to the full text
of such agreements. See "Available Information." Capitalized terms used in this
section and not otherwise defined in the section entitled "-- Certain
Definitions" below or elsewhere herein shall have their respective meanings set
forth in the Separation and Distribution Agreement (except that the term
"Company" is used in lieu of the term "Lucent").
SEPARATION AND DISTRIBUTION AGREEMENT
The Separation and Distribution Agreement sets forth the agreements among
the Company, AT&T and NCR with respect to the principal corporate transactions
required to effect the Separation, the Offerings and the Distribution, and
certain other agreements governing the relationship among the parties
thereafter. Certain agreements specifying the series of transactions necessary
to effect the separation of Assets and Liabilities of the Company, AT&T and NCR
located outside the United States are contained in the Non-U.S. Plan.
The Separation
To effect the Separation, AT&T and NCR have transferred or agreed to
transfer, or to cause their respective subsidiaries to transfer, the Company
Assets to the Company. The Company has assumed or agreed to assume and has
agreed faithfully to perform and fulfill all the Company Liabilities in
accordance with their respective terms. Except as expressly set forth in the
Separation and Distribution Agreement or in any Ancillary Agreement, no party is
making any representation or warranty as to the assets, businesses or
liabilities transferred or assumed as part of the Separation, as to any consents
or approvals required in connection therewith, as to the value or freedom from
any Security Interests of any of the Assets transferred or as to the absence of
any defenses or freedom from counterclaim with respect to any claim of any
party, or as to the legal sufficiency of any assignment, document or instrument
delivered to convey title to any Asset transferred. Except as expressly set
forth in any Transaction Agreement, all Assets are being transferred on an "as
is," "where is" basis, and the respective transferees have agreed to bear the
economic and legal risks that the conveyance is insufficient to vest in the
transferee good and marketable title, free and clear of any Security Interest.
The Distribution
The Separation and Distribution Agreement provides that, subject to the
terms and conditions thereof, AT&T and the Company will take all reasonable
steps necessary and appropriate to cause all conditions to the Distribution to
be satisfied, and to effect the Distribution on the Distribution Date. The AT&T
Board will have the sole discretion to determine the date of consummation of the
Distribution at any time after the Closing Date and on or prior to December 31,
1996. AT&T has agreed to consummate the Distribution no later than December 31,
1996, subject to the satisfaction or waiver by the AT&T Board, in its sole
discretion, of the following conditions:
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(i) a private letter ruling from the IRS shall have been obtained, and
shall continue in effect, to the effect that, among other things, the
Distribution will qualify as a tax-free distribution for federal income tax
purposes under Section 355 of the Code and the transfer to the Company of
the Company Assets and the assumption by the Company of the Company
Liabilities in connection with the Separation will not result in
recognition of any gain or loss for federal income tax purposes to AT&T,
the Company or AT&T's or the Company's shareholders, and such ruling shall
be in form and substance satisfactory to AT&T, in its sole discretion;
(ii) any material Governmental Approvals and Consents necessary to
consummate the Distribution shall have been obtained and be in full force
and effect;
(iii) no order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Distribution shall be in effect, and no other event
outside the control of AT&T shall have occurred or failed to occur that
prevents the consummation of the Distribution; and
(iv) no other events or developments shall have occurred subsequent to
the Closing Date that, in the judgment of the AT&T Board, would result in
the Distribution having a material adverse effect on AT&T or on the
shareholders of AT&T.
In the event that any such condition is not satisfied or waived on or before
December 31, 1996, AT&T has agreed to consummate the Distribution as promptly as
practicable following the satisfaction or waiver of all such conditions. AT&T
may terminate the obligation to consummate the Distribution if the Distribution
has not occurred by December 31, 1997. See "-- Termination."
On March 21, 1996, the Company received a private letter ruling from the
IRS to the effect described in clause (i) above.
The Company, AT&T and NCR have agreed that, after the Closing Date, none of
the parties will take, or permit any of its affiliates to take, any action which
reasonably could be expected to prevent the Distribution from qualifying as a
tax-free distribution within the meaning of Section 355 of the Code. The parties
have also agreed to take any reasonable actions necessary in order for the
Distribution to qualify as a tax-free distribution pursuant to Section 355 of
the Code. Without limiting the foregoing, after the Closing Date and on or prior
to the Distribution Date, the Company will not issue or grant, and will not
permit any member of the Company Group to issue or grant, directly or
indirectly, any shares of Common Stock or any rights, warrants, options or other
securities to purchase or acquire (whether upon conversion, exchange or
otherwise) any shares of Common Stock (whether or not then exercisable,
convertible or exchangeable).
Retained Receivables
Under the Separation and Distribution Agreement, AT&T has retained all the
Retained Receivables, consisting of certain receivables that arose in the
Company Business. The Retained Receivables have a face amount estimated for pro
forma purposes at approximately $2,000 million. The Separation and Distribution
Agreement provides that the Company will use its reasonable best efforts to
satisfy any conditions to the payment of any Retained Receivables and to fulfill
all obligations to the applicable account debtors related to such Retained
Receivables. Any payment made by an account debtor to the Company or any member
of the Company Group with respect to an account receivable will be applied to
any Retained Receivables attributable to that account debtor (and paid over to
AT&T) before they are applied to any other account receivable whenever arising
for such account debtor, subject to certain limited exceptions. In the
Separation and Distribution Agreement, the Company represents and warrants to
AT&T that each Retained Receivable constitutes a legal, valid and binding
obligation of the applicable account debtor enforceable against such account
debtor in accordance with its respective terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency, moratorium and other similar
laws affecting the enforcement of creditors' rights generally, and is not
subject to any Security Interest or any other lien, claim, defense or right of
set-off.
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Releases and Indemnification
The Separation and Distribution Agreement provides for a full and complete
release and discharge as of the Closing Date of all Liabilities existing or
arising from all acts and events occurring or failing to occur or alleged to
have occurred or to have failed to occur and all conditions existing or alleged
to have existed on or before the Closing Date, between or among the Company or
any member of the Company Group, on the one hand, and AT&T, NCR or any member of
the AT&T Services Group or the NCR Group, on the other hand (including any
contractual agreements or arrangements existing or alleged to exist between or
among any such members on or before the Closing Date), except as expressly set
forth in the Separation and Distribution Agreement.
Except as provided in the Separation and Distribution Agreement, the
Company has agreed to indemnify, defend and hold harmless each of AT&T and NCR,
each member of the AT&T Group and the NCR Group, and each of their respective
directors, officers and employees, from and against all Liabilities relating to,
arising out of or resulting from (i) the failure of the Company or any member of
the Company Group or any other Person to pay, perform or otherwise promptly
discharge any Company Liabilities, any Environmental Liabilities of a Subsidiary
of the Company not directly assumed by the Company, or any Company Contract, in
accordance with their respective terms, (ii) the Company Business, any Company
Liability, the Environmental Liabilities referred to above or any Company
Contract, (iii) any breach by the Company or any member of the Company Group of
the Separation and Distribution Agreement or any of the Ancillary Agreements,
and (iv) any untrue statement or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, with respect
to all information contained in this Prospectus or the Registration Statement of
which it forms a part. Also, in the Separation and Distribution Agreement, the
Company has indemnified the members of the AT&T Group, subject to limited
exceptions, against any claims of patent, copyright or trademark infringement or
trade secret misappropriation with respect to any product, software or other
material provided by or ordered from the Company Business (whether alone or in
combination with other items provided by the Company Business or third parties)
prior to the Offerings.
AT&T has agreed to indemnify, defend and hold harmless the Company, each
member of the Company Group and each of their respective directors, officers and
employees from and against all Liabilities relating to, arising out of or
resulting from (i) the failure of AT&T or any member of the AT&T Group or any
other Person to pay, perform or otherwise promptly discharge any liabilities of
the AT&T Group other than the Company Liabilities or the NCR Covered
Liabilities, (ii) the AT&T Services Business or any Liability of the AT&T Group
other than the Company Liabilities and the NCR Covered Liabilities, and (iii)
any breach by AT&T or any member of the AT&T Services Group of the Separation
and Distribution Agreement or any of the Ancillary Agreements.
NCR has agreed to indemnify, defend and hold harmless the Company, each
member of the Company Group and each of their respective directors, officers and
employees from and against all liabilities relating to, arising out of or
resulting from (i) the failure of NCR or any member of the NCR Group or any
other Person to pay, perform or otherwise promptly discharge any Exclusive NCR
Contingent Liability or any Shared NCR Percentage of any Shared Contingent
Liability, and (ii) any breach by NCR or any member of the NCR Group of the
Separation and Distribution Agreement or any of the Ancillary Agreements, or any
other agreement that is not contemplated to be terminated as of the Closing Date
pursuant to the Separation and Distribution Agreement.
The Separation and Distribution Agreement also specifies certain procedures
with respect to claims subject to indemnification and related matters.
Contingent Liabilities and Contingent Gains
The Separation and Distribution Agreement provides for indemnification by
the Company, AT&T and NCR with respect to Contingent Liabilities primarily
relating to their respective businesses or otherwise assigned to them
("Exclusive Contingent Liabilities"), subject to the sharing provisions
described below. In addition to contingent liabilities relating to present or
former businesses of the Company, any contingent
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liabilities related to AT&T's discontinued computer operations (other than those
of NCR) have been assigned to the Company. In the event the aggregate Value (as
defined herein) of all amounts paid by the Company, AT&T or NCR (in each case,
together with any members of its respective Group) in respect of any single
Exclusive Contingent Liability of such Group or any set or group of Related
Exclusive Contingent Liabilities of such Group is in excess of $100 million, the
Company, AT&T and NCR will share such portion in excess of $100 million (the
"Excess Portion") in accordance with the following percentages:
(i) if the Exclusive Contingent Liability primarily relates to the
business of AT&T, AT&T will bear 75% of such Excess Portion, the Company
will bear 22% of such Excess Portion, and NCR will bear 3% of such Excess
Portion;
(ii) if the Exclusive Contingent Liability primarily relates to the
business of the Company, the Company will bear 50% of such Excess Portion,
AT&T will bear 47% of such Excess Portion, and NCR will bear 3% of such
Excess Portion;
(iii) if the Exclusive Contingent Liability primarily relates to the
business of NCR, NCR will bear 50% of such Excess Portion, AT&T will bear
37% of such Excess Portion, and the Company will bear 13% of such Excess
Portion.
For purposes of the foregoing, the term "Value" is defined as the aggregate
amount of all cash payments, the fair market value of all non-cash payments and
the incremental cost of providing any goods or services made or provided in
respect of any Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities, net of: (a) any Insurance Proceeds received or realized in respect
of the applicable Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities, (b) any Tax benefits associated with such payments or the provision
of such goods or services (calculated in the manner specified in the Separation
and Distribution Agreement), (c) any amounts received pursuant to certain
specified third party agreements in respect of the Exclusive Contingent
Liability or Related Exclusive Contingent Liabilities, (d) any other amounts
recovered (including by way of set off) from a third party in connection with
any such Action or threatened Action and (e) the amount of any reserve, account
payable or similar accrual in respect of the Exclusive Contingent Liability or
Related Exclusive Contingent Liabilities, net of any offsetting receivables in
respect of such Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities, in each case as reflected on the Company's Balance Sheet or the
audited consolidated balance sheet of AT&T, including the notes thereto, as of
December 31, 1995.
As a result of the foregoing provisions, if the Value of amounts paid in
respect of any Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities of AT&T or NCR exceeds $100 million, the Company will be required to
pay 22% of the Excess Portion (in the case of any Exclusive AT&T Contingent
Liability or Related Exclusive Contingent Liabilities) or 13% of the Excess
Portion (in the case of any Exclusive NCR Contingent Liability or Related
Exclusive Contingent Liabilities), notwithstanding the fact that the Exclusive
Contingent Liability or Related Exclusive Contingent Liabilities do not relate
to the business and operations of the Company or any other member of the Company
Group. Conversely, if the Value of amounts paid in respect of any Company
Exclusive Contingent Liability or Related Exclusive Contingent Liabilities
exceeds $100 million, the Company will be entitled to reimbursement from AT&T
and NCR of 50%, in the aggregate, of the Excess Portion, notwithstanding the
fact that the Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities do not relate to the business and operations of AT&T or NCR or the
members of their Groups.
The Separation and Distribution Agreement also provides for the sharing of
Shared Contingent Liabilities, which are defined as (a) any Contingent
Liabilities that are not Exclusive AT&T Contingent Liabilities, Exclusive
Company Contingent Liabilities or Exclusive NCR Contingent Liabilities, (b) any
RBOC Liability, and (c) certain specifically identified Liabilities, including
certain Liabilities relating to terminated, divested or discontinued businesses
or operations of AT&T or its current or former Affiliates. With respect to any
Shared Contingent Liability, the parties have agreed that AT&T will be
responsible for 75%, the Company for 22% and NCR for 3% of such Shared
Contingent Liability. AT&T will assume the defense of, and may seek to settle or
compromise, any Third Party Claim that is a Shared Contingent Liability, and the
costs and expenses thereof will be included in the amount to be shared by the
parties.
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The Separation and Distribution Agreement provides that the Company, AT&T
and NCR will have the exclusive right to any benefit received with respect to
any Contingent Gain that primarily relates to the business of, or that is
expressly assigned to, the Company, AT&T or NCR, respectively (an "Exclusive
Contingent Gain"). Each of the Company, AT&T and NCR will have sole and
exclusive authority to manage, control and otherwise determine all matters
whatsoever with respect to an Exclusive Contingent Gain that primarily relates
to its respective business. The parties have agreed to share any benefit that
may be received from any Contingent Gain that is not an Exclusive Contingent
Gain (a "Shared Contingent Gain"), with AT&T receiving 75%, the Company
receiving 22% and NCR receiving 3% of any such benefit. The parties have agreed
that AT&T will have the sole and exclusive authority to manage, control and
otherwise determine all matters whatsoever with respect to any Shared Contingent
Gain. Pursuant to the Separation and Distribution Agreement, each of the Company
and NCR acknowledges that AT&T may elect not to pursue any Shared Contingent
Gain for any reason whatsoever (including a different assessment of the merits
of any Action, claim or right than the Company or NCR or any business reasons
that are in the best interests of AT&T or a member of the AT&T Services Group,
without regard to the best interests of any member of the Company Group or the
NCR Group) and that no member of the AT&T Group will have any liability to any
Person (including any member of the Company Group or the NCR Group) as a result
of any such determination.
The Separation and Distribution Agreement provides for the establishment of
a Contingent Claims Committee comprised of one representative designated from
time to time by each of AT&T, the Company and NCR and sets forth procedures for
the purpose of resolving disagreements among the parties as to Contingent Gains
and Contingent Liabilities.
Dispute Resolution
The Separation and Distribution Agreement contains provisions that govern,
except as otherwise provided in any Ancillary Agreement, the resolution of
disputes, controversies or claims that may arise between or among the parties.
These provisions contemplate that efforts will be made to resolve disputes,
controversies and claims by escalation of the matter to senior management (or
other mutually agreed) representatives of the parties. If such efforts are not
successful, any party may submit the dispute, controversy or claim to mandatory,
binding arbitration, subject to the provisions of the Separation and
Distribution Agreement. The Separation and Distribution Agreement contains
procedures for the selection of a sole arbitrator of the dispute, controversy or
claim and for the conduct of the arbitration hearing, including certain
limitations on discovery rights of the parties. These procedures are intended to
produce an expeditious resolution of any such dispute, controversy or claim.
In the event that any dispute, controversy or claim is, or is reasonably
likely to be, in excess of $100 million, or in the event that an arbitration
award in excess of $100 million is issued in any arbitration proceeding
commenced under the Separation and Distribution Agreement, subject to certain
conditions, any party may submit such dispute, controversy or claim to a court
of competent jurisdiction and the arbitration provisions contained in the
Separation and Distribution Agreement will not apply. In the event that the
parties do not agree that the amount in controversy is in excess of $100
million, the Separation and Distribution Agreement provides for arbitration of
such disagreement.
Certain Business Transactions
The Separation and Distribution Agreement provides that no member of any
Group will have any duty to refrain from engaging in the same or similar
activities or lines of business as any member of any other Group, or from doing
business with any potential or actual supplier or customer of any member of any
other Group. The Separation and Distribution Agreement also provides for the
allocation of certain corporate opportunities following the Closing Date and
prior to the Distribution Date. During this period, none of the Company, AT&T or
NCR will have any duty to communicate or offer such opportunities to any of the
others and may pursue or acquire any such opportunity for itself or direct such
opportunity to any other Person, unless (a) the opportunity relates primarily to
the Company Business, the AT&T Services Business or the NCR Business, in which
case the party that acquires knowledge of the opportunity will generally be
required to communicate
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and offer the opportunity to the company to whose business the opportunity
primarily relates, or (b) the opportunity relates both to the AT&T Services
Business and the Company Business but not primarily to either one, in which case
such party will generally be required to communicate and offer the opportunity
to the Company. In the event the foregoing clause (a) or (b) is applicable, no
party, other than the party to whom the opportunity must be offered in
accordance with such clauses, will pursue or acquire such opportunity for
itself, or direct such opportunity to any other Person, unless the party to whom
the opportunity is required to be offered does not within a reasonable period of
time begin to pursue, or does not thereafter continue to pursue, such
opportunity diligently and in good faith.
Ability to Terminate Certain Rights
The Separation and Distribution Agreement provides that certain rights
granted to the Company and the members of the Company Group will be subject to
the following provisions. Except as otherwise expressly provided, in the event
that, at any time prior to February 1, 2001, the Company or any member of the
Company Group offers, furnishes or provides any Telecommunications Services of
the type offered by the AT&T Services Business as of the Closing Date, then AT&T
may, in its sole discretion: (a) terminate all or any portion of the rights
granted by AT&T under the Brand License Agreement; (b) terminate all or any
remaining portion of the purchase commitments made by AT&T and the members of
the AT&T Group in the General Purchase Agreement; (c) exercise the right to
require the Company to transfer to AT&T certain personnel, information,
technology and software under the Supplemental Agreements; (d) terminate all or
any portion of the rights to patents and technology of AT&T or any member of the
AT&T Group granted to the Company and the members of the Company Group pursuant
to the Patent License Agreement and the Technology License Agreement; and (e)
direct the Company and the members of the Company Group to reconvey to AT&T all
interests in any and all patents and technology in which the Company or any
member of the Company Group was granted an undivided one-half interest pursuant
to the Patent Assignments or the Technology Assignment and Joint Ownership
Agreements. The Company and the members of the Company Group will not be deemed
to offer, furnish or provide any Telecommunications Services (and the foregoing
provisions will not apply) solely by virtue of certain specified investments in
Persons that offer, furnish or provide Telecommunications Services or by virtue
of offering, furnishing or providing Telecommunications Services below a
specified de minimis amount.
Provisions Relating to Third Party Patent License Agreements
The Separation and Distribution Agreement provides, subject to specified
exceptions, for the grant by AT&T to the Company and NCR of rights to share with
AT&T the patent license rights granted to AT&T under third-party patent license
agreements. To the extent this grant is not effective, AT&T will transfer the
patent license agreement to the Company (and the Company will seek equivalent
rights from the third party for AT&T and NCR) or, if such transfer is not
effective, AT&T will retain the patent license agreement (and AT&T will seek
equivalent rights from the third party for the Company and NCR).
Proceeds; Expenses
The Separation and Distribution Agreement provides that the Offerings will
be primary Offerings of the Common Stock and that the net proceeds of the
Offerings will be retained by the Company. See "Use of Proceeds." The Company
has agreed to pay all third party costs, fees and expenses relating to the
Offerings, all of the reimbursable expenses of the Underwriters pursuant to the
Underwriting Agreement, all of the costs of producing, printing, mailing and
otherwise distributing this Prospectus, as well as the Underwriters' discount as
provided in the Underwriting Agreement. See "Underwriting." Except as expressly
set forth in the Separation and Distribution Agreement or in any Ancillary
Agreement, whether or not the Offerings or the Distribution is consummated, all
third party fees, costs and expenses paid or incurred in connection with the
Distribution will be paid by AT&T.
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Termination
The Separation and Distribution Agreement may be terminated at any time
prior to the Distribution Date by the mutual consent of AT&T, NCR and the
Company, or by AT&T at any time prior to the Closing Date. In addition, the
obligations of AT&T and the Company to pursue or effect the Distribution may be
terminated by AT&T if the Distribution does not occur on or prior to December
31, 1997. If the Separation and Distribution Agreement is terminated prior to
the Closing Date, no party thereto (or any of its respective directors or
officers) will have any Liability or further obligation to any other party. In
the event of any termination of the Separation and Distribution Agreement on or
after the Closing Date, only the provisions of the Separation and Distribution
Agreement that obligate the parties to pursue the Distribution will terminate
and the other provisions of the Separation and Distribution Agreement and each
Ancillary Agreement will remain in full force and effect.
Amendments and Waivers
No provisions of the Separation and Distribution Agreement or any Ancillary
Agreement will be deemed waived, amended, supplemented or modified by any party,
unless such waiver, amendment, supplement or modification is in writing and
signed by the authorized representative against whom it is sought to enforce
such waiver, amendment, supplement or modification. The Company has agreed and
acknowledged on behalf of itself and each other member of the Company Group that
(a) AT&T and NCR may enter into a separation and distribution agreement and
other agreements and instruments in connection with the NCR Distribution or
otherwise providing for certain arrangements between AT&T and NCR and that no
consent of any member of the Company Group will be required in connection
therewith, (b) certain transfers of Assets and Liabilities may occur between
members of the AT&T Services Group and the NCR Group and that no consent of any
member of the Company Group will be required in connection therewith, (c) AT&T
will have no obligation to proceed with the NCR Distribution, and (d) except as
otherwise set forth, all of the rights and obligations of the NCR Group will
continue regardless of whether NCR is an Affiliate of AT&T. Effective
immediately on notice to the Company, without any further action required by any
member of the Company Group, AT&T may assume any Asset or Liability of any
member of the NCR Group under the Separation and Distribution Agreement or under
any Ancillary Agreement (and any rights of any member of the NCR Group in
connection therewith) and all members of the NCR Group will thereupon
automatically be released therefrom.
Further Assurances
In addition to the actions specifically provided for elsewhere in the
Separation and Distribution Agreement, each of the parties has agreed to use its
reasonable best efforts, prior to, on and after the Closing Date, to take, or
cause to be taken, all actions, and to do, or cause to be done, all things,
reasonably necessary, proper or advisable under applicable laws, regulations and
agreements to consummate and make effective the transactions contemplated by the
Separation and Distribution Agreement and the Ancillary Agreements.
INTERIM SERVICES AND SYSTEMS REPLICATION AGREEMENT
The Company, AT&T and NCR have entered into an Interim Services and Systems
Replication Agreement (the "Interim Services and Systems Replication
Agreement"), governing the provision by each to one or more of the others, on an
interim basis, of certain data processing and telecommunications services
(including voice telecommunications and data transmission), and certain
corporate support services (including accounting, financial management, tax,
payroll, stockholder and public relations, legal, human resources
administration, procurement, real estate management and other administrative
functions), each as specified and on the terms set forth therein and in the
schedules thereto. Specified charges for such services are generally intended to
allow the providing company to recover the fully allocated direct costs of
providing the services, plus all out-of-pocket costs and expenses, but without
any profit. The Interim Services and System Replication Agreement also provides
for the provision of certain additional services identified from time to time
after the Closing Date that a party reasonably believes were inadvertently or
unintentionally omitted from the specified services, or that are essential to
effectuate an orderly transition under the Separation and
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Distribution Agreement (so long as the provision of such services would not
significantly disrupt the providing party's operations).
In addition, the Interim Services and Systems Replication Agreement
provides for the replication and transfer, from each party to one or more of the
others, of certain computer systems, including hardware, software, data storage
or maintenance and support components, specified therein and in the schedules
thereto. The computer systems that will be replicated or transferred include
specified computer systems that are used to provide administrative support
services to the Company or for business applications specific to the Company's
business. Except where otherwise specified, the costs and expenses of separating
or replicating a system are intended to be borne by the parties in proportion to
their prior usage of the system. Costs and expenses of purchasing new hardware
or obtaining new software licenses will be borne by the party purchasing the new
hardware or licensing the new software.
With limited exceptions, these interim services are not expected to extend
beyond January 1, 1998 and many are expected to terminate at or prior to the
Distribution.
PURCHASE AGREEMENTS
The Company and AT&T have entered into a General Purchase Agreement (the
"General Purchase Agreement") and various related and supplemental agreements
pursuant thereto (the "Supplemental Agreements"). The General Purchase Agreement
governs transactions pursuant to which the company provides Products, Licensed
Materials and Services (as such terms are defined in the General Purchase
Agreement) to AT&T and certain designated AT&T affiliates (each an "Ordering
Company"). The Products, Licensed Materials and Services include those related
to switching, signaling, transmission, power and operations support systems. In
the General Purchase Agreement, AT&T has committed that payments made to the
Company (commencing January 1, 1996) for purchases of Products, Licensed
Materials and Services by all Ordering Companies will total at least $3,000
million cumulatively for the calendar years 1996, 1997 and 1998. If AT&T does
not meet this purchase commitment by December 31, 1998, AT&T will be required
thereafter to pay interest based on the shortfall until the $3,000 million
purchase commitment is met. Such interest payment is the sole remedy for any
shortfall in such commitment. Under the General Purchase Agreement, on or prior
to the Closing Date, AT&T will prepay to the Company $500 million, which will be
applied to accounts receivable owed by AT&T covering purchases of Products,
Licensed Materials and Services that are due and payable on or after January 1,
1997.
The General Purchase Agreement also contains provisions governing (i)
ordering and delivery, (ii) payment terms, (iii) certain intellectual property
matters, (iv) product warranties, (v) product support and documentation, (vi)
engineering, installation, maintenance and other services, and (vii) consulting
services. The General Purchase Agreement has a five-year term, which will be
automatically extended for additional one-year periods unless either party
provides the other party one year's prior written notice of its desire to permit
the General Purchase Agreement to expire without further extension of its term.
The Supplemental Agreements set forth the specific terms and conditions,
including pricing, applicable to the provision by the Company to AT&T of the
particular Products, Licensed Materials and Services covered by each
Supplemental Agreement. Under certain circumstances, including a Change of
Control of the Company that AT&T determines will have a material adverse impact
on particular AT&T programs, AT&T will have the right to require the Company to
transfer to AT&T certain personnel and certain information, technology and
software used by the Company in connection with specified Products, Licensed
Materials and Services provided by the Company to AT&T. The pricing terms for
the Products, Licensed Materials and Services covered by the Supplemental
Agreements reflect negotiated prices taking into account the size of AT&T's
purchase commitment and AT&T's position as one of the Company's largest
customers. Any purchases by AT&T Wireless Services, Inc. ("AT&T Wireless") under
separate agreements with the Company will also be included in determining
whether AT&T's $3,000 million commitment under the General Purchase Agreement is
met.
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EMPLOYEE BENEFITS AGREEMENT
AT&T and the Company have entered into an Employee Benefits Agreement,
dated as of February 1, 1996 (the "Employee Benefits Agreement") that governs
the employee benefit obligations of the Company, including both compensation and
benefits, with respect to active employees and retirees assigned to the Company.
Pursuant to the Employee Benefits Agreement, the Company assumes and agrees to
pay, perform, fulfill and discharge, in accordance with their respective terms,
all Liabilities to, or relating to, former employees of AT&T or its affiliates
who will be employed by the Company and its affiliates and certain former
employees of AT&T or its affiliates (including retirees) who either were
employed in the Company Business or who otherwise are assigned to the Company
for purposes of allocating employee benefit obligations (including all retirees
of Bell Labs). Until the Distribution Date, the employees and former employees
assigned to the Company will continue to participate in AT&T's pension and other
employee benefit plans, although the Company will bear its allocable share of
the costs of benefits and administration of such plans. Effective immediately
after the Distribution, the Company will establish its own pension and employee
benefit plans, which generally will be the same as AT&T's plans as in effect at
that time. The Employee Benefits Agreement does not preclude the Company from
discontinuing or changing such plans at any time thereafter, with certain
exceptions noted below. The Company's plans generally will assume all
liabilities under AT&T's plans to employees and former employees assigned to the
Company, and certain assets funding such liabilities, including assets held in
trusts constituting Voluntary Employee Beneficiary Associations (VEBAs), will be
transferred from trusts and other funding vehicles associated with AT&T's plans
to the corresponding trusts and other funding vehicles associated with the
Company's plans.
Assets of trusts under qualified pension plans will be divided, immediately
after the Distribution Date, between the trusts for AT&T qualified pension plans
and the new Company qualified pension plans. Each such trust will receive the
legally required funding minimum and, if greater, a sufficient amount of
additional trust assets to ensure continued compliance with the existing AT&T
pension funding policy. Any trust assets in excess of the funding policy level
will be divided equally between the trusts of AT&T and the Company for such
qualified pension plans. Consistent with existing collective bargaining
agreements and applicable law, there will be a specified period of portability
of benefits under certain pension and other employee benefit plans for
occupational employees who move from AT&T to the Company or from the Company to
AT&T after the Distribution Date. For management employees, there will be a
limited period of portability of such benefits after the Distribution Date if
such employees move between the companies. In addition, during a transitional
period, AT&T or its affiliates will provide certain benefit plan administrative
services, investment management services, and actuarial services to the Company
and will share the administration of contracts with third parties to support
certain welfare benefit plans of both AT&T and the Company. During the period of
joint administration of welfare benefit plans, changes to the plans may only be
made in accordance with procedures specified in the Employee Benefits Agreement
so that any such changes will not materially increase the costs of the other
company.
AT&T Stock Awards
General. Pursuant to the Employee Benefits Agreement, the Company will
issue Substitute Awards under the 1996 LTIP in substitution for awards
(collectively, "AT&T Stock Awards") under the 1987 Plan and under other
stock-based plans of AT&T as of the Distribution Date and held by individuals
employed by the Company as of such date (the "Company Employees"). With certain
exceptions, AT&T Stock Awards held by individuals employed by AT&T as of the
Distribution Date and AT&T Stock Awards held by individuals who will not
continue their employment after the Distribution Date with any of AT&T, the
Company or any of their subsidiaries, including individuals who have retired
prior to such date, will remain outstanding as AT&T Stock Awards, with an
appropriate antidilution adjustment to reflect the Distribution.
In the case of AT&T Stock Awards consisting of stock options, the
Substitute Award will provide for the purchase of a number of shares of the
Common Stock equal to the number of shares of AT&T Common Stock subject to such
AT&T Stock Award as of the Distribution Date, multiplied by the Ratio (as
defined herein), rounded down to the nearest whole share. The per share exercise
price of the Substitute Award will equal the per share exercise price of such
AT&T Stock Award as of the Distribution Date divided by the Ratio. The Company
will pay the holder of the Substitute Award cash in lieu of any fractional
share. The
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Substitute Award for each AT&T Stock Award consisting of performance shares,
stock units, restricted stock or restricted stock units will be a new award
consisting of Company performance shares, stock units, restricted stock or
restricted stock units, respectively, representing a number of shares of Common
Stock equal to the number of shares of AT&T Common Stock represented by such
AT&T Stock Award multiplied by the Ratio rounded down to the nearest whole
share. The Company will pay to the holder of such Substitute Award cash in lieu
of any fractional share. The other terms and conditions of each Substitute
Award, will be the same as those of the surrendered AT&T Stock Award. The
"Ratio" means the amount obtained by dividing (i) the average of the daily high
and low per share prices of the AT&T Common Stock as listed on the NYSE during
each of the five trading days immediately preceding the ex-dividend date for the
Distribution by (ii) the average of the daily high and low per share prices of
the Common Stock as listed on the NYSE during each of the five trading days
immediately preceding the ex-dividend date for the Distribution.
Shares Subject to Substitute Awards
It is not possible to specify how many shares of Common Stock will be
subject to Substitute Awards. It is expected that some AT&T Stock Awards
consisting of stock options and SARs held by Company Employees will be
exercised, other AT&T Stock Awards will vest and other AT&T Stock Awards could
be granted, prior to the Distribution Date. In addition, the remaining balance
of unexercised AT&T Stock Awards will be converted into Substitute Awards by
reference to the Ratio, which will not be known until after the Distribution is
completed. Stockholders of the Company are, however, likely to experience some
dilutive impact from the above-described adjustments. Under the Employee
Benefits Agreement, in the event that the market value of the shares of Common
Stock subject to Substitute Awards (based on the same measurement period used to
calculate the Ratio) plus the amounts paid by the Company or Company Employees
in connection with the exercise of AT&T stock options, as described below,
exceeds seven percent of the total market value of the shares of Common Stock
outstanding as of the Distribution Date (based on the same measurement period),
AT&T will make a cash payment to the Company in the amount of such excess.
Treatment of AT&T Stock Awards Pending the Distribution
Pending the Distribution, AT&T Stock Awards held by Company Employees will
remain outstanding as AT&T Stock Awards. Pursuant to the Employee Benefits
Agreement, however, the Company will pay AT&T (i) upon the exercise of an AT&T
Stock Award consisting of stock options by a Company Employee whether prior to,
on or after the Distribution, in an amount equal to the excess, if any, of the
Market Value (as defined below) of the purchased shares on the date of exercise
of such option or the date of such purchase, as applicable, over the price paid
for such shares; and (ii) upon the vesting or delivery of shares of AT&T Common
Stock pursuant to an Award (other than an option) held by a Company Employee in
an amount equal to the Market Value of such AT&T Common Stock on the date of
such vesting or delivery. The "Market Value" of a share of AT&T Common Stock on
a given date means the average of the high and the low per share price of the
AT&T Common Stock as listed on the NYSE on such date, or if there is no trading
on the NYSE on such date, on the most recent previous date on which such trading
takes place.
Outstanding AT&T Stock Awards Held by Employees of the Company
As of March 1, 1996, there were approximately 8.7 million shares of AT&T
Common Stock subject to options for AT&T Common Stock (approximately 4.9 million
of which were exercisable as of March 1, 1996) and approximately 638,000 shares
of AT&T Common Stock represented by other AT&T Stock Awards, in each case held
by Company Employees. If the Ratio were determined using the closing price of
the AT&T Common Stock on April 2, 1996, on the NYSE ($64 1/8 per share) and the
initial public offering price per share of Common Stock set forth on the cover
page of this Prospectus, the foregoing number of shares subject to AT&T stock
options and other AT&T Stock Awards would be replaced by options on
approximately 20.7 million shares of Common Stock and other stock awards
covering approximately 1.5 million shares of Common Stock.
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BRAND LICENSE AND RELATED MATTERS
The Company and AT&T have entered into a license agreement (the "Brand
License Agreement") pursuant to which the Company will have rights, on a
royalty-free basis, to continue to use the AT&T brand (including the AT&T globe
design) for specified transition periods following the Closing Date. Under the
Brand License Agreement, the Company will be entitled to use the AT&T brand,
alone or in combination with the Company's brand, for the sale of consumer
products and services and business communications systems and services for a
period of one year following the Closing Date. After the initial one-year
period, the Company will be entitled to continue to use the AT&T brand on these
products, systems and services, but only in combination with the Company's
brand, for an additional three-year period. The right to use the AT&T brand,
alone or in combination with the Company's brand, in connection with certain
leased products or maintenance contracts will extend for 66 months after the
Closing Date. The Brand License Agreement permits the Company to use the AT&T
brand on the Company's other products, systems and services until the earlier of
the Distribution or six months after the Closing Date. In addition, the Company
may use the AT&T brand after these time periods to the extent necessary to
deplete pre-existing inventory. Subject to certain conditions set forth in the
Brand License Agreement, the Company may also extend these rights to use the
AT&T brand to authorized dealers of the Company's products, systems and
services.
The Brand License Agreement provides that the Company will comply with
specified quality, customer care and marketing standards in connection with the
use of the AT&T brand. It also provides that neither the Company nor any of its
authorized dealers will, during the period it is using the AT&T brand, provide,
offer or market telecommunications services provided by any person other than
AT&T (with certain exceptions, including to permit specified authorized dealers
to continue existing practices). AT&T has agreed in the Brand License Agreement
that, for a period of one year after the Closing Date, it will not license the
AT&T brand or trade dress to third parties (other than AT&T's affiliates) for
use in connection with products or services that compete with the Company's
consumer products and services or business communications systems and services.
AT&T may terminate the Brand License Agreement in the event of a significant
breach (as defined therein), including in the event of a change of control of
the Company.
Pursuant to separate assignments, AT&T has also assigned to the Company all
rights in specified other trademarks, service marks and trade dress used in the
Company's business.
PATENT LICENSES AND RELATED MATTERS
The Company, AT&T and NCR have executed and delivered assignments and other
agreements, including a patent license agreement, related to patents currently
owned or controlled by AT&T and its subsidiaries. The patent assignments divide
ownership of patents, patent applications and foreign counterparts among the
Company, AT&T and NCR, with the substantial portion of those currently owned or
controlled by AT&T and its subsidiaries (other than NCR) being assigned to the
Company. A small number of the patents assigned to the Company are jointly owned
with either AT&T or NCR. Certain of the patents that the Company jointly owns
with AT&T are subject to a joint ownership agreement under which each of the
Company and AT&T has full ownership rights in the patents. The other patents
that the Company jointly owns with AT&T, and the patents that the Company
jointly owns with NCR, are subject to defensive protection agreements with AT&T
and NCR, respectively, under which the Company holds most ownership rights in
the patents exclusively. Under these defensive protection agreements, AT&T or
NCR, as the case may be, has the ability, subject to specified restrictions, to
assert infringement claims under the patents against companies that assert
patent infringement claims against them, and has consent rights in the event the
Company wishes to license the patents to certain third parties or for certain
fields of use under specified circumstances. The defensive protection agreements
also provide for one-time payments from AT&T and NCR to the Company.
The patent license agreement entered into by the Company, AT&T and NCR
provides for royalty-free cross-licenses to each company, under each of the
other company's patents that are covered by the licenses, to use, lease, sell
and import any and all products and services of the businesses in which the
licensed company (including specified related companies) is now or hereafter
engaged. The cross-licenses also permit each
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company, subject to specified limitations, to have third parties make items
under the other companies' patents, as well as to pass through to customers
certain rights under the other companies' patents with respect to products and
services furnished to customers by the licensed company. In addition, the rights
granted to the Company and AT&T include the right to license third parties under
each of the other company's patents to the extent necessary to meet existing
patent licensing obligations and AT&T has the right, subject to specified
restrictions and procedures, to seek sublicensing of a limited number of
identified patents to be assigned to the Company.
The cross-licenses between the Company and AT&T cover all of each company's
patents, including patents issued on patent applications filed on or before
December 31, 1996, except for certain patents and patents on filed applications
owned or controlled by AT&T Wireless. The cross-licenses between the Company and
NCR cover all of each company's patents, including patents issued on patent
applications filed on or before December 31, 1999.
TECHNOLOGY LICENSES AND RELATED MATTERS
The Company, AT&T and NCR have executed and delivered assignments and other
agreements, including the Technology License Agreement, related to technology
currently owned or controlled by AT&T and its subsidiaries. Technology includes
copyrights, mask works and other intellectual property other than trademarks,
trade names, trade dress, service marks and patent rights. The technology
assignments divide ownership of technology among the Company, AT&T and NCR, with
the Company and AT&T owning technology that was developed by or for, or
purchased by, the Company's business or AT&T's services business, respectively,
and NCR owning technology that was developed by or for, or purchased by, NCR.
Technology that is not covered by any of these categories is owned jointly by
the Company and AT&T or, in the case of certain specified technology, owned
jointly by the Company, AT&T and NCR.
The Technology License Agreement entered into by the Company, AT&T and NCR
provides for royalty-free cross-licenses to each company to use the other
companies' technology existing as of the Closing Date, except for specified
portions of each company's technology as to which use by the other companies is
restricted or prohibited.
TAX AGREEMENTS
Tax Allocation Agreements
The parties have entered into agreements to govern the allocation of
consolidated or combined federal and state and local income tax liability (the
"Tax Allocation Agreements") among AT&T, the Company, NCR and all other domestic
subsidiaries of AT&T for the period before the Distribution Date. No party will
pay an amount of income tax greater than the income tax it would have paid had
it filed its income tax return as a separate entity (prior to credits), except
in cases in which the consolidated or combined group as a whole realizes a
detriment from consolidation or combination. The Tax Allocation Agreements also
provide that profitable entities will compensate loss entities to the extent
that the losses are utilized in the consolidated tax return. No loss entity,
however, will be compensated for an amount of losses in excess of the amount of
losses that it would have shown had it filed its income tax return separately.
Consolidated or combined credits allowed against tax on a consolidated or
combined income tax return will be allocated to each entity in proportion to the
creditable expenditures by such entity (or, in the case of credits not based on
expenditures, in proportion to its contribution to such credits). To the extent
that the consolidated or combined group is subject to alternative minimum tax
("AMT"), such AMT will be allocated proportionately among those members of the
group that would have owed AMT had they filed their income tax return
separately.
Tax Sharing Agreement
The Tax Sharing Agreement, by and among the Company, AT&T and NCR (the "Tax
Sharing Agreement"), governs contingent tax liabilities and benefits, tax
contests and other tax matters with respect to
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tax returns filed with respect to tax periods, in the case of the Company,
ending or deemed to end on or before the Distribution Date. Under the Tax
Sharing Agreement, Adjustments (as defined in the Tax Sharing Agreement) to
Taxes that are clearly attributable to the business of one party will be borne
solely by that party. Adjustments to all other Tax liabilities will be borne 75%
by AT&T, 22% by the Company and 3% by NCR.
Notwithstanding the above, if as a result of the acquisition of all or a
portion of the capital stock or assets of the Company, the Distribution fails to
qualify as a tax-free distribution under Section 355 of the Code, then the
Company will be liable for any and all increases in Tax attributable thereto.
REAL ESTATE AGREEMENTS
AT&T, the Company and NCR have executed a series of instruments that assign
AT&T's worldwide real estate portfolio, consisting of both owned and leased
property, among the parties. Generally, such real estate was assigned by
reference to which party was the dominant tenant in the applicable facility. The
parties also have agreed to share, pursuant to intercompany leases, subleases
and sub-subleases, certain facilities, consisting predominantly of office space
and laboratory sites.
With certain exceptions the terms of such leases, subleases and
sub-subleases are substantially the same regardless of which company is tenant
or landlord. In the case of owned real estate to be leased, the lease terms will
be either two or three years, except that a limited number of leases may be
terminated on 90 days' notice by the tenant. In the case of subleases or
sub-subleases of property, the lease term will generally coincide with the
remaining term of the primary lease or sublease, respectively. In the case of
owned property, rent payments are generally determined by reference to
prevailing market rents or previously specified internal budget levels. In the
case of subleases of third-party leases, or sub-subleases, rent payments are
generally determined by reference to the rent specified in the underlying lease
or sublease, plus an administrative fee. The leases, subleases and sub-subleases
provide generally that owner, landlord or sub-landlord will provide property
services for specified fees.
OTHER AGREEMENTS
AT&T and the Company have entered into the Virtual Telecommunications
Network Service Agreement pursuant to which the Company has committed to
purchase a minimum of $62.5 million of telecommunication services from AT&T
under a publicly filed tariff (without regard to actual volume requirements of
the Company) over a three-year term. In addition, NCR and the Company have
entered into the Volume Purchase Agreement under which the Company has committed
to purchase at least $150 million of products and services from NCR (without
regard to actual volume requirements of the Company) by December 31, 1998.
CERTAIN DEFINITIONS
Set forth below are certain defined terms contained in the Separation and
Distribution Agreement.
AT&T Group means AT&T and each Person (other than any member of the Company
Group) that is an Affiliate of AT&T immediately after the Closing Date
(including any member of the NCR Group).
AT&T Services Business means: (a) the business and operations of the
telecommunications services divisions and Subsidiaries and the financial
services and leasing divisions and Subsidiaries of AT&T consisting principally
of the Communications Services Group, AT&T Wireless Services and its
Subsidiaries, Universal Card Services, Inc. and its Subsidiaries, AT&T Capital
and its Subsidiaries, AT&T Solutions, the Assets of Bell Labs that are being
retained by AT&T, Submarine Systems and, subject to the terms of the Separation
and Distribution Agreement, AT&T Ventures; (b) except as otherwise expressly
provided in the Separation and Distribution Agreement, any terminated, divested
or discontinued businesses or operations that at the time of termination,
divestiture or discontinuation primarily related to the AT&T Services Business
as then conducted; and (c) certain terminated, divested or discontinued
businesses and operations specified pursuant to the Separation and Distribution
Agreement.
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AT&T Services Group means each member of the AT&T Group other than any
member of the NCR Group.
Company Assets means (without duplication): (a) any and all Assets that are
expressly contemplated by the Separation and Distribution Agreement or any
Ancillary Agreement as Assets to be transferred to the Company or any other
member of the Company Group; (b) all issued and outstanding capital stock of
AT&T International Inc. ("ATTI") and any and all Assets owned by ATTI or its
Subsidiaries as of the date of the transfer of such capital stock to the Company
pursuant to the Separation and Distribution Agreement, except for the Assets
contemplated to be sold or otherwise transferred to any member of the AT&T Group
pursuant to the Non-U.S. Plan; (c) any Exclusive Company Contingent Gain and any
Shared Company Percentage of any Shared Contingent Gain; (d) certain rights in
respect of Insurance Policies and specified indemnification agreements; (e) (i)
specified tangible property, (ii) Company Contracts, and (iii) the Company's
Subsidiaries; (f) any Assets reflected in the Company's audited consolidated
Balance Sheet as of December 31, 1995, including the notes thereto, as Assets of
the Company and its Subsidiaries, subject to any dispositions of such Assets
subsequent to the date thereof; and (g) except as contemplated by the Separation
and Distribution Agreement, any and all Assets owned or held immediately prior
to the Closing Date by AT&T or any of its Subsidiaries that are used primarily
in the Company Business; provided, however, that the intention of such clause
(g) is only to rectify any inadvertent omission of transfer or conveyance of any
Assets that, had the parties given specific consideration to such Asset as of
the date thereof, would have otherwise been classified as a Company Asset; and
provided, further that no Asset will be deemed to be a Company Asset solely as a
result of such clause (g) if such Asset is within the category or type of Asset
expressly covered by the subject matter of an Ancillary Agreement and unless a
claim with respect thereto is made by the Company on or prior to the first
anniversary of the Distribution.
Notwithstanding the foregoing, the Company Assets will not in any event
include (collectively, "Excluded Assets"): (a) the Retained Receivables and
certain other specified Assets; (b) any and all Assets that are expressly
contemplated by the Separation and Distribution Agreement or any Ancillary
Agreement as Assets to be retained by AT&T or any other member of the AT&T Group
(including the NCR Group); and (c) certain specified contracts and agreements.
Company Business means: (a) the business and operations of the
telecommunications equipment divisions and Subsidiaries of AT&T consisting
principally of the Network Systems Group, the Global Business Communications
Systems Group, the Consumer Products Group, the Microelectronics Group, AT&T
Paradyne and the Assets of Bell Labs that are being transferred to the Company;
and (b) any terminated, divested or discontinued businesses or operations that
at the time of termination, divestiture or discontinuation primarily related to
the Company Business as then conducted.
Company Group means the Company, each Subsidiary of the Company and each
other Person that is either controlled directly or indirectly by the Company
immediately after the Closing Date or that is contemplated to be controlled by
the Company pursuant to the Non-U.S. Plan (other than any Person that is
contemplated not to be controlled by the Company pursuant to the Non-U.S. Plan).
Company Liabilities means (without duplication):
(a) any and all Liabilities that are expressly contemplated by the
Separation and Distribution Agreement or any Ancillary Agreement as
Liabilities to be assumed by the Company or any member of the Company
Group, and all agreements, obligations and Liabilities of any member of the
Company Group under the Separation and Distribution Agreement or any of the
Ancillary Agreements;
(b) all Liabilities (other than Taxes based on, or measured by
reference to, net income), including any employee-related Liabilities and
Environmental Liabilities, primarily relating to, arising out of or
resulting from:
(i) the operation of the Company Business, as conducted at any time
prior to, on or after the Closing Date (including any Liability relating
to, arising out of or resulting from any act or failure to act by any
director, officer, employee, agent or representative (whether or not
such act or failure to act is or was within such Person's authority));
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(ii) the operation of any business conducted by any member of the
Company Group at any time after the Closing Date (including any
Liability relating to, arising out of or resulting from any act or
failure to act by any director, officer, employee, agent or
representative (whether or not such act or failure to act is or was
within such Person's authority)); or
(iii) any Company Assets (including any Company Contracts and any
real property and leasehold interests);
in any such case whether arising before, on or after the Closing Date;
(c) subject to the terms of the Separation and Distribution Agreement,
all Exclusive Company Contingent Liabilities and the Shared Company
Percentage of any Shared Contingent Liabilities;
(d) all Liabilities relating to, arising out of or resulting from the
Working Capital Facility and, as of the Closing Date, the Commercial Paper
Program;
(e) all Liabilities relating to, arising out of or resulting from any
of certain specified terminated, divested or discontinued businesses and
operations;
(f) all Liabilities of ATTI or its Subsidiaries, as of the date of the
transfer of the capital stock of ATTI to the Company pursuant to the
Separation and Distribution Agreement, except for the Liabilities
contemplated to be assumed by any member of the AT&T Group pursuant to the
Non-U.S. Plan, and all Liabilities of any other member of the Company
Group; and
(g) all Liabilities reflected as Liabilities or obligations of the
Company in the Company's audited consolidated balance sheet, including the
notes thereto, as of December 31, 1995, subject to any discharge of such
Liabilities subsequent to the date thereof.
Notwithstanding the foregoing, the Company Liabilities will not include
(collectively, "Excluded Liabilities"): (a) any and all Liabilities that are
expressly contemplated by the Separation and Distribution Agreement or any
Ancillary Agreement as Liabilities to be retained or assumed by AT&T or any
other member of the AT&T Group (including the NCR Group), and all agreements and
obligations of any member of the AT&T Group under the Separation and
Distribution Agreement or any of the Ancillary Agreements; (b) subject to the
terms of the Separation and Distribution Agreement, all Exclusive AT&T Services
Contingent Liabilities and Exclusive NCR Contingent Liabilities and the Shared
AT&T Percentage and the Shared NCR Percentage of any Shared Contingent
Liabilities; and (c) certain specified Liabilities.
Contingent Gain means any claim or other right of AT&T, the Company, NCR or
any their respective Affiliates, whenever arising, against any Person other than
AT&T, the Company, NCR or any of their respective Affiliates, if and to the
extent that (a) such claim or right has accrued as of the Closing Date (based on
then existing law) and (b) the existence or scope of the obligation of such
other Person as of the Closing Date was not acknowledged, fixed or determined in
any material respect, due to a dispute or other uncertainty as of the Closing
Date or as a result of the failure of such claim or other right to have been
discovered or asserted as of the Closing Date, with certain specified exceptions
and as more fully set forth in the Separation and Distribution Agreement.
Contingent Liability means any Liability, other than Liabilities for Taxes
(which are governed by the Tax Sharing Agreement), of AT&T, the Company, NCR or
any of their respective Affiliates, whenever arising, to any Person other than
AT&T, the Company, NCR or any of their respective Affiliates, if and to the
extent that (a) such Liability has accrued as of the Closing Date (based on then
existing law) and (b) the existence or scope of the obligation of AT&T, the
Company, NCR or any of their respective Affiliates as of the Closing Date with
respect to such Liability was not acknowledged, fixed or determined in any
material respect, due to a dispute or other uncertainty as of the Closing Date
or as a result of the failure of such Liability to have been discovered or
asserted as of the Closing Date (it being understood that the existence of a
litigation or other reserve with respect to any Liability will not be sufficient
for such Liability to be considered acknowledged, fixed or determined), in the
case of any Liability a portion of which had accrued as of the Closing Date and
a portion of which accrues after the Closing Date, only that portion that had
accrued as of the Closing Date will be considered a Contingent Liability. For
purposes of the foregoing, a Liability will be deemed to have accrued
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as of the Closing Date if all the elements necessary for the assertion of a
claim with respect to such Liability have occurred on or prior to the Closing
Date, such that the claim, were it asserted in an Action on or prior to the
Closing Date, would not be dismissed by a court on ripeness or similar grounds.
For purposes of clarification of the foregoing, the parties agree that no
Liability relating to, arising out of or resulting from any obligation of any
Person to perform the executory portion of any contract or agreement existing as
of the Closing Date, or to satisfy any obligation accrued under any Plan (as
defined in the Employee Benefits Agreement) as of the Closing Date, will be
deemed to be a Contingent Liability.
NCR Business means: (a) the computer products, computer systems, data
processing and information solutions business and operations as conducted by NCR
and its Subsidiaries; (b) except as otherwise expressly provided in the
Separation and Distribution Agreement, any terminated, divested or discontinued
businesses or operations (i) that at the time of termination, divestiture or
discontinuation primarily related to the NCR Business as then conducted, or (ii)
that were conducted by NCR, or any Person that at any time was an Affiliate of
NCR, prior to the acquisition of NCR by AT&T; and (c) specified terminated,
divested or discontinued businesses and operations.
NCR Covered Liabilities means Liabilities relating to, arising out of or
resulting from any of the following items (without duplication): (a) the failure
of NCR or any member of the NCR Group or any other Person to pay, perform or
otherwise promptly discharge any Exclusive NCR Contingent Liability or any
Shared NCR Percentage of any Shared Contingent Liability, whether prior to or
after the Closing Date or the date of the Separation and Distribution Agreement;
and (b) any breach by NCR or any member of the NCR Group of the Separation and
Distribution Agreement or any of the Ancillary Agreements, or any other
agreement that is not contemplated to be terminated as of the Closing Date
pursuant to the Separation and Distribution Agreement.
NCR Group means NCR, each Subsidiary of NCR and each other Person that is
either controlled directly or indirectly by NCR immediately after the Closing or
that is contemplated to be controlled by NCR pursuant to the Non-U.S. Plan.
PRINCIPAL STOCKHOLDER
Prior to the Offerings, all of the outstanding shares of Common Stock will
be owned by AT&T. After the Offerings, AT&T will own approximately 82.4% of the
Common Stock then outstanding. Except as described above, the Company is not
aware of any person or group that will beneficially own more than 5% of the
outstanding shares of Common Stock following the Offerings.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Immediately after the Offerings, the Company's authorized capital stock
will consist of 250 million shares of preferred stock, par value $1.00 per share
(the "Preferred Stock"), and 3,000 million shares of Common Stock. Immediately
following the Offerings, 636,661,931 shares of Common Stock will be outstanding.
All of the shares of Common Stock that will be outstanding immediately following
the Offerings, including the shares of Common Stock sold in the Offerings, will
be validly issued, fully paid and nonassessable.
COMMON STOCK
The holders of Common Stock will be entitled to one vote for each share on
all matters voted on by stockholders, including elections of directors, and,
except as otherwise required by law or provided in any resolution adopted by the
Company Board with respect to any series of Preferred Stock, the holders of such
shares will possess all voting power. The Certificate does not provide for
cumulative voting in the election of directors. Subject to any preferential
rights of any outstanding series of Preferred Stock created by the Company Board
from time to time, the holders of Common Stock will be entitled to such
dividends as may be declared from time to time by the Company Board from funds
available therefor, and upon liquidation will be entitled to receive pro rata
all assets of the Company available for distribution to such holders. See
"Dividend Policy."
PREFERRED STOCK
The Certificate authorizes the Company Board to establish one or more
series of Preferred Stock and to determine, with respect to any series of
Preferred Stock, the terms and rights of such series, including (i) the
designation of the series, (ii) the number of shares of the series, which number
the Company Board may thereafter (except where otherwise provided in the
applicable certificate of designation) increase or decrease (but not below the
number of shares thereof then outstanding), (iii) whether dividends, if any,
will be cumulative or noncumulative, and, in the case of shares of any series
having cumulative dividend rights, the date or dates or method of determining
the date or dates from which dividends on the shares of such series shall be
cumulative, (iv) the rate of any dividends (or method of determining such
dividends) payable to the holders of the shares of such series, any conditions
upon which such dividends will be paid and the date or dates or the method for
determining the date or dates upon which such dividends will be payable; (v) the
redemption rights and price or prices, if any, for shares of the series, (vi)
the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series, (vii) the amounts payable on and the
preferences, if any, of shares of the series in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, (viii) whether the shares of the series will be convertible or
exchangeable into shares of any other class or series, or any other security, of
the Company or any other corporation, and, if so, the specification of such
other class or series or such other security, the conversion or exchange price
or prices or rate or rates, any adjustments thereof, the date or dates as of
which such shares will be convertible or exchangeable and all other terms and
conditions upon which such conversion or exchange may be made, (ix) restrictions
on the issuance of shares of the same series or of any other class or series,
(x) the voting rights, if any, of the holders of the shares of the series, and
(xi) any other relative rights, preferences and limitations of such series.
The Company believes that the ability of the Company Board to issue one or
more series of Preferred Stock will provide the Company with flexibility in
structuring possible future financings and acquisitions, and in meeting other
corporate needs which might arise. The authorized shares of Preferred Stock, as
well as shares of Common Stock, will be available for issuance without further
action by the Company's stockholders, unless such action is required by
applicable law or the rules of any stock exchange or automated quotation system
on which the Company's securities may be listed or traded. The NYSE currently
requires stockholder approval as a prerequisite to listing shares in several
instances, including where the present or potential issuance of shares could
result in an increase in the number of shares of common stock, or in the amount
of voting securities, outstanding of at least 20%. If the approval of the
Company's stockholders is not required for
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the issuance of shares of Preferred Stock or Common Stock, the Board may
determine not to seek stockholder approval.
Although the Company Board has no intention at the present time of doing
so, it could issue a series of Preferred Stock that could, depending on the
terms of such series, impede the completion of a merger, tender offer or other
takeover attempt. The Company Board will make any determination to issue such
shares based on its judgment as to the best interests of the Company and its
stockholders. The Company Board, in so acting, could issue Preferred Stock
having terms that could discourage an acquisition attempt through which an
acquirer may be able to change the composition of the Company Board, including a
tender offer or other transaction that some, or a majority, of the Company's
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then current
market price of such stock.
As of the Closing Date, 7,500,000 Junior Preferred Shares (as defined
herein) will be reserved for issuance upon exercise of the Rights. See
"-- Rights Plan."
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CERTIFICATE AND BY-LAWS
Board of Directors
The Certificate provides that except as otherwise fixed by or pursuant to
the provisions of a Certificate of Designations setting forth the rights of the
holders of any class or series of Preferred Stock, the number of the directors
of the Company will be fixed from time to time exclusively pursuant to a
resolution adopted by a majority of the total number of directors which the
Company would have if there were no vacancies (the "Whole Board") (but shall not
be less than three). The directors, other than those who may be elected by the
holders of Preferred Stock, will be classified, with respect to the time for
which they severally hold office, into three classes, as nearly equal in number
as possible, one class to be originally elected for a term expiring at the
annual meeting of stockholders to be held in 1997, another class to be
originally elected for a term expiring at the annual meeting of stockholders to
be held in 1998 and another class to be originally elected for a term expiring
at the annual meeting of stockholders to be held in 1999, with each director to
hold office until its successor is duly elected and qualified. Commencing with
the 1997 annual meeting of stockholders, directors elected to succeed directors
whose terms then expire will be elected for a term of office to expire at the
third succeeding annual meeting of stockholders after their election, with each
director to hold office until such person's successor is duly elected and
qualified.
The Certificate provides that except as otherwise provided for or fixed by
or pursuant to a Certificate of Designations setting forth the rights of the
holders of any class or series of Preferred Stock, newly created directorships
resulting from any increase in the number of directors and any vacancies on the
Company Board resulting from death, resignation, disqualification, removal or
other cause will be filled by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum of the
Company Board, and not by the stockholders. Any director elected in accordance
with the preceding sentence will hold office for the remainder of the full term
of the class of directors in which the new directorship was created or the
vacancy occurred and until such director's successor shall have been duly
elected and qualified. No decrease in the number of directors constituting the
Company Board will shorten the term of any incumbent director. Subject to the
rights of holders of Preferred Stock, any director may be removed from office
only for cause by the affirmative vote of the holders of at least a majority of
the voting power of all Voting Stock then outstanding, voting together as a
single class; provided, however, that prior to the Trigger Date (as defined
herein), any director or directors may be removed from office by the affirmative
vote of the holders of at least 80% of the voting power of all Voting Stock then
outstanding, voting together as a single class.
These provisions would preclude a third party from removing incumbent
directors and simultaneously gaining control of the Company Board by filling the
vacancies created by removal with its own nominees. Under the classified board
provisions described above, it would take at least two elections of directors
for any individual or group to gain control of the Company Board. Accordingly,
these provisions could discourage a third party from initiating a proxy contest,
making a tender offer or otherwise attempting to gain control of the Company.
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No Stockholder Action by Written Consent; Special Meetings
The Certificate and By-Laws provide that as of the time at which AT&T and
its affiliates cease to be the beneficial owner of an aggregate of at least a
majority of the then outstanding shares of Common Stock (the "Trigger Date"),
any action required or permitted to be taken by the stockholders of the Company
must be effected at a duly called annual or special meeting of such holders and
may not be effected by any consent in writing by such holders. Effective as of
the Trigger Date, except as otherwise required by law and subject to the rights
of the holders of any Preferred Stock, special meetings of stockholders of the
Company for any purpose or purposes may be called only by the Company Board
pursuant to a resolution stating the purpose or purposes thereof approved by a
majority of the Whole Board or by the Chairman of the Company Board and,
effective as of the Trigger Date, any power of stockholders to call a special
meeting is specifically denied. No business other than that stated in the notice
shall be transacted at any special meeting. In addition, prior to the Trigger
Date, the Company will call a special meeting of stockholders promptly upon
request by AT&T, or any of its affiliates, in each case, if such entity is a
stockholder of the Company. These provisions may have the effect of delaying
consideration of a stockholder proposal until the next annual meeting unless a
special meeting is called by the Company Board or the Chairman of the Board.
Advance Notice Procedures
The By-Laws establish an advance notice procedure for stockholders to make
nominations of candidates for election as directors or to bring other business
before an annual meeting of stockholders of the Company (the "Stockholder Notice
Procedure"). The Stockholder Notice Procedure provides that only persons who are
nominated by, or at the direction of, the Chairman of the Board, or by a
stockholder who has given timely written notice to the Secretary of the Company
prior to the meeting at which directors are to be elected, will be eligible for
election as directors of the Company. The Stockholder Notice Procedure also
provides that at an annual meeting only such business may be conducted as has
been brought before the meeting by, or at the direction of, the Chairman of the
Board or the Company Board, or by a stockholder who has given timely written
notice to the Secretary of the Company of such stockholder's intention to bring
such business before such meeting. Under the Stockholder Notice Procedure, for
notice of stockholder nominations to be made at an annual meeting to be timely,
such notice must be received by the Company not later than the close of business
on the 90th calendar day nor earlier than the close of business on the 120th
calendar day prior to the first anniversary of the preceding year's annual
meeting (except that, in the event that the date of the annual meeting is more
than 30 calendar days before or more than 60 calendar days after such
anniversary date, notice by the stockholder to be timely must be so delivered
not earlier than the close of business on the 120th calendar day prior to such
annual meeting and not later than the close of business on the later of the 90th
calendar day prior to such annual meeting or the 10th calendar day following the
day on which public announcement of a meeting date is first made by the
Company).
Notwithstanding the foregoing, in the event that the number of directors to
be elected to the Company Board is increased and there is no public announcement
by the Company naming all of the nominees for director or specifying the size of
the increased Company Board at least 100 calendar days prior to the first
anniversary of the preceding year's annual meeting, a stockholder's notice also
will be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered not later than the
close of business on the 10th calendar day following the day on which such
public announcement is first made by the Company. Under the Stockholder Notice
Procedure, for notice of a stockholder nomination to be made at a special
meeting at which directors are to be elected to be timely, such notice must be
received by the Company not earlier than the close of business on the 120th
calendar day prior to such special meeting and not later than the close of
business on the later of the 90th calendar day prior to such special meeting or
the 10th calendar day following the day on which public announcement is first
made of the date of the special meeting and of the nominees proposed by the
Company Board to be elected at such meeting.
In addition, under the Stockholder Notice Procedure, a stockholder's notice
to the Company proposing to nominate a person for election as a director or
relating to the conduct of business other than the nomination of directors must
contain certain specified information. If the chairman of a meeting determines
that an individual was not nominated, or other business was not brought before
the meeting, in accordance with the
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Stockholder Notice Procedure, such individual will not be eligible for election
as a director, or such business will not be conducted at such meeting, as the
case may be.
The Stockholder Notice Procedure does not apply to AT&T and its affiliates
prior to the Trigger Date.
Amendment
The Certificate provides that the affirmative vote of the holders of at
least 80% of the Voting Stock, voting together as a single class, is required to
amend provisions of the Certificate relating to stockholder action without a
meeting; the calling of special meetings; the number, election and term of the
Company's directors; the filling of vacancies; and the removal of directors. The
Certificate further provides that the related By-Laws described above (including
the Stockholder Notice Procedure) may be amended only by the Company Board or by
the affirmative vote of the holders of at least 80% of the voting power of the
outstanding shares of Voting Stock, voting together as a single class.
Rights Plan
The Company Board currently expects to adopt a Share Purchase Rights Plan
(the "Rights Plan") on or prior to the Closing Date. Pursuant to the Rights
Plan, the Company Board will cause to be issued one preferred share purchase
right (a "Right") for each outstanding share of Common Stock. Each Right will
entitle the registered holder to purchase from the Company one one-hundredth of
a share of a new series of junior preferred stock, par value $1.00 per share
(the "Junior Preferred Shares"), of the Company at a price of $90 per share (the
"Purchase Price"), subject to adjustment. The description and terms of the
Rights will be set forth in a Rights Agreement (the "Rights Agreement"), between
the Company and the designated Rights Agent (the "Rights Agent"). The
description set forth below is intended as a summary only and is qualified in
its entirety by reference to the form of the Rights Agreement, which will be
filed as an exhibit to the Registration Statement. See "Available Information."
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") have acquired beneficial ownership of 10% or more of the outstanding
shares of Common Stock or (ii) 10 business days (or such later date as may be
determined by action of the Company Board prior to such time as any person
becomes an Acquiring Person) following the commencement of, or announcement of
an intention to make, a tender offer or exchange offer the consummation of which
would result in the beneficial ownership by a person or group of 10% or more of
such outstanding shares of Common Stock (the earlier of such dates being called
the "Rights Distribution Date"), the Rights will be evidenced by the
certificates representing the Common Stock.
The Rights Agreement will provide that, until the Rights Distribution Date
(or earlier redemption or expiration of the Rights), the Rights will be
transferred with and only with the Common Stock. Until the Rights Distribution
Date (or earlier redemption or expiration of the Rights), the Common Stock
certificates will contain a notation incorporating the Rights Agreement by
reference. As soon as practicable following the Rights Distribution Date,
separate certificates evidencing the Rights (the "Right Certificates") will be
mailed to holders of record of the Common Stock as of the close of business on
the Rights Distribution Date and such separate Right Certificates alone will
evidence the Rights.
The Rights will not be exercisable until the Rights Distribution Date. The
Rights will expire on the 10th anniversary of the date of issuance (the "Final
Expiration Date"), unless the Final Expiration Date is extended or unless the
Rights are earlier redeemed or exchanged by the Company, in each case, as
summarized below.
In the event that any person or group of affiliated or associated persons
become an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights beneficially owned by the Acquiring Person (which
will thereafter be void), will thereafter have the right to receive upon
exercise that number of shares of Common Stock having a market value of two
times the exercise price of the Right. In the event that the Company is acquired
in a merger or other business combination transaction or 50% or more of its
consolidated assets or earning power are sold after a person or group of
affiliated or associated persons
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becomes an Acquiring Person, proper provision will be made so that each holder
of a Right will thereafter have the right to receive, upon the exercise thereof
at the then-current exercise price of the Right, that number of shares of common
stock of the acquiring company which at the time of such transaction will have a
market value of two times the exercise price of the Right.
At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 10% or more of the then
outstanding Common Stock and prior to the acquisition by such person or group of
50% or more of the outstanding Common Stock, the Company Board may exchange the
Rights (other than Rights owned by such person or group which have become void),
in whole or in part, at an exchange ratio of one share of Common Stock, or one
one-hundredth of a Junior Preferred Share, per Right (subject to adjustment).
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 10% or more of the then
outstanding Common Stock, the Company Board may redeem the Rights in whole, but
not in part, at a price of $.01 per Right (the "Redemption Price"). The
redemption of the Rights may be made effective at such time on such basis and
with such conditions as the Company Board, in its sole discretion, may
establish. Immediately upon any redemption of the Rights, the right to exercise
the rights will terminate and the only right of the holders of the Rights will
be eligible to receive the Redemption Price.
The terms of the Rights may be amended by the Company Board without the
consent of the holders of the Rights; provided, however, that, from and after
such time as any person or group of affiliated or associated persons becomes an
Acquiring Person, no such amendment may adversely affect the interests of the
holders of the Rights. Until a Right is exercised, the holder thereof, as such,
will have no rights as a stockholder of the Company, including, without
limitation, the right to vote or to receive dividends.
The number of outstanding Rights and the number of one one-hundredths of a
Junior Preferred Share issuable upon exercise of each Right also will be subject
to adjustment in the event of a stock split of the Common Stock or a stock
dividend on the Common Stock payable in Common Stock or subdivisions,
consolidations or combinations of the Common Stock occurring, in any such case,
prior to the Rights Distribution Date. The Purchase Price payable, and the
number of Junior Preferred Shares or other securities or property issuable, upon
exercise of the Rights will be subject to adjustment from time to time to
prevent dilution (i) in the event of a stock dividend on, or a subdivision,
combination or reclassification of, the Junior Preferred Shares, (ii) upon the
grant to holders of the Junior Preferred Shares of certain rights or warrants to
subscribe for or purchase Junior Preferred Shares at a price, or securities
convertible into Junior Preferred Shares with a conversion price, less than the
then-current market price of the Junior Preferred Shares or (iii) upon the
distribution to holders of the Junior Preferred Shares of evidences of
indebtedness or assets (excluding regular periodic cash dividends paid out of
earnings or retained earnings or dividends payable in Junior Preferred Shares)
or of subscription rights or warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least one
percent in such Purchase Price. No fractional Junior Preferred Shares will be
issued (other than fractions which are integral multiples of one one-hundredth
of a Junior Preferred Share, which may, at the election of the Company, be
evidenced by depositary receipts) and in lieu thereof, an adjustment in cash
will be made based on the market price of the Junior Preferred Shares on the
last trading day prior to the date of exercise.
Junior Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Junior Preferred Share will be entitled to a minimum
preferential quarterly dividend payment of $1.00 per share but will be entitled
to an aggregate dividend of 100 times the dividend declared per share of Common
Stock. In the event of liquidation, the holders of the Junior Preferred Shares
will be entitled to a minimum preferential liquidation payment of $100 per share
but will be entitled to an aggregate payment of 100 times the payment made per
share of Common Stock. Each Junior Preferred Share will have 100 votes voting
together with the Common Stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of Common Stock are
exchanged, each Junior Preferred Share will be entitled to receive 100 times the
amount received per Common Stock. These rights are protected by customary
anti-dilution provisions.
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<PAGE> 94
Due to the nature of the Junior Preferred Shares' dividend, liquidation and
voting rights, the value of the one one-hundredth interest in a Junior Preferred
Share purchasable upon exercise of each Right should approximate the value of
one share of Common Stock.
The Rights have certain antitakeover effects. The Rights will cause
substantial dilution to a person or group of persons that attempts to acquire
the Company on terms not approved by the Company Board. The Rights should not
interfere with any merger or other business combination approved by the Company
Board prior to the time that a person or group has acquired beneficial ownership
of 10% percent or more of the Common Stock since the Rights may be redeemed by
the Company at the Redemption Price until such time.
The Rights contain certain provisions to exclude AT&T and its affiliates
and associates from the operative provisions thereof.
DELAWARE BUSINESS COMBINATION STATUTE
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, an "interested stockholder" of a Delaware corporation shall
not engage in any business combination, including mergers or consolidations or
acquisitions of additional shares of the corporation, with the corporation for a
three-year period following the date that such stockholder becomes an interested
stockholder unless (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
"interested stockholder," the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares), or (iii) on or subsequent to such date,
the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder. Except as otherwise specified in
Section 203, an interested stockholder is defined to include (x) any person that
is the owner of 15% or more of the outstanding voting stock of the corporation,
or is an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within three
years immediately prior to the date of determination and (y) the affiliates and
associates of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. The Company has not
elected to be exempt from the restrictions imposed under Section 203. However,
AT&T and its affiliates are excluded from the definition of "interested
stockholder" pursuant to the terms of Section 203. The provisions of Section 203
may encourage persons interested in acquiring the Company to negotiate in
advance with the Company Board, since the stockholder approval requirement would
be avoided if a majority of the directors then in office approves either the
business combination or the transaction which results in any such person
becoming an interested shareholder. Such provisions also may have the effect of
preventing changes in the management of the Company. It is possible that such
provisions could make it more difficult to accomplish transactions which the
Company's stockholders may otherwise deem to be in their best interests.
LIABILITY OF DIRECTORS; INDEMNIFICATION
The Certificate provides that a director of the Company will not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except, if required by the DGCL as
amended from time to time, for liability (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL, which concerns unlawful payments of
dividends, stock purchases or redemptions, or (iv) for any transaction from
which the director derived an improper personal benefit. Neither the amendment
nor repeal of such provision will eliminate or reduce the effect of such
provision in respect of any matter occurring, or any cause of action, suit or
claim that, but for such provision, would accrue or arise prior to such
amendment or repeal.
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<PAGE> 95
While the Certificate provides directors with protection from awards for
monetary damages for breaches of their duty of care, it does not eliminate such
duty. Accordingly, the Certificate will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care.
The Certificate provides that each person who was or is made a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person, or a person of whom such person is the legal
representative, is or was a director or officer of the Company or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, will be indemnified and held harmless by
the Company to the fullest extent authorized by the DGCL, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment), against all expense, liability and loss reasonably incurred or
suffered by such person in connection therewith. Such right to indemnification
includes the right to have the Company pay the expenses incurred in defending
any such proceeding in advance of its final disposition, subject to the
provisions of the DGCL. Such rights are not exclusive of any other right which
any person may have or thereafter acquire under any statute, provision of the
Certificate, By-Law, agreement, vote of stockholders or disinterested directors
or otherwise. No repeal or modification of such provision will in any way
diminish or adversely affect the rights of any director, officer, employee or
agent of the Company thereunder in respect of any occurrence or matter arising
prior to any such repeal or modification. The Certificate also specifically
authorizes the Company to maintain insurance and to grant similar
indemnification rights to employees or agents of the Company.
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York will be the transfer agent and
registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 636,661,931 shares of Common Stock to be outstanding as of the
Closing Date the 112,037,037 shares of Common Stock sold in the Offerings will
be freely tradable without restriction under the Securities Act of 1933, as
amended (the "1933 Act"), except for any such shares which be may acquired by an
affiliate of the Company (an "Affiliate"), as that term is defined in Rule 144
promulgated under the 1933 Act ("Rule 144"). AT&T has announced that, subject to
certain conditions, AT&T intends to distribute to its shareholders by December
31, 1996 all of the Common Stock of the Company owned by AT&T by means of the
Distribution. Shares of Common Stock distributed to AT&T shareholders in the
Distribution generally will be freely transferable, except for shares of Common
Stock received by persons who may be deemed to be Affiliates. Persons who may be
deemed to be Affiliates generally include individuals or entities that control,
are controlled by, or are under common control with, the Company and may include
directors and certain officers of the Company as well as significant
stockholders of the Company, if any. Persons who are Affiliates will be
permitted to sell the shares of Common Stock that are issued in the Offerings or
that they receive in the Distribution only pursuant to an effective registration
statement under the 1933 Act or an exemption from the registration requirements
of the 1933 Act, including exemptions provided by Rule 144.
The shares of Common Stock held by AT&T are deemed "restricted securities"
as defined in Rule 144, and may not be sold other than through registration
under the 1933 Act or pursuant to an exemption from the regulations thereunder,
including exceptions provided by Rule 144. The Company and AT&T have agreed not
to offer or sell any shares of Common Stock, subject to certain exceptions
(including the Distribution), for a
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<PAGE> 96
period of 180 days after the date of this Prospectus, without the prior written
consent of the Underwriters. See "Underwriting."
Under the 1996 LTIP, the Company will issue Substitute Awards in
substitution for AT&T Stock Awards outstanding under various AT&T employee
benefit plans. See "Arrangements Between the Company and AT&T -- Employee
Benefits Agreement". In addition to such Substitute Awards, the Company may
grant shares of Common Stock and non-stock awards pursuant to the 1996 LTIP
subject to certain restrictions. See "Management -- 1996 Company Long Term
Incentive Plan." The Company currently expects to file in 1996 a registration
statement under the 1933 Act to register shares reserved for issuance under the
1996 LTIP. Shares issued pursuant to Awards after the effective date of such
registration statement (other than shares issued to Affiliates) generally will
be freely tradeable without restriction or further registration under the 1933
Act.
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<PAGE> 97
UNDERWRITING
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement"), the U.S. Underwriters
named below for whom Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as U.S.
Representatives, and the International Underwriters named below for whom Morgan
Stanley & Co. International Limited, Goldman, Sachs International and Merrill
Lynch International Limited are acting as International Representatives, have
severally agreed to purchase, and the Company has agreed to sell to them,
severally, the respective numbers of shares of Common Stock set forth opposite
the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---------------------------------------------------------------- -----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated............................. 13,694,992
Goldman, Sachs & Co. ......................................... 13,694,992
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... 13,694,991
Bear, Stearns & Co. Inc. ..................................... 6,812,703
CS First Boston Corporation................................... 6,812,703
J.P. Morgan Securities Inc. .................................. 6,812,703
PaineWebber Incorporated...................................... 6,812,703
Advest, Inc................................................... 415,000
Arnhold & S. Bleichroeder, Inc................................ 415,000
Robert W. Baird & Co. Incorporated............................ 415,000
M. R. Beal & Company.......................................... 208,750
Sanford C. Bernstein & Co., Inc............................... 415,000
William Blair & Company, L.L.C................................ 415,000
J. C. Bradford & Co........................................... 415,000
Alex. Brown & Sons Incorporated............................... 810,000
Cowen & Company............................................... 415,000
Crowell, Weedon & Co.......................................... 208,750
Dain Bosworth Incorporated.................................... 415,000
Dean Witter Reynolds Inc...................................... 810,000
Deutsche Morgan Grenfell/C. J. Lawrence Inc................... 810,000
Dillon, Read & Co. Inc........................................ 810,000
Donaldson, Lufkin & Jenrette Securities Corporation........... 810,000
A. G. Edwards & Sons, Inc..................................... 810,000
EVEREN Securities, Inc........................................ 415,000
Fahnestock & Co. Inc.......................................... 208,750
First Manhattan Co............................................ 208,750
First of Michigan Corporation................................. 415,000
Furman Selz LLC............................................... 415,000
Gabelli & Company, Inc........................................ 208,750
Gerard Klauer Mattison & Co., LLC............................. 208,750
Gruntal & Co., Incorporated................................... 415,000
Guzman & Company.............................................. 208,750
Hambrecht & Quist LLC......................................... 810,000
Interstate/Johnson Lane Corporation........................... 415,000
Janney Montgomery Scott Inc................................... 415,000
Edward D. Jones & Co., L.P.................................... 415,000
WR Lazard, Laidlaw & Luther................................... 208,750
Lazard Freres & Co. LLC....................................... 810,000
Legg Mason Wood Walker, Incorporated.......................... 415,000
</TABLE>
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<PAGE> 98
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---------------------------------------------------------------- -----------
<S> <C>
Lehman Brothers Inc........................................... 810,000
McDonald & Company Securities, Inc............................ 415,000
Montgomery Securities......................................... 810,000
Needham & Company, Inc........................................ 415,000
Oppenheimer & Co., Inc........................................ 810,000
Paribas Corporation........................................... 810,000
Parker/Hunter Incorporated.................................... 208,750
Piper Jaffray Inc............................................. 415,000
Prudential Securities Incorporated............................ 810,000
Pryor, McClendon, Counts & Co., Inc........................... 208,750
Ragen Mackenzie Incorporated.................................. 415,000
Rauscher Pierce Refsnes, Inc.................................. 415,000
Raymond James & Associates, Inc............................... 415,000
Robertson, Stephens & Company LLC............................. 810,000
The Robinson-Humphrey Company, Inc............................ 415,000
Salomon Brothers Inc.......................................... 810,000
SBC Capital Markets Inc....................................... 810,000
Schroder Wertheim & Co. Incorporated.......................... 810,000
Scott & Stringfellow, Inc..................................... 415,000
Muriel Siebert & Co., Inc..................................... 208,750
Smith Barney Inc.............................................. 810,000
Stifel, Nicholas & Company Incorporated....................... 415,000
Sutro & Co. Incorporated...................................... 415,000
UBS Securities Inc............................................ 810,000
Wasserstein Perella Securities, Inc........................... 810,000
Wheat, First Securities, Inc.................................. 415,000
----------
Subtotal................................................... 98,037,037
----------
International Underwriters:
Morgan Stanley & Co. International Limited.................... 1,973,334
Goldman Sachs International................................... 1,973,334
Merrill Lynch International Limited........................... 1,973,332
Banque Paribas................................................ 1,120,000
Morgan Grenfell & Co. Limited................................. 1,120,000
Swiss Bank Corporation........................................ 1,120,000
UBS Limited................................................... 1,120,000
Bear, Stearns International Limited........................... 700,000
CS First Boston Limited....................................... 700,000
J.P. Morgan Securities Ltd. .................................. 700,000
PaineWebber International (U.K.) Ltd.......................... 700,000
ABN AMRO Bank N.V............................................. 50,000
Argentaria Bolsa, S.V.B., S.A................................. 50,000
Cazenove & Co................................................. 50,000
CIBC Wood Gundy plc........................................... 50,000
Commerzbank Aktiengesellschaft................................ 50,000
Credit Lyonnais Securities.................................... 50,000
Daiwa Europe Limited.......................................... 50,000
Kleinwort Benson Limited...................................... 50,000
Robert Fleming & Co. Limited.................................. 50,000
</TABLE>
98
<PAGE> 99
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---------------------------------------------------------------- -----------
<S> <C>
HSBC Investment Bank Limited.................................. 50,000
ING Bank N.V.................................................. 50,000
Nikko Europe Plc.............................................. 50,000
Nomura International plc...................................... 50,000
RBC Dominion Securities Inc................................... 50,000
J. Henry Schroder & Co. Limited............................... 50,000
Societe Generale.............................................. 50,000
----------
Subtotal................................................... 14,000,000
----------
Total................................................. 112,037,037
==========
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively referred
to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several Underwriters
to pay for and accept delivery of the shares of Common Stock offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of the
shares of Common Stock offered hereby if any such shares are taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (a)
it is not purchasing any U.S. Shares (as defined herein) for the account of
anyone other than a United States or Canadian Person (as defined herein) and (b)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any U.S. Shares or distribute any prospectus relating to the U.S. Shares outside
of the United States or Canada or to anyone other than a United States or
Canadian Person. Pursuant to the Agreement between U.S. and International
Underwriters, each International Underwriter has represented and agreed that,
with certain exceptions: (i) it is not purchasing any International Shares (as
defined herein) for the account of any United States or Canadian Person and (ii)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any International Shares or distribute any prospectus relating to the
International Shares in the United States or in any province or territory of
Canada or to any United States or Canadian Person. The foregoing limitations do
not apply to stabilization transactions or to certain other transactions
specified in the Agreement between U.S. and International Underwriters. As used
herein, "United States or Canadian Person" means any national or resident of the
United States or of any province or territory of Canada, or any corporation,
pension, profit-sharing or other trust or other entity organized under the laws
of the United States or Canada or of any political subdivision thereof (other
than a branch located outside the United States and Canada of any United States
or Canadian Person) and includes any United States or Canadian branch of a
person who is otherwise not a United States or Canadian Person. All shares of
Common Stock to be purchased by the U.S. Underwriters and the International
Underwriters are referred to herein as the "U.S. Shares" and the "International
Shares," respectively.
Pursuant to the Agreement between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of shares of Common Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price of any
shares sold shall be the Price to Public set forth on the cover page hereof, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares of Common Stock, directly or indirectly, in any
province or territory of Canada in contravention of the securities laws thereof
and has represented that any offer of Common Stock in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
shares of Common Stock a notice stating in substance that, by purchasing such
Common Stock, such dealer represents and agrees that it has not offered or sold,
and will not offer or sell, directly or indirectly, any of such Common Stock in
any
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<PAGE> 100
province or territory of Canada or to, or for the benefit of, any resident of
any province or territory of Canada in contravention of the securities laws
thereof and that any offer of Common Stock in Canada will be made only pursuant
to an exemption from the requirement to file a prospectus in the province or
territory of Canada in which such offer is made, and that such dealer will
deliver to any other dealer to whom it sells any of such Common Stock a notice
to the foregoing effect.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and during the period of six months after the date hereof will not offer
to sell any shares of Common Stock to persons in the United Kingdom except to
persons whose ordinary activities involve them in acquiring, holding, managing
or disposing of investments (as principal or agent) for the purposes of their
business or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995 (the "U.K. Regulations"); (ii) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the U.K. Regulations with respect to anything done by it
in relation to the shares of Common Stock offered hereby in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and will
only issue or pass on to any person in the United Kingdom any document received
by it in connection with the issue of the shares of Common Stock, other than any
document which consists of, or is a part of, listing particulars, supplementary
listing particulars or any other document required or permitted to be published
by listing rules under Article IV of the Financial Services Act 1986, if that
person is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1995, or is a person to whom
the document may otherwise lawfully be issued or passed on.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the Price to Public set forth on the cover page
hereof and part to certain dealers at a price which represents a concession not
in excess of $.65 per share under the public offering price. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $.10 per
share to other Underwriters or to certain dealers. After the initial offering of
the shares of Common Stock, the offering price and other selling terms may from
time to time be varied by the Representatives.
The Common Stock has been approved for listing, subject to official notice
of issuance, on the NYSE under the symbol "LU."
The Company has agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated, it will not (a) register for sale or offer, issue,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (b) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences of ownership of
Common Stock, whether any such transaction described in clause (a) or (b) of
this sentence is to be settled by delivery of Common Stock or other securities,
in cash or otherwise, for a period of 180 days after the date of this
Prospectus, other than: (i) the shares of Common Stock offered hereby; (ii) any
shares of Common Stock issued upon the exercise, exchange or conversion of a
security outstanding on the date of this Prospectus; and (iii) any shares of
Common Stock issued pursuant to employee benefit, director or shareholder plans
or other continuous offerings of the same type of the Company (including in
connection with any Substitute Awards). In addition, except for the Distribution
and as set forth above, AT&T has agreed not to (a) offer, pledge, sell, contract
to sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
or (b) enter into any swap or other agreement that transfers, in whole or in
part, the economic consequences of ownership of Common Stock, whether any such
transaction described in clause (a) or (b) of this sentence is to be settled by
delivery of Common Stock or other securities, in cash or otherwise, for a period
of 180 days after the date of this Prospectus without the prior written consent
of Morgan Stanley & Co. Incorporated.
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The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the 1933 Act.
From time to time, each of Morgan Stanley & Co. Incorporated, Goldman,
Sachs & Co. and Merrill Lynch & Co. provide certain financial advisory services
to each of the Company and AT&T.
PRICING OF THE OFFERING
Prior to the Offerings, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock was determined by
negotiations between the Company and the Representatives. Among the factors
considered in determining the initial public offering price were the sales,
earnings and certain other pro forma financial and operating information of the
Company in recent periods, the future prospects of the Company and its industry
in general, and certain ratios and market prices of securities and certain
financial and operating information of companies engaged in activities similar
to those of the Company.
LEGAL MATTERS
The validity of the Common Stock offered hereby and certain other legal
matters will be passed upon for the Company by Richard J. Rawson, Senior Vice
President and General Counsel of the Company, and by Wachtell, Lipton, Rosen &
Katz, New York, New York. Certain legal matters will be passed upon for the
Underwriters by Davis Polk & Wardwell, New York, New York.
EXPERTS
The audited consolidated financial statements and financial statement
schedule included in this Prospectus and in the Registration Statement of which
this Prospectus forms a part have been included herein in reliance on the report
of Coopers & Lybrand L.L.P., independent auditors, given on the authority of
that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the 1933 Act with respect to the Common
Stock offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain parts of which have been omitted in accordance with the rules
and regulations of the Commission. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete, and, in each instance, reference is made to the copy of the document
filed as an exhibit to the Registration Statement. The Registration Statement
can be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; and at
the Commission's regional offices at Suite 1400, Northwest Atrium Center, 500
West Madison Street, Chicago, Illinois 60661, and 7 World Trade Center (13th
Floor), New York, New York 10048. Copies of such material can also be obtained
from the Commission at prescribed rates through its Public Reference Section at
450 Fifth Street, N.W., Washington, D.C. 20549.
The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934 (the "1934 Act"). As a result of the
Offerings, the Company will become subject to the informational requirements of
the 1934 Act. The Company will fulfill its obligations with respect to such
requirements by filing periodic reports and other information with the
Commission. In addition, the Company intends to
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<PAGE> 102
furnish to its stockholders annual reports containing consolidated financial
statements examined by an independent public accounting firm.
FOR FLORIDA RESIDENTS
AT&T, the parent of the Company, provides telecommunications services
between the United States and Cuba jointly with Empresa de Telecomunicaciones
Internacionales de Cuba ("EMTELCUBA"), the Cuban telephone company, pursuant to
all applicable U.S. laws and regulations. All payments due EMTELCUBA are handled
in accordance with the provisions of the Cuban Assets Control Regulations and
the Cuban Democracy Act of 1992 and specific licenses issued thereunder. AT&T is
the sole owner of the Cuban American Telephone and Telegraph Company ("CATT"), a
Cuban corporation. CATT owns cable facilities between the United States and Cuba
that were activated on November 25, 1994.
This information is accurate as of the date hereof. Current information
concerning the Company's and its affiliates' business dealings with the
government of Cuba or with any person or affiliate located in Cuba may be
obtained from the Division of Securities and Investor Protection of the Florida
Department of Banking and Finance, the Capitol, Tallahassee, Florida 32399-0350,
telephone number (904) 488-9805.
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LUCENT TECHNOLOGIES INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Statements of Operations for the three years ended December 31, 1995..... F-3
Consolidated Balance Sheets at December 31, 1995 and 1994............................. F-4
Consolidated Statements of Changes in Stockholder's Equity for the three years ended
December 31, 1995................................................................... F-5
Consolidated Statements of Cash Flows for the three years ended December 31, 1995..... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 104
REPORT OF INDEPENDENT AUDITORS
To the Stockholder of Lucent Technologies Inc.:
We have audited the consolidated financial statements of Lucent
Technologies Inc. and subsidiaries (the "Company") listed in the index on page
F-1 of this Form S-1. We have also audited the financial statement schedule of
the Company appearing on page S-1 of this Form S-1. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lucent
Technologies Inc. and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations, changes in their stockholder's equity
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles. In
addition, in our opinion the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
As discussed in Note 3 to the consolidated financial statements, in 1993
the Company changed its methods of accounting for postretirement benefits,
postemployment benefits and income taxes.
Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, New York
January 25, 1996
(Note 14 is dated February 1, 1996)
F-2
<PAGE> 105
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1995 1994 1993
------- ------- -------
(IN MILLIONS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES (includes $2,119 in 1995, $2,137 in 1994, and $1,967
in 1993 from AT&T) (Note 12)................................ $21,413 $19,765 $17,734
COSTS......................................................... 12,945 11,337 10,088
------- ------- -------
GROSS MARGIN.................................................. 8,468 8,428 7,646
------- ------- -------
OPERATING EXPENSES
Selling, general and administrative expenses (Note 12)........ 7,083 5,360 5,016
Research and development expenses............................. 2,385 2,097 1,961
------- ------- -------
TOTAL OPERATING EXPENSES...................................... 9,468 7,457 6,977
------- ------- -------
OPERATING INCOME (LOSS)....................................... (1,000) 971 669
Other income -- net (Note 4).................................. 164 83 193
Interest expense (includes $237 in 1995, $203 in 1994, and
$162 in 1993 to AT&T) (Note 7).............................. 302 270 243
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECTS OF
ACCOUNTING CHANGES.......................................... (1,138) 784 619
Provision (benefit) for income taxes (Note 6)................. (271) 302 189
------- ------- -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECTS OF ACCOUNTING
CHANGES..................................................... (867) 482 430
Cumulative effects of accounting changes, net of taxes (Note
3).......................................................... -- -- (4,208)
------- ------- -------
NET INCOME (LOSS)............................................. $ (867) $ 482 $(3,778)
======= ======= =======
UNAUDITED PRO FORMA NET INCOME (LOSS) PER COMMON SHARE (Note
1).......................................................... $ (1.65)
=======
</TABLE>
The notes on pages F-7 through F-23 are an integral part of the consolidated
financial statements.
F-3
<PAGE> 106
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------
1995 1994
------- -------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Cash and cash equivalents (Note 14)................................... $ 448 $ 580
Accounts receivable, less allowances of $248 in 1995, and $206 in
1994................................................................ 5,354 4,191
Inventories (Note 4).................................................. 3,222 2,405
Deferred income taxes -- net (Note 6)................................. 1,482 1,028
Other current assets.................................................. 173 288
------- -------
TOTAL CURRENT ASSETS.................................................. 10,679 8,492
Property, plant and equipment -- net (Note 4)......................... 4,338 4,676
Prepaid pension costs (Note 8)........................................ 2,522 2,252
Deferred income taxes -- net (Note 6)................................. 872 685
Capitalized software.................................................. 387 420
Other assets.......................................................... 924 815
------- -------
TOTAL ASSETS.......................................................... $19,722 $17,340
======= =======
LIABILITIES
Accounts payable...................................................... $ 1,229 $ 945
Payroll and benefit-related liabilities............................... 3,026 1,931
Postretirement and postemployment benefit liabilities (Notes 3 and
9).................................................................. 227 594
Debt sharing amount in anticipation of assumption of the Commercial
Paper Program (Notes 7 and 14)...................................... 3,842 2,961
Debt maturing within one year......................................... 49 49
Other current liabilities............................................. 2,690 1,766
------- -------
TOTAL CURRENT LIABILITIES............................................. 11,063 8,246
Postretirement and postemployment benefit liabilities (Notes 3 and
9).................................................................. 5,569 5,566
Long-term debt........................................................ 123 154
Other liabilities..................................................... 1,533 898
Commitments and contingencies (Note 13)
------- -------
TOTAL LIABILITIES..................................................... 18,288 14,864
STOCKHOLDER'S EQUITY
Common stock: 1,000 shares, without par value, authorized, issued
and outstanding at December 31, 1995............................. -- --
Additional paid-in capital.......................................... 1,406 --
Foreign currency translation........................................ 28 92
Stockholder's net investment........................................ -- 2,384
------- -------
TOTAL STOCKHOLDER'S EQUITY............................................ 1,434 2,476
------- -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............................ $19,722 $17,340
======= =======
</TABLE>
The notes on pages F-7 through F-23 are an integral part of the consolidated
financial statements.
F-4
<PAGE> 107
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C>
Common Stock
Balance -- Beginning of Year..................................... $ -- $ -- $ --
Issuance of 1,000 shares without par value.......................
------- ------ -------
Balance -- End of Year........................................... $ -- $ -- $ --
------- ------ -------
Additional Paid-in-Capital
Balance -- Beginning of Year..................................... $ -- $ -- $ --
Contribution from AT&T........................................... 1,406 -- --
------- ------ -------
Balance -- End of Year........................................... 1,406 -- --
------- ------ -------
Foreign Currency Translation
Balance -- Beginning of Year..................................... $ 92 $ (10) $ (26)
Translation adjustments.......................................... (64) 102 16
------- ------ -------
Balance -- End of Year........................................... $ 28 $ 92 $ (10)
------- ------ -------
Stockholder's Net Investment
Balance -- Beginning of Year..................................... $ 2,384 $2,590 $ 3,124
Net income (loss)................................................ (867) 482 (3,778)
Transfers from (to) AT&T......................................... (111) (688) 3,244
Transfer to Additional Paid-in-Capital........................... (1,406) -- --
------- ------ -------
Balance -- End of Year........................................... $ -- $2,384 $ 2,590
------- ------ -------
Total Stockholder's Equity......................................... $ 1,434 $2,476 $ 2,580
------- ------ -------
</TABLE>
The notes on pages F-7 through F-23 are an integral part of the consolidated
financial statements.
F-5
<PAGE> 108
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1995 1994 1993
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................. $ (867) $ 482 $ (3778)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Business restructuring charge............................... 2,613 -- --
Asset impairment and other charges.......................... 188 -- --
Cumulative effects of accounting changes.................... -- -- 4,208
Depreciation and amortization............................... 1,493 1,311 1,213
Deferred income taxes....................................... (653) 338 64
Provision for uncollectibles................................ 69 83 68
Other adjustments for noncash items, net.................... (103) (177) (375)
Increase in accounts receivable............................. (1,203) (159) (645)
Increase in inventories..................................... (1,089) (26) (409)
Increase in accounts payable................................ 271 291 42
Net increase in other operating assets and liabilities...... (241) (564) (1,656)
------- ------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES........... 478 1,579 (1,268)
------- ------- -------
INVESTING ACTIVITIES
Capital expenditures.......................................... (1,277) (878) (577)
Proceeds from sale or disposal of property, plant and
equipment................................................... 118 15 38
Purchases of equity investments............................... (86) (38) (48)
Sales of equity investments................................... -- 290 3
(Acquisitions) dispositions, net of cash acquired............. 10 119 (170)
Other investing activities, net............................... (107) (75) (333)
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES......................... (1,342) (567) (1,087)
------- ------- -------
FINANCING ACTIVITIES
Repayments of long-term debt.................................. (46) (22) (109)
Proceeds (repayments) of debt sharing agreement -- net........ 881 53 (624)
Transfers from (to) AT&T...................................... (111) (688) 3,244
Decrease in short-term borrowings -- net...................... -- (84) (1)
------- ------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES........... 724 (741) 2,510
------- ------- -------
Effect of exchange rate changes on cash....................... 8 13 (5)
------- ------- -------
Net increase (decrease) in cash and cash equivalents.......... (132) 284 150
Cash and cash equivalents at beginning of year................ 580 296 146
------- ------- -------
Cash and cash equivalents at end of year...................... $ 448 $ 580 $ 296
======= ======= =======
</TABLE>
Interest paid was $303, $274 and $353 during 1995, 1994 and 1993,
respectively. Income taxes paid were $224, $46 and $98, during 1995, 1994 and
1993 respectively.
The notes on pages F-7 through F-23 are an integral part of the
consolidated financial statements.
F-6
<PAGE> 109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
Lucent Technologies Inc. (the "Company") is currently a wholly owned
subsidiary of AT&T. On September 20, 1995, AT&T announced its intention to
create a separate company comprised of the AT&T businesses and operations that
now comprise the Company, and the associated assets and liabilities of such
businesses and operations and Bell Laboratories (the "Separation"). AT&T also
announced its intention to distribute to its shareholders by December 31, 1996,
subject to certain conditions, all of its interest in the Company following the
Offerings (the "Distribution"). The Company was incorporated on November 29,
1995 with 1,000 shares of Common Stock, without par value, authorized and
outstanding, all of which are owned by AT&T. Beginning February 1, 1996, AT&T is
planning to transfer to the Company substantially all of the assets and
liabilities related to the Company's operations, except that AT&T is retaining
approximately $2,000 in accounts receivable.
BASIS OF PRESENTATION
The consolidated financial statements reflect the results of operations,
financial position, changes in stockholder's equity and cash flows of the
businesses that will be transferred to the Company from AT&T in the Separation
(the "Company Businesses") as if the Company were a separate entity for all
periods presented. The consolidated financial statements have been prepared
using the historical basis in the assets and liabilities and historical results
of operations related to the Company Businesses. Changes in additional paid-in
capital and stockholder's net investment represent AT&T's contribution of its
net investment after giving effect to the net income (loss) of the Company plus
net cash transfers to or from AT&T. The Company will begin accumulating its
retained earnings on February 1, 1996, the date on which AT&T will begin to
transfer to the Company substantially all of the assets and liabilities relating
to the Company's operations.
Additionally, the consolidated financial statements include allocations of
certain AT&T corporate headquarters assets (including prepaid pension assets),
liabilities (including debt and benefit obligations, pension and postretirement
benefits), and expenses relating to the Company Businesses that will be
transferred to the Company from AT&T. Management believes these allocations are
reasonable. All material intercompany transactions and balances between the
Company Businesses have been eliminated.
The liabilities of the Company include outstanding direct third-party
indebtedness and the amounts of debt and related interest expense determined
under the Debt Sharing Agreement discussed in Note 7.
Interest expense shown in the consolidated financial statements reflects
the interest expense associated with the aggregate borrowings for each period
presented principally based on a blend of AT&T's short-term and long-term
weighted average interest rates for the applicable period. General corporate
overhead related to AT&T's corporate headquarters and common support divisions
has been allocated to the Company based on the ratio of the Company's external
costs and expenses to AT&T's external costs and expenses. Management believes
these allocations are reasonable. However, the costs of these services charged
to the Company are not necessarily indicative of the costs that would have been
incurred if the Company had performed these functions as a stand-alone entity.
Subsequent to the Separation, the Company will perform these functions using its
own resources or purchased services and will be responsible for the costs and
expenses associated with the management of a public corporation. Additionally,
income taxes are calculated on a separate tax return basis.
The Company's financial statements include the costs experienced by the
AT&T pension and postretirement benefit plans for employees and retirees for
whom the Company will assume responsibility.
F-7
<PAGE> 110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. BACKGROUND AND BASIS OF PRESENTATION -- (CONTINUED)
The financial information included herein may not necessarily reflect the
consolidated results of operations, financial position, changes in stockholder's
equity and cash flows of the Company in the future or what they would have been
had it been a separate, stand-alone entity during the periods presented.
EARNINGS (LOSS) PER COMMON SHARE
The Company has 1,000 shares of Common Stock outstanding, all of which are
owned by AT&T. Immediately prior to the Offerings, the Company will effect a
stock split or other issuance of shares resulting in 524,624,894 shares
outstanding. The pro forma net loss per common share was calculated by dividing
the 1995 net loss of $867 million by the 524,624,894 shares of Common Stock.
Subsequent to the Offerings of 112,037,037 shares, 636,661,931 shares will be
outstanding. Replacement stock options and awards have not been considered in
calculating the pro forma net loss per common share because their effect would
be anti-dilutive.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include all majority-owned
subsidiaries of the Company. Investments in which the Company exercises
significant influence but which it does not control (generally a 20% - 50%
ownership interest) are accounted for under the equity method of accounting.
Investments in which the Company has less than a 20% ownership interest are
accounted for under the cost method of accounting.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenue and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used when accounting for
long-term contracts, allowance for uncollectible accounts receivable, inventory
obsolescence, product warranty, depreciation, employee benefit plans, taxes,
restructuring reserves and contingencies.
CURRENCY TRANSLATION
For operations outside the United States that prepare financial statements
in currencies other than the United States dollar, income statement amounts are
translated at average exchange rates during the year, and assets and liabilities
are translated at year-end exchange rates. These translation adjustments are
included as a separate component of stockholder's equity.
REVENUE RECOGNITION
Revenue is generally recognized on the sales of products or services when
the products are delivered or the services performed, all substantial
contractual obligations have been satisfied, and the collection of the resulting
receivable is deemed probable. Revenue from sales of software products is
generally recognized upon product delivery, acceptance, and completion of all
significant vendor obligations. Revenue from rental sales is recognized
proportionately over the contract period. Revenues and estimated profits on
long-term construction type contracts are recognized under the percentage of
completion method of accounting using either a units of delivery or a cost to
cost methodology. Revisions of profit estimates are reflected in the period in
which the facts that require the revision to the estimate become known. Any
losses on contracts are immediately recognized when determinable.
F-8
<PAGE> 111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred except
for costs incurred for the development of computer software that will be sold,
leased or otherwise marketed which are capitalized when technological
feasibility has been established. These capitalized costs are recorded as
capitalized software and are subject to an ongoing assessment of recoverability
based upon anticipated future revenues and changes in hardware and software
technologies. Costs capitalized include direct labor and related overhead.
Amortization of capitalized software development costs begins when the
product is available for general release. Amortization is provided on a
product-by-product basis on either the straight-line method over periods not
exceeding two years or the sales ratio method. Unamortized capitalized software
development costs determined to be in excess of net realizable value of the
product are expensed at the date of such determination.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses various financial instruments, including derivative
financial instruments, for purposes other than trading. The Company does not
enter into derivative financial instruments for speculative purposes.
Derivatives, used as part of the Company's risk management strategy, must be
designated at inception as a hedge, and measured for effectiveness both at
inception and on an ongoing basis. For qualifying foreign currency hedges, the
gains and losses are deferred and recognized as adjustments of carrying amounts
when the underlying hedged transaction is recorded. Interest rate swap
agreements involve the periodic exchange of payments without the exchange of the
underlying principal or notional amounts. Net payments are recognized as an
adjustment to income or expense of the underlying hedged transaction. Gains and
losses on interest rate swap agreements that do not qualify as hedges are
recorded at fair value and recognized in other income or expense. If the Company
terminates a swap agreement, the gain or loss is recorded as an adjustment to
the basis of the underlying asset or liability and amortized over the remaining
life.
INCOME TAXES
Historically, the Company's operations have been included in the
consolidated income tax returns filed by AT&T. Income tax expense in the
Company's consolidated financial statements has been calculated on a separate
tax return basis.
INVESTMENT TAX CREDITS
For financial reporting purposes, investment tax credits are amortized as a
reduction to the provision for income taxes over the useful lives of the
property that produced the credits.
CASH AND CASH EQUIVALENTS
All highly liquid investments with original maturities of three months or
less are considered to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market (i.e., net realizable
value or replacement cost). Cost includes material, labor and manufacturing
overhead. Cost is determined principally on a first-in, first-out ("FIFO")
basis. Inventories also include unbilled costs and fees on contracts in process
net of progress payments.
F-9
<PAGE> 112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is determined primarily using the unit method. The
group method is used for certain facilities and equipment, except factory
machinery which is depreciated using the unit method. When assets that were
depreciated using the unit method are sold, the gains or losses are included in
operating results. When assets that were depreciated using the group method are
sold or retired, the original cost is deducted from the plant account and from
accumulated depreciation and any proceeds are applied against accumulated
depreciation. Buildings are depreciated over a 30 year life and equipment is
depreciated over a range of 3 to 10 years.
Accelerated depreciation methods are used for certain high technology
computer processing equipment. All other facilities and equipment are
depreciated on a straight-line basis over their estimated useful lives.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for as purchases. Goodwill is
amortized on a straight-line basis over the periods benefited, principally in
the range of 10 to 15 years. Goodwill is reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows is less
than the carrying amount of the asset, a loss is recognized immediately.
3. CHANGES IN ACCOUNTING PRINCIPLES
POSTRETIREMENT BENEFITS
AT&T adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," effective January 1, 1993. This standard requires
accrual of estimated future retiree benefits during the years employees are
working and accumulating these benefits. Previously, health care benefits were
expensed as claims were incurred and life insurance benefits were expensed as
plans were funded. AT&T recorded a one-time pretax charge for the unfunded
portions of these liabilities of $11,317 ($7,023 after taxes).
For purposes of preparing these consolidated financial statements,
estimates were made (see Note 9) of the Company's share of the unfunded portions
of postretirement benefit obligations and a one-time pretax charge of $6,142
($3,722 after taxes) was recorded. The impact of this change on 1993 operating
income was immaterial. This change in accounting does not affect cash flows.
POSTEMPLOYMENT BENEFITS
AT&T also adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," effective January 1, 1993. Analogous to SFAS No. 106, this standard
requires the Company to accrue for estimated future postemployment benefits,
including separation payments, during the years employees are working and
accumulating these benefits, and for disability payments when the disabilities
occur. Before this change in accounting, costs for separations were recognized
when approved and disability benefits were recognized when paid. AT&T recorded a
one-time pretax charge for the unprovided portion of these liabilities of $1,809
($1,128 after taxes).
For purposes of preparing these consolidated financial statements,
estimates were made of the Company's share of the unprovided portion of
postemployment liabilities and a one-time pretax charge of $875 ($530 after
taxes) was recorded. This change reduced 1993 operating income by $229 and net
income by $139. This change in accounting does not affect cash flows.
F-10
<PAGE> 113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CHANGES IN ACCOUNTING PRINCIPLES -- (CONTINUED)
INCOME TAXES
The Company adopted SFAS No. 109, "Accounting for Income Taxes," effective
January 1, 1993. Among other provisions, this standard requires the computation
of deferred tax amounts using the enacted corporate income tax rates for the
years in which the taxes will be paid or refunds received. Before this change in
accounting, deferred tax accounts reflected rates in effect when the deferrals
were made.
The change in calculating deferred tax amounts required by this standard
resulted in a one-time benefit of $44 in the first quarter of 1993. This change
in accounting does not affect cash flows. The impact of this change on 1993
income before cumulative effect of accounting change was a $54 increase in net
income due to the increase in the federal statutory tax rate to 35% from 34%
during 1993. See Note 6. This change will only affect net income in future
periods if applicable tax rates change.
IMPAIRMENT OF LONG-LIVED ASSETS
Effective October 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." This standard requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The adoption of the standard did not materially impact
the Company's consolidated results of operations, financial condition or cash
flows because this was essentially the method the Company used in the past to
measure and record asset impairments. The 1995 restructuring and other charges
did include recognition of asset impairments.
STOCK-BASED COMPENSATION
In 1996, SFAS No. 123, "Accounting for Stock-Based Compensation," will be
adopted. This standard establishes a fair value method for accounting for or
disclosing stock-based compensation plans. This standard will be adopted by
disclosing the pro forma consolidated net income and earnings per share amounts
assuming the fair value method was effective on January 1, 1995. The adoption of
this standard will not impact consolidated results of operations, financial
position, or cash flows.
F-11
<PAGE> 114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
1995 1994 1993
------ ---- ----
<S> <C> <C> <C>
INCLUDED IN COSTS
Amortization of software development costs.......................... $ 312 $345 $314
INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Amortization of goodwill............................................ $ 40 $ 31 $ 22
INCLUDED IN COSTS AND OPERATING EXPENSES
Depreciation and amortization of property, plant and equipment...... $1,109 $891 $836
OTHER INCOME
Interest income..................................................... $ 44 $ 24 $ 20
Minority interests in (earnings) losses of subsidiaries............. (20) (14) 21
Net equity (losses) earnings from investments....................... (25) 21 29
Increase in cash surrender value of life insurance.................. 40 30 32
Gain/loss on foreign currency transactions.......................... (26) (48) (13)
Miscellaneous -- net................................................ 151 70 104
------ ---- ----
Total other income -- net........................................... $ 164 $ 83 $193
====== ==== ====
</TABLE>
SUPPLEMENTARY BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
INVENTORIES
Completed goods......................................................... $ 1,673 $ 1,297
Unbilled costs and fees on contracts in process (net of progress
payments of $355 in 1995)............................................. 371 43
Work in process and raw materials....................................... 1,178 1,065
-------- -------
Inventories............................................................. $ 3,222 $ 2,405
======== =======
PROPERTY, PLANT AND EQUIPMENT -- NET
Land and improvements................................................... $ 273 $ 258
Buildings and improvements.............................................. 2,668 2,613
Machinery, electronic and other equipment............................... 8,096 8,355
Total property, plant and equipment..................................... 11,037 11,226
Less: Accumulated depreciation.......................................... (6,699) (6,550)
-------- -------
Property, plant and equipment -- net.................................... $ 4,338 $ 4,676
======== =======
</TABLE>
5. BUSINESS RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1995, a pre-tax charge of $2,801 was recorded to
cover restructuring costs of $2,613 and asset impairment and other charges of
$188. The Company's fourth quarter restructuring plans include the following
items: restructuring its consumer products business to implement major process
improvements in how it designs, manufactures and distributes those products,
including closing all of its Company-owned retail phone center stores,
consolidating and reengineering numerous corporate and business unit operations
during the next two years, and selling its Microelectronics interconnect
business and Paradyne business. Accordingly, the fourth quarter restructuring
charge of $2,613 included the separation costs, both voluntary and involuntary,
for nearly 22,000 employees, comprised of about 11,000 management and 11,000
F-12
<PAGE> 115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. BUSINESS RESTRUCTURING AND OTHER CHARGES -- (CONTINUED)
occupational employees. Approximately 1,000 additional management employees are
employed by businesses that the Company has announced plans to sell. As of
December 31, 1995, approximately 4,100 management employees of the 22,000 total
employees have accepted a voluntary severance package and the majority of these
employees will leave the Company in early 1996. The Company expects
approximately 70% of all separations to be completed by the end of 1996, with
the majority of the remaining separations being completed during 1997. The
restructuring charge also included costs associated with early termination of
building leases and asset write-downs as part of the plan to sell certain
businesses and restructure its operations.
The pre-tax total of the fourth quarter charge for restructuring,
impairments and other charges of $2,801 for 1995 was recorded as $892 of costs,
$1,645 of selling, general and administrative expenses, and $264 of research and
development expenses. The charges include $1,509 for employee separations; $627
for asset write-downs; $202 for closing, selling and consolidating facilities;
and $463 for other items. The total charges reduced net income by approximately
$1,847.
The following table displays a rollforward of the liabilities for business
restructuring from December 31, 1993 to December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31,
1993 -------------------------------- 1994
TYPE OF COST BALANCE ADDITIONS OTHER PAYMENTS BALANCE
- ------------------------------------ ------------ --------- ----- -------- ------------
<S> <C> <C> <C> <C> <C>
Employee Separation................. 112 (4) (56) 52
Facility closings................... 80 15 (25) 70
Other............................... 13 0 15 (17) 11
--- --------- ----- --- ------
Total............................. 205 0 26 (98) 133
========== ======= ==== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31,
1994 -------------------------------- 1995
TYPE OF COST BALANCE ADDITIONS OTHER PAYMENTS BALANCE
- ------------------------------------ ------------ --------- ----- -------- ------------
<S> <C> <C> <C> <C> <C>
Employee Separation................. 52 1,167 1,219
Facility closings................... 70 202 272
Other............................... 11 405 416
--- --------- ----- --- ------
Total............................. 133 1,774 1,907
========== ======= ==== ======= ==========
</TABLE>
The December 31, 1993 business restructuring balance included reserves
primarily for real estate. As of December 31, 1995, $133 of the $205 December
31, 1993 balance remained. The majority of this balance is related to excess
space at some locations and is expected to be fully utilized over the remaining
terms of the leases,
Management believes that the liabilities for business restructuring of
$1,907, at December 31, 1995 are adequate to complete its plans.
In 1995 in addition to restructuring liabilities of $1,774, asset
impairments of $497 (which were credited directly to the related asset balances)
and $342 of benefit plan losses were included in the total restructure costs of
$2,613. Benefit plan losses relate to pension and other employee benefit plans
and primarily represent losses in the current year for actuarial changes that
otherwise might have been amortized over future periods.
The 1995 charges also included $188 primarily for other asset impairments.
Of the total combined charges, $1,788 will result in cash payments in the
future and approximately $1,013 related to non cash items.
F-13
<PAGE> 116
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The following table presents the principal reasons for the difference
between the effective tax rate and the United States federal statutory income
tax rate:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
U.S. federal statutory income tax rate........................ 35% 35% 35%
------- ------- -------
Federal income tax provision (benefit) at statutory rate...... $ (398) $ 274 $ 217
State and local income taxes, net of federal income tax
effect...................................................... (57) 23 23
Amortization of intangibles................................... 29 12 6
Foreign rate differential..................................... 66 (64) (17)
Taxes on foreign income....................................... 74 100 38
Research credits.............................................. (3) (27) (20)
Effect of tax rate change on deferred tax assets.............. -- -- (54)
Other differences -- net...................................... 18 (16) (4)
------- ------- -------
Provision (benefit) for income taxes.......................... $ (271) $ 302 $ 189
======= ======= =======
Effective income tax rate..................................... 23.8% 38.5% 30.5%
</TABLE>
The following table presents the U.S. and foreign components of income
before income taxes and the provision for income taxes:
<TABLE>
<CAPTION>
1995 1994 1993
------- ----- ----
<S> <C> <C> <C>
INCOME (LOSS) BEFORE INCOME TAXES
United States................................................. $(1,253) $ 405 $405
Foreign....................................................... 115 379 214
------- ----- ----
$(1,138) $ 784 $619
======= ===== ====
PROVISION (BENEFIT) FOR INCOME TAXES
CURRENT
Federal....................................................... $ 199 $(119) $ 44
State and local............................................... 42 (40) 4
Foreign....................................................... 141 123 77
------- ----- ----
382 (36) 125
------- ----- ----
DEFERRED
Federal....................................................... (523) 267 34
State and local............................................... (130) 76 32
Foreign....................................................... 1 (4) (1)
------- ----- ----
(652) 339 65
Deferred investment tax credits............................... (1) (1) (1)
------- ----- ----
Provision (benefit) for income taxes.......................... $ (271) $ 302 $189
======= ===== ====
</TABLE>
The foreign deferred income tax provision is shown net of valuation
allowance increases of $46 and $39 in 1995 and 1993, respectively, and a
valuation allowance decrease of $27 in 1994.
Deferred income tax liabilities are taxes the Company expects to pay in
future periods. Similarly, deferred income tax assets are taxes recognized for
expected reductions in taxes payable. Deferred income taxes arise
F-14
<PAGE> 117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES -- (CONTINUED)
because of differences in the book and tax bases of certain assets and
liabilities. Deferred income tax assets/ liabilities consist of the following:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
CURRENT DEFERRED INCOME TAX ASSETS:
Business restructuring................................................. $ 519 $ 57
Employee pensions and other benefits................................... 516 540
Reserves and allowances................................................ 537 474
Valuation allowance.................................................... (117) --
Other.................................................................. 143 45
------- -------
Total current deferred income tax assets................................. 1,598 1,116
------- -------
CURRENT DEFERRED INCOME TAX LIABILITIES:
Other.................................................................. $ 116 $ 88
------- -------
Total current deferred income tax liabilities............................ $ 116 $ 88
------- -------
Net current deferred income tax assets................................... $ 1,482 $ 1,028
======= =======
LONG-TERM DEFERRED INCOME TAX ASSETS:
Employee pensions and other benefits, net.............................. $ 1,425 $ 1,478
Business restructuring................................................. 267 68
Net operating losses/credit carryforwards.............................. 28 96
Reserves and allowances................................................ 9 31
Valuation allowance.................................................... (25) (96)
Other.................................................................. 270 199
------- -------
Total long-term deferred income tax assets............................... 1,974 1,776
------- -------
LONG-TERM DEFERRED INCOME TAX LIABILITIES:
Property, plant and equipment.......................................... $ 738 $ 806
Other.................................................................. 364 285
------- -------
Total long-term deferred income tax liabilities.......................... 1,102 1,091
------- -------
Net long-term deferred income tax assets................................. $ 872 $ 685
======= =======
</TABLE>
The Company has not provided for United States federal income taxes or
foreign withholding taxes on $1,004 and $765 of undistributed earnings of its
non-United States subsidiaries as of December 31, 1995 and December 31, 1994,
respectively, because such earnings are intended to be reinvested indefinitely.
It is not practicable to determine the amount of applicable taxes.
7. DEBT SHARING AGREEMENT
As discussed in Note 1, the Company's consolidated financial statements
include an allocation of AT&T's consolidated debt and the related interest
expense. The allocation was based on the capital structure of the Company
anticipated at the Closing Date. At that date, the Company will assume up to
approximately $4,000 of Commercial Paper issued by AT&T, which is estimated to
be the amount of debt necessary to support the Company's assets and operations.
An allocation methodology was used to reflect the capital structure through each
historic period presented based on cash flows for those periods, adjusted for
interest expense. To formalize the allocations, the Company and AT&T entered
into a Debt Sharing Agreement which is effective from January 1, 1991 through
December 31, 1995.
F-15
<PAGE> 118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEBT SHARING AGREEMENT -- (CONTINUED)
Amounts shown as outstanding under the Debt Sharing Agreement were $3,842
and $2,961 at December 31, 1995 and 1994, respectively. Such amounts were
classified as short-term given the Company's plans to replace the amounts shown
as outstanding under the Debt Sharing Agreement with Commercial Paper issued by
AT&T. The Company expects that, over time, the Company may refinance all or part
of the Commercial Paper Program from the proceeds of short- or long-term
borrowings, as market conditions permit. The amount, timing and pricing of such
debt issues are uncertain.
Interest expense of $237, $203 and $162 for the years ended December 31,
1995, 1994 and 1993, respectively, was determined based on a blend of AT&T's
short-term and long-term weighted average interest rates of 6.8%, 6.9% and 6.2%
for each of the respective years.
The Company believes these allocations are reasonable estimates of the cost
of financing the Company's assets and operations in the past. However, the
Company may not be able to obtain financing with interest rates as favorable as
those enjoyed by AT&T, with the result that the Company's cost of capital will
be higher than that reflected in its historical consolidated financial
statements.
8. EMPLOYEE BENEFIT PLANS
At the Distribution, the Company will assume responsibility for pension and
post-retirement benefits for retirees whose last work assignment was a unit of
the Company, for other retirees assigned to the Company and for the employees of
the Company. Until the Distribution, the Company's financial statements will
include the costs experienced by the AT&T plans for employees and retirees for
whom the Company will assume responsibility.
PENSION PLANS
The majority of the Company's employees participate in AT&T's
noncontributory defined benefit plans. Benefits for management employees are
principally based on career-average pay. Benefits for occupational employees are
not directly pay-related. Pension contributions are principally determined using
the aggregate cost method and are primarily made to trust funds held for the
sole benefit of plan participants.
Immediately following the Distribution, the Company will establish separate
defined benefit plans for the employees and retirees of the Company. Pension
assets will be transferred from AT&T's pension trust to the Company's pension
trust pursuant to a specified formula. Assets of trusts under qualified pension
plans will be divided, immediately after the Distribution Date, between the
trusts for AT&T qualified pension plans and the new Company qualified pension
plans. Each such trust will receive the legally required funding minimum and, if
greater, a sufficient amount of additional trust assets to ensure continued
compliance with the existing AT&T pension funding policy. Any trust assets in
excess of the funding policy level will be divided equally between the trusts of
AT&T and the Company for such qualified pension plans. For purposes of preparing
these financial statements, estimates were made, as of December 31, 1995, of the
assets and pension obligations that will be transferred to the Company. As of
December 31, 1995, the projected benefit obligation is estimated at $23,410 and
the assets to be transferred are estimated at $29,092. The actual amounts
transferred will be measured at the Distribution Date, using the same
methodology, and will likely be different from these estimates. The estimated
December 31, 1995 assets and pension obligations were also the basis for
estimating the Company's assets and pension obligations for 1994 and 1993.
As of December 31, 1995 and 1994, AT&T had a prepaid pension asset of
$4,664 and $4,151, respectively. Based on the estimates described in this note,
the Company's share of the prepaid pension asset as of December 31, 1995 and
1994 is $2,522 and $2,252, respectively.
F-16
<PAGE> 119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
Pension cost is computed using the projected unit credit method. The
Company recorded pension income related to the AT&T plans of $135, $288 and $284
in 1995, 1994 and 1993, respectively. The 1995 consolidated statement of
operations includes a charge of $97 for curtailment loss.
The following information relates to the entire AT&T noncontributory
defined benefit plans. The Company's share of the amounts shown below for net
pension credit, actuarial present value of the accumulated plan benefit
obligation, plan assets at fair value, and prepaid pension costs have not been
determined at this time.
AT&T sponsors noncontributory defined benefit plans covering the majority
of its employees. Benefits for management employees are principally based on
career-average pay. Benefits for occupational employees are not directly related
to pay.
Pension contributions are principally determined using the aggregate cost
method and are primarily made to trust funds held for the sole benefit of plan
participants. AT&T computes pension cost using the projected unit credit method
and assumed a long-term rate of return on plan assets of 9.0% in 1995, 1994 and
1993.
Pension cost includes the following components:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Service cost -- benefits earned during the period............. $ 570 $ 669 $ 536
Interest cost on projected benefit obligation................. 2,551 2,400 2,294
Amortization of unrecognized prior service costs.............. 280 230 251
Credit for expected return on plan assets*.................... (3,318) (3,260) (3,110)
Amortization of transition asset.............................. (500) (501) (500)
Charges for special pension options........................... 213 -- 74
------- ------- -------
Net pension credit............................................ $ (204) $ (462) $ (455)
======= ======= =======
</TABLE>
- ---------------
* The actual return on plan assets was $9,484 in 1995, $582 in 1994 and $5,068
in 1993.
The net pension credit of $204 in 1995 was reduced by a one-time charge of
$213 for early retirement options and curtailments.
This table shows the funded status of the entire AT&T noncontributory
defined benefit plans:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Actuarial present value of accumulated benefit obligation, including
vested benefits of $32,726 and $26,338, respectively................... $36,052 $28,801
------- -------
Plan assets at fair value................................................ $47,634 $40,131
Less: Actuarial present value of projected benefit obligation............ 37,989 30,125
------- -------
Excess of assets over projected benefit obligation....................... 9,645 10,006
Unrecognized prior service costs......................................... 2,297 2,319
Unrecognized transition asset............................................ (2,961) (3,460)
Unrecognized net gain.................................................... (4,528) (4,928)
Net minimum liability of nonqualified plans.............................. (166) (103)
Prepaid pension costs.................................................... $ 4,287 $ 3,834
</TABLE>
F-17
<PAGE> 120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
AT&T used these rates and assumptions to calculate the projected benefit
obligation:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------
1995 1994
---- ----
<S> <C> <C>
Weighted-average discount rate............................. 7.0 % 8.7 %
Rate of increase in future compensation levels............. 5.0 % 5.0 %
</TABLE>
The prepaid pension costs shown above are net of pension liabilities for
plans where accumulated plan benefits exceed assets. Such liabilities are
included in other liabilities in AT&T's consolidated balance sheets.
AT&T is amortizing over approximately 15.9 years the unrecognized
transition asset related to its 1986 adoption of SFAS No. 87, "Employers'
Accounting for Pensions." AT&T amortizes prior service costs primarily on a
straight-line basis over the average remaining service period of active
employees. AT&T's plan assets consist primarily of listed stocks (including $259
and $216 of AT&T common stock at December 31, 1995 and 1994, respectively),
corporate and governmental debt, real estate investments, and cash and cash
equivalents.
SAVINGS PLANS
The majority of the Company's employees are eligible to participate in
savings plans sponsored by AT&T. The plans allow employees to contribute a
portion of their pre-tax and/or after-tax income in accordance with specified
guidelines. AT&T matches a certain percentage of employee contributions, up to
certain limits. The Company's expense related to the AT&T savings plans was $196
in 1995, $178 in 1994 and $167 in 1993. The Company expects to establish similar
plans following the Distribution.
9. POSTRETIREMENT BENEFITS
The majority of the Company's employees and retirees participate in AT&T's
benefit plans for retirees, which currently include health care benefits, life
insurance coverage and telephone concessions.
Immediately following the Distribution, the Company will establish separate
postretirement benefit plans for the employees and retirees of the Company.
Postretirement benefit assets will be transferred from AT&T to the Company pro
rata on the basis of the present value of future benefit obligations of the
applicable plan. For purposes of preparing these financial statements, estimates
were made, as of December 31, 1995, of the assets and postretirement benefit
obligations that will be transferred to the Company. As of December 31, 1995,
the accumulated postretirement benefit obligation is estimated at $8,368 and the
assets to be transferred are estimated at $3,462. The actual amounts transferred
will be measured at the Distribution date, using the same methodology, and will
likely be different from these estimates. The estimated December 31, 1995 assets
and postretirement benefit obligations were also the basis for estimating the
Company's assets and postretirement benefit obligations for 1994 and 1993.
As of December 31, 1995 and 1994, AT&T had an accrued postretirement
benefit liability of $7,389 and $7,816, respectively. Based on the estimates
described in this note, the Company's share of the accrued postretirement
benefit liability as of December 31, 1995 and 1994 is $4,635 and $5,006,
respectively.
The Company recorded postretirement benefit expense related to the AT&T
plans of $468, $461 and $529 in 1995, 1994 and 1993, respectively. It is
estimated that increasing the assumed health care cost trend rate by 1% would
raise the Company's portion of the accumulated postretirement benefit obligation
as of December 31, 1995 by $423 and 1995 postretirement benefit costs by $35.
The following information relates to the entire AT&T Postretirement Benefit
Plan. The Company's share of the amounts shown below for net postretirement
benefit cost, accumulated postretirement benefit
F-18
<PAGE> 121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. POSTRETIREMENT BENEFITS -- (CONTINUED)
obligation, plan assets at fair value and accrued postretirement benefit
obligation have not been determined at this time.
AT&T's benefit plans for retirees include health care benefits, life
insurance coverage and telephone concessions. This table shows the components of
the net postretirement benefit cost:
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
Service cost -- benefits earned during the period................. $ 98 $ 108
Interest cost on accumulated postretirement benefit obligation.... 888 852
Expected return on plan assets*................................... (298) (243)
Amortization of unrecognized prior service costs.................. 67 14
Amortization of net loss (gain)................................... (14) 1
Charge for special options........................................ 11 --
----- -----
Net postretirement benefit cost................................... $ 752 $ 732
===== =====
</TABLE>
- ---------------
* The actual return on plan assets was $962 and ($30) in 1994.
AT&T had approximately 146,700 retirees in 1995, 144,900 in 1994 and
142,200 in 1993.
AT&T's plan assets consist primarily of listed stocks, corporate and
governmental debt, cash and cash equivalents, and life insurance contracts. The
following table shows the funded status of AT&T's postretirement benefit plans
reconciled with the amounts recognized in AT&T's consolidated balance sheets:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1995 1994
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees..................................................... $ 8,250 $ 7,476
Fully eligible active plan participants...................... 1,453 822
Other active plan participants............................... 2,869 1,751
------- -------
Accumulated postretirement benefit obligation.................. 12,572 10,049
Plan assets at fair value...................................... 4,704 3,291
------- -------
Unfunded postretirement obligation............................. 7,868 6,758
Less:
Unrecognized prior service costs............................. 771 (46)
Unrecognized net (gain) loss................................. (292) (1,012)
------- -------
Accrued postretirement benefit obligation...................... $ 7,389 $ 7,816
======= =======
</TABLE>
AT&T made these assumptions in valuing its postretirement benefit
obligation at December 31:
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
Weighted-average discount rate...................................... 7.0% 8.8%
Expected long-term rate of return on plan assets.................... 9.0% 9.0%
Assumed rate of increase in the per capita cost of covered
health care benefits.............................................. 6.1% 8.6%
</TABLE>
AT&T assumed that the growth in the per capita cost of covered health care
benefits (the health care cost trend rate) would gradually decline after 1995 to
4.9% by the year 2005 and then remain level. This assumption greatly affects the
amounts reported. To illustrate, increasing the assumed trend rate by 1% in each
year would raise AT&T's accumulated postretirement benefit obligation at
December 31, 1995 by $646 and AT&T's 1995 postretirement benefit costs by $53.
F-19
<PAGE> 122
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SEGMENT INFORMATION
INDUSTRY SEGMENT
The Company operates in the global telecommunications networking industry
segment. This segment includes systems, software and products used for voice
data and video communications.
GEOGRAPHIC SEGMENTS
Transfers between geographic areas are on terms and conditions comparable
with sales to external customers. The methods followed in developing the
geographic area data require the use of estimation techniques and do not take
into account the extent to which product development, manufacturing and
marketing depend upon each other. Thus the information may not be indicative of
results if the geographic areas were independent organizations.
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
REVENUES
United States..................................................... $17,826 $17,207 $16,213
Other geographic areas............................................ 3,587 2,558 1,521
------- ------- -------
$21,413 $19,765 $17,734
======= ======= =======
TRANSFERS BETWEEN GEOGRAPHIC AREAS (ELIMINATED IN CONSOLIDATION)
United States..................................................... $ 1,081 $ 1,338 $ 946
Other geographic areas............................................ 911 1,041 892
------- ------- -------
$ 1,992 $ 2,379 $ 1,838
======= ======= =======
OPERATING INCOME (LOSS)
United States..................................................... $ (679) $ 1,241 $ 1,123
Other geographic areas............................................ (67) (5) (242)
Corporate, eliminations and nonoperating.......................... (392) (452) (262)
------- ------- -------
Income (loss) before income taxes................................. $(1,138) $ 784 $ 619
======= ======= =======
ASSETS
United States..................................................... $15,043 $14,114 $14,955
Other geographic areas............................................ 4,696 3,493 2,289
Corporate assets.................................................. 738 696 458
Eliminations...................................................... (755) (963) (593)
------- ------- -------
$19,722 $17,340 $17,109
======= ======= =======
</TABLE>
Corporate assets are principally cash and temporary cash investments. Data
on other geographic areas pertain to operations that are located outside the
United States. Revenues from all international activities, including those in
the table and exports, provided 23.3%, 19.1%, and 16.9% of consolidated revenues
in 1995, 1994 and 1993, respectively.
CONCENTRATIONS
Historically, the Company has relied on a limited number of customers for a
substantial portion of its total revenues. In terms of total revenues, the
Company's largest customer has been AT&T, although other large customers may
purchase more of any particular system or product line. The Company expects that
a significant portion of its future revenues will continue to be generated by a
limited number of customers. The loss of any of these customers or any
substantial reduction in orders by any of these customers could materially
F-20
<PAGE> 123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SEGMENT INFORMATION -- (CONTINUED)
adversely affect the Company's operating results. The Company does not have a
concentration of available sources of supply of materials, labor, services or
other rights that, if suddenly eliminated, could severely impact its operations.
11. FINANCIAL INSTRUMENTS
In the normal course of business, AT&T has entered into various financial
instruments, including derivative financial instruments, for purposes other than
trading. A portion of such financial instruments related to the Company's
Businesses have, as between AT&T and the Company, been assumed by the Company.
Derivative financial instruments are not entered into for speculative purposes.
These instruments include letters of credit, commitments to extend credit,
guarantees of debt and foreign currency exchange contracts. Unless otherwise
noted, the Company generally does not require collateral to support these
financial instruments.
By their nature, all such instruments involve risk, including the credit
risk of nonperformance by counterparties, and the maximum potential loss may
exceed the amount recognized in the balance sheet. The contract or notional
amount of the financial instruments reflects the maximum amount of the Company's
commitments to extend credit or the extent of involvement that the Company has
in particular classes of financial instruments. At December 31, 1995 and 1994,
the Company's maximum exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
financial guarantees is represented by the amount drawn and outstanding on those
instruments. For forward and futures contracts, and option contracts, the
contract or notional amounts do not represent exposure to credit loss.
At December 31, 1995 and 1994, in management's opinion, there was no
significant risk of loss in the event of nonperformance of the counterparties to
these financial instruments. Exposure to credit risk is controlled through
credit approvals, credit limits and monitoring procedures and management
believes that the reserves for losses are adequate. The Company had no
significant exposure to any individual customer or counterparty at December 31,
1995 and December 31, 1994. Letters of credit, commitments to extend credit and
guarantees of debt may exist or expire without being drawn upon. Therefore, the
total notional or contract amounts do not necessarily represent future cash
flows.
Requests for providing commitments to extend credit and financial
guarantees are reviewed and approved by the senior management of the Company.
Management conducts regular reviews of all outstanding commitments, letters of
credit and financial guarantees, and the results of these reviews are considered
in assessing the adequacy of the Company's reserve for possible credit and
guarantee losses.
For the years ended December 31, 1995 and December 31, 1994, no interest
rate cap agreements had been entered into for the benefit of the Company. The
Company may, in the future, enter into these or other types of derivative
transactions as it judges prudent for the proper management of its business.
LETTERS OF CREDIT
Letters of credit are purchased guarantees that ensure the Company's
performance or payment to third parties in accordance with specified terms and
conditions.
COMMITMENTS TO EXTEND CREDIT
Commitments to extend credit are legally binding, conditional agreements
generally having fixed expiration or termination dates and specified interest
rates and purposes.
F-21
<PAGE> 124
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. FINANCIAL INSTRUMENTS -- (CONTINUED)
GUARANTEES OF DEBT
From time to time, the Company guarantees the financing for product
purchases by customers and the debt of certain unconsolidated joint ventures.
Requests for providing such guarantees are reviewed and approved by the senior
management of the Company. The Company seeks to limit its exposure to credit
risks in any single country or region. Certain financial guarantees are backed
by amounts held in trust for the Company.
FOREIGN CURRENCY EXCHANGE CONTRACTS
Foreign currency exchange contracts, including forward, option and swap
contracts are used to manage exposure to changes in currency exchange rates,
principally Dutch guilders, Deutsche marks, and Japanese yen. Some of the
contracts involve the exchange of two foreign currencies, according to local
needs in foreign subsidiaries. The use of derivative financial instruments
allows the Company to reduce its exposure to the risk that the eventual dollar
net cash inflows and outflows resulting from the sale of products to foreign
customers and purchases from foreign suppliers will be adversely affected by
changes in exchange rates. The foreign exchange contracts are designated for
firmly committed or forecasted purchases and sales. These transactions are
generally expected to occur in less than one year for firmly committed sales and
purchases. These gains and losses are deferred in other current assets and
liabilities. Deferred gains and losses are recognized as adjustments to the
underlying hedged transactions when the future sales or purchases are
recognized, or immediately, if the commitment is canceled. Gains and losses on
foreign exchange contracts that are designated for forecasted transactions are
recognized in other income as the exchange rates change. At December 31, 1995
and 1994, deferred unrealized gains were $8 and $3 and deferred unrealized
losses were $6 and $7, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS INCLUDING DERIVATIVE FINANCIAL INSTRUMENTS
The tables below present the valuation methods and the carrying or notional
amounts and estimated fair values of material financial instruments. The
notional amounts represent agreed-upon amounts on which calculations of dollars
to be exchanged are based. They do not represent amounts exchanged by the
parties and, therefore, are not a measure of the instruments. The Company's
exposure is limited to the fair value of the contracts with a positive fair
value at the reporting date plus interest receivable, if any, at the reporting
date.
<TABLE>
<CAPTION>
FINANCIAL INSTRUMENT VALUATION METHOD
<S> <C>
Short-term debt............................. The carrying amount is a reasonable estimate
of fair value.
Letters of credit........................... Fees paid to obtain the obligations.
Guarantees of debt.......................... Costs to terminate agreements.
Commitments to extend credit................ Costs to terminate agreements.
Foreign currency exchange contracts......... Market quotes.
</TABLE>
<TABLE>
<CAPTION>
1995 1994
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
ON BALANCE SHEET
Liabilities:
Debt sharing amount in anticipation of assumption of
the commercial paper program......................... $3,842 $3,842 $2,961 $2,961
</TABLE>
F-22
<PAGE> 125
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. FINANCIAL INSTRUMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AMOUNTS DRAWN
1995 1994 DOWN AND
CONTRACT/ CONTRACT/ OUTSTANDING
NOTIONAL NOTIONAL ---------------
AMOUNT AMOUNT 1995 1994
--------- --------- ----- -----
<S> <C> <C> <C> <C>
DERIVATIVES AND OFF BALANCE SHEET INSTRUMENTS
Foreign exchange:.......................................
Forward contracts.....................................
Dutch guilders..................................... $ 324 $ 108
Deutsche marks..................................... 131 27
Japanese yen....................................... 304 393
Other.............................................. 327 262
---- ----
1,086 790
Swap contracts........................................ -- 118
Option contracts...................................... 4 --
Letters of credit....................................... 659 640
Commitments to extend credit............................ 16 119 $ 13 $ 34
Guarantees of debt...................................... 598 368 296 280
</TABLE>
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
--------------------- ---------------------
ASSET LIABILITY ASSET LIABILITY
------- --------- ------- ---------
<S> <C> <C> <C> <C>
1995
Foreign exchange forward contracts.................. $ 16 $ 10 $ 11 $ 15
Letters of credit................................... -- -- 2 --
1994
Foreign exchange forward contracts.................. $ 7 $ 12 $ 9 $ 28
Foreign exchange swap contracts..................... -- 5 5 4
Letters of credit................................... -- -- 1 --
</TABLE>
12. TRANSACTIONS WITH AT&T
For the years 1995, 1994 and 1993, the Company had $2,119, $2,137, and
$1,967, respectively, of revenues from AT&T. At December 31, 1995 and 1994, the
related receivables amounted to $291 and $81, respectively.
AT&T has allocated general corporate overhead expenses amounting to $372,
$358 and $312 in 1995, 1994 and 1993, respectively. Additionally, the Company
incurred expenses for long distance services provided by AT&T of $80, $93 and
$92 for the years ended December 31, 1995, 1994 and 1993, respectively. Amounts
payable to AT&T were $25 at December 31, 1995 and 1994.
Rights, title and interest in certain lease receivables for business
communication equipment are sold at a discount to AT&T's finance subsidiary,
AT&T Capital Corporation. The Company acts as an agent to bill and collect such
receivables. The Company has agreed to repurchase certain of these lease
receivables in the event of a default thereon. At December 31, 1995 and 1994,
$206 and $208, respectively, of such receivables had recourse to the Company in
the event of default.
In connection with the Separation, AT&T has agreed to prepay prior to the
closing of the Offerings $500 to the Company, which amount will be applied to
accounts receivable from AT&T that are due and payable on or after January 1,
1997 for the purchase of products, services and licensed materials from the
Company.
F-23
<PAGE> 126
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is subject to proceedings,
lawsuits and other claims, including proceedings under government laws and
regulations related to environmental and other matters. Such matters are subject
to many uncertainties, and outcomes are not predictable with assurance.
Consequently, the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at December 31, 1995 cannot be ascertained.
While these matters could affect the operating results of any one quarter when
resolved in future periods, and while there can be no assurance with respect
thereto, management believes that after final disposition, any monetary
liability or financial impact to the Company beyond that provided for at
year-end would not be material to the annual consolidated financial statements.
The Company's current and historical manufacturing and research operations
are subject to a wide range of environmental protection laws in the United
States and other countries. In the United States, these laws often require
parties to fund remedial action regardless of fault. The Company has remedial
and investigatory activities, including assessment and cleanup work, underway at
46 current and former manufacturing, laboratory and recycling facilities to
comply, or to determine compliance, with applicable environmental protection
laws. AT&T and its subsidiaries have been listed as potentially responsible
parties ("PRPs") at numerous "Superfund" sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or
comparable state statutes, either by a government agency (which may have either
sought information concerning AT&T's connection to the site, or may have sought
from AT&T participation in site cleanup work or contribution toward the cost of
site cleanup), or by a private party seeking contribution to site cleanup costs.
Under the terms of the Separation and Distribution Agreement the Company will
assume or indemnify AT&T for all liabilities primarily relating to, arising out
of or resulting from (i) the operation of the Company Business as conducted at
any time prior to, on or after the Closing Date or (ii) any Company Assets
including, without limitation, those associated with these sites.
It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. The Company records an environmental
reserve when it is probable that a liability has been incurred and the amount of
the liability is reasonably estimable. This practice is followed whether the
claims are asserted or unasserted. Management expects that the amounts reserved
for will be paid out over the period of remediation for the applicable site
which ranges from 5 to 30 years. Reserves for estimated losses from
environmental remediation are, depending on the site, based primarily upon
internal or third party environmental studies, and estimates as to the number,
participation level and financial viability of any other PRPs, the extent of the
contamination and the nature of required remedial actions. Accruals are adjusted
as further information develops or circumstances change. The amounts provided
for in the Company's consolidated financial statements in respect of
environmental reserves are the gross undiscounted amount of such reserves,
without deductions for insurance or third party indemnity claims. In those cases
where insurance carriers or third party indemnitors have agreed to pay any
amounts and management believes that collectibility of such amounts is probable,
the amounts are reflected as receivables in the financial statements. Although
the Company believes that its reserves are adequate, there can be no assurance
that the amount of capital expenditures and other expenses which will be
required to complete remedial actions and to comply with applicable
environmental laws will not exceed the amounts reflected in the Company's
reserves or will not have a material adverse effect on the financial condition
of the Company or on the Company's results of operations or cash flows. Any
amounts of environmental costs that may be incurred in excess of those provided
for at December 31, 1995 cannot be determined.
One of the Company's multi-year contracts is with Pacific Bell for the
provision of a broadband network based on hybrid fiber-coaxial cable technology.
Implementation difficulties and cost overruns have arisen under this contract,
which may result in claims being made by the parties under the contract. The
Company and Pacific Bell are conducting negotiations in an effort to resolve
outstanding issues and potential claims. The Company's historical financial
statements reflect a reserve relating to this contract. Based on the future
negotiations with Pacific Bell, the Company will continue to assess the adequacy
of this reserve.
F-24
<PAGE> 127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
The Company leases land, buildings and equipment through contracts that
expire in various years, through 2004. Rental expense under operating leases was
$209 in 1995, $183 in 1994 and $202 in 1993. The table below shows the future
minimum lease payments due under noncancelable operating leases at December 31,
1995. Such payments total $245.
<TABLE>
<CAPTION>
LATER
1996 1997 1998 1999 2000 YEARS
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Operating leases........................ $85 $59 $40 $26 $13 $22
</TABLE>
14. SUBSEQUENT EVENTS
In connection with the Separation and Distribution, the Company, AT&T and
NCR Corporation, a wholly owned subsidiary ("NCR"), executed and delivered the
Separation and Distribution Agreement, dated as of February 1, 1996 (the
"Separation and Distribution Agreement"), and certain related agreements which
are summarized below. This summary is qualified in all respects by the terms of
the Separation and Distribution Agreement and such related agreements.
SEPARATION AND DISTRIBUTION AGREEMENT
Pursuant to the Separation and Distribution Agreement, AT&T will transfer
to the Company substantially all of the assets and liabilities associated with
the Company's Business, other than accounts receivable having a face amount of
approximately $2,000.
The Separation and Distribution Agreement, among other things, provides
that the Company will indemnify AT&T and NCR for all liabilities relating to the
Company's business and operations and for all contingent liabilities relating to
the Company's business and operations or otherwise assigned to the Company. In
addition to contingent liabilities relating to present or former businesses of
the Company, any contingent liabilities related to AT&T's discontinued computer
operations (other than those of NCR) have been assigned to the Company. In
addition, the Separation and Distribution Agreement provides for the sharing of
contingent liabilities not allocated to one of the parties, in the following
proportions: AT&T: 75%, the Company: 22%, and NCR: 3%. The Separation and
Distribution Agreement also provides that each party will share specified
portions of contingent liabilities related to the business of any of the other
parties that exceed specified levels.
EMPLOYEE BENEFITS AGREEMENT
The Company entered into an agreement which governs its employee benefit
obligations with respect to actual employees as well as retirees assigned to the
Company. This agreement provides that, from the Separation until the
Distribution, the Company will be a "Participating Company" in AT&T employee
benefit plans and will bear its allocable share of costs for benefits and
administration under these plans. Immediately after the Distribution, pension
plan assets will be divided between AT&T pension plans and the Company's pension
plans so that each plan will receive the legally required minimum and a
sufficient amount of additional assets to ensure continued compliance with the
existing AT&T pension funding policy. Any trust assets in excess of the funding
policy level will be divided equally between the trusts of AT&T and the Company
with respect to such qualified plans. Liability under the AT&T plans relating to
the Company's employees or retirees will be assumed by the Company's plans.
FEDERAL, STATE AND LOCAL TAX ALLOCATION AGREEMENTS
The Company has entered into agreements with AT&T and its other domestic
subsidiaries that apply to income taxes attributable to the period from the
Company's incorporation through the Distribution. The
F-25
<PAGE> 128
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBSEQUENT EVENTS -- (CONTINUED)
agreements set forth principles to be applied in allocating tax liability among
those entities filing returns on a consolidated or combined basis.
TAX SHARING AGREEMENT
The Company has entered into an agreement with AT&T and NCR that governs
contingent tax liabilities and benefits, tax contests and other tax matters with
respect to tax periods ending or deemed to end on the date of the Distribution.
Under such agreement, adjustments to taxes that are clearly attributable to the
business of one party will be borne solely by that party. Adjustments to all
other tax liabilities generally will be borne 75% by AT&T, 22% by the Company
and 3% by NCR.
GENERAL PURCHASE AGREEMENT
The Company and AT&T have entered into the General Purchase Agreement and
various related and supplemental agreements which govern transactions pursuant
to which the Company provides products, licensed materials and services to AT&T
and certain designated AT&T affiliates. AT&T commits therein that payments made
to the Company (commencing January 1, 1996) for purchases of products, licensed
materials and services by AT&T and such designated affiliates will total at
least $3,000 cumulatively for the calendar years 1996, 1997 and 1998. If that
commitment is not fulfilled by December 31, 1998, interest is payable on the
shortfall until the $3,000 purchase commitment is met. Such interest is the sole
remedy for any shortfall.
INTERIM SERVICES AND SYSTEMS REPLICATION AGREEMENT; REAL ESTATE
SHARING
The Company, AT&T and NCR have entered into an agreement governing the
provision by each to one or more of the others on an interim basis of certain
data processing and telecommunications services and certain corporate support
services on specified terms. Specified charges are generally intended to allow
the providing company to recover the fully allocated direct costs of providing
the services, plus all out-of-pocket costs and expenses, but without any profit.
Such agreement also provides for the replication and transfer of certain
computer systems on specified terms. With limited exceptions, these interim
services are not expected to extend beyond January 1, 1998 and many are expected
to terminate at or prior to the Distribution. AT&T, the Company and NCR also
have entered into various leases and sublease arrangements for the sharing of
certain facilities for a transitional period on commercial terms. In the case of
owned real estate to be leased, the lease terms will be either two or three
years, except that a limited number of leases may be terminated on 90 days'
notice by the tenant. In the case of subleases or sub-subleases of property, the
lease term will generally coincide with the remaining term of the primary lease
or sublease, respectively.
BRAND LICENSE AGREEMENT
The Company and AT&T have entered into the Brand License Agreement,
pursuant to which the Company will have rights, on a royalty-free basis, to
continue to use the AT&T brand for specified transition periods following the
closing of the Offerings. Under the Brand License Agreement, the Company will be
entitled to use the AT&T brand, alone or in combination with the Company's
brand, for the sale of consumer products and services and business
communications systems and services for a period of one year following the
closing of the Offerings. After the initial one-year period, the Company will be
entitled to continue to use the AT&T brand on these products, systems and
services, but only in combination with the Company's brand, for an additional
three-year period. The right to use the AT&T brand, alone or in combination with
the Company's brand, in connection with certain leased products or maintenance
contracts will extend for 66 months after the closing of the Offerings. The
Brand License Agreement permits the Company to use the AT&T brand on the
Company's other products, systems and services until the earlier of the
Distribution or six
F-26
<PAGE> 129
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBSEQUENT EVENTS -- (CONTINUED)
months after the closing of the Offerings. In addition, the Company may use the
AT&T brand after these time periods to the extent necessary to deplete
pre-existing inventory.
FINANCING
The Company entered into a Competitive Advance and Revolving Credit
Facility Agreement, dated as of February 1, 1996, with Chemical Bank, as agent
(the "Initial Working Capital Facility"), pursuant to which the Company may
borrow up to $1,000 subject to the terms and conditions thereof. In addition,
AT&T intends to issue up to approximately $4,000 of short-term debt under a
commercial paper facility ("Commercial Paper Program"), which will be assumed by
the Company in respect of the debt sharing amount under the Debt Sharing
Agreement.
ACQUISITIONS OF CERTAIN PHILIPS OPERATIONS
On February 7, 1996, the Company will acquire several operations of Philips
Electronics, N.V. for approximately $260. This acquisition augments the
Company's global position in the development, manufacturing and marketing of
Synchronous Digital Hierarchy, Global System Mobile and Fixed Wireless Systems.
This acquisition is not expected to have a material impact on the Company's
results of operations.
LONG TERM INCENTIVE PLAN
The Company intends to adopt the 1996 Long Term Incentive Plan, under which
stock options, stock appreciation rights ("SARs") and other awards would be
granted. Details of the Plan are described elsewhere in this prospectus. No
grants under this Plan have been made at December 31, 1995.
Under AT&T's Long Term Incentive Program, certain employees of the Company
are eligible for the grant of stock options, SARs, either in tandem with stock
options or free standing, and other awards. Pending AT&T's distribution of all
of its interest in the Company, AT&T stock awards held by Company employees will
remain outstanding as AT&T stock awards. If any such AT&T stock options are
exercised or any such AT&T stock awards vest or are delivered, the Company will
reimburse AT&T for the difference between the exercise price and AT&T's common
stock market price on the date of exercise, in the case of stock options, and
for the market value of AT&T common stock on the date of vesting or delivery, in
the case of stock awards.
Immediately following the Distribution, outstanding awards under the AT&T
Long Term Incentive Program held by Company employees will be replaced by
substitute awards under the Company's 1996 Stock Plan. The substitute awards
will have the same ratio of the exercise price per option to the market value
per share, the same aggregate difference between market value and exercise price
and the same vesting provisions, option periods and other terms and conditions
as the AT&T options and SARs they replace. The formula for determining the total
number of substitute awards to be issued to Company employees depends on an
average of the respective market values of AT&T's and the Company's common stock
during the five trading days immediately preceding the ex-dividend date for the
Distribution. The formula is a fraction, with the average market value of AT&T's
common stock as the numerator and with the average market value of the Company's
common stock as the denominator, multiplied by the number of AT&T stock options,
SARs and other stock awards held by Company employees at the Distribution date.
Accordingly, the Company cannot currently determine the number of shares of its
common stock that will be subject to substitute awards after the Distribution.
At December 31, 1995, there were approximately 7.8 million shares of AT&T
Common Stock subject to options and other stock awards for AT&T Common Stock
held by Company employees. Approximately 4.7 million of such options and awards
were exercisable at December 31, 1995. Using AT&T's closing price at December
31, 1995 ($64.75) and the initial public offering price of $27.00 per share of
the Company's
F-27
<PAGE> 130
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBSEQUENT EVENTS -- (CONTINUED)
Common Stock, the foregoing number of shares subject to AT&T stock options and
other awards would be replaced by options and other awards on 18.7 million
shares of the Company's common stock.
15. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH(1) TOTAL
------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
1995
Total revenues.............................. $4,159 $ 5,083 $4,744 $7,427 $21,413
Gross margin................................ 1,850 2,251 2,042 2,325 8,468
Net income (loss)........................... (22) 159 13 (1,017) (867)
1994
Total revenues.............................. $4,052 $ 4,665 $4,776 $6,272 $19,765
Gross margin................................ 1,740 2,028 2,006 2,654 8,428
Net income (loss)........................... (43) 78 44 403 482
</TABLE>
- ---------------
(1) 1995 includes pre-tax charges of $2,801 ($1,847 after taxes), to cover
restructuring costs of $2,613 and asset impairment and other charges of
$188. (See Note 5.)
F-28
<PAGE> 131
PROSPECTUS
112,037,037 Shares
LUCENT TECHNOLOGIES
COMMON STOCK
------------------------
[LUCENT TECHNOLOGIES LOGO]
OF THE 112,037,037 SHARES OF COMMON STOCK BEING OFFERED, 14,000,000 SHARES
ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS AND 98,037,037 SHARES ARE BEING OFFERED INITIALLY
IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. ALL OF THE SHARES
OF COMMON STOCK ARE BEING OFFERED BY LUCENT TECHNOLOGIES INC., WHICH IS
CURRENTLY A WHOLLY OWNED SUBSIDIARY OF AT&T CORP. EACH SHARE WILL HAVE
ATTACHED ONE PREFERRED SHARE PURCHASE RIGHT WHICH WILL INITIALLY TRADE
TOGETHER WITH THE SHARE. PRIOR TO THE OFFERINGS, THERE HAS BEEN NO PUBLIC
MARKET FOR THE COMMON STOCK. SEE "UNDERWRITING" FOR A DISCUSSION OF THE
FACTORS CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
AFTER THE OFFERINGS, AT&T WILL OWN APPROXIMATELY 82.4% OF THE COMMON STOCK.
AT&T HAS ANNOUNCED ITS INTENTION, SUBJECT TO SATISFACTION OF CERTAIN
CONDITIONS, TO DIVEST ITS OWNERSHIP INTEREST IN THE COMPANY BY DECEMBER 31,
1996 BY MEANS OF A TAX-FREE DISTRIBUTION TO ITS SHAREHOLDERS.
SEE "ARRANGEMENTS BETWEEN THE COMPANY AND AT&T."
------------------------
THE COMMON STOCK HAS BEEN APPROVED FOR LISTING, SUBJECT TO OFFICIAL NOTICE OF
ISSUANCE, ON THE NEW YORK STOCK EXCHANGE
UNDER THE SYMBOL "LU."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR INFORMATION CONCERNING CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
PRICE $27 A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) THE COMPANY(2)
---------------- ---------------- ----------------
<S> <C> <C> <C>
Per Share..................... $27.00 $1.05 $25.95
Total......................... $3,024,999,999 $117,638,889 $2,907,361,110
</TABLE>
- ------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Company estimated at
$12,000,000.
------------------------
The shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the shares will be made on or about April 10, 1996 at the office of
Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in
immediately available funds.
------------------------
Joint Global Coordinators
MORGAN STANLEY & CO. GOLDMAN, SACHS & CO.
Incorporated
------------------------
MORGAN STANLEY & CO. GOLDMAN SACHS INTERNATIONAL
International
MERRILL LYNCH INTERNATIONAL LIMITED
DEUTSCHE MORGAN GRENFELL
PARIBAS CAPITAL MARKETS
SBC WARBURG
A Division of Swiss Bank
Corporation
UBS LIMITED
BEAR, STEARNS INTERNATIONAL LIMITED
CS FIRST BOSTON
J.P. MORGAN SECURITIES LTD.
PAINEWEBBER INTERNATIONAL
April 3, 1996
<PAGE> 132
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
UNTIL APRIL 29, 1996 (25 DAYS AFTER COMMENCEMENT OF THE OFFERINGS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------
For investors outside the United States: No action has been or will be
taken in any jurisdiction by the Company or by any Underwriter that would permit
a public offering of the Common Stock or possession or distribution of this
Prospectus in any jurisdiction where action for that purpose is required, other
than in the United States. Persons into whose possession this Prospectus comes
are required by the Company and the Underwriters to inform themselves about and
to observe any restrictions as to the offering of the Common Stock and the
distribution of this Prospectus.
In this Prospectus references to "dollars" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 9
The Company........................... 16
Use of Proceeds....................... 18
Dividend Policy....................... 18
Certain Transactions in Connection
with the Offerings.................. 19
Capitalization........................ 21
Selected Financial Data............... 22
Pro Forma Condensed Financial
Statements.......................... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 38
<CAPTION>
PAGE
-----
<S> <C>
Management............................ 54
Arrangements Between the Company and
AT&T................................ 73
Principal Stockholder................. 88
Description of Capital Stock.......... 89
Shares Eligible for Future Sale....... 95
Certain United States Tax Consequences
to Non-United States Holders........ 97
Underwriting.......................... 99
Legal Matters......................... 103
Experts............................... 103
Available Information................. 103
Index to Financial Statements......... F-1
</TABLE>
------------------------
IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVERALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME. DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH
PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR
OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO
EXEMPTIONS FROM RULE 10B-6, 10B-7 AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF
1934.
------------------------
This Prospectus contains trademarks, service marks or registered marks of
the Company, AT&T Corp. ("AT&T"), their respective subsidiaries, and other
companies, as indicated.
------------------------
2
<PAGE> 133
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information set forth elsewhere in this
Prospectus. As used herein, references to the "Company" include the historical
operating results and activities of, and assets and liabilities assigned to, the
businesses and operations which comprise the Company as of the date hereof.
------------------------
THE COMPANY
Lucent Technologies Inc. (the "Company") is one of the world's leading
designers, developers and manufacturers of telecommunications systems, software
and products. The Company is a global market leader in the sale of public
telecommunications systems, and is a supplier of systems or software to 23 of
the world's 25 largest network operators. The Company is also a global market
leader in the sale of business communications systems and in the sale of
microelectronic components for communications applications to manufacturers of
communications systems and computers. Further, the Company is the largest
supplier in the United States of telecommunications products for consumers. In
addition, the Company has provided engineering, installation, maintenance or
operations support services to over 250 network operators in 75 countries, over
1.4 million business locations in the United States, and approximately 100,000
business locations in over 90 other countries. The Company's research and
development activities are conducted through Bell Laboratories ("Bell Labs"),
which consists of approximately three-quarters of the total resources of AT&T's
former Bell Laboratories division, one of the world's foremost industrial
research and development organizations.
The Company's revenues of $21,413 million for the year ended December 31,
1995, were generated from the sale of systems for network operators (54% of
total revenues), business communications systems (24%), microelectronic products
(9%), consumer products (8%), and other systems and products, including
integrated systems for the United States government (5%). In 1995, approximately
77% of the Company's revenue was generated from sales in the United States and
approximately 23% internationally (including exports). For the year ended
December 31, 1995, the Company recorded a net loss of $867 million, including
restructuring and other charges of $2,801 million before taxes (or $1,847
million after taxes.)
Systems for Network Operators. The Company's systems and software enable
network operators to provide wireline and wireless local, long distance and
international voice, data and video communications services. The Company's
switching, transmission and cable systems are packaged and customized with
application software, operations support systems and associated professional
services, and range in size from small rural telephone systems to some of the
world's largest wireline and wireless networks. The Company's network operator
customers include local, long distance and international telecommunications
companies and cable television companies. The Company has a wireline local
access installed base (the number of access lines serviced by switches
manufactured by the Company) of approximately 110 million lines, representing
approximately 58% of the United States and 13% of the worldwide installed base.
The Company's wireless systems are in operation in nine of the top ten United
States Metropolitan Statistical Areas ("MSAs").
Business Communications Systems. The Company's business systems are
primarily customer premises-based telecommunications systems which are used in
networks that enable businesses to communicate within and between locations. The
Company has the largest installed base in the United States of private branch
exchanges ("PBXs"), key systems, structured cabling systems and voice processing
systems. In addition, the Company's direct sales, installation and maintenance
force works with business customers to integrate the Company's hardware and
software into customized applications such as call centers, which support such
customer services as banking by telephone and airline reservations.
Microelectronics. The Company's microelectronic components include
high-performance integrated circuits ("ICs"), electronic power systems and
optoelectronic components for communications applications. These microelectronic
products are important components of many of the Company's own systems and
products. The Company also supplies these components to other manufacturers of
communications systems and computers. The Company is a market leader in several
IC product areas critical to communications
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applications, including digital signal processors ("DSPs") for digital cellular
telephones and standard-cell application specific integrated circuits ("ASICs").
The Company's DSPs were included in more than half of the world's digital
cellular telephones shipped in the year ended December 31, 1995.
Consumer Products. The Company offers a wide range of corded, cordless and
cellular telephones, telephone answering systems and related accessories in the
United States for consumers and small businesses. In 1995, the Company sold 31%
of the corded telephones, 28% of the cordless telephones and 35% of the
telephone answering systems sold in the United States, approximately double the
market share of any single competitor in each of these categories.
INDUSTRY OVERVIEW
The global telecommunications networking industry includes systems,
software and products used for voice, data and video communications. This
industry has undergone significant transformation and growth since the
mid-1980's as a result of changes in domestic and international public policy,
technological innovations and economic factors. The Company believes that these
forces will intensify, and that the number of customers and the complexity of
the networks they demand will increase. In addition, the Company believes that
these networks will increasingly become multifunctional in nature, supporting
simultaneous wireline or wireless access to any combination of voice, data and
video communications services, thus reducing the operating costs associated with
separate networks. The Company further believes that the traditionally distinct
technology platforms supporting voice and data will converge, as will those
platforms for the traditionally separate wireline and wireless networks. In the
Company's view, significant industry growth areas will include wireless access,
multifunctional systems and networking software. The Company further believes
that the principal building blocks of the industry are and will continue to be
software, microelectronics and product innovation in advanced digital switching
and transmission platforms, supported by a competency in and a knowledge of
telecommunications networking.
STRATEGY
The Company believes that the global public policy, technological and
economic forces transforming the telecommunications industry are creating
opportunities for the Company to capitalize on its competency in and knowledge
of networking, software and microelectronics. The Company intends to utilize the
research and development capabilities of Bell Labs, its broad and well
established product lines and its strong global customer relationships with
leading network operators and major businesses to remain a leader in
telecommunications networking and to capitalize on the growing convergence of
voice and data and of wireline and wireless networks. Further, the Company is
increasing its focus on customers in the United States and internationally who
consider AT&T as a competitor or potential competitor and therefore have been
reluctant to rely on AT&T as a strategic supplier. The Company believes that
growth opportunities will be available in both developed and developing
countries, and that a significant portion of its growth will derive from the
sale of telecommunications networking systems outside the United States. The
Company intends to focus its efforts globally on wireless networks,
multifunctional systems and networking software.
Wireless Networks. The Company's strategy is to provide network operators
and businesses with complete, flexible wireless networks which will complement
or, in the case of systems for network operators, compete over time with
wireline networks. The Company's sales of wireless infrastructure systems have
grown as a percent of total revenues from 6.1% in 1993 to 10.3% in 1995. The
Company's wireless infrastructure systems for mobile and fixed access are
designed to support leading air interface standards around the world. The
Company believes that its recent advances and innovations in microelectronics
and software will produce further enhancements to its wireless communications
systems.
Multifunctional Systems. The Company's strategy is to provide network
operators and businesses with flexible integrated multifunctional systems that
will enable them to enhance their networks to support simultaneously wireline or
wireless access to any combination of voice, data and video communications. The
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Company intends to continue to utilize its expertise in digital switching,
digital transmission, optical technologies and telecommunications networking
software to provide these systems.
Networking Software. The Company's strategy is to use its software
expertise to enable network operators and businesses to continue to offer their
customers new and differentiating services. Further, the Company intends to
continue to offer telecommunications networking software that simplifies the
operation of networks and automates labor intensive network management and
provisioning tasks to reduce operating expenses and improve network efficiency.
The Company is pursuing these objectives through its research and development
activities at Bell Labs, where, in 1995, approximately two-thirds of the
technical staff were engaged in software-related activities.
The Company intends to pursue the above strategies globally through a
strong management emphasis on the rapid commercialization of customer-focused
technological innovations. The Company believes that, as an independent entity,
it will have a greater ability to pursue these strategies by defining its own
priorities and maintaining a focus on its customers. In response to its
establishment as a stand-alone entity, the Company has undertaken a
comprehensive review of all of its operations, including its organizational
structure, products and markets, with a view toward maximizing its return on
investments. In connection with this review, the Company adopted a strategic
reorganization plan and recorded pre-tax restructuring charges of $2,613
million, and other charges for asset impairments and other items of $188
million, in the fourth quarter of 1995. See "The Company -- Strategic
Reorganization" and "Business -- Strategy."
SEPARATION FROM AT&T
The Company is currently a wholly owned subsidiary of AT&T. On September
20, 1995, AT&T announced its intention to create a separate company composed of
the AT&T businesses and operations that now comprise the Company, and the
associated assets and liabilities of such businesses and operations (the
"Separation"). AT&T also announced its intention to distribute to its
shareholders by December 31, 1996, subject to certain conditions, all of its
interest in the Company following the Offerings (the "Distribution"). See "The
Company -- Conditions to the Distribution." After the completion of the
Offerings and prior to the Distribution, AT&T will own approximately 82.4% of
the outstanding shares of common stock, par value $.01 per share (the "Common
Stock"), of the Company. The Company, AT&T and, in certain cases, NCR
Corporation ("NCR"), a wholly owned subsidiary of AT&T, have entered into or
will, on or prior to the consummation of the Offerings (the "Closing Date"),
enter into certain agreements providing for the Separation and governing various
interim and ongoing relationships between and among the three companies,
including an agreement between the Company and AT&T providing for the purchase
of products, licensed materials and services from the Company. See "Arrangements
Between the Company and AT&T."
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THE OFFERINGS
<TABLE>
<S> <C>
Common Stock Offered
U.S. Offering......................... 98,037,037 shares
International Offering................ 14,000,000 shares
Total Offerings.................... 112,037,037 shares
Common Stock to be outstanding
immediately after the Offerings....... 636,661,931 shares(1)
Common Stock to be held by AT&T
immediately after the Offerings....... 524,624,894 shares
Use of Proceeds......................... The net proceeds to the Company from the Offerings
are estimated to be approximately $2,895 million
after deducting underwriting discounts and
commissions and estimated offering expenses. Such
net proceeds will be used to repay approximately
$2,000 million of indebtedness expected to be
outstanding under the Working Capital Facility (as
defined herein) and the remainder will be used for
general corporate purposes. See "Use of Proceeds."
Dividend Policy......................... It is anticipated that, subject to the Company's
financial results and declaration by the Company's
Board of Directors (the "Company Board"), the
Company initially will pay a quarterly dividend of
$.075 per share of Common Stock, beginning with a
dividend payable in the third quarter of 1996 in
respect of the operations of the Company in the
second quarter of 1996. If the Company does not
have sufficient earnings and profits for federal
income tax purposes prior to the Distribution,
dividends paid on the Common Stock prior to the
Distribution would be treated for federal income
tax purposes as non-taxable return of capital to
the extent of the holder's basis in the Common
Stock and as a capital gain to the extent of any
excess over such basis. See "Dividend Policy."
NYSE Symbol............................. LU
Rights.................................. One Right (as defined herein) will be attached to
each share of Common Stock sold in the Offerings.
See "Description of Capital Stock -- Antitakeover
Effects of Certain Provisions of the Certificate
and By-Laws."
</TABLE>
- ---------------
(1) Does not include shares of Common Stock that will be issuable upon exercise
of employee stock options, (not all of which will be immediately
exercisable) and other Common Stock-based employee benefit awards that will
be issued at the time of the Distribution under the Company's 1996 Long Term
Incentive Plan (the "1996 LTIP") in substitution for AT&T Stock Awards (as
defined herein). See "Management -- Executive Compensation" and
"Arrangements Between the Company and AT&T -- Employee Benefits Agreement."
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SUMMARY FINANCIAL DATA
The following table presents summary selected historical financial data of
the Company. The information set forth below should be read in conjunction with
"Pro Forma Condensed Financial Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
financial statements and notes thereto included elsewhere in this Prospectus.
The consolidated statement of operations data set forth below for each of the
three years ended December 31, 1995 and the consolidated balance sheet data at
December 31, 1995 and 1994 are derived from, and are qualified by reference to,
the audited consolidated financial statements included elsewhere in this
Prospectus, and should be read in conjunction with those financial statements
and the notes thereto. The consolidated balance sheet data at December 31, 1993
are derived from the audited consolidated balance sheet of the Company at
December 31, 1993, which is not included in this Prospectus. The consolidated
statement of operations data for each of the two years ended December 31, 1992
and the consolidated balance sheet data at December 31, 1992 and 1991 are
derived from unaudited consolidated financial statements not included in this
Prospectus.
The historical financial information may not be indicative of the Company's
future performance and does not necessarily reflect what the financial position
and results of operations of the Company would have been had the Company
operated as a separate, stand-alone entity during the periods covered. Per share
data for net income and dividends have not been presented because the Company's
business was operated through divisions of AT&T for the periods presented. See
"Risk Factors -- Limited Relevance of Historical Financial Information."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues.................................. $ 21,413 $ 19,765 $ 17,734 $ 17,312 $ 16,312
Costs(1).................................. 12,945 11,337 10,088 10,383 9,385
Gross margin........................... 8,468 8,428 7,646 6,929 6,927
Operating expenses
Selling, general and administrative
expenses(1)(2)....................... 7,083 5,360 5,016 4,814 6,241
Research and development expenses(1)... 2,385 2,097 1,961 1,711 1,996
Operating income (loss)................... (1,000) 971 669 404 (1,310)
Income (loss) before income taxes and
cumulative effects of accounting
changes................................ (1,138) 784 619 278 (1,522)
Income (loss) before cumulative effects of
accounting changes..................... (867) 482 430 179 (971)
Cumulative effects of accounting
changes................................ -- -- (4,208) -- --
Net income (loss)(1)...................... (867) 482 (3,778) 179 (971)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets.............................. $ 19,722 $ 17,340 $ 17,109 $ 14,466 $ 14,840
Total debt................................ 4,014 3,164 3,195 3,942 4,871
Stockholder's equity...................... 1,434 2,476 2,580 3,098 3,827
</TABLE>
- ---------------
(1) 1995 includes pre-tax restructuring and other charges of $2,801 ($1,847
after taxes) recorded as $892 of costs, $1,645 of selling, general and
administrative expenses and $264 of research and development expenses. (See
Note 5 of Notes to Consolidated Financial Statements.)
(2) 1991 includes pre-tax restructuring and other charges of $1,006 ($612 after
taxes).
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SUMMARY PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma condensed financial statement data for
the Company as of and for the year ended December 31, 1995 give effect to (i)
the Offerings at the initial public offering price set forth on the cover page
of this Prospectus, (ii) the retention by AT&T of accounts receivable having a
face amount estimated for pro forma purposes at approximately $2,000 million,
(iii) borrowings by the Company under the Working Capital Facility estimated for
pro forma purposes at $2,000 million and the repayment of the entire $2,000
million thereof with proceeds from the Offerings, and (iv) the prepayment by
AT&T of $500 million to be applied to accounts receivable from AT&T that are due
and payable on or after January 1, 1997 for the purchase of products, licensed
materials and services from the Company (such retention of accounts receivable,
borrowings and repayment under the Working Capital Facility and prepayment are
referred to herein as the "Related Transactions"). See "Certain Transactions in
Connection with the Offerings" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview." The unaudited pro
forma adjustments were prepared assuming that the Offerings and the Related
Transactions had occurred on December 31, 1995 for balance sheet data and
January 1, 1995 for statement of operations data.
The unaudited pro forma financial data presented below do not purport to
represent what the financial position actually would have been had the Offerings
and the Related Transactions occurred on the date referred to above or to
project the Company's financial position for any future date. The unaudited pro
forma data and adjustments should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical financial statements of the Company and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
--------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
BALANCE SHEET DATA
Total assets................................................ $ 19,722 $ 1,395 $21,117
Working capital............................................. (384) 895 511
Total debt.................................................. 4,014 4,014
Stockholders' equity........................................ 1,434 895 2,329
STATEMENT OF OPERATIONS DATA
Revenues.................................................... $ 21,413 $ -- $21,413
Net loss.................................................... (867) (867)
Pro forma net loss per share................................ (1.65) (1.36)
</TABLE>
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RISK FACTORS
Purchasers of shares of Common Stock should carefully consider and evaluate
all of the information set forth in this Prospectus, including the risk factors
listed below. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and "Arrangements Between the Company and
AT&T" for a description of other factors generally affecting the Company's
business.
RISK OF NONCOMPLETION OF THE DISTRIBUTION
AT&T has announced that, subject to certain conditions, AT&T intends to
distribute to its shareholders by December 31, 1996 all of the Common Stock
owned by AT&T following the Offerings. See "The Company -- Conditions to the
Distribution" and "Arrangements Between the Company and AT&T -- Separation and
Distribution Agreement." No assurance can be given that such conditions will be
satisfied or waived, or that the Distribution will occur. As described herein,
one of AT&T's principal reasons for deciding to effect the Distribution was to
eliminate what AT&T perceived as a growing adverse impact on the Company's
relationship with its customers and potential customers as a result of the
Company's affiliation with AT&T. Although AT&T expects to effect the
Distribution, it is likely that the failure of the Distribution to occur in the
time frame contemplated or at all would materially adversely affect the Company.
See "The Company -- Background of the Separation and Distribution."
CONTROL BY AT&T PENDING THE DISTRIBUTION; ONGOING RELATIONSHIP WITH AT&T
Prior to the Distribution, AT&T will control the Company and will continue
to be able to elect the entire Company Board and to determine the outcome of
corporate actions requiring stockholder approval. After the completion of the
Offerings and prior to the Distribution, AT&T will own approximately 82.4% of
the outstanding shares of Common Stock. See "Principal Stockholder."
The Company currently has, and after the Offerings and the Distribution
will continue to have, a variety of contractual relationships with AT&T and its
affiliates, including a multi-year purchase agreement, under which AT&T will
remain one of the Company's largest customers. There can be no assurance that
existing and potential customers will not be deterred by the existence of these
relationships or by the historical ties between the Company and AT&T. See
"Arrangements Between the Company and AT&T."
POSSIBILITY OF SUBSTANTIAL SALES OF COMMON STOCK
The planned Distribution would involve the distribution of an aggregate of
524,624,894 shares of Common Stock to the shareholders of AT&T by December 31,
1996. Substantially all of such shares would be eligible for immediate resale in
the public market. The Company is unable to predict whether substantial amounts
of Common Stock will be sold in the open market in anticipation of, or
following, the Distribution. Any sales of substantial amounts of Common Stock in
the public market, or the perception that such sales might occur, whether as a
result of the Distribution or otherwise, could materially adversely affect the
market price of the Common Stock. See "Shares Eligible for Future Sale."
COMPETITION
The Company currently faces significant competition in its markets and
expects that the level of price and product competition will increase. In
addition, as a result of both the trend toward global expansion by foreign and
domestic competitors and technological and public policy changes, the Company
anticipates that new and different competitors will enter its markets. These
competitors may include entrants from the telecommunications, software and data
networking industries. Existing competitors have, and new competitors may have,
strong financial capability, technological expertise and well-recognized brand
names. Depending on the continuing pace of global expansion by domestic and
foreign competitors, the nature of their product offerings and prices, and the
extent to which they benefit from foreign market subsidies, as well as the new
types of product offerings from companies in other industries and the timing and
circumstances of the entry of these competitors into the Company's markets, the
Company's future revenues and net income could be materially adversely affected.
See "Business."
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<PAGE> 140
In addition, the Regional Bell Operating Companies (the "RBOCs")
historically have been prohibited from manufacturing telecommunications
equipment by the terms of the Modification of Final Judgment (the "MFJ") entered
into in connection with the divestiture of the RBOCs by AT&T in 1984. The RBOCs
are major customers of the Company. The recently enacted Telecommunications Act
of 1996 (the "Telecommunications Act") contains provisions that permit the
RBOCs, subject to satisfying certain conditions designed to facilitate local
exchange competition, to manufacture telecommunications equipment. In light of
these provisions, it is possible that one or more RBOCs may decide to
manufacture telecommunications equipment, to design and provide
telecommunications software, or to form alliances with other manufacturers. Any
of these developments could result in increased competition for the Company and
reduce the RBOCs' purchases from the Company.
DEPENDENCE ON NEW PRODUCT DEVELOPMENT
The markets for the Company's principal products are characterized by
rapidly changing technology, evolving industry standards, frequent new product
introductions and evolving methods of building and operating telecommunications
systems for network operators and business customers. The Company's operating
results will depend to a significant extent on its ability to continue to
introduce new systems, software and services successfully on a timely basis and
to reduce costs of existing systems, software and services. The success of these
and other new offerings is dependent on several factors, including proper
identification of customer needs, cost, timely completion and introduction,
differentiation from offerings of the Company's competitors and market
acceptance. There can be no assurance that the Company will successfully
identify new product or service opportunities and develop and bring new systems,
software and services to market in a timely manner, or that products or
technologies developed by others will not render the Company's offerings
obsolete or noncompetitive. Any such development could have a material adverse
effect on the Company's future competitive position and results of operations.
In addition, new technological innovations generally require a substantial
investment before any assurance is available as to their commercial viability,
including, in some cases, certification by international and domestic
standards-setting bodies. See "Business." There can be no assurance that any of
the technologies in which the Company is focusing its research and development
investments will achieve broad acceptance in the marketplace, and the lack of
such market acceptance could have a material adverse effect on the Company's
future competitive position and results of operations.
In addition, there can be no assurance that the Company will be able to
attract and retain the highly skilled technical personnel necessary to enable
the Company to develop new products, systems and software successfully.
POTENTIAL ENVIRONMENTAL LIABILITIES
The Company's current and historical manufacturing and research operations
are subject to a wide range of environmental protection laws in the United
States and other countries. In the United States, these laws often require
parties to fund remedial action regardless of fault. The Company has remedial
and investigatory activities, including assessment and cleanup work, underway at
46 current and former manufacturing, laboratory and recycling facilities to
comply, or to determine compliance, with applicable environmental protection
laws. AT&T and its subsidiaries have been listed as potentially responsible
parties ("PRPs") at numerous "Superfund" sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or
comparable state statutes, either by a government agency (which may have either
sought information concerning AT&T's connection to the site, or may have sought
from AT&T participation in site cleanup work or contribution toward the cost of
site cleanup), or by a private party seeking contribution to site cleanup costs.
Under the terms of the Separation and Distribution Agreement (as defined
herein), the Company will assume or indemnify AT&T for all liabilities primarily
relating to, arising out of or resulting from (i) the operation of the Company
Business (as defined herein) as conducted at any time prior to, on or after the
Closing Date or (ii) any Company Assets (as defined herein), including, without
limitation, those associated with these sites. It is often difficult to estimate
the future impact of environmental matters, including potential liabilities. The
Company records an environmental reserve when it is probable that a liability
has been incurred and the amount of the liability is reasonably estimable. This
practice is followed
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<PAGE> 141
whether the claims are asserted or unasserted. Management expects that the
amounts reserved for will be paid out over the period of remediation for the
applicable site which ranges from 5 to 30 years. Reserves for estimated losses
from environmental remediation are, depending on the site, based primarily upon
internal or third party environmental studies, and estimates as to the number,
participation level and financial viability of any other PRPs, the extent of the
contamination and the nature of required remedial actions. Accruals are adjusted
as further information develops or circumstances change. The amounts provided
for in the Company's consolidated financial statements in respect of
environmental reserves are the gross undiscounted amount of such reserves,
without deductions for insurance or third party indemnity claims. In those cases
where insurance carriers or third party indemnitors have agreed to pay any
amounts and management believes that collectibility of such amounts is probable,
the amounts are reflected as receivables in the financial statements. Although
the Company believes that its reserves are adequate, there can be no assurance
that the amount of capital expenditures and other expenses which will be
required to complete remedial actions and to comply with applicable
environmental laws will not exceed the amounts reflected in the Company's
reserves or will not have a material adverse effect on the financial condition
of the Company or on the Company's results of operations or cash flows. Any
amounts of environmental costs that may be incurred in excess of those provided
for at December 31, 1995 cannot be determined.
RISK OF INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS
The Company relies on patent, trademark, trade secret and copyright laws
both to protect its proprietary technology and to protect the Company against
claims from others. The Company believes that it has direct intellectual
property rights or rights under cross-licensing arrangements covering
substantially all of its material technologies and has not received notice of
any claims against it which it believes are valid. Given the technological
complexity of the Company's systems and products, however, there can be no
assurance that claims of infringement will not be asserted against the Company
or against the Company's customers in connection with their use of the Company's
systems and products, nor can there be any assurance as to the outcome of any
such claims. The Company has been assigned ownership of the substantial majority
of the current AT&T patents. Pursuant to the patent license agreement entered
into among the Company, AT&T and NCR, the Company has been given rights, subject
to specified limitations, to pass through to its customers certain rights under
the approximately 400 patents retained by AT&T. There can be no assurance that
the Company's customers and potential customers will be satisfied with the
pass-through rights available to them under the patents retained by AT&T or with
any indemnification commitments the Company may be willing to provide in
connection therewith. See "Arrangements Between the Company and AT&T -- Patent
Licenses and Related Matters" and "-- Technology Licenses and Related Matters."
RELIANCE ON MAJOR CUSTOMERS
Historically, the Company has relied on a limited number of customers for a
substantial portion of its total revenues. In terms of total revenues, the
Company's largest customer has been AT&T, although other large customers may
purchase more of any particular system or product line. The contribution of AT&T
to the Company's total revenues and percentage of total revenues for the years
ended December 31, 1995, 1994 and 1993 was $2,119 million (9.9%), $2,137 million
(10.8%) and $1,967 million (11.1%), respectively. Except as set forth in the
General Purchase Agreement and the Supplemental Agreements (each as defined
herein) entered into between the Company and AT&T, following the Offerings AT&T
is not obligated to make any minimum level of future purchases from the Company
or to provide the Company with binding forecasts of product purchases for any
future period. Pursuant to the General Purchase Agreement, AT&T and its
designated affiliates have committed to purchase an aggregate of at least $3,000
million of products, licensed materials and services from the Company during the
three-year period ending December 31, 1998. If AT&T does not meet this purchase
commitment by December 31, 1998, AT&T will be required thereafter to pay
interest based on the shortfall until the $3,000 million purchase commitment is
met. See "Arrangements Between the Company and AT&T -- Purchase Agreements."
In addition, sales to approximately ten network operators (including AT&T),
some of which may vary from year to year, constituted approximately 38%, 41% and
42% of total revenues in the years ended
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<PAGE> 142
December 31, 1995, 1994 and 1993, respectively. The Company has diversified its
customer base in the past several years and expects this trend to continue.
Nevertheless, the Company expects that a significant portion of its future
revenues will continue to be generated by a limited number of customers. See
"Business." The loss of any of these customers or any substantial reduction in
orders by any of these customers could materially adversely affect the Company's
operating results. The United States government is, in the aggregate, also a
large customer of the Company. Given the current pressures on the government to
reduce its overall level of spending, there can be no assurance that government
purchases from the Company will not decrease in the future.
MULTI-YEAR CONTRACTS
The Company has several significant contracts for the sale of
infrastructure systems to network operators which extend over a multi-year
period. In certain cases, these contracts relate to new technologies which may
not have been deployed previously on a large scale commercial basis, and there
can be no assurance that these contracts can be completed on a timely basis, in
accordance with the customer's technical specifications or without significant
cost overruns. Certain of the Company's multi-year contracts also contain
demanding installation and maintenance requirements, in addition to other
performance criteria relating to timing, unit cost requirements and compliance
with government regulations, which, if not satisfied, could subject the Company
to substantial penalties, damages or non-payment, or could result in contract
termination. There can be no assurance of the Company's ability to satisfy these
requirements completely, without losses. In addition, specific terms of such
contracts may cause revenues under these agreements to fluctuate. The Company
expects that multi-year contracts it may enter into in the future may give rise
to similar uncertainties.
One of the Company's multi-year contracts is with Pacific Bell for the
provision of a broadband network based on hybrid fiber-coaxial cable technology.
Implementation difficulties and cost overruns have arisen under this contract,
which may result in claims being made by the parties under the contract. The
Company and Pacific Bell are conducting negotiations in an effort to resolve
outstanding issues and potential claims. The Company's historical financial
statements reflect a reserve relating to this contract. Based on the future
negotiations with Pacific Bell, the Company will continue to assess the adequacy
of this reserve.
SEASONALITY; ANTICIPATED LOSS FOR FIRST HALF OF 1996
The Company's business is highly seasonal, with revenue and net income
concentrated in the fourth quarter of the year. Consequently, during the three
quarters ending in March, June and September, the Company historically has not
been as profitable as in the quarter ending in December, and the Company
traditionally incurs losses in the first quarter. Such seasonality also causes
the Company's cash flow requirements to vary greatly from quarter to quarter.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Variability in the Company's Business."
In the first quarter of 1996, the Company expects to incur a net loss
before cumulative effects of accounting changes, net of taxes in the range of
$100 million to $140 million as compared to a net loss of $22 million in the
first quarter of 1995. For the second quarter of 1996, the Company expects that
it may earn substantially less than the $159 million earned in the second
quarter of 1995, resulting in a loss for the first half of 1996. There are
several factors influencing the significantly lower operating results
anticipated for the first half of 1996: (i) one-time expenses associated with
the Company's transition to operation as an independent publicly held company,
including replication and modification of information, payroll and financial
systems, and development of corporate identity programs; (ii) increased selling,
general and administrative expenses associated with plans that pre-date the
Company's restructuring decisions; (iii) the planned increase in expenditure by
the Company for research and development; and (iv) one-time costs associated
with the integration of the businesses purchased from Philips Electronics NV
("Philips") in February 1996. The impact on selling, general and administrative
expenses of the actions taken in connection with the Company's strategic
reorganization is not expected to be realized until the second quarter of 1996
and subsequent periods.
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ABSENCE OF HISTORY AS A STAND-ALONE COMPANY
The Company has never operated as a stand-alone company. After the
Offerings and prior to the Distribution, the Company will continue to be a
subsidiary of AT&T, but will operate as a stand-alone company, and AT&T will
have no obligation to provide assistance to the Company or any of its
subsidiaries except as described in "Arrangements Between the Company and AT&T."
In anticipation of being established as a stand-alone entity, the Company
has reviewed its business and operations and is implementing certain
organizational changes. See "The Company -- Strategic Reorganization." The
Company believes that these changes, when implemented, will have a positive
impact. However, there can be no assurance that this positive impact will be
realized or that these changes will not have an adverse impact on the Company's
future revenues and net income.
LIMITED RELEVANCE OF HISTORICAL FINANCIAL INFORMATION
The financial information included herein may not necessarily reflect the
results of operations, financial position and cash flows of the Company in the
future or what the results of operations, financial position and cash flows
would have been had the Company been a separate, stand-alone entity during the
periods presented. The financial information included herein does not reflect
many significant changes that will occur in the funding and operations of the
Company as a result of the Separation and the Offerings. In addition, the
consolidated financial statements of the Company include certain assets,
liabilities, revenues and expenses which were not historically recorded at the
level of, but are associated with, the businesses transferred to the Company.
See "Certain Transactions in Connection with the Offerings," "Pro Forma
Condensed Financial Statements," including the discussion of the assumptions
reflected therein, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
CHANGE OF COMPANY BRAND NAME
In connection with the Separation, the Company will, rapidly in the case of
some products and over specified periods of time in the case of other products,
change the trademarks and trade names under which it conducts its business. The
Company believes that its sale of business communications systems to small
businesses and sales of consumer products have benefitted from the use of the
"AT&T" brand name. The impact of the change in trademarks and trade names and
other changes (including, without limitation, restrictions on the use of the
"AT&T" brand name and related trade dress) on the Company's business and
operations cannot be fully predicted. See "Arrangements Between the Company and
AT&T -- Brand License and Related Matters."
FUTURE CAPITAL REQUIREMENTS; ABSENCE OF AT&T FUNDING
The Company's working capital requirements and cash flow provided by
operating activities can vary greatly from quarter to quarter, depending on the
volume of production, the timing of deliveries, the build-up of inventories, and
the payment terms offered to customers. In the past, the Company's working
capital needs have been satisfied pursuant to AT&T's corporate-wide cash
management policies. However, AT&T is no longer providing funds to finance the
Company's operations.
The Company believes that the proceeds of the Offerings, along with the
Working Capital Facility, cash flow from operations and long- and short-term
debt financings, will be sufficient to satisfy its future working capital,
capital expenditure, research and development and debt service requirements,
including debt service requirements on the Commercial Paper Program (as defined
herein). On February 26, 1996, the Company filed a shelf registration statement
on Form S-3 (Registration No. 333-01223) (as it may be amended, the "Shelf
Registration Statement") to register the offering from time to time of up to
$3,500 million of long-term debt. Although the Company believes that it will be
able to access the capital markets on terms and in amounts that will be
satisfactory to it, there can be no assurance that the Company will be
successful in this regard. The historical financial statements of the Company
reflect a blend of AT&T's short-term and long-term weighted average interest
rates. The Company expects that it will incur long-term debt as well as short-
term debt, and that it may not be able to obtain financing with interest rates
as favorable as those historically enjoyed by AT&T, with the result that its
cost of capital will be higher than that reflected in the Company's
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<PAGE> 144
historical financial statements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financial Condition, Liquidity
and Capital Resources."
Network operators, domestically and internationally, increasingly have
required their suppliers to arrange or provide long-term financing for them as a
condition to obtaining or bidding on infrastructure projects. These projects may
require financing in amounts ranging from modest sums to over a billion dollars.
In this regard, in February 1996, the Company entered into an agreement with
MajorCo L.P., an affiliate of Sprint Spectrum LP ("SSLP"), to supply and install
approximately 60% of SSLP's market areas over a five-year period. This agreement
is conditioned, among other things, upon the Company providing (or guaranteeing)
long-term financing to SSLP for its purchase of equipment and services from the
Company. The Company has entered into discussions with SSLP with respect to such
financing and has proposed providing (or guaranteeing) $1,000 million of
long-term financing for SSLP's purchases from the Company. These discussions are
ongoing. The ability of the Company to arrange or provide financing for network
operators generally, without AT&T's support, will depend on a number of factors,
including the Company's capital structure and level of available credit. There
can be no assurance that the Company will be able to continue to arrange or
provide such financing following the Offerings on terms and conditions, and in
amounts, that will be satisfactory to such network operators. Any such inability
of the Company to arrange or provide financing in accordance with its past
practices could have a material adverse effect on the Company's financial
condition and results of operations.
RISK OF INTERNATIONAL GROWTH AND FOREIGN EXCHANGE
The Company intends to continue to pursue growth opportunities in
international markets. In many international markets, long-standing
relationships between potential customers of the Company and their local
providers, and protective regulations, including local content requirements and
type approvals, create barriers to entry. In addition, pursuit of such
international growth opportunities may require significant investments for an
extended period before returns on such investments, if any, are realized. Such
projects and investments could be adversely affected by reversals or delays in
the opening of foreign markets to new competitors, exchange controls, currency
fluctuations, investment policies, repatriation of cash, nationalization, social
and political risks, taxation, and other factors, depending on the country in
which such opportunity arises. In addition, the laws and policies of the United
States affecting foreign trade, investment and taxation could also adversely
affect such projects and investments. There can be no assurance that the Company
will be able to overcome these barriers.
A significant change in the value of the dollar against the currency of one
or more countries where the Company recognizes substantial revenue or earnings
may materially adversely affect the Company's results. The Company attempts to
mitigate any such effects through the use of foreign currency contracts,
although there can be no assurances that such attempts will be successful.
CERTAIN ANTITAKEOVER EFFECTS
The Restated Certificate of Incorporation of the Company (the
"Certificate") and the By-Laws of the Company (the "By-Laws"), the Rights, and
applicable provisions of the Delaware General Corporation Law (the "DGCL"),
contain several provisions that may make more difficult the acquisition of
control of the Company without the approval of the Company Board. Certain
provisions of the Certificate and the By-Laws, among other things, (i) classify
the Company Board into three classes, each of which (after an initial transition
period) will serve for staggered three-year periods; (ii) provide that a
director of the Company may be removed by the stockholders only for cause; (iii)
provide that only the Company Board or the Chairman of the Board of the Company
may call special meetings of the stockholders; (iv) provide that the
stockholders may take action only at a meeting of the stockholders; (v) provide
that stockholders must comply with certain advance notice procedures in order to
nominate candidates for election to the Company Board or to place stockholders'
proposals on the agenda for consideration at meetings of the stockholders; and
(vi) provide that the stockholders may amend or repeal any of the foregoing
provisions of the Certificate or the By-Laws only by a vote of 80% of the stock
entitled to vote generally in the election of directors (the "Voting Stock").
The Rights would cause substantial dilution to a person or group that attempts
to acquire the Company on terms not approved in advance by the Company Board.
With certain exceptions, Section 203 of the DGCL
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<PAGE> 145
("Section 203") imposes certain restrictions on mergers and other business
combinations between the Company and any holder of 15% or more of the Common
Stock. Some of the provisions described above do not apply to, or otherwise
contain exceptions for, AT&T as long as AT&T beneficially owns a majority of the
Common Stock. See "Description of Capital Stock -- Antitakeover Effects of
Certain Provisions of the Certificate and By-Laws" and " -- Delaware Business
Combination Statute."
ABSENCE OF A PUBLIC MARKET FOR THE COMMON STOCK
Prior to the Offerings, there has been no public market for the Common
Stock. Although the Common Stock has been approved for listing, subject to
official notice of issuance, on The New York Stock Exchange, Inc. (the "NYSE"),
there can be no assurance that an active public market for the Common Stock will
develop or that the price at which the Common Stock will trade will not be lower
than the initial public offering price. The initial public offering price was
determined through negotiations between the Company and the Underwriters. See
"Underwriting."
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<PAGE> 146
THE COMPANY
The Company is one of the world's leading designers, developers and
manufacturers of telecommunications systems, software and products. The Company
is a global market leader in the sale of public telecommunications systems, and
is a supplier of systems or software to 23 of the world's 25 largest network
operators. The Company is also a global market leader in the sale of business
communications systems and in the sale of microelectronic components for
communications applications to manufacturers of communications systems and
computers. Further, the Company is the largest supplier in the United States of
telecommunications products for consumers. In addition, the Company has provided
engineering, installation, maintenance or operations support services to over
250 network operators in 75 countries, over 1.4 million business locations in
the United States and approximately 100,000 business locations in over 90 other
countries. The Company's research and development activities are conducted
through Bell Labs, which consists of approximately three-quarters of the total
resources of AT&T's former Bell Laboratories division, one of the world's
foremost industrial research and development organizations.
The Company's revenues of $21,413 million for the year ended December 31,
1995 were generated from the sale of systems for network operators (54% of total
revenues), business communications systems (24%), microelectronic products (9%),
consumer products (8%) and other systems and products, including integrated
systems for the United States government (5%). In 1995, approximately 77% of the
Company's revenue was generated from sales in the United States and
approximately 23% internationally (including exports). For the year ended
December 31, 1995, the Company recorded a net loss of $867 million, including
restructuring and other charges of $2,801 million before taxes (or $1,847
million after taxes).
The Company was incorporated in Delaware in November 1995. The Company has
its principal executive offices at 600 Mountain Avenue, Murray Hill, New Jersey
07974. Its telephone number at such offices is (908) 582-8500. The Company is
currently a wholly owned subsidiary of AT&T. Prior to February 1, 1996, AT&T
conducted the Company's businesses through various divisions and subsidiaries.
For the year ended December 31, 1995, the Company's revenues excluding sales to
AT&T were $19,294 million, which accounted for 24.2% of AT&T's total external
revenues.
BACKGROUND OF THE SEPARATION AND DISTRIBUTION
Historically, AT&T has viewed its strategy of vertical integration,
combining communications equipment, communications services and other
businesses, as a source of strength in addressing the challenges and
opportunities presented by the environment in which it has done business.
However, changes in customer needs and demands, public policy and technology are
creating a new industry structure in which, increasingly, the advantages of this
vertical integration strategy are outweighed by its costs and disadvantages. As
a result of the industry restructuring over the past decade, new actual and
potential competitors of AT&T have been created by the growth of companies
formerly affiliated with AT&T and by the expansion of other domestic and
international companies, both geographically and in terms of scope of services
provided. These changes have resulted in a situation in which many of the actual
and potential customers of the Company are or will be competitors of AT&T's
communications services business. As a result, the obstacles currently faced by
the Company in marketing its products to competitors and potential competitors
of AT&T's communications services business have become severe and are expected
to continue to intensify. For these reasons, AT&T has announced that, subject to
certain conditions, AT&T intends to distribute to its shareholders by December
31, 1996 all of the Common Stock owned by AT&T after the Offerings. See "Risk
Factors -- Risk of Noncompletion of the Distribution."
After the completion of the Offerings and prior to the Distribution, AT&T
will own approximately 82.4% of the outstanding shares of Common Stock. The
Company and AT&T have entered into certain agreements providing for the
Separation and the provision by AT&T of certain interim services to the Company.
See "Arrangements Between the Company and AT&T."
CONDITIONS TO THE DISTRIBUTION
The Distribution is subject to the satisfaction, or waiver by the Board of
Directors of AT&T (the "AT&T Board"), in its sole discretion, of the following
conditions: (i) a private letter ruling from the Internal Revenue
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<PAGE> 147
Service (the "IRS") shall have been obtained, and shall continue in effect, to
the effect that, among other things, the Distribution will qualify as a tax-free
distribution for federal income tax purposes under Section 355 of the Internal
Revenue Code of 1986, as amended (the "Code"), and the transfer to the Company
of assets and the assumption by the Company of liabilities in connection with
the Separation will not result in recognition of any gain or loss for federal
income tax purposes to AT&T, the Company or AT&T's or the Company's
shareholders, and such ruling shall be in form and substance satisfactory to
AT&T, in its sole discretion; (ii) any material Governmental Approvals and
Consents (as such terms are defined in the Separation and Distribution
Agreement) necessary to consummate the Distribution shall have been obtained and
shall be in full force and effect; (iii) no order, injunction or decree issued
by any court or agency of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the Distribution shall be in effect,
and no other event outside the control of AT&T shall have occurred or failed to
occur that prevents the consummation of the Distribution; and (iv) no other
events or developments shall have occurred subsequent to the Closing Date that,
in the judgment of the AT&T Board, would result in the Distribution having a
material adverse effect on AT&T or on the shareholders of AT&T. On March 21,
1996, the Company received a private letter ruling from the IRS to the effect
described in clause (i) above. The AT&T Board will have the sole discretion to
determine the date of consummation of the Distribution (the "Distribution Date")
at any time after the Closing Date and on or prior to December 31, 1996. AT&T
has agreed to consummate the Distribution no later than December 31, 1996,
subject to the satisfaction, or waiver by the AT&T Board, in its sole
discretion, of the conditions set forth above. In the event that any such
condition shall not have been satisfied or waived on or before December 31,
1996, AT&T has agreed to consummate the Distribution as promptly as practicable
following the satisfaction or waiver of all such conditions. AT&T may terminate
the obligation to consummate the Distribution if the Distribution has not
occurred by December 31, 1997. In addition, with the consent of the Company and
AT&T, the Separation and Distribution Agreement may be amended or terminated at
any time prior to the Distribution Date. See "Risk Factors -- Risk of
Noncompletion of the Distribution" and "Arrangements Between the Company and
AT&T -- Separation and Distribution Agreement."
STRATEGIC REORGANIZATION
The Company historically has operated as part of AT&T. The Separation will
establish the Company as a stand-alone entity with objectives separate from
those of AT&T. The Company intends to focus its resources and management
emphasis on the technologies and markets it views as critical to its long-term
success as a stand-alone entity. The Company therefore has undertaken a
comprehensive review of all of its operations, including its organizational
structure, products and markets, with a view toward maximizing its return on
investments. In connection with this review, the Company adopted a strategic
reorganization plan and recorded a pre-tax restructuring charge of $2,613
million in the fourth quarter of 1995. In addition, in the fourth quarter of
1995, the Company recorded a charge of $188 million for asset impairments and
other items.
As part of these efforts, and as announced January 2, 1996, the Company
will eliminate approximately 22,000 positions, of which approximately 11,000 are
management positions and 11,000 occupational positions. Approximately 1,000
additional management employees are employed by businesses that the Company has
announced plans to sell. As of December 31, 1995, approximately 4,100 management
employees have accepted a voluntary severance package, the majority of whom will
leave the Company in early 1996. The Company expects approximately 70% of all
separations to be completed by the end of 1996 and the majority of the remaining
separations to be completed during 1997. These reductions are the result of the
Company's decisions to form a single corporate structure that eliminated
duplicative management and streamlined administrative functions, and to
outsource certain corporate functions.
The Company's reorganization efforts also include a plan to close all of
the Company's 338 retail stores (the "Phone Center Stores"), most of which are
expected to be closed by May 1996. In addition, the Company plans to consolidate
certain international facilities and functions for international customers that
previously were performed in the United States. In conjunction with these work
force reduction and consolidation efforts, the Company intends to reduce its
leased space from approximately 19 million square feet to approximately 14
million square feet and to reduce its owned space from approximately 37 million
square feet to approximately 28 million square feet.
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<PAGE> 148
As part of the redefinition of its objectives, the Company intends to focus
its investments on its core technologies, primarily through expanded and
targeted research and development efforts. Consequently, the Company has decided
to sell and exit tangential product lines and markets, including the
manufacturing of certain data communications equipment, backplanes and printed
circuit boards. In 1995, revenues associated with operations that the Company
has exited or expects to exit in connection with these reorganization efforts
accounted for approximately 4.6% of the Company's total revenues. Where
appropriate, the Company will pursue core technologies through strategic
acquisitions, partnerships or joint ventures. For example, on February 7, 1996,
the Company completed the acquisition of several manufacturing and other
operations of certain subsidiaries of Philips, primarily in France and Germany
(the "Philips Businesses"), for approximately $260 million in cash, plus the
assumption of certain liabilities relating to those operations. The acquired
operations relate to synchronous digital hierarchy ("SDH") technology, global
systems for mobile communications ("GSM") technology, and Philips' fixed
wireless system technology, which is based on the DECT (digital enhanced
cordless telephone) standard. This acquisition is designed to permit the Company
to expand its global line of systems which support non-United States standards
for mobile and fixed wireless access and digital optical transport.
Finally, in addition to seeking to control expenses, the Company is
instituting processes designed to reduce the costs and time required to develop
and bring to market new systems, software and products. The Company intends to
create product realization centers at which it will locate Bell Labs developers
with product managers and manufacturing teams. The Company's development efforts
will be oriented toward scaleable and reusable software and microelectronic
technologies that it intends to incorporate into products addressing multiple
marketplaces.
USE OF PROCEEDS
The net proceeds to the Company from the Offerings are estimated to be
approximately $2,895 million after deducting underwriting discounts and
commissions and estimated offering expenses. Such proceeds will be used to repay
the approximately $2,000 million of indebtedness expected to be outstanding
under the Working Capital Facility at the Closing Date and the remainder will be
used for general corporate purposes. As of April 2, 1996, the Company had
borrowed $1,954 million under the Working Capital Facility, all of which was
used for general working capital purposes. Such borrowings bear interest at a
variable rate (approximately 5.55% per annum at April 2, 1996). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition, Liquidity and Capital Resources."
DIVIDEND POLICY
It is anticipated that, following the Offerings, the Company initially will
declare and pay cash dividends at the quarterly rate of $.075 per share of
Common Stock, beginning with a dividend payable in the third quarter of 1996 in
respect of the operations of the Company in the second quarter of 1996. The
declaration of dividends by the Company and the amount thereof will, however, be
in the discretion of the Company Board and will depend upon the Company's
results of operations, financial condition, cash requirements, future prospects
and other factors deemed relevant by the Company Board.
There is no assurance that the Company will have earnings and profits for
federal income tax purposes until the Distribution. To the extent the Company
does not have sufficient earnings and profits, dividends paid on the Common
Stock prior to the Distribution would be treated for federal income tax purposes
as a non-taxable return of capital to the extent of the holder's basis in the
Common Stock and as a capital gain to the extent of any excess over such basis.
Dividends paid to corporate holders that are treated as return of capital or
capital gains would not qualify for the intercorporate dividends-received
deduction. See "Risk Factors -- Risk of Noncompletion of the Distribution."
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<PAGE> 149
CERTAIN TRANSACTIONS IN CONNECTION WITH THE OFFERINGS
The Company is currently a wholly owned subsidiary of AT&T. Prior to
February 1, 1996, AT&T conducted the Company's businesses through various
divisions and subsidiaries. Beginning February 1, 1996, AT&T began effectuating
the Separation by transferring to the Company the assets and liabilities related
to such businesses, except that AT&T is retaining accounts receivable having a
face amount estimated for pro forma purposes at approximately $2,000 million.
The Company believes that the Separation will be substantially completed,
including the transfer of substantially all of such assets and liabilities, by
the Closing Date. Certain international assets relating primarily to the
communications services business of AT&T or to the computer business of NCR
which are not material to the Company in the aggregate may be held by the
Company or its subsidiaries at the Closing Date pending receipt of consents or
approvals or satisfaction of other applicable foreign requirements necessary for
the transfer of such assets to AT&T or NCR. In addition, certain international
assets relating primarily to the business of the Company which are not material
to the Company in the aggregate may be held by AT&T or its subsidiaries at the
Closing Date pending receipt of consents or approvals or satisfaction of other
applicable foreign requirements necessary for the transfer of such assets to the
Company. The Company's financial statements assume the consummation of all such
transactions. In addition, employee benefits assets will be held by AT&T or
employee benefit trusts subject to agreements to transfer these assets to the
Company or trusts established by the Company following the Distribution. See
"Arrangements Between the Company and AT&T -- Separation and Distribution
Agreement" and "-- Employee Benefits Agreement."
The Separation and the transactions being undertaken in connection
therewith, including the Offerings and the Distribution, are being effected
pursuant to a Separation and Distribution Agreement, dated as of February 1,
1996, by and among the Company, AT&T and NCR (the "Separation and Distribution
Agreement"). AT&T has announced that, subject to certain conditions, AT&T
intends to distribute to its shareholders by December 31, 1996 all of the Common
Stock of the Company owned by AT&T following the Offerings. See "Arrangements
Between the Company and AT&T -- Separation and Distribution Agreement."
In addition, as contemplated by the Separation and Distribution Agreement,
the Company, AT&T and, in certain cases, NCR have entered into certain ancillary
agreements which govern various interim and ongoing relationships between and
among the three companies (the "Ancillary Agreements"). The Ancillary Agreements
include agreements with respect to employee benefit arrangements, intellectual
property arrangements, the provision of interim services, tax sharing and
various commercial arrangements, including the sale of equipment by the Company
to AT&T. Pursuant to the General Purchase Agreement, AT&T and its designated
affiliates have committed to purchase an aggregate of at least $3,000 million of
products, licensed materials and services from the Company during the three-year
period ending December 31, 1998. If AT&T does not meet this purchase commitment
by December 31, 1998, AT&T will be required thereafter to pay interest based on
the shortfall until the $3,000 million purchase commitment is met. AT&T has also
agreed to prepay $500 million to the Company, on or prior to the Closing Date,
to be applied to accounts receivable from AT&T that are due and payable on or
after January 1, 1997 for the purchase of products, licensed materials and
services from the Company. See "Arrangements Between the Company and AT&T."
As reflected in the audited consolidated balance sheets for the Company at
December 31, 1995 and 1994, the Company has had limited direct third-party
indebtedness and historically has relied on internally generated funds and funds
provided by AT&T to finance its operations. However, AT&T is no longer providing
funds to finance the Company's operations. The Company has entered into a
Competitive Advance and Revolving Credit Facility Agreement, dated as of March
4, 1996, with Chemical Bank, as Agent (the "Working Capital Facility"), pursuant
to which the Company may borrow up to $4,000 million, subject to the terms and
conditions thereof. For a summary of certain provisions of the Working Capital
Facility, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition, Liquidity and Capital Resources."
The Company plans to repay the approximately $2,000 million expected to be
outstanding under the Working Capital Facility at the Closing Date with the
proceeds of the Offerings.
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In addition, AT&T has commenced issuance of up to $4,000 million of
short-term debt under a commercial paper facility (the "Commercial Paper
Program") which will be assumed by the Company, subject to certain conditions,
at the Closing Date. The Commercial Paper Program will be comprised of short-
term borrowings in the commercial paper market at market interest rates. It is
contemplated that AT&T will retain as of the Closing Date the proceeds of all
borrowings under the Commercial Paper Program and that AT&T will be released
from all of its obligations thereunder, with the result that the Company will
become the obligor thereunder. The Commercial Paper Program will be supported by
a back-up credit facility with third-party financial institutions initially
entered into by AT&T but which will be assumed by the Company, subject to
certain conditions, at the Closing Date. Neither AT&T nor the Company expects to
make any borrowings under the back-up credit facility. The Company expects that,
over time, the Company may refinance all or part of the Commercial Paper Program
from the proceeds of short- or long-term borrowings. In this regard, the Company
has filed the Shelf Registration Statement to register the offering from time to
time of up to $3,500 million of long-term debt. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview" and
"-- Financial Condition, Liquidity and Capital Resources."
The assumption by the Company of the Commercial Paper Program and the
retention by AT&T of accounts receivable are part of the establishment of the
initial capitalization of the Company. The factors considered in determining the
amount of this capitalization include the Company's prospective financing
requirements, the Company's working capital expenditure requirements, the
Company's desired credit rating, the Company's pro forma debt to capital ratio,
and the Company's need to procure bid and performance bonds, to arrange or
provide customer financing, to engage in hedging transactions and to attain
required self-insurance levels. In reviewing these factors, the capitalizations
and credit ratings of comparable companies in the Company's industry were also
considered. The Commercial Paper Program was developed to permit the assumption
by the Company of part of AT&T's debt in light of the fact that AT&T's
preexisting debt was not assumable by the Company. The retention of accounts
receivable by AT&T was designed to permit AT&T to retain approximately $2,000
million of cash equivalents as part of balancing the capitalizations of the two
companies.
The Company believes that the proceeds of the Offerings, as well as the
Working Capital Facility, cash flow from operations and short- and long-term
debt financings, will be sufficient to satisfy its future working capital,
capital expenditure, research and development and debt service requirements,
including debt service requirements on the Commercial Paper Program. The Company
also believes that it will be able to procure bid and performance bonds, to
arrange or provide customer financing as necessary, and to engage in hedging
transactions, on commercially acceptable terms. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition, Liquidity and Capital Resources" and "Risk Factors -- Future Capital
Requirements; Absence of AT&T Funding."
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CAPITALIZATION
Set forth below is the historical capitalization of the Company at December
31, 1995 and on a pro forma basis to give effect to the Offerings at the initial
public offering price set forth on the cover page of this Prospectus and the
Related Transactions. The unaudited pro forma balance sheet set forth below
should be read in conjunction with the unaudited pro forma condensed financial
statements of the Company and the historical financial statements of the Company
appearing elsewhere in this Prospectus. For an explanation of the adjustments
made in order to derive the unaudited pro forma information below, see "Certain
Transactions in Connection with the Offerings" and "Pro Forma Condensed
Financial Statements."
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
---------------------------
PRO FORMA
HISTORICAL (UNAUDITED)
----------- ---------
(IN MILLIONS)
<S> <C> <C>
SHORT-TERM DEBT:
Debt maturing within one year................................... $ 49 $ 49
Debt sharing amount in anticipation of assumption of the
Commercial Paper Program..................................... 3,842 --
Commercial Paper Program........................................ -- 3,842
Working Capital Facility........................................ -- --
-------- ------- -
Total short-term debt................................... $ 3,891 $ 3,891
======== ========
LONG-TERM DEBT.................................................... $ 123 $ 123
STOCKHOLDERS' EQUITY:
Common stock.................................................... -- 6
Preferred stock (authorized but unissued)....................... -- --
Additional paid-in capital...................................... 1,406 2,295
Foreign currency translation.................................... 28 28
-------- ------- -
Total stockholders' equity.............................. 1,434 2,329
-------- ------- -
TOTAL CAPITALIZATION.............................................. $ 1,557 $ 2,452
======== ========
</TABLE>
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SELECTED FINANCIAL DATA
The following table presents selected historical financial data of the
Company. The information set forth below should be read in conjunction with "Pro
Forma Condensed Financial Statements," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical financial
statements and notes thereto included elsewhere in this Prospectus. The
consolidated statement of operations data set forth below for each of the three
years ended December 31, 1995 and the consolidated balance sheet data at
December 31, 1995 and 1994 are derived from, and are qualified by reference to,
the audited consolidated financial statements included elsewhere in this
Prospectus, and should be read in conjunction with those financial statements
and the notes thereto. The consolidated balance sheet data at December 31, 1993
are derived from the audited consolidated balance sheet of the Company at
December 31, 1993, which is not included in this Prospectus. The consolidated
statement of operations data for each of the two years ended December 31, 1992
and the consolidated balance sheet data at December 31, 1992 and 1991 are
derived from unaudited consolidated financial statements not included in this
Prospectus.
The historical financial information may not be indicative of the Company's
future performance and does not necessarily reflect what the financial position
and results of operations of the Company would have been had the Company
operated as a separate, stand-alone entity during the periods covered. Per share
data for net income and dividends have not been presented because the Company's
businesses were operated through various divisions and subsidiaries of AT&T for
the periods presented. See "Risk Factors -- Limited Relevance of Historical
Financial Information."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues................................ $ 21,413 $ 19,765 $ 17,734 $ 17,312 $ 16,312
Costs(1)................................ 12,945 11,337 10,088 10,383 9,385
Gross margin......................... 8,468 8,428 7,646 6,929 6,927
Operating expenses
Selling, general and administrative
expenses(1)(2)..................... 7,083 5,360 5,016 4,814 6,241
Research and development
expenses(1)........................ 2,385 2,097 1,961 1,711 1,996
Operating income (loss)................. (1,000) 971 669 404 (1,310)
Income (loss) before income taxes and
cumulative effects of accounting
changes.............................. (1,138) 784 619 278 (1,522)
Income (loss) before cumulative effects
of accounting changes................ (867) 482 430 179 (971)
Cumulative effects of accounting
changes.............................. -- -- (4,208) -- --
Net income (loss)(1).................... (867) 482 (3,778) 179 (971)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets............................ $ 19,722 $ 17,340 $ 17,109 $ 14,466 $ 14,840
Total debt.............................. 4,014 3,164 3,195 3,942 4,871
Stockholder's equity.................... 1,434 2,476 2,580 3,098 3,827
</TABLE>
- ---------------
(1) 1995 includes pre-tax restructuring and other charges of $2,801 ($1,847
after taxes) recorded as $892 of costs, $1,645 of selling, general and
administrative expenses and $264 of research and development expenses. (See
Note 5 of Notes to Consolidated Financial Statements).
(2) 1991 includes pre-tax restructuring and other charges of $1,006 ($612 after
taxes).
22
<PAGE> 153
PRO FORMA CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma condensed financial statements set forth below have
been prepared assuming that the Offerings and the Related Transactions occurred
on December 31, 1995 for pro forma condensed balance sheet purposes and January
1, 1995 for pro forma condensed statement of operations purposes. THE UNAUDITED
PRO FORMA BALANCE SHEET PRESENTED BELOW DOES NOT PURPORT TO REPRESENT WHAT THE
COMPANY'S FINANCIAL POSITION ACTUALLY WOULD HAVE BEEN HAD THE OFFERINGS AND THE
RELATED TRANSACTIONS OCCURRED ON THE DATE INDICATED OR TO PROJECT THE COMPANY'S
FINANCIAL POSITION FOR ANY FUTURE DATE. THE UNAUDITED PRO FORMA CONDENSED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995, SET FORTH BELOW,
DOES NOT PURPORT TO REPRESENT WHAT THE COMPANY'S OPERATIONS ACTUALLY WOULD HAVE
BEEN HAD THE OFFERINGS AND THE RELATED TRANSACTIONS OCCURRED ON THE DATE
INDICATED OR TO PROJECT THE COMPANY'S OPERATING RESULTS FOR ANY FUTURE PERIOD.
The unaudited pro forma adjustments are based upon available information and
certain assumptions that the Company believes are reasonable. The unaudited pro
forma balance sheet should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and the
historical financial statements of the Company and the notes thereto appearing
elsewhere in this Prospectus.
PRO FORMA CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
----------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.................................. $ 448 $ 3,395(2)(5) $ 3,843
Accounts receivable -- net................................. 5,354 (2,000)(3) 3,354
Inventories................................................ 3,222 3,222
Deferred income taxes -- net............................... 1,482 1,482
Other current assets....................................... 173 173
---------- ----------- ---------
Total current assets.................................. 10,679 1,395 12,074
Property, plant and equipment -- net....................... 4,338 4,338
Prepaid pension costs...................................... 2,522 2,522
Deferred income taxes -- net............................... 872 872
Capitalized software....................................... 387 387
Other assets............................................... 924 924
---------- ----------- ---------
Total assets.......................................... $ 19,722 $ 1,395 $21,117
======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................................... $ 1,229 $ 1,229
Payroll and benefit-related liabilities.................... 3,026 3,026
Postretirement and postemployment benefit liabilities...... 227 227
Debt sharing amount in anticipation of assumption of the
Commercial Paper Program................................. 3,842 $(3,842)(4) --
Commercial Paper Program................................... 3,842(4) 3,842
Working Capital Facility................................... --(1)(5) --
Debt maturing within one year.............................. 49 49
Other current liabilities.................................. 2,690 500(2) 3,190
---------- ----------- ---------
Total current liabilities................................ 11,063 500 11,563
Postretirement and postemployment benefit liabilities...... 5,569 5,569
Long-term debt............................................. 123 123
Other liabilities.......................................... 1,533 1,533
---------- ----------- ---------
Total liabilities........................................ 18,288 500 18,788
Stockholders' equity
Common Stock............................................. -- 6(1) 6
Preferred stock (authorized but unissued)................ -- -- --
Additional paid-in capital............................... 1,406 889(1)(3) 2,295
Foreign currency translation............................. 28 28
---------- ----------- ---------
Total stockholders' equity................................. 1,434 895 2,329
---------- ----------- ---------
Total liabilities and stockholders' equity....... $ 19,722 $ 1,395 $21,117
======= ========= ========
</TABLE>
- ---------------
(1) Reflects the sale of 112,037,037 shares in the Offerings at the initial
public offering price set forth on the cover page of this Prospectus. As set
forth under "Use of Proceeds," the Company plans to use the
23
<PAGE> 154
proceeds of the Offerings to repay the approximately $2,000 of indebtedness
expected to be outstanding under the Working Capital Facility as of the
Closing Date and the remainder for general corporate purposes. Also reflects
the stock split or other issuance resulting in the ownership by AT&T of
524,624,894 shares of Common Stock.
(2) Gives effect to the prepayment by AT&T of $500 to be applied to accounts
receivable from AT&T that are due and payable on or after January 1, 1997
for the purchase of products, licensed materials and services from the
Company.
(3) Reflects the retention by AT&T of customer accounts receivable having a face
amount estimated for pro forma purposes at approximately $2,000.
(4) As described in Note 7 of Notes to Consolidated Financial Statements,
amounts shown as outstanding under the Debt Sharing Agreement at December
31, 1995 will be replaced with Commercial Paper issued by AT&T and assumed
by the Company on the Closing Date.
(5) The Company has entered into a $4,000 Working Capital Facility to fund
working capital subsequent to February 1, 1996. The Company expects to
borrow $2,000 under the Working Capital Facility prior to the Closing Date.
For purposes of the Pro Forma Condensed Balance Sheet, the Company has
assumed that the entire $2,000 will be repaid from the proceeds of the
Offerings.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
----------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues................................................... $ 21,413 $21,413
Costs...................................................... 12,945 12,943
Gross margin............................................. 8,468 8,468
Operating expenses
Selling, general and administrative expenses............. 7,083 7,083
Research and development expenses........................ 2,385 2,385
Operating income (loss).................................... (1,000) (1,000)
Other income -- net........................................ 164 164
Interest expense........................................... 302 302
Income (loss) before income taxes and cumulative effects of
accounting changes....................................... (1,138) (1,138)
Cumulative effects of accounting changes................... -- --
Net income (loss).......................................... (867) (867)
Loss per share
(Historical -- based on 524,624,894 shares
outstanding).......................................... (1.65)
(Pro forma -- based on 636,661,931 shares outstanding)... (1.36)(1)
</TABLE>
- ---------------
(1) Reflects the sale of an additional 112,037,037 shares of Common Stock in the
Offerings.
24
<PAGE> 155
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is currently a wholly owned subsidiary of AT&T. Prior to
February 1, 1996, AT&T conducted the Company's businesses through various
divisions and subsidiaries. Beginning February 1, 1996, AT&T began effectuating
the Separation by transferring to the Company the assets and liabilities related
to such businesses, except that AT&T is retaining accounts receivable having a
face amount estimated for pro forma purposes at approximately $2,000 million.
The Company believes that the Separation will be substantially completed,
including the transfer of substantially all of such assets and liabilities, by
the Closing Date. Certain international assets relating primarily to the
communications services business of AT&T or to the computer business of NCR
which are not material to the Company in the aggregate may be held by the
Company or its subsidiaries at the Closing Date pending receipt of consents or
approvals or satisfaction of other applicable foreign requirements necessary for
the transfer of such assets to AT&T or NCR. In addition, certain international
assets relating primarily to the business of the Company which are not material
to the Company in the aggregate may be held by AT&T or its subsidiaries at the
Closing Date pending receipt of consents or approvals or satisfaction of other
applicable foreign requirements necessary for the transfer of such assets to the
Company. The Company's financial statements assume the consummation of all such
transactions. In addition, employee benefits assets will be held by AT&T or
employee benefit trusts subject to agreements to transfer these assets to the
Company or trusts established by the Company following the Distribution. See
"Arrangements Between the Company and AT&T -- Separation and Distribution
Agreement" and "-- Employee Benefits Agreement."
The Separation and the transactions being undertaken in connection
therewith, including the Offerings and the Distribution, are being effected
pursuant to the Separation and Distribution Agreement. AT&T has announced that,
subject to certain conditions, AT&T intends to distribute to its shareholders by
December 31, 1996 all of the Common Stock of the Company owned by AT&T following
the Offerings. See "Arrangements Between the Company and AT&T -- Separation and
Distribution Agreement."
After the completion of the Offerings and prior to the Distribution, AT&T
will own approximately 82.4% of the outstanding shares of Common Stock. The
Company and AT&T and, in certain cases, NCR have entered into certain agreements
providing for the Separation and governing various interim and ongoing
relationships between and among the three companies, including an agreement
between the Company and AT&T providing for the purchase of products, licensed
materials and services from the Company. See "Arrangements Between the Company
and AT&T."
The consolidated financial statements of the Company, which are discussed
below, reflect the results of operations, financial position and cash flows of
the businesses transferred to the Company from AT&T in the Separation. As a
result, the consolidated financial statements of the Company have been carved
out from the financial statements of AT&T using the historical results of
operations and historical basis of the assets and liabilities of such
businesses. Additionally, the consolidated financial statements of the Company
include certain assets, liabilities, revenues and expenses which were not
historically recorded at the level of, but are primarily associated with, such
businesses. Management believes the assumptions underlying the Company's
financial statements to be reasonable.
The financial information included herein, however, may not necessarily
reflect the results of operations, financial position and cash flows of the
Company in the future or what the results of operations, financial position and
cash flows would have been had the Company been a separate, stand-alone entity
during the periods presented. This is due to the historical operation of the
Company as part of the larger AT&T enterprise. The financial information
included herein does not reflect the many significant changes that will occur in
the funding and operations of the Company as a result of the Separation and the
Offerings.
As set forth in the financial information included herein, interest expense
reflects interest associated with the aggregate borrowings for each period
presented primarily using a blend of AT&T's short-term and long-term weighted
average interest rates. The average borrowings assumed to be outstanding for
1995, 1994, and
25
<PAGE> 156
1993 were $3,589 million, $3,179 million and $3,568 million, respectively. The
associated average interest rates were 7.3%, 7.4% and 6.3% per annum,
respectively. In the future, the Company may not be able to obtain financing
with interest rates as favorable as those enjoyed by AT&T with the result that
the Company's cost of capital will be higher than that reflected in its
historical financial statements. General corporate overhead related to AT&T's
corporate headquarters and common support divisions has been allocated to the
Company based on the ratio of the Company's external costs and expenses to
AT&T's external costs and expenses. This allocation of AT&T's general corporate
overhead expense may not reflect the Company's actual general corporate overhead
expense as a separate entity. Also, certain expenses incurred by the Company
were for services received from AT&T under direct contracting arrangements.
Although management believes the allocations and the charges for such services
to be reasonable, the costs of these services charged to the Company are not
necessarily indicative of the costs that would have been incurred if the Company
had been an independent entity and had otherwise contracted for or managed these
functions. Subsequent to the Separation, the Company will manage these functions
using its own resources or contract with third parties to perform these services
and, in addition, will be responsible for the costs and expenses associated with
the management of a public corporation. In addition, income taxes were
calculated as if the Company filed separate tax returns. However, AT&T was
managing its tax position for the benefit of its entire portfolio of businesses,
and its tax strategies are not necessarily reflective of the tax strategies that
the Company would have followed or will follow as a stand-alone entity.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the period reported. Actual results
could differ from those estimates. In addition, there are certain risks and
uncertainties inherent in operating the business, including the matters
discussed below under "-- Variability in the Company's Business" and
"-- Environmental." Other areas where estimates and judgments are required are
discussed in the Notes to Consolidated Financial Statements included elsewhere
in this Prospectus.
Prior to the Separation, the businesses transferred to the Company were
funded through AT&T and the Company had limited indebtedness to third parties.
The Company plans to assume, as of the Closing Date, up to $4,000 million of
direct short-term debt under the Commercial Paper Program. To the extent that
the aggregate amount of indebtedness of the Company shown in the consolidated
financial statements exceeds the direct third-party indebtedness of the
businesses transferred to the Company, such amount is reflected in the
consolidated financial statements as debt and shown as "Debt sharing amount in
anticipation of assumption of the Commercial Paper Program." This debt is
classified as short-term debt, consistent with the expectation that the Company
will assume, at the Closing Date, the commercial paper issued under the
Commercial Paper Program.
STRATEGIC REORGANIZATION
The Company historically has operated as part of AT&T. The Separation will
establish the Company as a stand-alone entity with objectives separate from
those of AT&T. The Company intends to focus its resources on the technologies
and markets it views as critical to its long-term success as a stand-alone
entity. The Company therefore has undertaken a comprehensive review of all of
its operations, including its organizational structure, products and markets,
with a view toward maximizing its return on investments. In connection with this
review, the Company adopted a strategic reorganization plan and recorded a
pre-tax restructuring charge of $2,613 million in the fourth quarter of 1995, in
addition to charges of $188 million for asset impairments and other items.
The total restructuring and other charges of $2,801 million ($1,847 million
after taxes) for 1995 was recorded as $892 million of costs, $1,645 million of
selling, general and administrative expenses, and $264 million of research and
development expenses. The charges included $1,509 million for employee
separation and other related items, $627 million for asset write-downs, $202
million for closing, selling and consolidating facilities and $463 million for
other items. Of the total charges, $1,788 million will result in future cash
payments and $1,013 million of the charges related to noncash items.
26
<PAGE> 157
As part of these efforts, and as announced January 2, 1996, the Company
will eliminate approximately 22,000 positions, of which approximately 11,000 are
management positions and 11,000 are occupational positions. Approximately 1,000
additional management employees are employed by operations that the Company has
announced plans to sell. As of December 31, 1995, approximately 4,100 management
employees have accepted a voluntary severance package, the majority of whom will
leave the Company in early 1996. The Company expects approximately 70% of all
separations to be completed by the end of 1996 and the majority of the remaining
separations to be completed during 1997. These reductions are the result of the
Company's decisions to form a single corporate structure that eliminates
duplicative management and streamlines administrative functions, and to
outsource certain corporate functions.
The Company's reorganization efforts also include a plan to close all of
the Company's 338 Phone Center Stores, most of which are expected to be closed
by May 1996, and to distribute its consumer products only through national,
regional and catalog retailers and network operators. In addition, the Company
plans to consolidate certain international facilities.
As part of the redefinition of its objectives, the Company intends to focus
its investments on its core technologies, primarily through expanded and
targeted research and development efforts. Consequently, the Company has decided
to sell and exit tangential product lines and markets, including its Paradyne
subsidiary which manufactures certain data communications equipment, and its
microelectronics interconnect products business which manufactures backplanes
and printed circuit boards. In 1995, revenues associated with operations that
the Company has exited or expects to exit in connection with these
reorganization efforts accounted for approximately 4.6% of the Company's total
revenues. When appropriate, the Company will pursue core technologies through
strategic acquisitions, partnerships or joint ventures. For example, the Company
recently acquired certain telecommunications assets of the Philips Businesses to
expand its global line of systems which support non-United States standards for
mobile and fixed wireless access and digital optical transport.
The restructuring charges also included costs associated with early
termination of building leases, the closing, sale or consolidation of certain
owned facilities and asset write-downs as part of the plan to sell certain
businesses and to restructure certain operations.
VARIABILITY IN THE COMPANY'S BUSINESS
There are a number of factors that contribute to variability in the
Company's business. This variability can produce wide fluctuations in revenues
and earnings quarter to quarter, and in some cases year to year. Variability is
not a new trend and the Company expects it to continue, and possibly intensify.
Notwithstanding this variability, the Company has increased both revenues and
earnings (absent restructuring and other charges). The factors contributing to
variability include seasonality, multi-year contracts and associated revenue
recognition.
27
<PAGE> 158
Seasonality
The following table sets forth the unaudited total revenues, gross margin
and net income of the Company on a quarterly basis for each of the two years
ended December 31, 1995:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
------ ------ ------ ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1995
Total revenues.................... $4,159 $5,083 $4,744 $ 7,427 $21,413
Gross margin...................... 1,850 2,251 2,042 2,325(1) 8,468(1)
Net income (loss)................. (22) 159 13 (1,017)(2) (867)(2)
1994
Total revenues.................... 4,052 4,665 4,776 6,272 19,765
Gross margin...................... 1,740 2,028 2,006 2,654 8,428
Net income (loss)................. (43) 78 44 403 482
</TABLE>
- ---------------
(1) Includes restructuring charges of $892 of costs.
(2) Includes restructuring and other charges of $2,801 ($1,847 after taxes).
Like most telecommunications systems manufacturers, the Company's sales are
highly seasonal. Most of the Company's large customers delay a large and growing
percentage of their capital expenditures until the fourth quarter due to
cautious capital spending against budgets, while still seeking year-end tax
benefits. A focus on project completion by year-end also supports this buying
behavior. The Company has responded to this customer capital spending trend in
various ways that assure product availability and the necessary sales focus
during a critical quarterly period. Further, the Company has placed an increased
focus on the completion of software releases by mid-year to allow for commercial
availability and delivery in the fourth quarter. These software releases require
significant research and development expenditures early in the year, with
minimal offsetting revenues, but are key contributors to the Company's profits
during the fourth quarter. The Company's promotional and sales incentive
programs also tend to focus on the fourth quarter to sustain marketing support
during this period. Additionally, sales of consumer products in the retail
markets are generally stronger in the fourth quarter, corresponding to holiday
buying. In contrast, adverse weather conditions and incomplete customer budget
plans, as well as the impact of customer vacation schedules on deployment and
purchasing plans, tend particularly to depress Company revenues during the first
and third quarters, respectively.
As a result of growing competitive pressures among network operators (which
have led to an increasing emphasis on return on investment and the budgeting
process), along with the increasing prominence of software as a percentage of
the Company's revenues, the trend toward seasonality has been increasing over
the past three years.
Due to the foregoing factors, the Company's revenues and net income are
strongest in the fourth quarter of each year, representing 34.7% and 31.7% of
consolidated revenues and 84.7% (before restructuring and other charges) and
83.6% of net income in 1995 and 1994, respectively. Software sales were higher
in the fourth quarter of 1995 than those in the comparable quarter in 1994.
Consequently, the Company's results of operations for the first three quarters
of each year have in the aggregate been significantly less profitable than the
fourth quarter and the Company has frequently experienced net losses in the
first quarter. For a discussion of the expected significantly lower operating
results for the first and second quarters of 1996 as compared to the
corresponding 1995 periods, see "Risk Factors -- Seasonality; Anticipated Loss
for First Half of 1996."
Multi-Year Contracts and Associated Revenue Recognition
In recent years, the purchasing behavior of the Company's large customers
has increasingly been characterized by the use of fewer, larger contracts. This
trend is expected to intensify, and contributes to the variability of the
Company's results. Such larger purchase contracts typically involve longer
negotiating cycles, require the dedication of substantial amounts of working
capital and other Company resources, and in general
28
<PAGE> 159
require investments which may substantially precede recognition of associated
revenues. Moreover, in return for larger, longer-term purchase commitments,
customers often demand more stringent acceptance criteria, which can also cause
revenue recognition delays. Certain multi-year contracts may relate to new
technologies which may not have been previously deployed on a large-scale
commercial basis. The Company may incur significant initial cost overruns and
losses on such contracts which would be recognized in the quarter in which they
became ascertainable. Further profit estimates on such contracts are revised
periodically over the lives of the contracts, and such revisions can have a
significant impact on reported earnings in any one quarter.
The Company has managed this particular aspect of variability by
significantly reducing its product development, manufacturing and system
deployment intervals. The Company has also invested in project management tools
and disciplines to enhance its ability to execute successfully. Additionally,
the Company has worked to deploy its resources against the highest-value
projects. In part to manage the fluctuations produced by this buying behavior,
the Company has diversified its customer base, both in the United States and
internationally, and has developed relationships with other sets of customers
(including, for example, competitive access providers ("CAPs"), cable television
network operators and computer manufacturers).
Revenue recognition for work on multi-year contracts is based upon the
specific terms and conditions of each contract. These terms and conditions may
vary markedly depending upon the nature of the technology being purchased and
the development cycles of such technology, the specific requirements of the
customer, delivery, deployment schedules and acceptance criteria. Therefore, the
amount of purchases actually contracted for or deployed in a period may differ
substantially from the revenues realized for the same period.
One of the Company's multi-year contracts is with Pacific Bell for the
provision of a broadband network based on hybrid fiber-coaxial cable technology.
Implementation difficulties and cost overruns have arisen under this contract,
which may result in claims being made by the parties under the contract. The
Company and Pacific Bell are conducting negotiations in an effort to resolve
outstanding issues and potential claims. The Company's historical financial
statements reflect a reserve relating to this contract. Based on the future
negotiations with Pacific Bell, the Company will continue to assess the adequacy
of this reserve.
GENERAL
The following table sets forth the Company's revenues by product line, and
the approximate percentage of total revenues represented thereby, for each of
the three years ended December 31, 1995:
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS)
Systems for Network Operators.......... $11,459 54% $10,841 55% $ 9,367 53%
Business Communications Systems........ 5,144 24 4,557 23 3,982 22
Microelectronic Products............... 1,864 9 1,461 7 1,323 8
Consumer Products...................... 1,787 8 1,924 10 1,816 10
Other Systems and Products............. 1,159 5 982 5 1,246 7
------- --- ------- --- ------- ---
Total............................... $21,413 100% $19,765 100% $17,734 100%
======= === ======= === ======= ===
</TABLE>
29
<PAGE> 160
The following table sets forth a summary of costs and expenses as a
percentage of revenues for each of the three years ended December 31, 1995, and
for the year ended December 31, 1995 as adjusted to exclude the restructuring
and other charges:
<TABLE>
<CAPTION>
1995 1995 1994 1993
------------- ----- ----- -----
(AS ADJUSTED)
<S> <C> <C> <C> <C>
Revenues............................................... 100.0% 100.0% 100.0% 100.0%
Costs.................................................. 56.3 60.5 57.4 56.9
------- ---- ------ ----
Gross margin......................................... 43.7 39.5 42.6 43.1
Operating expenses
Selling, general and administrative
expenses.......................................... 25.4 33.1 27.1 28.3
Research and development expenses.................... 9.9 11.1 10.6 11.0
------- ---- ------- ----
Operating income (loss)................................ 8.4% (4.7%) 4.9% 3.8%
======= ==== ======= ====
</TABLE>
1995 VERSUS 1994
Revenues grew in the Company's three largest product lines in 1995 compared
with 1994, causing total revenues to increase $1,648 million or 8.3%. Growth in
revenues from customers outside the United States (international and export)
provided 74.5% of the increase in revenues. International revenues (which
include export revenues) represented 23.3% of total revenues in 1995 compared to
19.1% of total revenues in 1994.
Revenues from systems for network operators were $11,459 million, an
increase of $618 million or 5.7% in 1995 compared with 1994. Sales of wireless
infrastructure to network operators accounted for approximately 15% of total
sales to network operators. Sales in the United States were essentially flat,
which the Company attributes to delays in spending by network operators and
their growing reluctance to purchase from a potential competitor. However,
domestic sales of wireless infrastructure increased approximately 19%. Revenues
from systems for network operators outside the United States increased
approximately 28% in 1995 compared with 1994. These increases were due primarily
to increases in sales of wireless infrastructure of approximately 14%, to
increases in sales of switching and transmission systems, including software, of
approximately 22%, and to revenues under a $4,000 million multi-year contract
awarded in 1994 to design and build a fully digital telecommunications network
in Saudi Arabia.
Revenues from business communications systems of $5,144 million increased
$587 million or 12.9% in 1995 compared with 1994, primarily due to strong United
States and international product sales growth. Service revenues increased due to
growth in maintenance contracts and higher installation revenues associated with
the increased sales. United States revenues grew approximately 10%, primarily
due to increased sales of DEFINITY(R) products, including upgrades, and sales of
INTUITY(TM) voice messaging products. This increase was offset in part by the
continuing decline in the rental base of approximately $84 million, reflecting
the Company's emphasis on the sale rather than rental of its products.
International revenues grew approximately 36%, primarily due to sales of the
Company's SYSTIMAX(R) structured cabling systems and higher sales through
international distributors.
Sales of microelectronic products of $1,864 million increased $403 million
or 27.6% in 1995 compared with 1994, due to higher sales of ICs both inside and
outside the United States. Most of this growth derived from sales to customers
outside the United States. Included in microelectronic products are $50 million
in sales of the Company's interconnect products business which the Company plans
to sell.
Revenues from consumer product sales (including $425 million in sales
through the Phone Center Stores, which the Company plans to close) were $1,787
million, a decline of $137 million or 7.1% in 1995 compared with 1994. The
decrease in 1995 revenues was primarily due to the expected continuing decline
in the customer base for rental revenues for telephones and declines in product
sales related to discontinued product lines, partially offset by strong consumer
demand for cordless telephones.
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Revenues from sales of other systems and products of $1,159 million in 1995
increased $177 million or 18.0% compared with 1994, due to higher royalties.
Sales of other systems and products include $388 million in revenues from the
Company's Paradyne subsidiary, which the Company plans to sell.
Costs of $12,945 million increased $1,608 million or 14.2% in 1995 compared
with 1994. Excluding the restructuring and other charges of $892 million, costs
grew $716 million or 6.3%, reflecting the higher volume of sales and services.
Gross margin decreased to 39.5% in 1995 from 42.6% in 1994, due to restructuring
and other charges. Excluding these charges, gross margin increased to 43.7% in
1995 from 1994, due to increased sales of higher margin software products to
network operators, offset in part by the erosion of high margin rental revenues.
Research and development expenses of $2,385 million increased $288 million
or 13.7% in 1995 compared with 1994. This increase was due to restructuring
charges of $264 million (which were principally related to the reduction in
administrative support functions at Bell Labs and disposal of research and
development assets related to changing technologies), as well as development
work associated with software, wireless access and type approval and
certification of products for local markets. Research and development expenses
represented 11.1% of revenues in 1995 compared with 10.6% of revenues in 1994.
Excluding the charges, research and development expenses represented 9.9% of
revenues in 1995. Consistent with the Company's strategy, the Company expects
that research and development expenses, as an absolute amount and as a
percentage of revenues, will increase in 1996.
Selling, general and administrative expenses of $7,083 million increased
$1,723 million or 32.1% in 1995 compared with 1994. This increase was due to
$1,645 million in restructuring and other charges and increased spending on
sales and sales support efforts, including expenses relating to growth in
international revenues. Selling, general and administrative expenses were 33.1%
of revenues in 1995, an increase from 27.1% of revenues in 1994, reflecting the
restructuring charges (which were principally related to the reduction in
personnel in administrative and corporate support functions and at Phone Center
Stores). Excluding the charges, selling general and administrative expenses were
25.4% of revenues in 1995, reflecting cost containment efforts.
Interest expense in 1995 was $302 million, an increase of $32 million or
12% compared with 1994. The increase was due to higher average debt levels in
1995 compared with 1994. The average borrowings assumed to be outstanding in
1995 increased to approximately $3,589 million from approximately $3,179 million
in 1994. The associated average interest rates were 7.3% per annum in 1995
compared with 7.4% per annum in 1994.
Other income -- net increased $81 million to $164 million in 1995 compared
with 1994, primarily due to gains on investments in 1995.
The effective income tax rate of 23.8% in 1995 decreased from 38.5% in
1994, primarily due to the nondeductibility of certain of the 1995 restructuring
and other charges, which resulted in a net loss for 1995.
For 1995, the Company had a net loss of $867 million, reflecting $2,801
million ($1,847 million after taxes) of restructuring and other charges.
Excluding the charges, net income was $980 million, an increase of $498 million
compared to 1994.
1994 VERSUS 1993
Revenues grew in each of the Company's four main product lines in 1994
compared with 1993, causing revenue to increase $2,031 million or 11.5%. Growth
in revenues from customers outside of the United States provided 38.4% of the
increase. International revenues represented 19.1% of total revenues in 1994
compared with 16.9% in 1993.
Revenues from systems for network operators rose $1,474 million or 15.7% to
$10,841 million in 1994 compared with 1993. Approximately 16% of the revenue
growth was the result of AG Communications Systems Corporation being accounted
for on a consolidated basis after the Company increased its ownership to 80%
from 49%. Sales of wireless infrastructure to network operators accounted for
approximately 14% of
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total sales to network operators. Sales in the United States increased
approximately 15%. The increases also resulted from an increase in wireless
sales of approximately 55%, and an increase in sales of switching and
transmission systems, including software, of approximately 13%. Revenues from
systems for network operators outside the United States increased approximately
19%. These increases were due primarily to increases in wireless sales of
approximately 49% and to increases in sales of switching and transmission
systems, including software, of approximately 7%.
Revenues from business communications systems were $4,557 million, an
increase of $575 million or 14.4% in 1994 compared with 1993 due to strong
United States and international product sales growth. Service revenues increased
due to growth in maintenance contracts and higher installation revenues
associated with the increased sales. Partially offsetting these increases was
the erosion of the rental base of approximately $96 million which continued to
drive rental revenues down. United States revenues grew approximately 10%
primarily due to increased sales of DEFINITY products, including upgrades to
accommodate expansion in the number of area codes, sales of INTUITY
CONVERSANT(R) voice processing products and sales of INTUITY AUDIX(R) voice
messaging products. International revenues grew approximately 53% primarily due
to the implementation of the Company's global growth strategy which included
acquisitions in Europe.
Revenues from microelectronic products of $1,461 million increased $138
million or 10.4% in 1994 compared with 1993 due to higher sales of ICs and
electronic power systems to customers outside of the United States.
Revenues from consumer products were $1,924 million, an increase of $108
million or 5.9% in 1994 compared with 1993. The increase in 1994 sales was due
primarily to strong consumer sales of cellular and cordless phones, partially
offset by the continuing decline in rental revenues for telephones.
Revenues from sales of other systems and products were $982 million in
1994, a decrease of $264 million or 21.2% compared with 1993. The decrease
results from a decline in sales of special design products for the United States
government due to reductions in defense spending.
Costs of $11,337 million increased $1,249 million, or 12.4% in 1994
compared with 1993. The increase is due to the higher volume of sales and
services. The gross margin percentage declined to 42.6% in 1994 from 43.1% in
1993. Increases in gross margins for most major product lines were more than
offset by a lower gross margin for consumer products due to the erosion of the
rental base.
Research and development expenses of $2,097 million increased $136 million
or 6.9% in 1994 compared with 1993, as a result of work related to wireless
system technology and type approval and certification of products for local
standards. Research and development expenses represented 10.6% of 1994 revenues,
as compared with 11.0% of revenues in 1993.
Selling, general and administrative expenses of $5,360 million increased
$344 million, or 6.9% in 1994 compared with 1993. The increase was largely due
to increased spending on sales and sales support efforts, as well as for
expenses related to global growth. Selling, general and administrative expenses
as a percentage of revenues decreased to 27.1% in 1994 from 28.3% in 1993,
reflecting cost containment efforts.
Other income -- net in 1994 was $83 million compared to $193 million in
1993. The decrease of $110 million in 1994 compared with 1993 relates primarily
to a charge of $38 million in 1994 for the write-down of the Company's
investment in a hand-held tablet communication device business and an increase
in losses on foreign currency transactions of $35 million. See Note 4 of Notes
to Consolidated Financial Statements.
Interest expense of $270 million in 1994 was approximately $27 million
greater than 1993, due to higher interest rates offset by a decrease in average
borrowings in 1994 compared to 1993. The average borrowings assumed to be
outstanding in 1994 decreased to approximately $3,179 million from approximately
$3,568 million in 1993. The decrease in average borrowings was offset by a
higher associated average interest rate of 7.4% per annum in 1994 compared with
6.3% per annum in 1993.
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The effective income tax rate was 38.5% in 1994, compared with 30.5% in
1993. The lower effective tax rate in 1993 relates primarily to a net tax
benefit recorded in 1993 to increase the Company's net deferred tax assets to
reflect the increase in the federal income tax rate from 34% to 35%.
The adoption of three accounting standards, effective January 1, 1993,
issued by the Financial Standards Accounting Board resulted in an after-tax
charge of $4,208 million in 1993, representing the cumulative effect of these
accounting changes.
Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers
Accounting for Postretirement Benefits Other Than Pensions," requires accrual of
estimated future retiree benefits during the years in which employees are
working and accumulating these benefits. Previously, health care benefits were
expensed as claims were incurred and life insurance benefits were expensed as
plans were funded. A one-time after-tax charge for the unfunded portions of
these liabilities of $3,722 million was recorded in 1993 as a cumulative effect
of accounting change upon adoption of this standard.
SFAS No. 112, "Employers' Accounting for Postemployment Benefits," requires
the Company to accrue for estimated future postemployment benefits, including
separation payments, during the years in which employees are working and
accumulating these benefits, and for disability payments when the disabilities
occur. Previously, costs for separations were recognized when approved and
disability benefits were recognized when paid. The Company recognized a $530
million after-tax charge upon adoption of this standard.
SFAS No. 109, "Accounting for Income Taxes," requires, among other
provisions, the computation of deferred tax amounts using the enacted corporate
income tax rates for the years in which the taxes will be paid or refunds
received. A cumulative effect of accounting change benefit of $44 million was
recognized in 1993 related to adopting this standard.
Reported net income increased $4,260 million for the year ended December
31, 1994 compared with the year ended December 31, 1993, primarily due to the
$4,208 million net charge for the accounting changes discussed above. Excluding
the cumulative effect of the accounting changes in 1993, net income increased
$52 million, or 12.1% for the year ended December 31, 1994 compared with the
year ended December 31, 1993.
ENVIRONMENTAL
The Company's current and historical operations are subject to a wide range
of environmental protection laws. The Company has remedial and investigatory
activities underway at 46 current and former facilities. In addition, AT&T and
its subsidiaries have been named a PRP at numerous "Superfund" sites pursuant to
CERCLA or comparable state statutes. Under the Separation and Distribution
Agreement, the Company will assume or indemnify AT&T for all liabilities
primarily relating to, arising out of or resulting from (i) the operation of the
Company Business as conducted at any time prior to, on or after the Closing Date
or (ii) any Company Assets including, without limitation, those associated with
these sites. It is often difficult to estimate the future impact of
environmental matters, including potential liabilities. The Company records an
environmental reserve when it is probable that a liability has been incurred and
the amount of the liability is reasonably estimable. This practice is followed
whether the claims are asserted or unasserted. Management expects that the
amounts reserved for will be paid out over the period of remediation for the
applicable site which ranges from 5 to 30 years. Reserves for estimated losses
from environmental remediation are, depending on the site, based primarily upon
internal or third party environmental studies, and estimates as to the number,
participation level and financial viability of any other PRPs, the extent of the
contamination and the nature of required remedial actions. Accruals are adjusted
as further information develops or circumstances change. The amounts provided
for in the Company's consolidated financial statements in respect of
environmental reserves are the gross undiscounted amount of such reserves,
without deductions for insurance or third party indemnity claims. In those cases
where insurance carriers or third party indemnitors have agreed to pay any
amounts and management believes that collectibility of such amounts is probable,
the amounts are reflected as receivables in the financial statements. Although
the Company believes that its reserves are adequate, there can be no assurance
that the amount of capital expenditures and other expenses which will be
required relating to remedial actions and compliance with applicable
environmental laws will not exceed the amounts reflected in the Company's
reserves or will not have a material adverse effect on the financial condition
of the Company or
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the Company's results of operations or cash flows. Any amounts of environmental
costs that may be incurred in excess of those provided for at December 31, 1995
cannot be determined.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company generated (used) cash flow from operations of $478 million,
$1,579 million and $(1,268) million for the years ended 1995, 1994 and 1993,
respectively. The decline in cash flow provided by operations in 1995 compared
to 1994 was primarily due to the higher accounts receivable balance at year-end
1995, reflecting significantly higher fourth quarter sales, and higher inventory
balances, as work in process for long-term contracts increased. The improvement
in cash flow from operations in 1994 compared with 1993 was due to lower levels
of contributions to trusts for retiree benefits in 1994.
Fluctuations in the amount of inventories, accounts receivable and accounts
payable are principally associated with the level and timing of business
volumes. In 1995, the Company's inventory turnover ratio decreased slightly to
3.4 times from 3.5 times in 1994. Accounts receivable were outstanding an
average of 81 days in 1995, compared with 76 days in 1994, reflecting the
increase in fourth quarter revenues in 1995.
Cash flow used in investing activities was $1,342 million, $567 million and
$1,087 million in 1995, 1994 and 1993, respectively. Capital expenditures, the
largest component, were $1,277 million, $878 million and $577 million for the
years ended 1995, 1994 and 1993, respectively. Capital expenditures generally
relate to expenditures for equipment and facilities used in manufacturing and
research and development, including expansion of manufacturing capacity, and
expenditures for cost reduction efforts and international growth. For example,
in 1995 capital expenditures included construction of a new facility to
consolidate the Company's operations relating to systems for network operators
and expansion of manufacturing capacity for ICs and wireless equipment.
Net cash provided by (used in) financing activities was $724 million,
$(741) million, and $2,510 million for the years ended 1995, 1994 and 1993,
respectively. The Company historically has relied on AT&T to provide financing
for its operations. The cash flows from financing activities reflected herein
principally reflect changes in the Company's assumed capital structure. These
cash flows are not necessarily indicative of the cash flows that would have
resulted if the Company were a stand-alone entity.
The Company leases land, buildings and equipment through contracts that
expire in various years, through 2004. Rental expense under operating leases was
$209 million in 1995, $183 million in 1994 and $202 million in 1993. Future
minimum lease payments due under noncancelable operating leases at December 31,
1995 total $245 million. The Company expects to fund such commitments through
its working capital and funds generated from operations.
In February 1996, the Company entered into an agreement with MajorCo L.P.,
an affiliate of Sprint Spectrum LP, to supply and install approximately 60% of
SSLP's market areas over a five-year period. This agreement is conditioned,
among other things, upon the Company providing (or guaranteeing) long-term
financing to SSLP for its purchase of equipment and services from the Company.
The Company has entered into discussions with SSLP with respect to such
financing and has proposed providing (or guaranteeing) $1,000 million of
long-term financing for SSLP's purchases from the Company. These discussions are
ongoing.
Prepaid pension costs are increasing as returns on pension plan assets
exceed pension benefits earned during the year plus interest cost on the
projected benefit obligation.
In the normal course of business the Company uses various financial
instruments, including derivative financial instruments, for purposes other than
trading. The Company does not use derivative financial instruments for
speculative purposes. These instruments include commitments to extend credit,
letters of credit, guarantees of debt, interest rate swap and cap agreements,
and foreign currency exchange contracts. Foreign currency exchange contracts are
used to mitigate foreign currency exposure. As is customary for these types of
instruments, collateral is generally not required to support these financial
instruments. The Separation and Distribution Agreement provides that, as between
the Company and AT&T, the Company has assumed all liabilities under or otherwise
relating to derivatives and similar obligations primarily related to the
Company's business. Initially, AT&T may continue to perform obligations under
such derivatives and similar
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obligations on behalf of the Company but all amounts paid to or received from
third parties will be charged to, or paid over or credited to, the Company, as
the case may be.
By their nature all such instruments involve risk including the credit risk
of nonperformance by counterparties, and the Company's maximum potential loss
may exceed the amount recognized in the Company's balance sheet. However, at
both December 31, 1995 and 1994, in management's opinion there was no
significant risk of loss in the event of nonperformance of the counterparties to
these financial instruments. The Company controls its exposure to credit risk
through credit approvals, credit limits and monitoring procedures, and
management believes that reserves for losses are adequate. The Company does not
have any significant exposure to any individual customer or counterparty nor any
major concentration of credit risk related to any financial instruments.
The ratio of total debt to total capital (debt plus equity) was 73.7% at
December 31, 1995, compared to 56.1% at December 31, 1994. The increase reflects
the lower level of equity due to the restructuring and other charges taken in
1995. The Offerings and the other Related Transactions result in a pro forma
debt to capital ratio for the Company as of December 31, 1995 of approximately
63.3%.
For the reasons described under "-- Variability in the Company's Business,"
the Company's working capital requirements and cash flow provided by operating
activities can vary greatly from quarter to quarter, depending on the volume of
production, the timing of deliveries and the payment terms offered to customers.
In the past, the Company's working capital needs have been satisfied as part of
AT&T's corporate-wide cash management policies. However, AT&T is no longer
providing funds to finance the Company's operations.
The Company estimates that the future cash expenditures to implement the
restructuring programs will be approximately $1,788 million and will be paid
primarily in 1996. Such expenditures are expected to be funded through cash
flows from operations and working capital. As part of the Separation, AT&T is
retaining accounts receivable that arose in the business of the Company having a
face amount estimated for pro forma purposes at approximately $2,000 million.
To meet its working capital needs, the Company has entered into the Working
Capital Facility. The Working Capital Facility provides that, subject to the
terms and conditions thereof, the Company may borrow on a revolving credit basis
at any time and from time to time prior to March 3, 1997 a principal amount not
in excess of $4,000 million at any time outstanding. The Company may use the
proceeds of the Working Capital Facility for capital expenditures, refunding of
debt and general corporate purposes, including working capital. The Working
Capital Facility also provides that the Company may invite the lenders party
thereto to bid on an uncommitted basis on short-term borrowings (which would
reduce the availability of the $4,000 million commitment) by the Company
maturing on or prior to such date. The final maturity of all loans under the
Working Capital Facility is March 3, 1997. The Working Capital Facility contains
certain representations and warranties, conditions to borrowing, affirmative and
negative covenants (including covenants imposing limitations on liens and on
sale and leaseback transactions) and events of default.
Each standby borrowing will be comprised entirely of Eurodollar standby
loans, certificate of deposit ("CD") loans or Alternate Base Rate ("ABR") loans,
as the Company may request. Eurodollar standby loans and CD loans will bear
interest at a rate per annum equal to the London Interbank Offered ("LIBO") rate
or the adjusted CD rate, plus the respective spreads determined pursuant to the
Applicable Percentage (as defined below), in each case as in effect from time to
time. ABR loans will bear interest at the alternate base rate (determined by
reference to federal funds or prime rates) in effect from time to time. After
the Closing Date, ABR loans will bear interest at a rate equal to the greater of
(i) the prime rate or (ii) the federal funds rate plus 1/2 of 1% per annum. Each
competitive borrowing will be comprised entirely of Eurodollar competitive loans
or fixed rate loans with interest rates established pursuant to the competitive
bid process. In addition to certain administrative fees, the Working Capital
Facility provides for a facility fee equal to the Applicable Percentage per
annum in effect from time to time on the average daily amount of the commitments
whether used or unused.
The Working Capital Facility provides that the "Applicable Percentage" will
be determined by reference to the ratings applicable at the time of
determination to the long-term debt of the Company. Subject to certain
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exceptions and adjustments, the Eurodollar standby loan spread, the CD loan
spread and the facility fee components of the Applicable Percentage will range,
respectively, from .11%, .235% and .04% for ratings AA-or higher by S&P and Aa3
or higher by Moody's to .275%, .40%, and .10% for ratings BBB or lower by S&P
and Baa2 or lower by Moody's.
As of April 2, 1996, the Company had borrowed $1,954 million under the
Working Capital Facility, all of which was used for general working capital
purposes. Such borrowings bear interest at a daily variable rate. The Company
plans to repay the approximately $2,000 million expected to be outstanding under
the Working Capital Facility at the Closing Date with proceeds of the Offerings.
In addition, AT&T has commenced issuance of up to $4,000 million of
short-term debt under the Commercial Paper Program, which will be assumed by the
Company, subject to certain conditions, at the Closing Date. The Commercial
Paper Program will be comprised of short-term borrowings in the commercial paper
market at market interest rates. It is contemplated that AT&T will retain the
proceeds of all borrowings under the Commercial Paper Program and that, on the
Closing Date, AT&T will be released from all of its obligations thereunder, with
the result that the Company will become the obligor thereunder. The Commercial
Paper Program will be supported by a back-up credit facility with third-party
financial institutions initially entered into by AT&T but which will be assumed
by the Company, subject to certain conditions, at the Closing Date. Neither AT&T
nor the Company expects to make any borrowings under the back-up credit
facility. The Company expects that, over time, the Company may refinance all or
part of the Commercial Paper Program from the proceeds of short- or long-term
borrowings. In this regard, the Company has filed the Shelf Registration
Statement to register the offering from time to time of up to $3,500 million of
long-term debt.
Pursuant to the General Purchase Agreement, AT&T has agreed to prepay $500
million to the Company, on or prior to the Closing Date, to be applied to
accounts receivable from AT&T that are due and payable on or after January 1,
1997 for the purchase of products, licensed materials and services from the
Company. See "Certain Transactions in Connection with the Offerings."
The assumption by the Company of the Commercial Paper Program and the
retention by AT&T of accounts receivable are part of the establishment of the
initial capitalization of the Company. The factors considered in determining the
amount of this capitalization include the Company's prospective financing
requirements, the Company's working capital and capital expenditure
requirements, the Company's desired credit rating, the Company's pro forma debt
to capital ratio, and the Company's need to procure bid and performance bonds,
to arrange or provide customer financing, to engage in hedging transactions and
to attain required self-insurance levels. In reviewing these factors, the
capitalizations and credit ratings of comparable companies in the Company's
industry were also considered. The Commercial Paper Program was developed to
permit the assumption by the Company of part of AT&T's debt in light of the fact
that AT&T's preexisting debt was not assumable by the Company. The retention of
accounts receivable by AT&T was designed to permit AT&T to retain approximately
$2,000 million of cash equivalents as part of balancing the capitalizations of
the two companies.
The Company believes that the proceeds of the Offerings, as well as the
Working Capital Facility, cash flow from operations and short- and long-term
debt financings, will be sufficient to satisfy its future working capital,
capital expenditure, research and development, and debt service requirements,
including debt service requirements on the Commercial Paper Program. The Company
further believes that it will be able to access the capital markets on terms and
in amounts that will be satisfactory to it, although there can be no assurance
that will be the case. The Company believes that it will be able to obtain bid
and performance bonds, to arrange or provide customer financing as necessary,
and to engage in hedging transactions on commercially acceptable terms.
RECENT PRONOUNCEMENTS
Effective on October 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of ." This standard requires the Company to review long-lived assets and certain
identifiable intangibles held and used for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption
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of this standard did not have a material impact on the Company's results of
operations, financial condition or cash flows because this was essentially the
method the Company used in the past to measure and record asset impairments. The
1995 restructuring and other charges did include recognition of asset
impairments.
In 1996, SFAS No. 123, "Accounting for Stock-Based Compensation," will be
adopted. This standard establishes a fair value method for accounting for or
disclosing stock-based compensation plans. This standard will be adopted in 1996
by disclosing the pro forma consolidated net income and earnings per share
amounts assuming the fair value method was effective on January 1, 1995. The
adoption of this standard will not affect the Company's results of operations,
financial position or cash flows.
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BUSINESS
The Company is one of the world's leading designers, developers and
manufacturers of telecommunications systems, software and products. The Company
is a global market leader in the sale of public telecommunications systems, and
is a supplier of systems and software to 23 of the world's 25 largest network
operators. The Company is also a global market leader in the sale of business
communications systems and in the sale of microelectronic components for
communications applications to manufacturers of communications systems and
computers. Further, the Company is the largest supplier in the United States of
telecommunications products for consumers. In addition, the Company has provided
engineering, installation, maintenance or operation support services to over 250
network operators in 75 countries, over 1.4 million business locations in the
United States and approximately 100,000 business locations in over 90 other
countries. The Company's research and development activities are conducted
through Bell Labs, which consists of approximately three-quarters of the total
resources of AT&T's former Bell Laboratories division, one of the world's
foremost industrial research and development organizations.
The Company's revenues of $21,413 million for the year ended December 31,
1995, were generated from the sale of systems for network operators (54% of
total revenues), business communications systems (24%), microelectronic products
(9%), consumer products (8%), and other systems and products, including
integrated systems for the United States government (5%). In 1995, approximately
77% of the Company's revenue was generated from sales in the United States and
approximately 23% internationally (including exports). See Note 10 to
Consolidated Financial Statements. For the year ended December 31, 1995, the
Company recorded a net loss of $867 million, including restructuring and other
charges of $2,801 million before taxes (or $1,847 million after taxes).
The following table sets forth the revenues by product line for each of the
five years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Systems for Network Operators.................. $11,459 $10,841 $ 9,367 $ 9,616 $ 9,028
Business Communications Systems................ 5,144 4,557 3,982 3,689 3,610
Microelectronic Products....................... 1,864 1,461 1,323 1,167 781
Consumer Products.............................. 1,787 1,924 1,816 1,934 1,934
Other Systems and Products..................... 1,159 982 1,246 906 959
------- ------- ------- ------- -------
Total....................................... $21,413 $19,765 $17,734 $17,312 $16,312
======= ======= ======= ======= =======
</TABLE>
INDUSTRY OVERVIEW
The global telecommunications networking industry includes systems,
software and products used for voice, data and video communications. This
industry has undergone significant transformation and growth since the
mid-1980's as a result of changes in domestic and international public policy,
technological innovations and economic factors. The Company believes that these
forces will intensify, and that the number of customers and the complexity of
the networks they demand will increase. In addition, the Company believes that
these networks will increasingly become multifunctional in nature, supporting
simultaneous wireline or wireless access to any combination of voice, data and
video communications services, thus reducing the operating costs associated with
separate networks. The Company further believes that the traditionally distinct
technology platforms supporting voice and data will converge, as will those
platforms for the traditionally separate wireline and wireless networks. In the
Company's view, significant industry growth areas will include wireless access,
multifunctional systems and networking software. The Company further believes
that the principal building blocks of the industry are and will continue to be
software, microelectronics and product innovation in advanced digital switching
and transmission platforms, supported by a competency in and a knowledge of
telecommunications networking.
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Public Policy Changes
Changes in the public policy affecting telecommunications services have
increased, and are expected to further increase, the number of network operators
and, therefore, the demand for telecommunications network systems and products
worldwide. In the United States, changes in federal and state regulations have
created a number of new network operators and fostered competition between both
new and established network operators. For example, in 1995, the Federal
Communications Commission (the "FCC") auctioned additional spectrum for wireless
communications, thus potentially doubling the number of operators licensed to
compete in each MSA from two to four. The FCC has also announced plans to
auction additional spectrum in 1996. Changes in FCC regulations governing
interconnections have created the opportunity for CAPs to enter the market. Over
the past several years, certain state public utility commissions have removed
the prohibition on competition in intra-LATA long distance services, thereby
opening these markets to a number of competitors.
More broadly, the recently enacted Telecommunications Act permits local and
long distance telecommunications companies, cable television companies and
electric utility companies, subject to certain conditions designed to facilitate
local exchange competition, to compete with each other to provide local and long
distance telephony and video services. The Company believes that the
Telecommunications Act, together with these other government initiatives, will
increase the demand for systems, software and services as network operators
respond to the changing competitive environment by constructing new or enhancing
existing networks.
Over the last few years, the governments of a number of developed and
developing countries have privatized their state-owned telecommunications
monopolies. In most instances, as part of the privatization, such governments
have imposed service requirements on the newly privatized network operators
resulting in an acceleration of capital expenditures on networking systems,
software and services. In addition, certain governments have granted licenses to
new network operators to compete with the traditional network operators in their
countries. The Company expects the trend toward telecommunications service
competition to continue.
Technological Innovation
Telecommunications networking has undergone several technological
transformations, including the ongoing evolution from voice-centric to
multifunctional applications of any combination of voice, data and video, from
hardware-enabled to software-enabled and from wireline-only to an environment
where wireline and wireless interoperate. In addition, technological platforms
that support telecommunications networking and data networking have begun to
converge. To support the changing demands occasioned by these transformations,
networks are becoming more software intensive and the microelectronic content of
networking systems and end-user products is increasing.
These changes have added significantly to the number of services that
network operators can offer. Increasingly, network operators and business
customers are demanding multifunctional networks that can simultaneously support
any combination of voice, data and video services accessible from wireline and
wireless terminal devices. For example, telecommunications service providers are
beginning to offer multifunctional services, such as integrated services digital
network ("ISDN") which allows for the dynamic allocation of bandwidth between,
and the simultaneous transmission of any combination of voice, data and video,
and individual call routing, which permits the user to easily designate and
change the wireline or wireless telephone number to which their calls should be
directed. In addition, cable television operators are beginning to expand beyond
one-way broadcast to provide interactive services, and have announced their
intent to provide telephony and high speed data services.
The Company believes that traditionally distinct telecommunications
networks and data networks increasingly will be built on the same technological
platforms. The Company further believes that the convergence between voice and
data networking will continue as a result of the further adoption of common
technologies such as optical transmission and asynchronous transfer mode ("ATM")
switching.
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International Growth
The Company believes that the opportunities described above will be
available in both developed and developing countries and that a significant
portion of its growth will derive from the sale of telecommunications networking
systems, software and services outside the United States. Many of the network
operators and businesses that are pursuing international opportunities are well
established and well capitalized companies with whom the Company has strong
relations. The Company intends to pursue global opportunities in a focused and
disciplined approach to build upon the successes the Company has achieved and
will involve the withdrawal from areas where future profitability is deemed
questionable. The Company intends to utilize a combination of joint ventures and
direct investments to achieve its goals in this area.
SYSTEMS FOR NETWORK OPERATORS
The Company designs, develops, manufactures and services systems and
software which enable network operators to provide wireline and wireless local,
long distance and international voice, data and video services and cable
television service. The Company's networks, which include switching,
transmission and cable systems, are packaged and customized with application
software, operations support systems and associated professional services.
Systems and Services
Telecommunications Networking Systems. The Company designs, develops,
manufactures and services advanced telecommunications networking systems, which
include equipment, software and associated professional services. These systems
connect, route, manage and store voice, data and video in any combination, and
are used for: wireline access; local and long distance switching; intelligent
network services and signaling; wireless communications, including both cellular
and personal communications services ("PCS"); and high-speed, broadband
multifunctional communications.
The Company is one of the world's largest suppliers in each of the five
broad elements that comprise telecommunications networks: switching systems,
which route information through the network; transmission systems, which provide
the communications path through the network that carries information between
points in the network; operation support systems, which enable service providers
to manage the work flow, planning, surveillance, management, provisioning and
continuous testing of their networks; intelligent network/ application software,
which enables service providers to offer a broad array of enhanced and
differentiated services; and cable systems, which provide the transport media
between points in a network. These systems collectively comprise the
infrastructure that enables telecommunications network operators to provide
traditional narrowband voice and data services and that enables both new and
traditional network operators to offer broadband multifunctional services.
The Company has a wireline local access installed base (the number of
access lines serviced by switches manufactured by the Company) of approximately
110 million lines, representing approximately 58% of the United States and 13%
of the total worldwide installed base. The Company's primary switching products
are the 5ESS switch for local and long distance switching and international
gateways, and the 4ESS(TM) Digital Switch (the "4ESS switch") for long distance
and international switching.
The 5ESS switch is the most reliable switch in the industry, with an
average supplier-attributable time out of service of less than two minutes per
year. The 5ESS switch is in service in 49 countries with more than 72 million
access lines sold. In recent years, substantially all of the newly installed
access lines have been digital, providing the base for the evolution to ISDN and
other multifunctional services. From 1988 to 1994, the 5ESS switch was installed
by United States network operators to service over 40% of their new central
office lines, many to replace older analog installations.
The 5ESS switch is used throughout the world to provide a combination of
network applications, including local and long distance switching and
international gateways, operator services, network signaling, intelligent
networking and wireless switching. As of September 1995, the 5ESS switch, with
the Company's
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5E10 software, has enabled network operators to offer simultaneous wireline and
wireless, local, long distance and international services as well as any
combination of voice, data and video.
The 4ESS switch, which was developed for and is primarily deployed in
AT&T's network, is used to provide domestic and international long distance
switching. The 4ESS switch can handle over 775,000 peak hour calls.
The Company designs, develops, manufactures and services a broad range of
transmission access and transport systems. Network operators use these systems
to transport any combination of voice, data and video between subscribers and
the central office or between points within a network engaged in local, national
or international communications. In 1992, the Company's transmission systems
business was awarded the Malcolm Baldrige National Quality Award.
World standards for transmission systems have undergone rapid technological
progress in recent years. The new standards, known as Synchronous Optical
Network ("SONET") in North America and SDH in other markets, maximize
transmission capability and simplify network management for network operators.
The Company markets systems supporting both standards and is one of the largest
suppliers of SONET-based systems. As part of the acquisition of the Philips
Businesses, the Company broadened its SDH product catalog by acquiring Philips'
SDH transmission product line.
The Company offers a broad line of transmission access systems for the
provision of a wide range of services, including traditional telecommunications
service and broadband multifunctional services, in which it was the first
supplier. Transmission access systems transport information between the
subscriber and the central office. The Company's products include SLC(R)-2000, a
hybrid fiber/copper pair system, and HFC-2000(TM), a hybrid fiber/coaxial
system, both of which extend fiber-based optical transmission into the local
loop. The Company's products also include the SDV-2000, a switched digital video
system which extends fiber to the curb, and ASOS, one of the first operations
support system which enables network operators to manage the work flow,
planning, surveillance, provisioning and continuous testing of their
multifunctional networks.
The Company's transmission transport systems are utilized for high capacity
communications between points within a communications network. These products
are primarily digital and provide for the movement of any combination of voice,
data, and video across fiber, coaxial and microwave based media. The Company's
products include fiber transport systems (FT 2000), digital multiplexer systems
(DDM 2000) and the digital access and cross connect systems (DACS(TM) family of
products).
The Company's operation support systems enhance a network operator's
ability to activate, manage and maintain its networks. These systems
continuously monitor network performance and activity level, and allow for rapid
trouble identification, load balancing and planning for network utilization. The
Company's systems support the efforts of network operators to reduce operating
costs and minimize labor by automating previously labor intensive tasks.
The Company's network management systems offer a broad array of modular
software, including element managers designed for traditional telephony, video
and wireless; network managers that monitor, test and optimize the utilization
of a network; service managers that manage work flow; and business managers that
include customer service systems. For example, the Company's NetMinder system is
an advanced network management routing system that mitigates network congestion
through efficient call routing and completion which is utilized by 30 network
operators in 15 countries.
The Company's A-I-NET(R) intelligent network products enable network
operators to offer new services that can be created, deployed or managed by
themselves, the Company, or third parties. Services created with A-I-NET
products include toll free calling (800 and 888 service in the United States),
call forwarding, call waiting, voice dialing and messaging.
The Company has recently introduced products to address the growing demand
for emerging broadband multifunctional services which permit the simultaneous
transmission of any combination of voice, data and video. In 1994, the Company
introduced its GLOBEVIEW-2000 Broadband System, which is one of the
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highest capacity ATM switches offered for use in public networks. More than 100
GLOBEVIEW-2000 Broadband Systems are currently installed at more than 30
customers in nine countries, including local network operators such as Ameritech
Corporation, GTE Corporation and BellSouth Corporation; long distance network
operators such as AT&T; cable television operators such as Time Warner Inc. and
Cablevision Systems Corporation; and foreign network operators such as British
Telecommunications plc, Kokushin Denshin Denwa Co. Ltd. of Japan and the network
operator that is currently the sole broadband service provider in China.
In addition, the Company designs, develops, manufactures and services cable
systems, which include optical fiber, fiber optic cable, electronic wire and
cable and apparatus for both fiber and copper cable systems. The Company's cable
systems are used to connect various devices in a network and terminal devices to
public and private networks. These cable systems are deployed for outside plant
and central office wiring, and for traditional telephony, cable television,
wireless networks and broadband applications.
The Company is one of the world's largest suppliers of fiber optic cable
systems, high strength, high performance fiber for underseas cablers and outside
plant turnkey systems, which are generally large capital projects in emerging
markets for the engineering and construction of telecommunications
infrastructure. The Company's TRUEWAVE(TM) optical fiber enables network
operators to reduce their costs by increasing the distance between optical
amplifiers. In addition, the Company offers customers their choice of any
combination of fiber and cable design.
Wireless Network Systems. The Company designs, develops, manufactures and
services wireless network infrastructure systems, which include the 5ESS switch,
base stations, wireless network software and operation support systems. These
systems provide network operators with the capability to offer a wide range of
cellular and other wireless communications services, including PCS, wireless
data and fixed wireless access. The Company's sales of wireless infrastructure
systems have grown as a percent of total revenues from 6.1% in 1993 to 10.3% in
1995.
The Company's wireless systems are in operation in nine of the top ten
United States MSAs. The Company's primary wireless system is the AUTOPLEX(R)
System 1000 product family, which includes the Series II base station, which has
a higher call handling capacity per single control complex than any other base
station on the market. The base station contains the radio transceiver that
establishes wireless communications with a mobile telephone. Base stations are
arranged geographically so that mobile customers can be "handed off " seamlessly
from one base station to the next as they travel. The network intelligence to
accomplish this is housed in the Company's Mobile Switching Center, which
includes the 5ESS switch and which connects the base stations to the public
telephone network. The Company also offers base stations for start-up
applications and smaller markets, a minicell product for rural and international
markets and a microcell for congested, high traffic areas.
Wireless technology is evolving from analog to digital. The Company
provides networks based on a variety of the leading air interface standards:
AMPS, CDMA, TDMA and GSM. The Company believes that its implementation of CDMA
technology provides superior digital voice quality and greater capacity
utilization, and allows for the utilization of lower power handsets than other
wireless technologies. As part of the acquisition of the Philips Businesses and
in furtherance of its goal to enhance its international operations in this area,
the Company acquired Philips' GSM research, design, development, manufacturing,
marketing and sales capabilities. The Company is deploying what will be the
first and second national CDMA networks in the United States, one of the world's
largest AMPS networks in Korea, and one of the world's largest GSM-based
networks in Saudi Arabia.
In addition, the Company designs, develops, manufactures and services fixed
wireless access systems. The Company offers Wireless Subscriber Systems, which
support the AMPS standard, and the new AIRLOOP(R) Wireless Local Loop system,
which utilizes CDMA technology. Also, as part of the acquisition of the Philips
Businesses, the Company acquired Philips' fixed wireless system, which is based
on the DECT (digital enhanced cordless telephone) standard. All three systems
enable network operators to expand their networks in markets where traditional
wireline systems are not cost justified, and to provide telephone services as an
alternative to traditional network operators.
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The Company designs, develops, manufactures, and services CDPD-based
wireless data systems which enable wireless network operators to offer data
services as an overlay to their existing analog voice infrastructure without
acquiring additional spectrum or upgrading to a digital network. These systems
offer the increased reliability and efficiency of switched digital packet data
systems.
Due to the complexity of wireless systems, the Company also offers a broad
range of professional services, which include project management, site
acquisition, radio frequency engineering, microwave relocation, construction
management, cellular optimization and wireless data support.
Markets
The principal customers for the Company's systems are network operators
that provide wireline and wireless local, long distance and international
telecommunications services. The Company's systems for network operators are
installed to expand the capacity and features offered by existing networks, to
replace older technology in existing networks and to establish new networks for
entrants into deregulated or previously unserved markets. See "Risk
Factors -- Reliance on Major Customers."
As a result of structural, public policy and technological changes, since
the mid-1980's the telecommunications industry has undergone a period of
significant growth in the number of lines in service and applications offered.
In developed markets, deregulation has permitted new market entrants to
construct networks in previously monopolistic markets. In response, existing
network operators have expanded beyond traditional franchises and are offering
new services. In emerging markets, privatization, competition and economic
expansion have increased demand for networking systems. At the same time,
technological advances also have increased demand by reducing operating costs
and facilitating new applications, including multifunctional services.
Changes in customer needs and demands, public policy and technology are
creating a new industry structure in which many of the actual and potential
customers of the Company are or will be competitors of AT&T's communications
services business. As a result, the obstacles currently faced by the Company in
marketing its products to competitors and potential competitors of AT&T's
communications services business have become severe and are expected to continue
to intensify. For these reasons, AT&T has announced that, subject to certain
conditions, it intends to effect the Distribution.
The Company markets and sells its products worldwide primarily through a
direct sales force due to the complexity of these systems. Most of the Company's
sales of systems for network operators are made pursuant to general purchase
agreements, which establish the terms and conditions and provide for price
determination to be made on a contract bid basis. In addition, certain of the
large infrastructure projects are conducted under long-term, fixed-price
contracts. See "Risk Factors -- Multi-Year Contracts" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Variability in the Company's Business."
As a result of the increased complexity of systems for network operators
and the high cost of developing and maintaining in-house expertise, network
operators demand complete, integrated and turn-key projects. Network operators
increasingly are seeking overall network or systems solutions that require an
increased software content which would enable them to deploy rapidly new and
differentiable services. In response, the Company has formed an organization
focused on turn-key network engineering projects for both public and private
sector customers. The Company markets integrated solutions whereby the Company
assumes full responsibility for the project, and engineers, designs and installs
the network, including equipment and software manufactured by both the Company
and third parties. In certain cases, operation of the network through contract
also may be included in the project.
Increasingly, as a result of the financial demands of major network
deployments, network operators are looking to their suppliers to arrange for
financing. The ability to provide financing is a requirement to conduct business
in certain emerging markets. As a result, the Company works with its customers
to structure and place financing packages. See "Risk Factors -- Future Capital
Requirements; Absence of AT&T Funding."
In order to market its product line worldwide, the Company has established
wholly owned subsidiaries and joint ventures with local companies in 16
countries. This approach also helps the Company meet local content regulations,
reduce its foreign exchange exposure and establish a local identity and employee
base.
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Competition
The Company believes that it enjoys a strong competitive position due to
its broad product line, large installed base, strong relationship with key
customers, technological expertise and new product development capabilities. The
primary competitors in the market for telecommunications systems, in addition to
the Company, are four very large European and North American companies which
have substantial technological and financial resources and which offer similar
broad product catalogs. These competitors are Alcatel Alsthom, Northern Telecom
Limited, Siemens AG and Telefonaktiebolaget LM Ericsson. In 1994, the Company
and these four competitors collectively accounted for over 35% of the world's
public network systems sales, of which the Company's sales of systems for
network operators accounted for 8%.
In addition, in all of the Company's product areas other than switching,
the Company faces significant competition from companies which do business in
one or a number of such product areas. For example, in wireless systems,
Motorola, Inc. and Nokia Corporation, both of which are very large companies
with substantial technological and financial resources, are significant
competitors. In transmission and cable systems, the markets are highly
fragmented and include hundreds of smaller competitors.
BUSINESS COMMUNICATIONS SYSTEMS
The Company designs, develops, manufactures and services telecommunications
systems and products for large and small business customers, home offices and
government agencies. The Company's business communications systems can be
upgraded regularly with new software releases, can support local and wide area
voice and data networking and are often integral components of global enterprise
networks. The Company's systems primarily are customer premises-based private
switching systems and products, call center systems, voice processing systems,
which include voice messaging and voice response systems, and the associated
application software and professional support services.
The Company is the market leader in customer premises-based
telecommunication systems in the United States with the largest aggregate
installed base of PBXs, key systems, structured cabling systems and voice
processing systems. The Company serves over 1.4 million business locations in
the United States and approximately 100,000 business locations in over 90 other
countries.
Systems and Services
The Company's core business communications system products are private
switching systems, generally PBXs and key systems, usually located at the
customer's premises, that permit a number of local telephones or terminals to
communicate with one another, with or without use of the public telephone
network. The Company offers the DEFINITY communications system family of
products for large customers and the wired and wireless MERLIN LEGEND(R) and
PARTNER(R) systems for smaller businesses and home offices. The DEFINITY
Enterprise Communication Server provides real-time voice and mixed-media call
processing. The recently announced FREEWORKS family of business mobility
solutions includes the DEFINITY Cellular Business System, which enables in- and
out-of-building mobility with standard cellular phones.
The Company's messaging and response systems store and forward voice, data
and images and conduct initial call processing, which integrates PBX and
computer functions. In addition, the Company is a technological leader in the
development of speech recognition algorithms, which have been incorporated into
both public and private call processing applications, such as operator services.
The Company's principal systems include the INTUITY AUDIX and DEFINITY AUDIX
voice messaging systems for use with the Company's or a competitor's PBX;
INTUITY CONVERSANT, a multi-lingual interactive voice response system which can
recognize speech in nine languages/dialects; and the INTUITY Multimedia
Messaging System, a system that combines voice messaging and voice-response
technology into a single desktop application.
The Company is the United States market leader in the sale of call center
systems, integrating the hardware and software associated with computing,
telephony, and multifunctional messaging and response applications. Call centers
are the initial entry point for customers to access a business' telephone sales
and
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support operation. The Company's systems permit the routing and administration
of a large volume of incoming calls, and the integration with business databases
of customer and product information. The Company's call center systems are used
by companies in diverse industries such as financial services, retailing and
transportation. The call center environment in which these companies operate is
characterized by hundreds of telephone service agents located in geographically
dispersed networked sites, processing tens of thousands of calls per hour. For
example, using these systems, businesses can provide their customers with the
ability to check balances or order status, to place orders, and to receive
additional information and support. The Company has the ability to build
customized systems integrating a variety of products, including both newly
purchased equipment and equipment manufactured by third parties.
In October 1995, the Company introduced the MMCX, the industry's first
multifunctional product to deliver real-time business calling features such as
conferencing, transfer, call coverage, and add/drop to switched voice or data
networking. The MMCX allows customers to migrate their existing network to
multifunction capabilities. This enables the customer to support new
applications and transport technologies, such as ATM.
In addition, subsequent to its introduction in 1989, the Company's SYSTIMAX
structured wiring system for business customers, which provides broadband
multifunctional LAN interconnections within a building or campus, has grown into
the global market leader. These systems are comprised of fiber optic and copper
cable and associated apparatus.
The Company offers a wide range of professional service options, including
remote diagnostics, a variety of on-demand services and dedicated on-site
technicians. Their on-demand services involve routine testing and diagnostics,
maintenance and repair, moves and rearrangements, and software and hardware
upgrade installations.
The Company believes that a key competitive advantage is its remote
diagnostics and repair capability, which permits the Company to monitor, test,
maintain and resolve problems from its regional service centers. Many of the
Company's systems are designed with intelligent software which establishes a
real-time link between the customer premises and a regional service center's
expert system. This permits the customer to reduce its system down-time and
enables the Company to automate many maintenance and repair tasks.
Markets
The Company markets its systems to large and small businesses and
government agencies. In the United States, the Company markets its systems
through the industry's largest direct sales force. Outside the United States,
the Company markets its systems directly and through a network of dealers and
distributors. The Company's systems are deployed in applications for customer
sales and service, conferencing and collaboration, mobility and distributed work
force, messaging and enterprise networking. The Company fields a large group of
application specialists to design call center, distance learning and other
customized applications.
The Company considers its close working relationships with its customers
and its knowledge of their individual business needs to be important
contributors to its success. The Company's sales historically have been
facilitated by system upgrades, which provide a migration path to new
applications, and new system sales to its existing customer base.
The Company believes that the premises-based communications market is
transforming from distinct voice and data networks to single multifunctional
networks that will be able to support any combination of voice, video and data
communications simultaneously. The Company is designing certain business
communications systems to enable its customers to simplify their premises
networks by combining separate voice, video and data networks into a single
architecture. The Company's development efforts are being focused on extending
the ubiquity and ease of use of today's voice calls to multifunctional
communications, and on reducing the costs associated with the administration and
maintenance of the customer's network.
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The Company has entered into alliances with Lotus Development Corporation,
to enable multimedia messaging in the Lotus Notes* environment, and with Novell,
Inc. to extend multimedia messaging and computer/telephony integration, and was
one of the founders with International Business Machines Corporation, Apple
Computer, Inc., and Siemens AG of VERSIT*, an industry consortium organized to
ensure the interoperability of multivendor multimedia applications.
Competition
The Company competes principally with three other large companies with
substantial technological and financial resources in the sale of business
communication systems. These competitors are Northern Telecom Limited, Siemens
AG (through its subsidiary Siemens Rolm Communications, Inc.) and Alcatel
Alsthom. Together with the Company, in 1994 these four competitors accounted for
approximately 40% of the sales of business communications systems globally, with
the Company accounting for approximately 8%. In addition, as the market
transforms to multifunctional systems, the Company expects that it also may
encounter competition from companies that design and manufacture data network
equipment.
The Company believes that key competitive factors in this market are
service support, the ability to upgrade existing systems for new applications,
price and reliability.
MICROELECTRONICS PRODUCTS
The Company designs, manufactures and sells ICs, electronic power systems
and optoelectronic components for communications applications. These
microelectronic products are important components of many of the Company's own
systems and products. The Company also supplies these components to other
manufacturers of communications systems and computers. The Company is a market
leader in several IC product areas critical to communications applications,
including DSPs for digital cellular phones and standard-cell ASICs. The
Company's DSPs were included in more than half of the world's digital cellular
telephones shipped in the year ended December 31, 1995.
Products
The Company's ICs are designed to provide advanced communications and
control functions for a wide variety of electronic products and systems. The
Company focuses on IC products that are used in communications and computing and
that require high-performance and low power chip architectures; complex
large-scale chip design in digital, analog and mixed-signal technologies; DSP
architectures and algorithms; high-frequency and high-voltage technologies; and
high speed data and signal processing. The Company offers a wide variety of
standard, semi-custom and custom products for cellular equipment, communications
networks, computers and computer peripherals, modems and consumer communications
products. Products include DSPs, ASICs, field programmable gate arrays and
communications ICs. The Company's products are manufactured using a variety of
technologies, from low-power, low-voltage submicron CMOS (complementary metal
oxide semiconductors) to high-frequency and high-voltage bipolar processes. The
Company's Orlando IC factory was awarded the Shingo Prize for excellence in
manufacturing in 1994.
The Company designs, develops and manufactures energy systems, electronic
power supplies and associated magnetic components for the telecommunications and
electronic data processing industries. These products serve applications ranging
from modems for personal computers to large telephone central offices. Products
include DC/DC converters, AC/DC switching power supplies, transformers,
inductors and energy systems that provide alarm, control, and backup power
management. The Company's Dallas electronic power systems factory was awarded
the Shingo Prize in 1992. In 1994, the Company was the first United States
manufacturer to be awarded the Deming Prize for quality for its electronic power
systems business.
- ---------------
* Lotus Notes is a registered trademark of Lotus Development Corporation; VERSIT
is a trademark of the consortium's founders.
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The Company designs, develops and manufactures optoelectronic products
which convert electricity to light (emitters) and light to electricity
(detectors), thereby facilitating optical transmission of information. These
products include semiconductor lasers, photodetectors, integrated transmitters
and receivers, and advanced-technology erbium-doped fiber amplifiers. The
Company provides these products worldwide to manufacturers serving the
telecommunications, cable television and network computing markets.
Optoelectronic products extend the transmission capacity of fiber to meet the
requirements of such applications as video-on-demand, interactive video,
teleconferencing, image transmission and remote database searching. The Company
markets a number of advanced products, including critical optoelectronic
components that support telecommunication transmission; long-wavelength optical
data modules for data networking; and analog lasers for use in cable television
fiber optic transmission. The Company believes that its optoelectronic products
have higher photonics reliability than those of its competitors due to their low
field failure rate and the Company's evaluation methodologies in manufacturing
that allow the detection and elimination of early failures.
The Company seeks to respond to the pace of technological change by
improving its manufacturing process technologies and developing advanced design
tools and low-cost assembly and test capabilities. In addition to using the
capabilities of Bell Labs, the Company has established close working
relationships with customers to conceive, research, develop and design new
products jointly. To support these relationships, the Company maintains a
presence in the form of research, design, manufacturing and sales offices in
over 15 countries. As a result of these relationships, the Company has been able
to develop a number of technological innovations for its customers. For example,
in order to help reduce customers' time to market, in 1994 the Company developed
the first DSP products with on-chip flash memory. These products allow customers
to load, test, and reload development software in actual prototype systems.
The Company also designs and manufactures printed circuit boards and
backplanes. The Company expects to exit this business and has offered these
operations for sale.
Markets
The Company's microelectronic products are sold globally to manufacturers
of communications systems and computers. In addition, the Company's energy power
systems are sold directly to U.S. and foreign telephone companies. The Company's
customers are competing in markets characterized by rapid technological changes,
decreasing product life cycles, price competition and increased user
applications. These markets have experienced significant expansion in the number
and types of products they offer to end-users, particularly in personal
computing and portable access communication devices. As a result, the Company's
customers continue to demand components which are smaller, require less power,
are more complex, provide greater functionality, and are produced with shorter
design cycles and less manufacturing lead time.
In 1995, the Company also introduced a GSM hardware platform based upon a
highly integrated multiple-chip design for digital cellular phones that performs
all the key handset functions between the microphone and the antenna in both
voice and data services. The Company also sells the associated software product
elements necessary to support the GSM standard.
In 1995, more than half of the Company's microelectronic production was
sold to customers other than the Company. The Company's microelectronic products
are also key components of its systems for network operators, business
communications systems, and consumer products. The Company's microelectronics
products compete with products of third-party manufacturers for inclusion in the
Company's systems and products.
Competition
The Company believes that its success is due to technological leadership,
product leadership, and close relationships with key customers. The market for
microelectronic products is global and generally highly fragmented. The
Company's competitors differ widely among product categories. The Company's
competitors in certain IC product categories include Motorola, Inc. and Texas
Instruments Incorporated; in electronic power systems include Astec Industries,
Inc. and Unitech plc (through its subsidiary, NEMEC-Lambda); and in
optoelectronics include Fujitsu Limited and Northern Telecom Limited.
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The Company believes that key competitive factors in the microelectronics
marketplace are the early involvement in customers' future application
requirements, the speed of product and technological innovation, price, customer
service, and manufacturing capacity. Other important competitive factors include
quality, reliability and local manufacturing presence.
CONSUMER PRODUCTS
The Company designs, manufactures, services and leases communications
products for consumer, small office and home office use. In 1995, the Company
sold 31% of the corded telephones, 28% of the cordless telephones and 35% of the
telephone answering systems sold in the United States, approximately double the
market share of any single competitor in each of these categories.
Products
The Company has a broad catalog of telephone products for the consumer
market. Cordless telephones are the Company's primary consumer product line, to
which the Company has continued to make improvements and innovations. The
Company was the first in the industry to introduce cordless telephones with 25
channel capability, which reduces interference. The Company also offers a broad
line of analog, digital, stand-alone and integrated telephone answering systems,
which are offered in corded and cordless versions. The Company's main corded
product is the TRIMLINE(R) telephone, with more than 88 million units sold over
the last 30 years. The Company sold over 2.5 million TRIMLINE telephones in
1995.
The Company offers a broad range of cellular products which support all of
the major United States cellular standards. The Company has captured
approximately 5% of the United States market for cellular products since
entering the market in 1992. The Company's product development efforts are
focused on developing flexible, digital wireless handsets capable of supporting
all of the major standards for cellular and PCS service in the United States.
The Company is implementing a common design for its consumer products,
which includes a common look, feel, feature placement and feature use. As part
of this process, the Company expects to reduce the number of different
components and casings used in its product line. The Company believes this
uniformity will reduce costs, reinforce its brand identity, and increase
manufacturing flexibility. Under the Brand License Agreement (as defined
herein), the Company has the right to market certain consumer products under the
"AT&T" name alone, and in combination with the Company's name, each for certain
specified periods. See "Arrangements Between the Company and AT&T -- Brand
License and Related Matters."
Markets
The Company distributes its products in the United States through
approximately 900 retailers representing over 17,000 retail outlets, including
such national retailers as Wal-Mart Stores, Inc., Sears, Roebuck and Co.,
Circuit City Stores, Inc., Best Buy Co., Inc. and Service Merchandise Company.
The Company also sells its products through the Phone Center Stores. As part of
the Company's reorganization efforts, the Company plans to close all 338 of the
Phone Center Stores by May 1996. See "The Company -- Strategic Reorganization."
The Company also offers consumers a rental option for selected products, and
currently serves over five million rental customers.
Competition
The Company believes that its position in the consumer communications
products industry is due to the quality and reliability of its products, the
"AT&T" brand name, its strong distribution channels and its broad product line.
The Company's competitors in consumer products are traditional consumer
electronic manufacturers. The industry is characterized by significant
consolidation within each product category, although the principal competitors
in each are different. In traditional telephone products, the Company's
principal competitors are Thomson Consumer Electronics (marketing under the GE
brand), U.S. Electronics, Inc. (marketing under the BellSouth brand), Panasonic
Co., USA and Sony Corporation which, together with the
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Company, accounted for over 70% of market sales in the first three quarters of
1995, of which the Company accounted for 31%.
OTHER SYSTEMS AND PRODUCTS
The Company designs, develops and manufactures advanced technology systems
which support the United States federal government's need for specially designed
integrated systems for military and civilian use. The Company offers a full
range of products on a direct funding basis from the United States government.
These systems focus on undersea sensor systems, information processing and
secure communications. The funded research has generated commercial by-products
in lightwave transmission equipment, wireless communications systems and
multifunctional compression algorithms.
The Company, through its subsidiary, Paradyne, also designs and
manufactures modems and other data communications equipment for communications
and computing. The Company has offered for sale this subsidiary.
BELL LABORATORIES
The Company has been and will continue to be supported by the technological
expertise provided by Bell Labs, one of the world's foremost industrial research
and development organizations. Bell Labs consists of all of the operations of
AT&T's former Bell Laboratories division which support the businesses of the
Company, and basic research capability, which together comprise approximately
three quarters of the total resources of AT&T's former Bell Laboratories
division. The remaining approximately one quarter of the resources of AT&T's
former Bell Laboratories division, that historically have supported AT&T's
communications services business, will be retained by AT&T. Bell Labs has made
significant discoveries and advances in communications science and technology,
software design and engineering, and networking. These contributions include the
invention of the transistor and the design and development of ICs and many types
of lasers. Areas of Bell Labs research and development work in recent years
include: networking software; lightwave transmission, which offers greater
transmission capacity than other transmission systems; electronic switching
technology, which enables rapid call processing, increased reliability and
reduced network costs; and microelectronics components, which bring the latest
advantages of very large scale integration to the full range of products offered
by the Company.
Since its founding in 1925, on average, one patent has been issued per
business day to Bell Labs. Further, seven Bell Labs scientists have received the
Nobel Prize for physics, seven have received the United States National Medal of
Science, and five have received the National Medal of Technology. In addition,
Bell Labs was the first institution to be awarded the National Medal of
Technology.
Bell Labs is thoroughly integrated with the Company's operating units in
design, development and manufacturing engineering. In general, substantially all
of Bell Labs' development staff are aligned with specific operating units. In
addition, its research, standards, architecture work and software consulting are
core functions structured to support all of the Company's operating units.
Bell Labs' research and development activities continue to focus on the
core technologies critical to the Company's success, which are software, network
design and engineering, microelectronics and photonics.
Bell Labs is a leader in software research, development and engineering for
communications applications. In 1969, it produced the UNIX* operating system, in
1972, the C and, in 1983, the C++ programming languages, and, recently, PLAN
9(TM), a distributed operating system that advances client/server applications
over public as well as private networks. In addition, since the early 1980's
Bell Labs' innovations in fault-tolerant software have enabled the Company to
achieve a level of system reliability with off-the-shelf commercial processors
that allows the Company to reduce its reliance on custom microprocessors.
- ---------------
* UNIX is a registered trademark licensed exclusively by Novell, Inc.
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Bell Labs has contributed many innovations in voice quality, and is a
leader in the development of digital signal processing. In the 1990's Bell Labs
has developed a number of innovative algorithms for high-quality speech and
audio at low-bit rates, for high-definition television, and for data, image, and
video compression in multifunctional communications. These innovations have
contributed to the Company's implementation of speech processing applications
which include text-to-speech synthesis, speech recognition and automatic
translation of speech from one language to another.
Bell Labs has led in the development of software-based networking
technologies that support the Company's systems and products. Since the 1970's,
Bell Labs' inventions have included automated network management and cellular
mobile communications. Recently, it has developed systems for digital cellular,
PCS, mobile computing and wireless LANs. Bell Labs' research in ATM led to the
Company's offering of the first large ATM switch in 1993, and is presently
focusing on ATM offerings for office and home applications.
The microelectronics industry began with Bell Labs' invention of the
transistor. Bell Labs' innovations in IC design and manufacturing include
molecular beam epitaxy in 1968, which is the technique used to build
semiconductors one atomic layer at a time.
Similarly, Bell Labs' advances extended from the first semiconductor lasers
that could operate at room temperature to the microlasers used in today's
broadband multifunctional transmission systems, and from early optical fiber
research to today's optical amplifiers and TRUEWAVE fiber. Current photonic
research includes work on passive optical networks, photonic switching and
quantum wire lasers.
RESEARCH AND DEVELOPMENT
The Company's research and product development costs charged to expense
were $2,121 million (excluding the 1995 restructuring and other charges), $2,097
million and $1,961 million for the years ended December 31, 1995, 1994 and 1993,
respectively. Historically, the Company has targeted approximately 1% of its
revenues to fund basic research activities.
MFJ AGREEMENTS
Certain agreements associated with the implementation of the MFJ impose
obligations concerning AT&T's manufacturing support of RBOC equipment needs,
including advance notice of AT&T's discontinuance of support for certain
equipment, and, in that event, the transfer to the RBOCs of necessary technical
resources, including, under certain circumstances, software source codes, to
enable the RBOCs to obtain the necessary equipment support elsewhere. The
Company would remain obligated to comply with these agreements.
BACKLOG
The Company's backlog, calculated as the aggregate of the sales price of
orders received from customers less revenue recognized, was approximately $4,100
million and $3,700 million on December 31, 1995 and December 31, 1994,
respectively (approximately 7% and 1% of which, respectively, represented
backlog of orders from AT&T). Approximately $200 million of orders included in
the December 31, 1995 backlog are scheduled for delivery after December 31,
1996. However, all orders are subject to possible rescheduling by customers.
Although the Company believes that the orders included in the backlog are firm,
some orders may be canceled by the customer without penalty, and the Company may
elect to permit cancellation of orders without penalty where management believes
that it is in the Company's best interest to do so. Not included in backlog at
December 31, 1995 is approximately $3,400 million for a long-term contract with
the Ministry of Post and Telecommunications of Saudi Arabia. Although this
contract is considered firm, it is excluded from backlog due to the annual
appropriations of the Saudi Arabian government.
In recent years the Company's backlog as a percentage of revenues has
decreased principally as a result of reduced manufacturing cycle times and the
increased software content of orders allowing for the faster delivery and
installation of new systems. The Company believes that these advances have
allowed customers
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to deploy networks more rapidly than in the past and have resulted in a
reduction in the time between customer order and system implementation, which
has also affected the Company's backlog.
SOURCES AND AVAILABILITY OF MATERIALS
The Company makes significant purchases of electronic components, copper,
silicon, precious metals, aluminum, and other materials and components from many
domestic and foreign sources. The Company has been able to obtain sufficient
materials and components from sources around the world to meet its needs. The
Company also develops and maintains alternative sources for essential materials
and components. Occasionally, special inventories of components are maintained
to minimize the effects of shortages. The Company does not have a concentration
of sources of supply of materials, labor, services or other rights that, if
suddenly eliminated, could severely impact its operations.
PATENTS AND TRADEMARKS
The Company owns approximately 8,000 patents in the United States and
11,000 in foreign countries. These foreign patents are counterparts of the
Company's United States patents. Many of the patents owned by the Company are
licensed to others and the Company is licensed to use certain patents owned by
others. In connection with the Separation, the Company has entered into an
extensive cross-licensing agreement with AT&T and NCR. See "Arrangements Between
the Company and AT&T -- Patent Licenses and Related Matters."
The Company intends to market its products under its own name and mark,
except with respect to certain consumer products and business communications
systems, which may be marketed under the "AT&T" name alone for one year after
the Closing Date or in combination with the Company's name for a period of up to
four years after the Closing Date. In addition, certain leased products or
maintenance contracts may be marketed under the "AT&T" name for 66 months after
the Closing Date. See "Arrangements Between the Company and AT&T -- Brand
License and Related Matters."
The Company considers its many trademarks to be valuable assets. Most of
its trademarks are registered throughout the world.
EMPLOYEES
At December 31, 1995, the Company employed approximately 131,000 persons,
of whom 82% were located in the United States. Of these domestic employees, 47%
are represented by unions, primarily the Communications Workers of America and
the International Brotherhood of Electrical Workers. The Company's labor
agreements with these unions expire on May 30, 1998. Such unions have filed
grievances on behalf of Company employees they represent asserting claims for
severance pay as a result of the Distribution and related transactions. The
Company has continued to honor its labor agreements with these unions and
believes that such claims are without merit. The Company intends to oppose such
grievances vigorously.
As part of the Company's restructuring efforts, and as announced January 2,
1996, the Company will eliminate approximately 22,000 positions, of which
approximately 11,000 are management positions and 11,000 are occupational
positions. Approximately 1,000 additional management employees are employed by
businesses that the Company has announced plans to sell. As of December 31,
1995, approximately 4,100 management employees have accepted a voluntary
severance package, the majority of whom will leave the Company in early 1996.
The Company expects approximately 70% of all separations to be completed by the
end of 1996 and the majority of the remaining separations to be completed during
1997. See "The Company -- Strategic Reorganization" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Strategic
Reorganization." The Company considers its relationships with its employees to
be satisfactory.
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LEGAL PROCEEDINGS
In the normal course of business, the Company is subject to proceedings,
lawsuits and other claims, including proceedings under laws and regulations
related to environmental and other matters. Such matters are subject to many
uncertainties and outcomes are not predictable with assurance. Consequently, the
Company is unable to ascertain the ultimate aggregate amount of monetary
liability or financial impact with respect to these matters at December 31,
1995. While these matters could affect operating results of any one quarter when
resolved in future periods and, while there can be no assurance with respect
thereto, it is management's opinion that after final disposition, any monetary
liability or financial impact to the Company beyond that provided in the
consolidated balance sheet at December 31, 1995 would not be material to the
Company's annual consolidated financial statements.
On February 14, 1996, Bell Atlantic Corporation and DSC Communications
Corporation filed a complaint against AT&T and the Company in the United States
District Court for the Eastern District of Texas. The complaint alleges, among
other things, that AT&T or the Company has monopolized or attempted to
monopolize alleged markets for communications transmission equipment, related
software and caller identification services. The complaint seeks injunctive
relief and damages, after trebling, in excess of $3,500 million. AT&T and the
Company do not believe that the complaint has merit and intend to defend the
lawsuit vigorously.
ENVIRONMENTAL MATTERS
The Company's current and historical manufacturing and research operations
are subject to a wide range of environmental protection laws in the United
States and other countries. In the United States these laws often require
parties to fund remedial action regardless of fault. The Company has remedial
and investigatory activities, including assessment and cleanup work, underway at
46 current and former manufacturing, laboratory and recycling facilities to
comply, or to determine compliance with, applicable environmental protection
laws. AT&T and its subsidiaries have been listed as PRPs at numerous "Superfund"
sites pursuant to CERCLA or comparable state statutes, either by a government
agency (which may have either sought information concerning AT&T's connection to
the site, or may have sought from AT&T participation in site cleanup work or
contribution toward the cost of site cleanup), or by a private party seeking
contribution to site cleanup costs. Under the terms of the Separation and
Distribution Agreement, the Company will assume or indemnify AT&T for all
liabilities primarily relating to, arising out of or resulting from (i) the
operation of the Company Business as conducted at any time prior to, on or after
the Closing Date or (ii) any Company Assets including, without limitation, those
associated with these sites.
It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. The Company records an environmental
reserve when it is probable that a liability has been incurred and the amount of
the liability is reasonably estimable. This practice is followed whether the
claims are asserted or unasserted. Management expects that the amounts reserved
for will be paid out over the period of remediation for the applicable site
which ranges from 5 to 30 years. Reserves for estimated losses from
environmental remediation are, depending on the site, based primarily upon
internal or third party environmental studies, and estimates as to the number,
participation level and financial viability of any other PRPs, the extent of the
contamination and the nature of required remedial actions. Accruals are adjusted
as further information develops or circumstances change. The amounts provided
for in the Company's consolidated financial statements in respect of
environmental reserves are the gross undiscounted amount of such reserves,
without deductions for insurance or third party indemnity claims. In those cases
where insurance carriers or third party indemnitors have agreed to pay any
amounts and management believes that collectibility of such amounts is probable,
the amounts are reflected as receivables in the financial statements. Although
the Company believes that its reserves are adequate, there can be no assurance
that the amount of capital expenditures and other expenses which will be
required to complete remedial actions and to comply with applicable
environmental laws will not exceed the amounts reflected in the Company's
reserves or will not have a material adverse effect on the financial condition
of the Company or the Company's results of operations or cash flows. Any amounts
of environmental costs that may be incurred in excess of those provided for at
December 31, 1995 cannot be determined.
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On July 31, 1991, the United States Environmental Protection Agency Region
III issued a complaint pursuant to Section 3008a of the Resource Conservation
and Recovery Act of 1976 alleging violations of various waste management
regulations at the Company's Richmond Works in Richmond, Virginia. The complaint
alleges violations relating to training, solder dross management, the facility's
waste analysis plan and the handling of gold ion exchange resins. The complaint
seeks a total of $4.2 million in penalties. The Company is contesting both
liability and the penalties.
In addition, on July 31, 1991, the United States Environmental Protection
Agency filed a civil complaint in the U.S. District Court for the Southern
District of Illinois against AT&T (with respect to the Company's businesses) and
nine other parties seeking enforcement of its CERCLA Section 106 cleanup order,
issued in November 1990 for the NL Granite City Superfund site in Granite,
Illinois. This complaint seeks past costs, civil penalties of $25,000 per day
and treble damages related to certain United States costs. While the
Environmental Protection Agency has not stated the costs for which it seeks
treble damages, its contractors, the Army Corps of Engineers, estimated that
$4.3 million of costs have been incurred as of November 15, 1995. The Company is
contesting liability.
During 1994, AT&T Nassau Metals Corporation ("Nassau"), a wholly owned
subsidiary of the Company, and the New York State Department of Environmental
Conservation (the "NYSDEC") were engaged in negotiations over a study and
cleanup of the Nassau plant located on Richmond Valley Road in Staten Island,
New York. During these negotiations, in June 1994, NYSDEC presented Nassau with
a draft consent order which included not only provisions for site investigation
and remediation but also a provision for payment of a $3.5 million penalty for
alleged violations of hazardous waste management regulations. NYSDEC claims that
Nassau improperly engaged in landfilling and storing of lead dust. No formal
proceeding has been commenced by NYSDEC. Negotiations and discussions regarding
the matter are continuing.
PROPERTIES
At December 31, 1995, the Company operated 46 manufacturing and repair
sites, of which 26 were located in the United States, occupying in excess of
20.0 million square feet, of which approximately 1.1 million square feet were
leased. These sites were located in 19 countries. In 1995, the Company closed,
relocated or sold three manufacturing and repair sites in the United States
occupying in excess of 800,000 square feet, of which none were leased. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Strategic Reorganization."
At December 31, 1995, the Company operated 106 warehouse sites, of which 80
were located in the United States, occupying in excess of 4.0 million square
feet, substantially all of which were leased. These sites were located in 19
countries.
At December 31, 1995, the Company operated 718 office sites
(administration, sales, field service), of which 639 were located in the United
States, occupying in excess of 17.0 million square feet, substantially all of
which were leased. These sites were located in 47 countries.
At December 31, 1995, the Company operated additional sites in 15 cities,
of which 14 were located in the United States, with significant research and
development activities, occupying in excess of 9.0 million square feet, of which
approximately 1.4 million square feet were leased.
In addition, the Company has plans to close or to discontinue the lease of
certain facilities. See "The Company -- Strategic Reorganization."
For a summary of certain leases and subleases to be entered into in
connection with the Separation, see "Arrangements Between the Company and
AT&T -- Real Estate Agreements."
The Company believes its plants and facilities are suitable and adequate,
and have sufficient productive capacity, to meet its current needs.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is certain information concerning the directors and
executive officers of the Company. Seven of such directors who are officers or
employees but not directors of AT&T will only serve as directors of the Company
until the Distribution. The Company Board is divided into three classes.
Commencing with the annual meeting of stockholders to be held in April 1997,
directors for each class will be elected at the annual meeting of stockholders
held in the year in which the term for such class expires and thereafter will
serve for a term of three years. See "Description of Capital
Stock -- Antitakeover Effects of Certain Provisions of the Certificate and
By-Laws."
<TABLE>
<CAPTION>
NAME AGE(1) POSITION AND OFFICES HELD
- ----------------------------------- --------- --------------------------------------------
<S> <C> <C>
Henry B. Schacht................... 61 Chairman of the Board and Chief Executive
Officer
Richard A. McGinn.................. 49 President and Chief Operating Officer, and a
Director
Carla A. Hills..................... 61 Director
Drew Lewis......................... 64 Director
Donald S. Perkins.................. 68 Director
Franklin A. Thomas................. 61 Director
Ephraim M. Brecher*................ 49 Director
Jim G. Kilpatric*.................. 57 Director
Marc E. Manly*..................... 44 Director
S. Lawrence Prendergast*........... 54 Director
Maureen B. Tart*................... 40 Director
Florence L. Walsh*................. 34 Director
Paul J. Wondrasch*................. 52 Director
Curtis R. Artis.................... 48 Senior Vice President, Human Resources
Gerald J. Butters.................. 52 President, North American Region, Network
Systems
Joseph S. Colson, Jr. ............. 48 President, AT&T Customer Business Unit,
Network Systems
Curtis J. Crawford................. 48 President, Microelectronics
Carleton S. Fiorina................ 41 Executive Vice President, Corporate
Operations
Homayoun Firouztash................ 52 Vice President, Consumer Products
William B. Marx, Jr. .............. 57 Senior Executive Vice President
William T. O'Shea.................. 48 President, International, Network Systems
Donald K. Peterson................. 46 Executive Vice President and Chief Financial
Officer
Richard J. Rawson.................. 43 Senior Vice President, General Counsel and
Secretary
Patricia F. Russo.................. 43 President, Business Communications Systems
Daniel C. Stanzione................ 51 President, Network Systems; President, Bell
Laboratories
</TABLE>
- ---------------
* Indicates an AT&T officer or employee.
(1) As of March 1, 1996.
Mr. Schacht was named Chief Executive Officer of the Company effective
February 1, 1996 and Chairman of the Board of the Company effective April 3,
1996. He has been a member of the AT&T Board since 1981 but will resign from the
AT&T Board effective no later than the Closing Date. Mr. Schacht is a
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<PAGE> 185
director of Cummins Engine Company, Inc. ("Cummins"), a position he has held
since 1977. He was Chief Executive Officer of Cummins from 1973 to 1994 and
Chairman of the Board of Cummins from 1977 to 1995. In addition, Mr. Schacht is
a director of Aluminum Company of America and of each of The Chase Manhattan
Corp. and its subsidiary, The Chase Manhattan Bank, N.A. Mr. Schacht's initial
term will expire at the annual meeting of stockholders to be held in 1999.
Mr. McGinn was named President and Chief Operating Officer of the Company
effective February 1, 1996 and became a director effective April 3, 1996.
Previously, he was Executive Vice President and Chief Executive Officer of the
AT&T Network Systems Group, a position to which he was named in October 1994.
From August 1993 to October 1994, Mr. McGinn was President and Chief Operating
Officer, AT&T Network Systems Group, and, from August 1991 to August 1993, he
was Senior Vice President, AT&T Network Systems Group. Prior to that time, Mr.
McGinn held various senior management positions within AT&T. Mr. McGinn's
initial term will expire at the annual meeting of stockholders of the Company to
be held in 1998.
Ms. Hills became a director effective April 3, 1996. Ms. Hills has been a
director of AT&T since 1993 but will resign from the AT&T Board effective no
later than the Closing Date. She has been Chairman and Chief Executive Officer
of Hills & Company (international consultants) since 1993. Hills & Company
assists U.S. businesses with their trade and investment interests abroad,
particularly in the emerging markets. She was the United States Trade
Representative, Executive Office of the President, from 1989 to 1993. In
addition, she is a director of American International Group, Inc., Chevron
Corporation and Time Warner Inc. Ms. Hills' initial term will expire at the
annual meeting of stockholders of the Company to be held in 1997.
Mr. Lewis became a director effective April 3, 1996. Mr. Lewis has been a
director of AT&T since 1989, but will resign from the AT&T Board effective no
later than the Closing Date. He has been Chairman and Chief Executive Officer of
Union Pacific Corporation since 1987. He is also a director of American Express
Company, FPL Group., Inc., Ford Motor Company, and Gannett Co., Inc. Mr. Lewis'
initial term will expire at the annual meeting of stockholders of the Company to
be held in 1997.
Mr. Perkins became a director effective April 3, 1996. Mr. Perkins has been
a director of AT&T since 1979, but will resign from the AT&T Board effective no
later than the Closing Date. From 1970 to 1980, Mr. Perkins served as the
Chairman and Chief Executive Officer of Jewel Companies, Inc., a diversified
retailer. From January through June 1995, Mr. Perkins served as Non-Executive
Chairman of Kmart Corp. In addition, Mr. Perkins is a director of Aon Corp.,
Cummins, Current Assets L.L.C., Illinova Corporation and its subsidiary,
Illinois Power Corporation, Inland Steel Industries, LaSalle Street Fund, The
Putnam Funds, Springs Industries, Inc. and Time Warner Inc. Mr. Perkins' initial
term will expire at the annual meeting of stockholders of the Company to be held
in 1997.
Mr. Thomas became a director effective April 3, 1996. Mr. Thomas has been a
director of AT&T since 1988, but will resign from the AT&T Board effective no
later than the Closing Date. He has been President of The Ford Foundation since
1979. He also is a director of the Aluminum Company of America, CBS Inc.,
Citicorp and its subsidiary, Citibank, N.A., Cummins and Pepsico, Inc. Mr.
Thomas' initial term will expire at the annual meeting of stockholders of the
Company to be held in 1998.
Mr. Brecher became a director of the Company effective April 3, 1996. Mr.
Brecher joined AT&T as Vice President -- Law in July 1990. In this position, he
was responsible for the leadership of the AT&T Law Division Tax Group. Since
December 1991, Mr. Brecher has held the position of President -- Taxes and Tax
Counsel of AT&T. Mr. Brecher's initial term will expire at the annual meeting of
stockholders of the Company to be held in 1997.
Mr. Kilpatric became a director of the Company effective April 3, 1996. Mr.
Kilpatric has held the position of Senior Vice President -- Law of AT&T since
1989. Mr. Kilpatric's initial term will expire at the annual meeting of
stockholders of the Company to be held in 1998.
Mr. Manly became a director of the Company effective April 3, 1996. Mr.
Manly has held the position of Vice President -- Law & Solicitor General of AT&T
since January 1995. Prior to that time, Mr. Manly was a
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<PAGE> 186
partner with the firm of Sidley & Austin, representing AT&T in litigation and
regulatory matters. Mr. Manly's initial term will expire at the annual meeting
of stockholders of the Company to be held in 1998.
Mr. Prendergast became a director of the Company effective April 3, 1996.
Mr. Prendergast has held the position of Vice President and Treasurer of AT&T
since 1983. Mr. Prendergast's initial term will expire at the annual meeting of
stockholders of the Company to be held in 1999.
Ms. Tart was appointed as a director of the Company effective February 1,
1996. Ms. Tart has been Vice President and Controller of AT&T since March 1994.
Prior to her current position, Ms. Tart was the Chief Financial Officer of AT&T
Capital Corporation, a position to which she was named in 1990. Ms. Tart's
initial term will expire at the annual meeting of stockholders of the Company to
be held in 1999.
Ms. Walsh became a director of the Company effective April 3, 1996. Ms.
Walsh has been Assistant Treasurer of AT&T since November 1994. From May 1993
until November 1994, she was Director, Domestic Finance at General Motors
Corporation. Prior to that time, Ms. Walsh held a variety of management
positions at General Motors Corporation. Ms. Walsh has been nominated as a
director of the LIN Television Corporation Board of Directors. Ms. Walsh's
initial term will expire at the annual meeting of stockholders of the Company to
be held in 1999.
Mr. Wondrasch became a director of the Company effective April 3, 1996.
Since December 1995, Mr. Wondrasch has held the position of Senior Vice
President of AT&T International Inc. and Chief Executive Officer of AT&T
Caribbean/Latin America Inc. He held a senior management position with AT&T from
1993 to 1995. From 1989 to 1993, Mr. Wondrasch held the position of President,
AT&T General Business Systems. Mr. Wondrasch's initial term will expire at the
annual meeting of stockholders of the Company to be held in 1999.
Mr. Artis became Senior Vice President, Human Resources of the Company
effective February 1, 1996. Mr. Artis held the position of Vice President, Human
Resources for the AT&T Network Systems Group since August 1994. From December
1993 to August 1994, Mr. Artis was a Vice President of Corporate Human
Resources, AT&T. Prior to that time, Mr. Artis held various senior management
positions within AT&T.
Mr. Butters became President, North American Region, Network Systems, of
the Company effective February 1, 1996. Since January 1994, Mr. Butters has held
various positions within the AT&T Network Systems Group, including President,
North American Region (since January 1996), President, Global Public Networks,
Offer Business Unit (from January 1995 to January 1996), President, North
American Region, Customer Business Unit (from July 1994 to January 1995), and
Vice President, Strategic Business Development (from January 1994 to July 1994).
From January 1993 to January 1994, Mr. Butters held the position of President,
Northern Telecom, Inc. Mr. Butters was Executive Vice President, Sales and
Service, from February 1992 to January 1993 and Executive Vice President, Public
Networks, both of Northern Telecom, Inc., from January 1991 to February 1992.
Mr. Colson became President, AT&T Customer Business Unit, Network Systems
of the Company effective February 1, 1996. Since April 1993, Mr. Colson has held
the position of President, AT&T Customer Business Unit for the AT&T Network
Systems Group. From July 1990 to April 1993, Mr. Colson was the Switching
Systems Vice President, United States, AT&T Network Systems Group.
Mr. Crawford became President, Microelectronics of the Company effective
February 1, 1996. Mr. Crawford held the position of President, AT&T
Microelectronics since July 1993. From August 1991 to July 1993, Mr. Crawford
was Vice President, AT&T Microelectronics.
Ms. Fiorina became Executive Vice President, Corporate Operations of the
Company effective February 1, 1996. Previously, Ms. Fiorina held the positions
of President, North America (from January 1995 to January 1996) and President,
Atlantic and Canadian Region (from July 1994 to January 1995) within the AT&T
Network Systems Group. From February 1993 to July 1994, Ms. Fiorina was Vice
President, Strategy and Marketing Development for the AT&T Network Systems
Group. Prior to that time, Ms. Fiorina held various senior positions with AT&T
in business development and marketing.
56
<PAGE> 187
Mr. Firouztash became Vice President, Consumer Products, of the Company
effective February 1, 1996. From October 1995, Mr. Firouztash was Vice
President, Marketing, Sales and Product Management of the Consumer Products
Group of AT&T. From August 1994 to October 1995, Mr. Firouztash held the
position of Global Marketing and Sales Vice President of AT&T Consumer Products
Group. From September 1993 to August 1994, Mr. Firouztash held the position of
Group Vice President, Global Sales/Customer Service for the Consumer Products
Group. Prior to that time, Mr. Firouztash was Vice President -- America's Region
of Control Data Systems Inc., a position he held from January 1991 to January
1992, and Vice President -- Western Europe Region of Control Data Systems Inc.,
a position he held from January 1990 to January 1992.
Mr. Marx became Senior Executive Vice President of the Company effective
February 1, 1996. Since July 1989, Mr. Marx has held a number of senior
management positions within AT&T, most recently as Executive Vice President and
Chief Executive Officer, AT&T Multimedia Products Group, beginning October 1994
and, previously, as Executive Vice President and Chief Executive Officer, AT&T
Network Systems Group (from August 1993) and Group Executive, AT&T Network
Systems Group (from July 1989 to August 1993).
Mr. O'Shea became President, International, Network Systems of the Company
effective February 1, 1996. Since July 1995 Mr. O'Shea has held the position of
President, International Regions and Professional Services of the AT&T Network
Systems Group. Previously, in 1995, Mr. O'Shea held the position of acting Chief
Executive Officer of AT&T Global Information Solutions Company (renamed NCR)
("AT&T GIS"). Mr. O'Shea was named Senior Vice President, Worldwide Marketing of
AT&T GIS in 1993. Prior to that time, Mr. O'Shea held the position of Senior
Vice President of the AT&T GIS Network Products Group.
Mr. Peterson became Executive Vice President and Chief Financial Officer of
the Company effective February 1, 1996. Mr. Peterson has held the positions of
Vice President and Chief Financial Officer of the AT&T Communications Services
Group since September 1995. Prior to that time, Mr. Peterson held various senior
executive positions at Northern Telecom, Inc. which included President of Nortel
Communications Systems, Inc. (from January 1993 to September 1995), Vice
President of Finance of Northern Telecom, Inc. (from January 1991 to January
1993) and Group Vice President of Northern Telecom, Inc. (from September 1987 to
January 1991).
Mr. Rawson became Senior Vice President, General Counsel and Secretary of
the Company effective February 1, 1996. Previously, Mr. Rawson was Vice
President, Law -- AT&T Network Systems Group, a position to which he was named
in September 1992. From July 1984 to September 1992, Mr. Rawson was legal
counsel for various business units within AT&T.
Ms. Russo became President, Business Communications Systems of the Company
effective February 1, 1996. From May 1993 through January 1996, Ms. Russo held
the position of President, Global Business Communications Systems of AT&T. From
January 1992 to May 1993, Ms. Russo was Vice President, National Sales and
Service of AT&T Global Business Communications Systems. Prior to that time, Ms.
Russo held various senior positions in Marketing, Sales, and Customer Service
Operations within AT&T.
Mr. Stanzione became President, Network Systems Group and President, Bell
Laboratories effective February 1, 1996. Mr. Stanzione had held the position of
President, AT&T Bell Laboratories since January 1995. Previously, Mr. Stanzione
held the positions of President, Global Public Networks (from July 1994 to
January 1995) and President, Switching Systems (from November 1993 to July 1994)
both units of the AT&T Network Systems Group. From April 1992 to November 1993,
Mr. Stanzione held the position of Group Technical Officer and Corporate
Information Officer, AT&T Network Systems Group and from January 1989 to April
1992 Mr. Stanzione was President, Operations Systems of the AT&T Network Systems
Group.
Effective as of the Distribution, the seven directors who are officers or
employees but not directors of AT&T will resign from the Company Board. Prior to
the Distribution, the Corporate Governance and Compensation Committee of the
Company Board expects to identify a number of additional candidates not
affiliated with the Company or AT&T for election by the Company Board.
57
<PAGE> 188
ANNUAL MEETING
The By-Laws provide that annual meetings of stockholders will be held at
the Company's principal office or at such other place and on such date as may be
fixed from time to time by resolution of the Company Board. The first annual
meeting for which proxies will be solicited from stockholders will be held on
April 16, 1997.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company Board has established four committees: an Audit and Finance
Committee, a Corporate Governance and Compensation Committee, a Public Policy
Committee and a Development Committee. Each of Ms. Hills, Mr. Lewis, Mr. Perkins
and Mr. Thomas will serve on each of the four Committees.
The Audit and Finance Committee meets with management to consider the
adequacy of the internal controls and the objectivity of financial reporting.
The Audit and Finance Committee also meets with the independent auditors and
with appropriate financial personnel and internal auditors of the Company
regarding these matters. The Audit and Finance Committee recommends to the
Company Board the appointment of the independent auditors, subject to
ratification by the stockholders at the annual meeting. Both the internal
auditors and the independent auditors periodically will meet alone with the
Audit and Finance Committee and will have unrestricted access to the Audit and
Finance Committee. The Audit and Finance Committee also reviews the Company's
long-term plans and financings, and reports its recommendations to the full
Company Board for approval and to authorize action. The Audit and Finance
Committee will consist of directors who are not employees of the Company or
employees or directors of AT&T ("Non-Employee Directors"), together with the
Chief Executive Officer and the Chief Operating Officer, ex officio, neither of
whom will participate in Audit and Finance Committee meetings when audit matters
are discussed.
The Corporate Governance and Compensation Committee's functions include
recommending to the full Company Board nominees for election as directors of the
Company, making recommendations from time to time to the Company Board as to
matters of corporate governance, administering management incentive compensation
plans, including the 1996 LTIP, and making recommendations to the Company Board
with respect to the compensation of directors and officers of the Company. The
Corporate Governance and Compensation Committee also supervises the Company's
employee benefit plans. The Corporate Governance and Compensation Committee will
consist of Non-Employee Directors. It is expected that following the
Distribution, the Corporate Governance and Compensation Committee will be
reconstituted as the Executive, Corporate Governance and Compensation Committee,
which, between meetings of the Company Board, will be authorized to exercise all
the powers and authority of the Company Board in the management of the business
and affairs of the Company, except for powers reserved to the full board of
directors by the DGCL. At that time, it is expected that the Chief Executive
Officer and the Chief Operating Officer will become ex officio members of such
committee, but will not participate in Executive, Corporate Governance and
Compensation Committee meetings where compensation or benefit matters are
discussed.
The Development Committee is responsible for evaluating plans to develop
the overall strategic direction of the Company and for assessing the merits of
potential business ventures, plans and opportunities in order to make
recommendations to the Company Board in connection therewith.
The Public Policy Committee reviews matters concerning the policies,
practices and procedures of the Company that relate to public policy issues
facing the Company and its industry in general.
COMPENSATION OF DIRECTORS
As of the Closing Date, all Non-Employee Directors will receive an annual
retainer of $55,000. The chair of each committee will receive an additional
annual retainer of $10,000. Directors will not receive separate meeting fees.
One-half of the annual retainer and of the additional annual retainer for
committee chairs will be paid in Common Stock.
Pursuant to the Company's Deferred Compensation Plan for Directors,
Non-Employee Directors may defer all or a portion of their compensation to a
deferred compensation account (the "Account"). Directors
58
<PAGE> 189
may elect to defer all or part of the receipt of such compensation payable in
cash into a portion of the Account, the value of which is measured from time to
time by the value of the Common Stock (the "Company Shares Portion") or into a
cash portion of the Account (the "Cash Portion") and to defer all or part of the
receipt of such compensation payable in Common Stock into the Company Shares
Portion of the Account. The Company Shares Portion is credited on each dividend
payment date for Common Stock with a number of deferred shares of Common Stock
equivalent in market value to the amount of the quarterly dividend on the shares
then credited in the Account. The Cash Portion of the Account earns interest,
compounded quarterly, at an annual rate equal to the average interest rate for
ten-year United States Treasury notes for the previous quarter, plus 5%. All
distributions in respect of the Company Shares Portion are payable solely in
cash. For this purpose, the value of the deferred shares of Common Stock will be
equal to the average of the closing prices of the Common Stock on the five
consecutive trading days immediately prior to the payment date. In the event of
a potential change in control, the Company's Deferred Compensation Plan for
Directors will be supported by a benefits protection grantor trust, the assets
of which will be subject to the claims of the Company's creditors.
The Company also provides Non-Employee Directors with travel accident
insurance when on Company business. A Non-Employee Director may purchase life
insurance sponsored by the Company. The Company will share the premium expense
with the director; however, all the Company contributions will be returned to
the Company at the earlier of (a) the director's death or (b) the later of age
70 or 10 years from the policy's inception. This benefit will continue after the
Non-Employee Director's retirement from the Company Board.
The current Non-Employee Directors of the Company who formerly were
directors of AT&T are eligible for an annual retirement benefit under the AT&T
Retirement Plan for Outside Directors, equal to their annual retainer at
retirement from the AT&T Board, provided they attain five years of service. Such
Plan will be assumed by the Company with respect to such directors. The
directors' years of service as directors of both AT&T and the Company will be
credited in the determination of years of service. The benefit begins at the
later of age 70 or retirement and is payable for life. Except as set forth
herein, the Company does not have a retirement plan for Non-Employee Directors.
59
<PAGE> 190
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
No present or future officer or director currently owns any shares of
Common Stock, all of which are currently owned by AT&T. Such directors and
officers will receive shares of Common Stock in the Distribution in respect of
shares of AT&T common stock, $1.00 par value ("AT&T Common Stock"), held by them
on the record date for the Distribution. In addition, AT&T Stock Awards will be
converted into comparable awards based on Common Stock under the 1996 LTIP as
described below. See "-- 1996 Company Long Term Incentive Plan" and
"Arrangements Between the Company and AT&T -- Employee Benefits Agreement." The
following table sets forth the number of shares of AT&T Common Stock
beneficially owned on March 1, 1996 by each of the Company's directors and
director nominees, the executive officers named in the Summary Compensation
Table below and all directors and executive officers of the Company as a group.
Except as otherwise noted, the individual director, director nominee or
executive officer or their family members had sole voting and investment power
with respect to such securities.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY DEFERRAL
NAME OWNED(1)(2) PLANS(3) TOTAL
- --------------------------------------------------------- ------------ ---------- ---------
<S> <C> <C> <C>
Henry B. Schacht......................................... 1,055 0 1,055
Richard A. McGinn........................................ 79,170 0 79,170
William B. Marx, Jr. .................................... 150,396 16,808 167,204
Daniel C. Stanzione...................................... 61,296 0 61,296
Patricia F. Russo........................................ 46,781 856 47,637
Carla A. Hills........................................... 400 3,061 3,461
Drew Lewis............................................... 4,000 0 4,000
Donald S. Perkins........................................ 3,251,450(4) 252 3,251,702
Franklin A. Thomas....................................... 1,115 2,511 3,626
Ephraim M. Brecher....................................... 36,459 0 36,459
Jim G. Kilpatric......................................... 62,499 12,526 75,025
Marc E. Manly............................................ 1,650 0 1,650
S. Lawrence Prendergast.................................. 27,637 0 27,637
Maureen B. Tart.......................................... 17,833 0 17,833
Florence L. Walsh........................................ 1,000 0 1,000
Paul J. Wondrasch........................................ 77,102 0 77,102
Directors and Executive Officers as a Group (25
persons)............................................... 4,061,541(5) 43,288 4,104,829
</TABLE>
- ---------------
(1) No individual director, director nominee or named executive officer
beneficially owns 1% or more of the AT&T Common Stock, nor do the directors
and executive officers as a group.
(2) Includes beneficial ownership of the following number of shares of AT&T
Common Stock which may be acquired within 60 days of March 1, 1996 pursuant
to stock options awarded under employee incentive compensation plans of
AT&T: Mr. Schacht - 0; Mr. McGinn - 69,653; Mr. Marx - 147,238; Mr.
Stanzione - 58,541; Ms. Russo - 44,075; Mr. Brecher - 34,059; Mr.
Kilpatric - 57,707; Mr. Manly -- 1,550; Mr. Prendergast - 25,827; Ms.
Tart - 17,697; Ms. Walsh - 1,000; Mr. Wondrasch - 61,673; and all other
executive officers as a group - 214,024.
(3) Reflects share units representing AT&T Common Stock held in elective
deferred compensation accounts.
(4) Mr. Perkins as an investment company trustee has shared voting and
investment power over 3,251,450 shares of AT&T Common Stock reflected
above.
(5) Includes beneficial ownership of 733,044 shares of AT&T Common Stock which
may be acquired within 60 days of March 1, 1996 pursuant to stock options
awarded under employee incentive compensation plans as well as 3,251,450
shares over which they have sole or shared voting and investment power as
trustees.
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<PAGE> 191
Options to purchase Common Stock and other stock-based awards may be
granted to directors, officers and other key employees of the Company in the
future under the 1996 LTIP. See "-- 1996 Company Long Term Incentive Plan."
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
chief executive officer and the four other executive officers of the Company as
of February 1, 1996 who, based on employment with AT&T and its subsidiaries,
were the most highly compensated for the year ended December 31, 1995. All of
the information set forth in this table reflects compensation earned by such
individuals for services with AT&T and its subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION(2)
ANNUAL COMPENSATION(2) AWARDS PAYOUTS
------------------------------------------------------------------------------------------------------------------
AT&T ALL
OTHER RESTRICTED AT&T OTHER
ANNUAL STOCK AT&T LTIP COMPEN-
NAME AND SALARY BONUS COMPEN- AWARD(S) OPTIONS/ PAYOUTS SATION
PRINCIPAL POSITION(1) YEAR ($) ($) SATION($)(3) ($)(4)(C) SARS(#) ($)(5) ($)(6)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Henry B. Schacht(7) 1995 0 0 0 0 0 0 0
Chairman of the Board 1994 0 0 0 0 0 0 0
and Chief Executive 1993 0 0 0 0 0 0 0
Officer
Richard A. McGinn 1995 469,400 517,200 70,637 501,897(4)(a) 36,504 158,712 31,991
President and Chief 1994 373,525 562,300 49,450 0 28,654 152,302 23,659
Operating Officer 1993 304,167 224,800 31,351 0 16,241 61,367 17,653
William B. Marx, Jr. 1995 659,000 440,500 176,782 530,389(4)(a) 138,484 523,783 62,500
571,500(4)(b)
Senior Executive 1994 598,000 830,400 134,662 0 30,220 502,640 51,408
Vice President 1993 545,000 452,067 96,130 0 30,220 226,725 51,378
Daniel C. Stanzione 1995 336,000 314,000 57,551 280,445(4)(a) 219,692 108,450 28,169
1,079,500(4)(b)
President -- Bell Labs; 1994 278,000 283,500 39,410 0 9,165 104,071 22,717
President -- Network
Systems 1993 246,000 142,500 28,336 0 9,165 62,942 25,356
Patricia F. Russo 1995 301,000 339,000 44,617 155,222(4)(a) 70,330 92,598 23,985
844,800(4)(b)
President, Business 1994 273,000 293,000 28,709 0 9,165 88,856 18,670
Communications Systems 1993 238,667 103,200 19,088 0 9,165 51,550 21,915
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Includes Chairman of the Board and Chief Executive Officer and the four
other most highly compensated executive officers as measured by salary and
bonus.
(2) Compensation deferred at the election of named officers is included in the
category (e.g., bonus, LTIP payouts) and year it would have otherwise been
reported had it not been deferred.
(3) Includes (a) payments of above-market interest on deferred compensation, (b)
dividend equivalents paid with respect to long-term performance shares prior
to end of three-year performance period, and other earnings on long-term
incentive compensation paid during the year, (c) tax payment reimbursements,
and (d) the value of personal benefits and perquisites.
(4) (a) On January 1, 1995, awards classified as performance share awards under
the 1987 Plan (the "Three Year Awards") were granted to Messrs. McGinn, Marx
and Stanzione and to Ms. Russo. At the time of such grant, the payout of
such awards was tied to achieving specific levels of return-to-equity
("RTE"). The target amount would be earned if 100% of the targeted RTE rate
is achieved. At its December 1995 meeting, the Compensation Committee of the
AT&T Board of Directors recommended and approved that the performance
amounts for the 1995-1997 performance cycle be deemed to have been met at
the target level. This action was taken in acknowledgment that AT&T's
restructuring had rendered the original performance criteria inapplicable
and of the difficulty of establishing revised criteria while the
restructuring was in progress. Awards will be distributed as common stock,
or as cash in such an amount equal to the value of these shares, or partly
in common stock and partly in cash. As a result of such action, such Three
Year Awards will vest in one installment and be payable in the first quarter
of 1998 if
61
<PAGE> 192
the holder remains in the employ of the Company for the three full years
ending December 31, 1997, with certain exceptions in the case of death,
disability or retirement. Dividend equivalents on such awards are paid in
cash to holders thereof. The number of shares of AT&T Common Stock
represented by Three Year Awards for the 1995-1997 cycle for Messrs. McGinn,
Marx and Stanzione and Ms. Russo, respectively, were 9,988, 10,555, 5,581
and 3,089. The value of such awards at the date of grant is reflected in the
Table above. In addition, on December 31, 1995, Mr. McGinn held an
outstanding grant of restricted stock of 5,000 shares.
A similar determination was made by such Compensation Committee with
respect to the 1994-1996 cycle Three Year Awards with the result that such
awards will vest in one installment and be payable in the first quarter of
1997 if the holder remains in the employ of the Company for the three full
years ending December 31, 1996, subject to the same exceptions. The number
of shares of AT&T Common Stock represented by the 1994-1996 Three Year
Awards for Messrs. McGinn, Marx and Stanzione and Ms. Russo, respectively,
were 8,317, 8,783, 2,661 and 2,661.
(b) On September 25, 1995, an award of restricted stock units was granted to
Messrs. Marx and Stanzione and on October 31, 1995 to Ms. Russo as part of
an AT&T special equity incentive/retention program in amounts of 9,000
units, 17,000 units and 13,200 units, respectively. The value at the
respective date of grant of these restricted stock units is reflected in the
Table above. These grants vest four years after the date of grant and carry
stringent penalties for competition and other specified adverse activities.
Dividends on such shares are paid in cash to holders thereof.
(c) The aggregate value at December 31, 1995 of the Three Year Awards for
the 1994-1996 cycle and the 1995-1997 cycle and for outstanding restricted
stock awards for Messrs. McGinn, Marx and Stanzione and Ms. Russo,
respectively was $1,508,999, $1,834,886, $1,634,420 and $1,227,013.
(5) Includes distribution in 1995 to Messrs. McGinn, Marx and Stanzione, and Ms.
Russo of performance shares where three-year performance period ended
December 31, 1994.
(6) In 1995, includes (a) Company contributions to savings plans (Mr. McGinn
$6,000, Mr. Marx $6,000, Mr. Stanzione $6,000 and Ms. Russo $6,000, (b)
dollar value of the benefit of premiums paid for split-dollar life insurance
policies (unrelated to term life insurance coverage) projected on an
actuarial basis (Mr. McGinn $17,409, Mr. Marx $38,756, Mr. Stanzione
$17,088, and Ms. Russo $13,151), and (c) payments equal to lost AT&T savings
match caused by IRS limitations (Mr. McGinn $8,582, Mr. Marx $17,744, Mr.
Stanzione $5,081, and Ms. Russo $4,834).
(7) Mr. Schacht became Chief Executive Officer of the Company on February 1,
1996. The Company did not have a Chief Executive Officer prior to Mr.
Schacht's appointment. For a description of Mr. Schacht's 1995 and 1996
compensation arrangements, see "-- Other Employment Arrangements."
OPTION AND SAR GRANTS OF AT&T COMMON STOCK TO EXECUTIVE OFFICERS
The following tables disclose information regarding stock options and stock
appreciation rights granted to the executive officers named in the above Summary
Compensation Table in respect of shares of AT&T Common Stock under the AT&T 1987
Long Term Incentive Plan (the "1987 Plan").
62
<PAGE> 193
AGGREGATED OPTION/STOCK APPRECIATION RIGHTS
EXERCISES IN 1995 AND YEAR-END VALUES
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT YEAR END AT YEAR END
(#)(2) ($)(2)
SHARES ACQUIRED VALUE REALIZED ------------------------- -------------------------
NAME(1) ON EXERCISE(#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -------------------------- --------------- -------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Henry B. Schacht.......... 0 0 0 0
0 0
Richard A. McGinn......... 0 0 57,485 752,896
55,254 780,683
William B. Marx, Jr....... 84,046 1,983,425 134,410 2,352,580
225,984 1,593,198
Daniel C. Stanzione....... 1,350 52,023 51,977 1,217,027
242,192 807,663
Patricia F. Russo......... 0 0 40,465 857,003
70,330 226,003
</TABLE>
- ---------------
(1) Includes Chairman of the Board and Chief Executive Officer and the four
other most highly compensated executives officers as measured by salary and
bonus. Sets forth information regarding options/stock appreciation rights
regardless of year of grant.
(2) None of the options set forth in the table above have stock appreciation
rights.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------
NUMBER OF
SHARES GRANT
UNDERLYING % OF TOTAL DATE
OPTIONS OPTIONS EXERCISE PRESENT
GRANTED GRANTED TO PRICE EXPIRATION VALUE
NAME(1) #(2) EMPLOYEES(3) ($/SH) DATE ($)(4)
- ---------------------------------------- ---------- ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Henry B. Schacht........................ 0 0 0 0 0
Richard A. McGinn....................... 36,504 .28% 49.9375 1/3/05 384,752
William B. Marx, Jr..................... 38,484 1.04% 49.9375 1/3/05 405,621
100,000 63.5000 9/25/05 1,294,000
Daniel C. Stanzione..................... 19,692 1.65% 49.9375 1/3/05 207,554
200,000 63.5000 9/25/05 2,588,000
Patricia F. Russo....................... 10,830 0.53% 49.9375 1/3/05 114,148
59,500 63.5000 10/31/05 769,930
</TABLE>
- ---------------
(1) Includes Chairman of the Board and Chief Executive Officer and the four
other most highly compensated executive officers as measured by salary and
bonus.
(2) Includes the regular annual grant of options as well as a special equity
incentive/retention grant following the announcement of AT&T intended
restructuring. Options granted January 3, 1995, become exercisable to the
extent of one-third of the grant on January 3, 1996, January 3, 1997, and
January 3, 1998, respectively. Options granted September 25, 1995 and
October 31, 1995, become exercisable four years after the date of grant
provided that applicable price performance criteria have been satisfied.
Irrespective of price performance, all options granted on September 25, 1995
and October 31, 1995 will vest 6 years after the date of grant.
(3) Percent of total options granted based on total options granted to AT&T
employees.
(4) In accordance with Securities and Exchange Commission rules, the
Black-Scholes option pricing model was chosen to estimate the grant date
present value of the options set forth in this table. The Company's use of
this model should not be construed as an endorsement of its accuracy at
valuing options. All stock option valuation models, including the
Black-Scholes model, require a prediction about the future
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<PAGE> 194
movement of the stock price. The following assumptions were made for
purposes of calculating the Grant Date Present Value: for the January grant,
an option term of 7 years, volatility at .1769, dividend yield at 2.77%,
interest rate at 7.83%, and a 3% per year discount for each year in the
vesting period for risk of forfeiture over the 3-year vesting schedule, and
for the September and October grants, an option term of 7 years, volatility
at .1572, dividend yield at 2.66%, interest rate at 6.40%, and a 3% per year
discount for each year in the vesting period for risk of forfeiture over the
4-year vesting schedule. The real value of the options in this table depends
upon the actual performance of the Company's stock and, after the
Distribution, the Common Stock, during the applicable period.
PENSION PLANS
Prior to the Distribution, the Company's management employees will be
participants in AT&T's Management Pension Plan (the "AT&T Management Pension
Plan"). Effective at the time of the Distribution, the Company will adopt a
management pension plan (the "Company Management Pension Plan") that will
replicate, in all material respects, the AT&T Management Pension Plan and that
will be a non-contributory pension plan which covers all management employees,
including Mr. McGinn, Mr. Marx, Mr. Stanzione and Ms. Russo. The Company also
will adopt non-contributory supplementary pension plans which will replicate in
all material respects AT&T's supplementary pension plans. The following is a
summary description of the expected terms of the Company Management Pension
Plan. Participants will be given full credit under the Company Management
Pension Plan for service and compensation accrued under the AT&T Management
Pension Plan. The normal retirement age under the Company Management Pension
Plan is 65; however, retirement before age 65 can be elected under certain
conditions.
Under the Company Management Pension Plan, annual pensions will be computed
on an adjusted career average pay basis. The adjusted career average pay formula
will be the sum of (a) 1.6% of the average annual pay for the six years ending
December 31, 1992, times the number of years of service prior to January 1,
1993, plus (b) 1.6% of pay subsequent to December 31, 1992. Only the basic
salary will be taken into account in the formula used to compute pension
amounts.
Federal laws place limitations on pensions that may be paid from the
pension trust related to the Company Management Pension Plan. Pension amounts
based on the Company Management Pension Plan formula which exceed the applicable
limitations will be paid under the Company's supplemental pension plans (the
"Supplemental Plans") rather than under the Company Management Pension Plan.
Such amounts will be treated for accounting purposes as an operating expense of
the Company.
Prior to the Distribution, certain of the Company's employees will be
participants in AT&T's Non-Qualified Pension Plan (the "AT&T Non-Qualified
Plan"). Effective at the time of the Distribution, the Company will adopt a
non-qualified pension plan (the "Company Non-Qualified Plan") that will
replicate, in all material respects, the AT&T Non-Qualified Plan, and under
which annual pensions for Mr. McGinn, Mr. Marx, Mr. Stanzione, Ms. Russo and
other senior managers will be computed based primarily on actual annual bonus
awards under the Company's short-term incentive plan. Participants will be given
full credit under the Company Non-Qualified Plan for service and compensation
under the AT&T Non-Qualified Plan.
Under the Company Non-Qualified Plan, pension benefits generally will
commence at the same time as benefits under the Company Management Pension Plan.
The annual pension amounts payable under the Company Non-Qualified Plan will be
equal to the greater of the amounts computed under the Basic or Alternate
Formula described below.
Basic Formula:
The sum of (a) 1.5% of the average of the actual annual bonus awards for
the three-year period ending December 31, 1989, times the number of years
of service prior to January 1, 1990, plus (b) 1.6% of the actual annual
bonus awards subsequent to December 31, 1989.
Alternate Formula:
The excess of (a) 1.7% of the adjusted career average pay, over (b) 0.8% of
the covered compensation base, times years of service to retirement, minus
the benefit calculated under the Company Management Pension Plan formula
(without regard to limitations imposed by the IRS). For purposes of this
formula,
64
<PAGE> 195
adjusted career average pay will be determined by dividing the sum of the
employee's total adjusted career income by the employee's actual term of
employment at retirement. Total adjusted career income is the sum of (A)
and (B), where (A) is the sum of (i) employee's years of service prior to
January 1, 1993, multiplied by the employee's average annual compensation
(within the meaning of the Company Management Pension Plan) for the
three-year period ending December 31, 1992, without regard to the
limitations imposed by the Code, plus (ii) the employee's years of service
prior to January 1, 1990, multiplied by the average of the employee's
actual annual bonus awards for the three-year period ending December 31,
1989, and (B) is the sum of the employee's actual compensation (within the
meaning of the Company Management Pension Plan) after December 31, 1992,
without regard to the limitations imposed by the Code, and actual annual
bonus awards subsequent to December 31, 1989. The covered compensation base
used in this formula is the average of the maximum wage amount on which an
employee was liable for social security tax for each year beginning with
1961 and ending with 1995. In 1995, the covered compensation base was
$25,800.
An Alternative Minimum Formula ("AMF") will apply to active senior managers
with five years of service who were participants in the predecessor to the AT&T
Non-Qualified Plan as of December 31, 1993. The annual pension amount payable
under the AMF will be equal to the greater of the amounts computed under
Formulas A and B plus an additional percent increase factor as described below:
Formula A:
The sum of (a) 1.5% of the average of the total compensation for the
three-year period ending December 31, 1992, times the number of years of
service prior to January 1, 1993, plus (b) 1.6% of the total compensation
from January 1, 1993, to December 31, 1993. For purposes of this Formula A,
total compensation will be basic salary plus actual annual bonus awards.
The pension amounts resulting from this Formula A will be reduced to
reflect retirements prior to age 55.
Formula B:
The excess of (a) 1.7% of the adjusted career average pay, over (b) 0.8% of
the covered compensation base, times years of service to December 31, 1993.
For purposes of this Formula B, adjusted career average pay is determined
by dividing the sum of the employee's total adjusted career income used for
purposes of Formula A, by the employee's actual term of employment to
December 31, 1993. The covered compensation base used in this Formula B is
the average of the maximum wage amounts on which an employee was liable for
social security tax for each year beginning with 1959 and ending with 1993.
In 1993, the covered compensation base was $22,800. The pension amounts
resulting from this Formula B will be reduced to reflect retirements prior
to age 60.
An additional percent increase factor based on age and service is applied
to the pension amount resulting from the higher of Formula A or B. The total AMF
pension results in a fixed benefit and such amount will be reduced by the amount
payable under the Company Management Pension Plan. It is anticipated that after
1997, a senior manager's normal pension increases resulting from additional age
and service as well as possible future pension plan amendments could cause the
regular accrued pension benefit (under the Basic or Alternative Formulas above)
to exceed the fixed AMF benefit. Pensions resulting from the AMF will be payable
under the Company Non-Qualified Plan.
Pension amounts under either the Company Management Pension Plan formula or
the Company Non-Qualified Plan are not subject to reductions for social security
benefits or other offset amounts. If Mr. McGinn, Mr. Marx, Mr. Stanzione and Ms.
Russo continue in the positions above and retire at normal retirement age, the
estimated annual pension amounts payable under the Company Management Pension
Plan formula and the Company Non-Qualified Plan (including any amounts that may
be payable pursuant to the Supplemental Plans) would be $305,400, $228,900;
$314,800, $256,800; $219,800, $114,200; and $287,600, $152,000, respectively.
Amounts shown are straight-life annuity amounts not reduced by a joint and
survivorship provision which is available to the officers named. Mr. Schacht,
based on age at hire and current mandatory retirement age practices, would have
insufficient service to vest in any Company qualified or non-qualified pension
plans.
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The Company has reserved the right to purchase annuity contracts to satisfy
its unfunded obligations to any of these officers under the Company
Non-Qualified Plan. In the event the Company purchases an annuity contract for
any officer, the pension payments for such officer will vary from those set
forth above. In such event, there would be a tax gross-up payment to the officer
and annuity benefits paid by the annuity provider will be reduced to offset the
tax gross-up payment. The after-tax pension benefit will be the same as the
after-tax benefit the participant would otherwise have received under the
Company Non-Qualified Plan.
Certain of the Company's non-qualified executive benefit plans will be
supported by a benefits protection grantor trust, the assets of which are
subject to the claims of the Company's creditors. In the event of a "Change in
Control" or "Potential Change in Control" of the Company (as such terms are
defined therein), certain additional funds might be required to be contributed
to such trust to support benefits under such plans.
OTHER EMPLOYMENT ARRANGEMENTS
Mr. Schacht became Chief Executive Officer of the Company on February 1,
1996. During 1995, Mr. Schacht did not receive any compensation as an employee
of either the Company or AT&T. However, he received $264,516 for consulting
services rendered from October 12, 1995 through December 31, 1995. It is
expected that Mr. Schacht will receive a salary for 1996 equal to $900,000. He
will also be eligible for an incentive bonus award, which, assuming achievement
of target levels, would result in a payment of an additional $1,118,000. In
addition, in January 1996, the Compensation Committee of the AT&T Board of
Directors awarded Mr. Schacht stock units representing 20,090 shares of AT&T
Common Stock and options to acquire 72,672 shares of AT&T Common Stock under the
1987 Plan. Such stock units vest in one installment at the end of three years.
Such options have an exercise price of $66.8125 per share of AT&T Common Stock,
vest in equal installments over three years, and have a term of 10 years from
the date of grant. At the time of the Distribution, such stock units and stock
options will be converted into Awards based on shares of Common Stock, as more
fully set forth below under "Arrangements Between the Company and
AT&T -- Employee Benefits Agreement."
1996 COMPANY LONG TERM INCENTIVE PLAN
The Company intends to adopt, with the approval of AT&T in its capacity as
the sole stockholder of the Company, the 1996 LTIP. After the Distribution, the
1996 LTIP will be administered by the Compensation Subcommittee of the
Executive, Corporate Governance and Compensation Committee of the Company Board
(the "Compensation Committee"). In order to ensure that compensation paid
pursuant to the 1996 LTIP can qualify as "performance-based compensation" not
subject to the limitation on deductibility of certain executive compensation in
excess of $1 million, the Company intends to seek stockholder approval of the
1996 LTIP at either its 1997 or 1998 annual meeting of stockholders. Such
stockholder approval is not required for any other purpose. The following
description of the 1996 LTIP is qualified by reference to the full text thereof,
a copy of which will be filed as an exhibit to the Registration Statement. See
"Available Information."
Awards
The 1996 LTIP provides for the grant of incentive stock options that
qualify under Section 422 of the Code ("ISOs") and non-statutory stock Options,
SARs, Restricted Stock Awards, Performance Awards, Other Stock Unit Awards (as
such terms are defined herein), and any other right, interest, or option
relating to shares of Common Stock or other securities of the Company
(collectively, "Awards"). No determination has yet been made as to the number of
employees of the Company who will be eligible to participate in the 1996 LTIP.
However, as described under "Arrangements Between the Company and
AT&T -- Employee Benefits Agreement," employees of the Company who hold AT&T
Stock Awards (approximately 1,400 persons as of March 1, 1996) are expected to
receive in substitution therefor, following consummation of the Distribution,
Awards under the 1996 LTIP (the "Substitute Awards"). Although the Company
expects that, in addition to the Substitute Awards, Awards will be made from
time to time after the Distribution under the 1996 LTIP, no determinations have
yet been made in that regard.
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Shares Available
The 1996 LTIP contains a formula for establishing an annual limit on the
number of shares of Common Stock which may be awarded (or with respect to which
non-stock Awards may be made) in any given calendar year, except that Substitute
Awards will not be counted against such limit. Subject to customary
anti-dilution adjustments, the total number of shares of Common Stock available
for grant under the 1996 LTIP in each calendar year is 1.2% of the total
outstanding shares of Common Stock as of the first day of such year for which
the 1996 LTIP is in effect (except that for 1996, the number of shares of Common
Stock outstanding immediately after the Offerings will be used); provided that
such number will be increased in any year by the number of shares of Common
Stock available for grant under the 1996 LTIP in previous years but not covered
by Awards granted thereunder in such years; provided, further; that no more than
50 million shares of Common Stock will be cumulatively available for the grant
of ISOs. Any shares of Common Stock issued by the Company through the assumption
or substitution of outstanding grants from an acquired company ("Rollover
Awards") will not reduce the number of shares of Common Stock available for
grants thereunder. In addition, no one individual may be granted Awards with
respect to more than 1,000,000 shares of Common Stock in any one year (not
including Substitute Awards). Any shares of Common Stock issued under the 1996
LTIP (including in connection with Substitute Awards) may consist, in whole or
in part, of authorized and unissued shares or treasury shares or shares
purchased in the open market. If any shares of Common Stock subject to any Award
are forfeited or such Award otherwise terminates without the issuance of such
shares of Common Stock or of other consideration in lieu of such shares, the
shares subject to such Award, to the extent of any such forfeiture or
termination, will again be available for grant under the 1996 LTIP. In the event
of any merger, reorganization, consolidation, recapitalization, stock dividend,
stock split, reverse stock split, spin off or similar transaction or other
change in corporate structure affecting the shares of Common Stock, such
adjustments and other substitutions will be made to the 1996 LTIP and to Awards
as the Compensation Committee in its sole discretion deems equitable or
appropriate, including without limitation such adjustments in the aggregate
number, class and kind of shares of Common Stock which may be delivered under
the 1996 LTIP, in the aggregate or to any one Participant, in the number, class,
kind and option or exercise price of shares of Common Stock subject to
outstanding Options, SARs or other Awards granted under the 1996 LTIP, and in
the number, class and kind of shares of Common Stock subject to Awards granted
under the 1996 LTIP (including, if the Compensation Committee deems appropriate,
the substitution of similar options to purchase the shares of, or other awards
denominated in the shares of, another company), as the Compensation Committee
may determine to be appropriate in its sole discretion, provided that the number
of shares of Common Stock or other securities subject to any Award shall always
be a whole number.
Corporate Governance and Compensation Committee
The Compensation Committee, which is comprised of Non-Employee Directors,
none of whom may receive any Awards under the 1996 LTIP, will administer the
1996 LTIP after the Distribution. See "-- Committees of the Board of Directors."
The Compensation Committee will have full power and authority, subject to such
orders or resolutions not inconsistent with the provisions of the 1996 LTIP as
may from time to time be adopted by the Company Board, (i) to select the
employees of the Company and its affiliates to whom Awards may from time to time
be granted (the "Participants"); (ii) to determine the type or types of Award to
be granted to each Participant; (iii) to determine the number of shares of
Common Stock to be covered by each Award; (iv) to determine the terms and
conditions, not inconsistent with the provisions of the 1996 LTIP of any Award;
(v) to determine whether, to what extent and under what circumstances Awards may
be settled in cash, shares of Common Stock or other property or canceled or
suspended; (vi) to determine whether, to what extent and under what
circumstances cash, shares of Common Stock and other property and other amounts
payable with respect to an Award will be deferred either automatically or at the
election of the Participant; (vii) to interpret and administer the 1996 LTIP and
any instrument or agreement entered into thereunder; (viii) to establish such
rules and regulations and appoint such agents as it may deem appropriate for the
proper administration thereof; and (ix) to make any other determination and take
any other action that the Compensation Committee deems necessary or desirable
for administration of the 1996 LTIP.
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Substitute Awards
Pursuant to the Employee Benefits Agreement, Substitute Awards will be
issued to employees of the Company following the Distribution in exchange for
AT&T Stock Awards. The terms and conditions of each Substitute Award, including,
without limitation, the time or times when, and the manner in which, each Option
or SAR constituting a Substitute Award will be exercisable, the duration of the
exercise period, the permitted method of exercise, settlement and payment, the
rules that will apply in the event of the termination of employment of the
employee, the events, if any, that may give rise to an employee's right to
accelerate the vesting or the time of exercise thereof and the vesting
provisions of any Restricted Stock Award or Performance Award constituting
Substitute Awards, will be the same as those of the surrendered or forfeited
AT&T Stock Award. See "Arrangements Between the Company and AT&T -- Employee
Benefits Agreement."
Options; Stock Appreciation Rights
Options to purchase Common Stock ("Options") may be granted under the 1996
LTIP, either alone or in addition to other Awards. Except in the case of
Substitute Awards and Rollover Awards, the purchase price per share of Common
Stock purchasable under an Option will be determined by the Compensation
Committee, in its sole discretion; provided that such purchase price will not be
less than the Fair Market Value (as defined in the 1996 LTIP) of a share of
Common Stock on the date of the grant of the Option. The term of each Option
will be fixed by the Compensation Committee in its sole discretion; provided
that no ISO will be exercisable after the expiration of 10 years from the date
the Option is granted. Options will be exercisable at such time or times as
determined by the Compensation Committee at or subsequent to grant. Unless
otherwise determined by the Compensation Committee at or subsequent to grant, no
ISO will be exercisable during the year ending on the day before the first
anniversary date of the granting of the ISO. Subject to the other provisions of
the 1996 LTIP and any applicable Award agreement, any Option may be exercised by
the Participant, in whole or in part, at such time or times, and the Participant
may make payment of the option price in such form or forms, including, without
limitation, payment by delivery of cash, shares of Common Stock or other
consideration (including, where permitted by law and the Compensation Committee,
Awards) having a Fair Market Value on the exercise date equal to the total
option price, or by any combination of cash, shares of Common Stock and other
consideration as the Compensation Committee may specify in the applicable Award
agreement.
In accordance with rules and procedures established by the Compensation
Committee, the aggregate Fair Market Value (determined as of the time of grant)
of the shares of Common Stock with respect to which ISOs held by any Participant
and exercisable for the first time by such Participant during any calendar year
under the 1996 LTIP (and under any other benefit plans of the Company or of any
parent or subsidiary corporation of the Company) will not exceed $100,000 or, if
different, the maximum limitation in effect at the time of grant under Section
422 of the Code, or any successor provision, and any regulations promulgated
thereunder. In its sole discretion, the Compensation Committee may provide, at
the time of grant, that the shares to be issued upon an Option's exercise will
be in the form of restricted stock or other similar securities, or may reserve
the right so to provide after the time of grant. SARs may be granted to
Participants either alone or in addition to other Awards and may, but need not,
relate to a specific Option. The provisions of SARs need not be the same with
respect to each recipient. Any SAR related to an Option other than an ISO may be
granted at the same time such Option is granted or at any time thereafter before
exercise or expiration of such Option. Any SAR related to an ISO must be granted
at the same time such Option is granted. In the case of any SAR related to any
Option, the SAR or applicable portion thereof will terminate and no longer be
exercisable upon the termination or exercise of the related Option, except that
any SAR granted with respect to less than the full number of shares of Common
Stock covered by a related Option will not be reduced except to the extent that
the number of shares affected by the exercise or termination of the related
Option exceeds the number of shares not covered by the SAR. Any Option related
to any SAR will no longer be exercisable to the extent the related SAR has been
exercised. The Compensation Committee may impose such conditions or restrictions
on the exercise of any SAR as it may deem appropriate.
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Performance Shares
Performance-based equity awards ("Performance Awards") may be issued to
Participants, for no cash consideration or for such minimum consideration as may
be required by applicable law, either alone or in addition to other Awards
granted under the 1996 LTIP. The performance criteria to be achieved during any
Performance Period (as defined in the 1996 LTIP) and the length of the
Performance Period will be determined by the Compensation Committee upon the
grant of each Performance Award. With certain exceptions, Performance Awards
will be distributed only after the end of the relevant Performance Period.
Performance Awards may be paid in cash, shares of Common Stock, other property
or any combination thereof, in the sole discretion of the Compensation Committee
at the time of payment. The performance levels to be achieved for each
Performance Period and the amount of the Performance Award to be distributed
will be conclusively determined by the Compensation Committee. Performance
Awards may be paid in a lump sum or in installments following the close of the
Performance Period or, in accordance with procedures established by the
Compensation Committee, on a deferred basis.
Other Stock Unit Awards
Other Awards of shares of Common Stock and other Awards that are valued in
whole or in part by reference to, or are otherwise based on, shares of Common
Stock or other property ("Other Stock Unit Awards") may be granted to
Participants, either alone or in addition to other Awards. Other Stock Unit
Awards may be paid in shares of Common Stock, other securities of the Company,
cash or any other form of property as the Compensation Committee may determine.
Subject to the provisions of the 1996 LTIP, the Compensation Committee will have
sole and complete authority to determine the employees of the Company and its
affiliates to whom, and the time or times at which, such Awards will be made,
the number of shares of Common Stock to be granted pursuant to such Awards, and
all other conditions of the Awards. The provisions of Other Stock Unit Awards
need not be the same with respect to each recipient.
Shares of Common Stock (including securities convertible into shares of
Common Stock) granted as Other Stock Unit Awards may be issued for no cash
consideration or for such minimum consideration as may be required by applicable
law; shares of Common Stock (including securities convertible into such shares)
purchased pursuant to a purchase right granted as an Other Stock Unit Award will
be purchased for such consideration as the Compensation Committee may, in its
sole discretion, determine, which (other than in the case of Substitute Awards
or Rollover Awards) will not be less than the Fair Market Value of such shares
of Common Stock or other securities as of the date such purchase right is
awarded.
Restricted Shares
Restricted stock awards ("Restricted Stock Awards") may be issued to
Participants, for no cash consideration or for such minimum consideration as may
be required by applicable law, either alone or in addition to other Awards
granted under the 1996 LTIP. The provisions of Restricted Stock Awards need not
be the same with respect to each recipient. Except as otherwise determined by
the Compensation Committee at the time of grant, upon termination of employment
for any reason during the restriction period, all Restricted Stock Awards still
subject to restriction will be forfeited by the Participant and reacquired by
the Company; provided that, in the event of a Participant's retirement,
permanent disability, other termination of employment or death, or in cases of
special circumstances, the Compensation Committee may, in its sole discretion,
when it finds that a waiver would be in the best interests of the Company,
waive, in whole or in part, any or all remaining restrictions with respect to
such Participant's Restricted Stock Awards.
Change in Control
The 1996 LTIP provides, that unless the Compensation Committee determines
otherwise at the time of grant with respect to a particular Award, in the event
of a Change in Control (as defined below), with certain exceptions, (i) any
Options and SARs outstanding as of the date such Change in Control will become
fully exercisable and vested to the full extent of the original grant; (ii) the
restrictions and deferral limitations applicable to any Restricted Stock Awards
will lapse; (iii) all Performance Awards will be considered to be
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earned and payable in full, and any deferral or other restriction will lapse and
such Performance Awards will be immediately settled or distributed; and (iv) the
restrictions and deferral limitations and other conditions applicable to any
Other Stock Awards or any other Awards will lapse, and such Other Stock Awards
or such other Awards will become free of all restrictions, limitations or
conditions and become fully vested and transferable to the full extent of the
original grant.
The 1996 LTIP also provides, with certain exceptions, that, if determined
by the Compensation Committee at or after the time of grant, during the 60-day
period from and after a Change in Control (the "Exercise Period"), a Participant
holding an Option will have the right, whether or not the Option is fully
exercisable and in lieu of the payment of the purchase price for the shares of
Common Stock being purchased under the Option and by giving notice to the
Company, to elect (within the Exercise Period) to surrender all or part of the
Option to the Company and to receive cash, within 30 days of such notice, in an
amount equal to the amount by which the Change in Control Price (as defined
below) per share of the Common Stock on the date of such election exceeds the
purchase price per share under the Option multiplied by the number of Shares
granted under the Option as to which such right has been exercised.
The 1996 LTIP defines "Change in Control" to mean, with certain exceptions,
the happening of any of the following events: (i) an acquisition by any
individual, entity or group of beneficial ownership of 20% or more of either (A)
the then outstanding shares of Common Stock or (B) the combined voting power of
the then outstanding voting securities of the Company entitled to vote generally
in the election of directors; or (ii) a change in the composition of the Board
such that the individuals who, as of the Distribution, constitute the Board
cease for any reason to constitute at least a majority of the Board; or (iii)
the approval by the stockholders of the Company of a merger, reorganization or
consolidation or sale of other disposition of all or substantially all of the
assets of the Company (each, a "Corporate Transaction") or, if consummation of
such Corporate Transaction is subject, at the time of such approval by
stockholders, to the consent of any government or governmental agency, the
obtaining of such consent (either explicitly or implicitly by consummation); or
(iv) the approval of the stockholders of the Company of a complete liquidation
or dissolution of the Company.
The 1996 LTIP defines "Change in Control Price", with certain exceptions,
as the higher of (i) the highest price of a share of Common Stock during the
60-day period prior to and including the date of a Change in Control or (ii) if
the Change in Control is the result of a tender or exchange offer or a Corporate
Transaction, the highest price per share of Common Stock paid in such tender or
exchange offer or Corporate Transaction.
Other Provisions
The Company Board may amend, alter or discontinue the 1996 LTIP, but no
amendment, alteration, or discontinuation may be made that would impair rights
under an Award theretofore granted without the Participant's consent, or that,
without the approval of the stockholders, would (a) except pursuant to the
provisions providing for anti-dilution adjustments, increase the total number of
shares of Common Stock reserved thereunder; (b) change the employees or class of
employees eligible to participate therein; or (c) prevent the Company from
fulfilling its obligations with respect to Substitute Awards pursuant to the
Employee Benefits Agreement. The Compensation Committee may amend the terms of
any Award theretofore granted, prospectively or retroactively, but no such
amendment may impair the rights of any Participant without his or her consent.
The Compensation Committee may also substitute new Awards for previously granted
Awards, including, without limitation, previously granted Options having higher
Option prices.
The Compensation Committee will be authorized to make adjustments in
Performance Award criteria or in the terms and conditions of other Awards in
recognition of unusual or nonrecurring events affecting the Company or its
financial statements or changes in applicable laws, regulations or accounting
principles. The Compensation Committee may also establish certain procedures
providing for the deferral of the payment of any Award and the delivery of
shares of Common Stock in satisfaction of withholding tax obligations.
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Subject to the provisions of the 1996 LTIP and any Award agreement, the
recipient of an Award (including, without limitation, any deferred Award) may,
if so determined by the Compensation Committee, be entitled to receive,
currently or on a deferred basis, interest or dividends, or interest or dividend
equivalents, with respect to the number of shares of Common Stock covered by the
Award, as determined by the Compensation Committee, in its sole discretion, and
the Compensation Committee may provide that such amounts (if any) will be deemed
to have been reinvested in additional shares of Common Stock or otherwise
reinvested.
The 1996 LTIP also provides that, if the Compensation Committee determines
at the time Restricted Stock, a Performance Award or an Other Stock Unit Award
is granted to a Participant that such Participant is, or is likely to be at the
time he or she recognizes income for federal income tax purposes in connection
with such Award, a covered employee within the meaning of Section 162(m) of the
Code, then the Compensation Committee may impose certain performance goals and
impose certain other restrictions with respect to such Award.
The Company's Other Benefit Plans
Pursuant to the Employee Benefits Agreement, the Company will create plans
for management and occupational employees of the Company that replicate in all
material respects AT&T's benefit plans. Except as provided therein, the Employee
Benefits Agreement does not preclude the Company from discontinuing any plan,
changing any plan or benefit or adopting any new plan. See "Arrangements Between
the Company and AT&T -- Employee Benefits Agreement."
In addition, the Company plans to investigate other programs for more
broad-based ownership of Common Stock by the Company's employees following the
Distribution.
RELATED TRANSACTIONS
AT&T owns over 80% of the outstanding common stock of AT&T Capital Corp.
("AT&T Capital"). In 1993, AT&T and AT&T Capital entered into an operating
agreement (the "Operating Agreement"), pursuant to which AT&T provides AT&T
Capital with the right to be the preferred provider of leasing and financing
services for AT&T's products on a basis consistent with past practice. The
Operating Agreement expires in August 2000. The Company, as a subsidiary of
AT&T, has operated under the Operating Agreement and, pursuant to the terms
thereof, has entered into a comparable operating agreement with AT&T Capital
having the same term. In connection therewith, the Company has also agreed that
AT&T Capital and certain subsidiaries will be entitled to use certain of the
Company's marks for use in connection with the provision of financing services
under the operating agreement in accordance with the existing license agreement
between AT&T and AT&T Capital. The Company has further agreed that it will
continue to be bound by the provisions of an intercompany agreement between AT&T
and AT&T Capital to the extent the Company is currently bound thereby, under
which the Company will continue to give AT&T Capital the right to bid for the
provision of leasing and financing services in connection with the Company's
internal equipment purchasing and leasing. In addition, right, title and
interest in certain lease receivables for business communication equipment are
sold at a discount to AT&T Capital. The Company acts as an agent to bill and
collect such receivables. The Company has agreed to repurchase certain of these
lease receivables in the event of a default thereon. At December 31, 1995, $206
million of such receivables had recourse to the Company in the event of default.
As described under "Risk Factors -- Reliance on Major Customers," the
Company's largest customer in terms of total revenue has been AT&T. For the year
1995, the Company had $2,119 million of revenues from AT&T. At December 31,
1995, the related receivables amounted to $291 million.
In addition, the Company has engaged, and expects to continue to engage,
with AT&T and with affiliates of AT&T, in certain ordinary course business
transactions. For a summary of such transactions, see "Arrangements Between the
Company and AT&T" and Note 12 of Notes to Consolidated Financial Statements
included elsewhere in this Prospectus.
During 1995, the Company had outstanding two loans to Mr. Butters,
President, North American Region, Network Systems. The largest aggregate
principal amounts of such loans during such year were $120,000 and $95,000,
although $12,000 and $28,000, respectively, of such amounts were voluntarily
repaid
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during such year. The loans carry rates of 5.19% and 5.21% per annum,
respectively, payable annually, and mature in 1999.
As described under "-- Other Employment Arrangements," Mr. Schacht received
$264,516 for consulting services rendered from October 12, 1995 to December 31,
1995. Such services included advising in connection with the structuring and
organization of the Company and assisting in the Company's transition from a
division of AT&T to a publicly held company.
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ARRANGEMENTS BETWEEN THE COMPANY AND AT&T
For the purposes of governing certain of the relationships between the
Company and AT&T (including NCR) following the Separation, the Offerings and the
Distribution, the Company, AT&T and NCR have entered into the Separation and
Distribution Agreement, and have entered into the Ancillary Agreements to which
they are parties (collectively, the "Transaction Agreements"). The Ancillary
Agreements include the Interim Services and Systems Replication Agreement; the
General Purchase Agreement and the supplemental agreements related thereto; the
Employee Benefits Agreement; the Brand License Agreement; the Patent License
Agreement and other patent-related agreements; the Technology License Agreement
and other technology-related agreements; the Tax Sharing Agreement and other
tax-related agreements; certain agreements providing for the assignment of, and
the establishment of transitional arrangements with respect to, real property;
and agreements pursuant to which AT&T will provide communications services to
the Company and NCR will sell certain products to the Company. Certain of the
Transaction Agreements summarized below have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part and the summaries
of such agreements are qualified in their entirety by reference to the full text
of such agreements. See "Available Information." Capitalized terms used in this
section and not otherwise defined in the section entitled "-- Certain
Definitions" below or elsewhere herein shall have their respective meanings set
forth in the Separation and Distribution Agreement (except that the term
"Company" is used in lieu of the term "Lucent").
SEPARATION AND DISTRIBUTION AGREEMENT
The Separation and Distribution Agreement sets forth the agreements among
the Company, AT&T and NCR with respect to the principal corporate transactions
required to effect the Separation, the Offerings and the Distribution, and
certain other agreements governing the relationship among the parties
thereafter. Certain agreements specifying the series of transactions necessary
to effect the separation of Assets and Liabilities of the Company, AT&T and NCR
located outside the United States are contained in the Non-U.S. Plan.
The Separation
To effect the Separation, AT&T and NCR have transferred or agreed to
transfer, or to cause their respective subsidiaries to transfer, the Company
Assets to the Company. The Company has assumed or agreed to assume and has
agreed faithfully to perform and fulfill all the Company Liabilities in
accordance with their respective terms. Except as expressly set forth in the
Separation and Distribution Agreement or in any Ancillary Agreement, no party is
making any representation or warranty as to the assets, businesses or
liabilities transferred or assumed as part of the Separation, as to any consents
or approvals required in connection therewith, as to the value or freedom from
any Security Interests of any of the Assets transferred or as to the absence of
any defenses or freedom from counterclaim with respect to any claim of any
party, or as to the legal sufficiency of any assignment, document or instrument
delivered to convey title to any Asset transferred. Except as expressly set
forth in any Transaction Agreement, all Assets are being transferred on an "as
is," "where is" basis, and the respective transferees have agreed to bear the
economic and legal risks that the conveyance is insufficient to vest in the
transferee good and marketable title, free and clear of any Security Interest.
The Distribution
The Separation and Distribution Agreement provides that, subject to the
terms and conditions thereof, AT&T and the Company will take all reasonable
steps necessary and appropriate to cause all conditions to the Distribution to
be satisfied, and to effect the Distribution on the Distribution Date. The AT&T
Board will have the sole discretion to determine the date of consummation of the
Distribution at any time after the Closing Date and on or prior to December 31,
1996. AT&T has agreed to consummate the Distribution no later than December 31,
1996, subject to the satisfaction or waiver by the AT&T Board, in its sole
discretion, of the following conditions:
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(i) a private letter ruling from the IRS shall have been obtained, and
shall continue in effect, to the effect that, among other things, the
Distribution will qualify as a tax-free distribution for federal income tax
purposes under Section 355 of the Code and the transfer to the Company of
the Company Assets and the assumption by the Company of the Company
Liabilities in connection with the Separation will not result in
recognition of any gain or loss for federal income tax purposes to AT&T,
the Company or AT&T's or the Company's shareholders, and such ruling shall
be in form and substance satisfactory to AT&T, in its sole discretion;
(ii) any material Governmental Approvals and Consents necessary to
consummate the Distribution shall have been obtained and be in full force
and effect;
(iii) no order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Distribution shall be in effect, and no other event
outside the control of AT&T shall have occurred or failed to occur that
prevents the consummation of the Distribution; and
(iv) no other events or developments shall have occurred subsequent to
the Closing Date that, in the judgment of the AT&T Board, would result in
the Distribution having a material adverse effect on AT&T or on the
shareholders of AT&T.
In the event that any such condition is not satisfied or waived on or before
December 31, 1996, AT&T has agreed to consummate the Distribution as promptly as
practicable following the satisfaction or waiver of all such conditions. AT&T
may terminate the obligation to consummate the Distribution if the Distribution
has not occurred by December 31, 1997. See "-- Termination."
On March 21, 1996, the Company received a private letter ruling from the
IRS to the effect described in clause (i) above.
The Company, AT&T and NCR have agreed that, after the Closing Date, none of
the parties will take, or permit any of its affiliates to take, any action which
reasonably could be expected to prevent the Distribution from qualifying as a
tax-free distribution within the meaning of Section 355 of the Code. The parties
have also agreed to take any reasonable actions necessary in order for the
Distribution to qualify as a tax-free distribution pursuant to Section 355 of
the Code. Without limiting the foregoing, after the Closing Date and on or prior
to the Distribution Date, the Company will not issue or grant, and will not
permit any member of the Company Group to issue or grant, directly or
indirectly, any shares of Common Stock or any rights, warrants, options or other
securities to purchase or acquire (whether upon conversion, exchange or
otherwise) any shares of Common Stock (whether or not then exercisable,
convertible or exchangeable).
Retained Receivables
Under the Separation and Distribution Agreement, AT&T has retained all the
Retained Receivables, consisting of certain receivables that arose in the
Company Business. The Retained Receivables have a face amount estimated for pro
forma purposes at approximately $2,000 million. The Separation and Distribution
Agreement provides that the Company will use its reasonable best efforts to
satisfy any conditions to the payment of any Retained Receivables and to fulfill
all obligations to the applicable account debtors related to such Retained
Receivables. Any payment made by an account debtor to the Company or any member
of the Company Group with respect to an account receivable will be applied to
any Retained Receivables attributable to that account debtor (and paid over to
AT&T) before they are applied to any other account receivable whenever arising
for such account debtor, subject to certain limited exceptions. In the
Separation and Distribution Agreement, the Company represents and warrants to
AT&T that each Retained Receivable constitutes a legal, valid and binding
obligation of the applicable account debtor enforceable against such account
debtor in accordance with its respective terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency, moratorium and other similar
laws affecting the enforcement of creditors' rights generally, and is not
subject to any Security Interest or any other lien, claim, defense or right of
set-off.
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Releases and Indemnification
The Separation and Distribution Agreement provides for a full and complete
release and discharge as of the Closing Date of all Liabilities existing or
arising from all acts and events occurring or failing to occur or alleged to
have occurred or to have failed to occur and all conditions existing or alleged
to have existed on or before the Closing Date, between or among the Company or
any member of the Company Group, on the one hand, and AT&T, NCR or any member of
the AT&T Services Group or the NCR Group, on the other hand (including any
contractual agreements or arrangements existing or alleged to exist between or
among any such members on or before the Closing Date), except as expressly set
forth in the Separation and Distribution Agreement.
Except as provided in the Separation and Distribution Agreement, the
Company has agreed to indemnify, defend and hold harmless each of AT&T and NCR,
each member of the AT&T Group and the NCR Group, and each of their respective
directors, officers and employees, from and against all Liabilities relating to,
arising out of or resulting from (i) the failure of the Company or any member of
the Company Group or any other Person to pay, perform or otherwise promptly
discharge any Company Liabilities, any Environmental Liabilities of a Subsidiary
of the Company not directly assumed by the Company, or any Company Contract, in
accordance with their respective terms, (ii) the Company Business, any Company
Liability, the Environmental Liabilities referred to above or any Company
Contract, (iii) any breach by the Company or any member of the Company Group of
the Separation and Distribution Agreement or any of the Ancillary Agreements,
and (iv) any untrue statement or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, with respect
to all information contained in this Prospectus or the Registration Statement of
which it forms a part. Also, in the Separation and Distribution Agreement, the
Company has indemnified the members of the AT&T Group, subject to limited
exceptions, against any claims of patent, copyright or trademark infringement or
trade secret misappropriation with respect to any product, software or other
material provided by or ordered from the Company Business (whether alone or in
combination with other items provided by the Company Business or third parties)
prior to the Offerings.
AT&T has agreed to indemnify, defend and hold harmless the Company, each
member of the Company Group and each of their respective directors, officers and
employees from and against all Liabilities relating to, arising out of or
resulting from (i) the failure of AT&T or any member of the AT&T Group or any
other Person to pay, perform or otherwise promptly discharge any liabilities of
the AT&T Group other than the Company Liabilities or the NCR Covered
Liabilities, (ii) the AT&T Services Business or any Liability of the AT&T Group
other than the Company Liabilities and the NCR Covered Liabilities, and (iii)
any breach by AT&T or any member of the AT&T Services Group of the Separation
and Distribution Agreement or any of the Ancillary Agreements.
NCR has agreed to indemnify, defend and hold harmless the Company, each
member of the Company Group and each of their respective directors, officers and
employees from and against all liabilities relating to, arising out of or
resulting from (i) the failure of NCR or any member of the NCR Group or any
other Person to pay, perform or otherwise promptly discharge any Exclusive NCR
Contingent Liability or any Shared NCR Percentage of any Shared Contingent
Liability, and (ii) any breach by NCR or any member of the NCR Group of the
Separation and Distribution Agreement or any of the Ancillary Agreements, or any
other agreement that is not contemplated to be terminated as of the Closing Date
pursuant to the Separation and Distribution Agreement.
The Separation and Distribution Agreement also specifies certain procedures
with respect to claims subject to indemnification and related matters.
Contingent Liabilities and Contingent Gains
The Separation and Distribution Agreement provides for indemnification by
the Company, AT&T and NCR with respect to Contingent Liabilities primarily
relating to their respective businesses or otherwise assigned to them
("Exclusive Contingent Liabilities"), subject to the sharing provisions
described below. In addition to contingent liabilities relating to present or
former businesses of the Company, any contingent
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liabilities related to AT&T's discontinued computer operations (other than those
of NCR) have been assigned to the Company. In the event the aggregate Value (as
defined herein) of all amounts paid by the Company, AT&T or NCR (in each case,
together with any members of its respective Group) in respect of any single
Exclusive Contingent Liability of such Group or any set or group of Related
Exclusive Contingent Liabilities of such Group is in excess of $100 million, the
Company, AT&T and NCR will share such portion in excess of $100 million (the
"Excess Portion") in accordance with the following percentages:
(i) if the Exclusive Contingent Liability primarily relates to the
business of AT&T, AT&T will bear 75% of such Excess Portion, the Company
will bear 22% of such Excess Portion, and NCR will bear 3% of such Excess
Portion;
(ii) if the Exclusive Contingent Liability primarily relates to the
business of the Company, the Company will bear 50% of such Excess Portion,
AT&T will bear 47% of such Excess Portion, and NCR will bear 3% of such
Excess Portion;
(iii) if the Exclusive Contingent Liability primarily relates to the
business of NCR, NCR will bear 50% of such Excess Portion, AT&T will bear
37% of such Excess Portion, and the Company will bear 13% of such Excess
Portion.
For purposes of the foregoing, the term "Value" is defined as the aggregate
amount of all cash payments, the fair market value of all non-cash payments and
the incremental cost of providing any goods or services made or provided in
respect of any Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities, net of: (a) any Insurance Proceeds received or realized in respect
of the applicable Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities, (b) any Tax benefits associated with such payments or the provision
of such goods or services (calculated in the manner specified in the Separation
and Distribution Agreement), (c) any amounts received pursuant to certain
specified third party agreements in respect of the Exclusive Contingent
Liability or Related Exclusive Contingent Liabilities, (d) any other amounts
recovered (including by way of set off) from a third party in connection with
any such Action or threatened Action and (e) the amount of any reserve, account
payable or similar accrual in respect of the Exclusive Contingent Liability or
Related Exclusive Contingent Liabilities, net of any offsetting receivables in
respect of such Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities, in each case as reflected on the Company's Balance Sheet or the
audited consolidated balance sheet of AT&T, including the notes thereto, as of
December 31, 1995.
As a result of the foregoing provisions, if the Value of amounts paid in
respect of any Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities of AT&T or NCR exceeds $100 million, the Company will be required to
pay 22% of the Excess Portion (in the case of any Exclusive AT&T Contingent
Liability or Related Exclusive Contingent Liabilities) or 13% of the Excess
Portion (in the case of any Exclusive NCR Contingent Liability or Related
Exclusive Contingent Liabilities), notwithstanding the fact that the Exclusive
Contingent Liability or Related Exclusive Contingent Liabilities do not relate
to the business and operations of the Company or any other member of the Company
Group. Conversely, if the Value of amounts paid in respect of any Company
Exclusive Contingent Liability or Related Exclusive Contingent Liabilities
exceeds $100 million, the Company will be entitled to reimbursement from AT&T
and NCR of 50%, in the aggregate, of the Excess Portion, notwithstanding the
fact that the Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities do not relate to the business and operations of AT&T or NCR or the
members of their Groups.
The Separation and Distribution Agreement also provides for the sharing of
Shared Contingent Liabilities, which are defined as (a) any Contingent
Liabilities that are not Exclusive AT&T Contingent Liabilities, Exclusive
Company Contingent Liabilities or Exclusive NCR Contingent Liabilities, (b) any
RBOC Liability, and (c) certain specifically identified Liabilities, including
certain Liabilities relating to terminated, divested or discontinued businesses
or operations of AT&T or its current or former Affiliates. With respect to any
Shared Contingent Liability, the parties have agreed that AT&T will be
responsible for 75%, the Company for 22% and NCR for 3% of such Shared
Contingent Liability. AT&T will assume the defense of, and may seek to settle or
compromise, any Third Party Claim that is a Shared Contingent Liability, and the
costs and expenses thereof will be included in the amount to be shared by the
parties.
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The Separation and Distribution Agreement provides that the Company, AT&T
and NCR will have the exclusive right to any benefit received with respect to
any Contingent Gain that primarily relates to the business of, or that is
expressly assigned to, the Company, AT&T or NCR, respectively (an "Exclusive
Contingent Gain"). Each of the Company, AT&T and NCR will have sole and
exclusive authority to manage, control and otherwise determine all matters
whatsoever with respect to an Exclusive Contingent Gain that primarily relates
to its respective business. The parties have agreed to share any benefit that
may be received from any Contingent Gain that is not an Exclusive Contingent
Gain (a "Shared Contingent Gain"), with AT&T receiving 75%, the Company
receiving 22% and NCR receiving 3% of any such benefit. The parties have agreed
that AT&T will have the sole and exclusive authority to manage, control and
otherwise determine all matters whatsoever with respect to any Shared Contingent
Gain. Pursuant to the Separation and Distribution Agreement, each of the Company
and NCR acknowledges that AT&T may elect not to pursue any Shared Contingent
Gain for any reason whatsoever (including a different assessment of the merits
of any Action, claim or right than the Company or NCR or any business reasons
that are in the best interests of AT&T or a member of the AT&T Services Group,
without regard to the best interests of any member of the Company Group or the
NCR Group) and that no member of the AT&T Group will have any liability to any
Person (including any member of the Company Group or the NCR Group) as a result
of any such determination.
The Separation and Distribution Agreement provides for the establishment of
a Contingent Claims Committee comprised of one representative designated from
time to time by each of AT&T, the Company and NCR and sets forth procedures for
the purpose of resolving disagreements among the parties as to Contingent Gains
and Contingent Liabilities.
Dispute Resolution
The Separation and Distribution Agreement contains provisions that govern,
except as otherwise provided in any Ancillary Agreement, the resolution of
disputes, controversies or claims that may arise between or among the parties.
These provisions contemplate that efforts will be made to resolve disputes,
controversies and claims by escalation of the matter to senior management (or
other mutually agreed) representatives of the parties. If such efforts are not
successful, any party may submit the dispute, controversy or claim to mandatory,
binding arbitration, subject to the provisions of the Separation and
Distribution Agreement. The Separation and Distribution Agreement contains
procedures for the selection of a sole arbitrator of the dispute, controversy or
claim and for the conduct of the arbitration hearing, including certain
limitations on discovery rights of the parties. These procedures are intended to
produce an expeditious resolution of any such dispute, controversy or claim.
In the event that any dispute, controversy or claim is, or is reasonably
likely to be, in excess of $100 million, or in the event that an arbitration
award in excess of $100 million is issued in any arbitration proceeding
commenced under the Separation and Distribution Agreement, subject to certain
conditions, any party may submit such dispute, controversy or claim to a court
of competent jurisdiction and the arbitration provisions contained in the
Separation and Distribution Agreement will not apply. In the event that the
parties do not agree that the amount in controversy is in excess of $100
million, the Separation and Distribution Agreement provides for arbitration of
such disagreement.
Certain Business Transactions
The Separation and Distribution Agreement provides that no member of any
Group will have any duty to refrain from engaging in the same or similar
activities or lines of business as any member of any other Group, or from doing
business with any potential or actual supplier or customer of any member of any
other Group. The Separation and Distribution Agreement also provides for the
allocation of certain corporate opportunities following the Closing Date and
prior to the Distribution Date. During this period, none of the Company, AT&T or
NCR will have any duty to communicate or offer such opportunities to any of the
others and may pursue or acquire any such opportunity for itself or direct such
opportunity to any other Person, unless (a) the opportunity relates primarily to
the Company Business, the AT&T Services Business or the NCR Business, in which
case the party that acquires knowledge of the opportunity will generally be
required to communicate
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and offer the opportunity to the company to whose business the opportunity
primarily relates, or (b) the opportunity relates both to the AT&T Services
Business and the Company Business but not primarily to either one, in which case
such party will generally be required to communicate and offer the opportunity
to the Company. In the event the foregoing clause (a) or (b) is applicable, no
party, other than the party to whom the opportunity must be offered in
accordance with such clauses, will pursue or acquire such opportunity for
itself, or direct such opportunity to any other Person, unless the party to whom
the opportunity is required to be offered does not within a reasonable period of
time begin to pursue, or does not thereafter continue to pursue, such
opportunity diligently and in good faith.
Ability to Terminate Certain Rights
The Separation and Distribution Agreement provides that certain rights
granted to the Company and the members of the Company Group will be subject to
the following provisions. Except as otherwise expressly provided, in the event
that, at any time prior to February 1, 2001, the Company or any member of the
Company Group offers, furnishes or provides any Telecommunications Services of
the type offered by the AT&T Services Business as of the Closing Date, then AT&T
may, in its sole discretion: (a) terminate all or any portion of the rights
granted by AT&T under the Brand License Agreement; (b) terminate all or any
remaining portion of the purchase commitments made by AT&T and the members of
the AT&T Group in the General Purchase Agreement; (c) exercise the right to
require the Company to transfer to AT&T certain personnel, information,
technology and software under the Supplemental Agreements; (d) terminate all or
any portion of the rights to patents and technology of AT&T or any member of the
AT&T Group granted to the Company and the members of the Company Group pursuant
to the Patent License Agreement and the Technology License Agreement; and (e)
direct the Company and the members of the Company Group to reconvey to AT&T all
interests in any and all patents and technology in which the Company or any
member of the Company Group was granted an undivided one-half interest pursuant
to the Patent Assignments or the Technology Assignment and Joint Ownership
Agreements. The Company and the members of the Company Group will not be deemed
to offer, furnish or provide any Telecommunications Services (and the foregoing
provisions will not apply) solely by virtue of certain specified investments in
Persons that offer, furnish or provide Telecommunications Services or by virtue
of offering, furnishing or providing Telecommunications Services below a
specified de minimis amount.
Provisions Relating to Third Party Patent License Agreements
The Separation and Distribution Agreement provides, subject to specified
exceptions, for the grant by AT&T to the Company and NCR of rights to share with
AT&T the patent license rights granted to AT&T under third-party patent license
agreements. To the extent this grant is not effective, AT&T will transfer the
patent license agreement to the Company (and the Company will seek equivalent
rights from the third party for AT&T and NCR) or, if such transfer is not
effective, AT&T will retain the patent license agreement (and AT&T will seek
equivalent rights from the third party for the Company and NCR).
Proceeds; Expenses
The Separation and Distribution Agreement provides that the Offerings will
be primary Offerings of the Common Stock and that the net proceeds of the
Offerings will be retained by the Company. See "Use of Proceeds." The Company
has agreed to pay all third party costs, fees and expenses relating to the
Offerings, all of the reimbursable expenses of the Underwriters pursuant to the
Underwriting Agreement, all of the costs of producing, printing, mailing and
otherwise distributing this Prospectus, as well as the Underwriters' discount as
provided in the Underwriting Agreement. See "Underwriting." Except as expressly
set forth in the Separation and Distribution Agreement or in any Ancillary
Agreement, whether or not the Offerings or the Distribution is consummated, all
third party fees, costs and expenses paid or incurred in connection with the
Distribution will be paid by AT&T.
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Termination
The Separation and Distribution Agreement may be terminated at any time
prior to the Distribution Date by the mutual consent of AT&T, NCR and the
Company, or by AT&T at any time prior to the Closing Date. In addition, the
obligations of AT&T and the Company to pursue or effect the Distribution may be
terminated by AT&T if the Distribution does not occur on or prior to December
31, 1997. If the Separation and Distribution Agreement is terminated prior to
the Closing Date, no party thereto (or any of its respective directors or
officers) will have any Liability or further obligation to any other party. In
the event of any termination of the Separation and Distribution Agreement on or
after the Closing Date, only the provisions of the Separation and Distribution
Agreement that obligate the parties to pursue the Distribution will terminate
and the other provisions of the Separation and Distribution Agreement and each
Ancillary Agreement will remain in full force and effect.
Amendments and Waivers
No provisions of the Separation and Distribution Agreement or any Ancillary
Agreement will be deemed waived, amended, supplemented or modified by any party,
unless such waiver, amendment, supplement or modification is in writing and
signed by the authorized representative against whom it is sought to enforce
such waiver, amendment, supplement or modification. The Company has agreed and
acknowledged on behalf of itself and each other member of the Company Group that
(a) AT&T and NCR may enter into a separation and distribution agreement and
other agreements and instruments in connection with the NCR Distribution or
otherwise providing for certain arrangements between AT&T and NCR and that no
consent of any member of the Company Group will be required in connection
therewith, (b) certain transfers of Assets and Liabilities may occur between
members of the AT&T Services Group and the NCR Group and that no consent of any
member of the Company Group will be required in connection therewith, (c) AT&T
will have no obligation to proceed with the NCR Distribution, and (d) except as
otherwise set forth, all of the rights and obligations of the NCR Group will
continue regardless of whether NCR is an Affiliate of AT&T. Effective
immediately on notice to the Company, without any further action required by any
member of the Company Group, AT&T may assume any Asset or Liability of any
member of the NCR Group under the Separation and Distribution Agreement or under
any Ancillary Agreement (and any rights of any member of the NCR Group in
connection therewith) and all members of the NCR Group will thereupon
automatically be released therefrom.
Further Assurances
In addition to the actions specifically provided for elsewhere in the
Separation and Distribution Agreement, each of the parties has agreed to use its
reasonable best efforts, prior to, on and after the Closing Date, to take, or
cause to be taken, all actions, and to do, or cause to be done, all things,
reasonably necessary, proper or advisable under applicable laws, regulations and
agreements to consummate and make effective the transactions contemplated by the
Separation and Distribution Agreement and the Ancillary Agreements.
INTERIM SERVICES AND SYSTEMS REPLICATION AGREEMENT
The Company, AT&T and NCR have entered into an Interim Services and Systems
Replication Agreement (the "Interim Services and Systems Replication
Agreement"), governing the provision by each to one or more of the others, on an
interim basis, of certain data processing and telecommunications services
(including voice telecommunications and data transmission), and certain
corporate support services (including accounting, financial management, tax,
payroll, stockholder and public relations, legal, human resources
administration, procurement, real estate management and other administrative
functions), each as specified and on the terms set forth therein and in the
schedules thereto. Specified charges for such services are generally intended to
allow the providing company to recover the fully allocated direct costs of
providing the services, plus all out-of-pocket costs and expenses, but without
any profit. The Interim Services and System Replication Agreement also provides
for the provision of certain additional services identified from time to time
after the Closing Date that a party reasonably believes were inadvertently or
unintentionally omitted from the specified services, or that are essential to
effectuate an orderly transition under the Separation and
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Distribution Agreement (so long as the provision of such services would not
significantly disrupt the providing party's operations).
In addition, the Interim Services and Systems Replication Agreement
provides for the replication and transfer, from each party to one or more of the
others, of certain computer systems, including hardware, software, data storage
or maintenance and support components, specified therein and in the schedules
thereto. The computer systems that will be replicated or transferred include
specified computer systems that are used to provide administrative support
services to the Company or for business applications specific to the Company's
business. Except where otherwise specified, the costs and expenses of separating
or replicating a system are intended to be borne by the parties in proportion to
their prior usage of the system. Costs and expenses of purchasing new hardware
or obtaining new software licenses will be borne by the party purchasing the new
hardware or licensing the new software.
With limited exceptions, these interim services are not expected to extend
beyond January 1, 1998 and many are expected to terminate at or prior to the
Distribution.
PURCHASE AGREEMENTS
The Company and AT&T have entered into a General Purchase Agreement (the
"General Purchase Agreement") and various related and supplemental agreements
pursuant thereto (the "Supplemental Agreements"). The General Purchase Agreement
governs transactions pursuant to which the company provides Products, Licensed
Materials and Services (as such terms are defined in the General Purchase
Agreement) to AT&T and certain designated AT&T affiliates (each an "Ordering
Company"). The Products, Licensed Materials and Services include those related
to switching, signaling, transmission, power and operations support systems. In
the General Purchase Agreement, AT&T has committed that payments made to the
Company (commencing January 1, 1996) for purchases of Products, Licensed
Materials and Services by all Ordering Companies will total at least $3,000
million cumulatively for the calendar years 1996, 1997 and 1998. If AT&T does
not meet this purchase commitment by December 31, 1998, AT&T will be required
thereafter to pay interest based on the shortfall until the $3,000 million
purchase commitment is met. Such interest payment is the sole remedy for any
shortfall in such commitment. Under the General Purchase Agreement, on or prior
to the Closing Date, AT&T will prepay to the Company $500 million, which will be
applied to accounts receivable owed by AT&T covering purchases of Products,
Licensed Materials and Services that are due and payable on or after January 1,
1997.
The General Purchase Agreement also contains provisions governing (i)
ordering and delivery, (ii) payment terms, (iii) certain intellectual property
matters, (iv) product warranties, (v) product support and documentation, (vi)
engineering, installation, maintenance and other services, and (vii) consulting
services. The General Purchase Agreement has a five-year term, which will be
automatically extended for additional one-year periods unless either party
provides the other party one year's prior written notice of its desire to permit
the General Purchase Agreement to expire without further extension of its term.
The Supplemental Agreements set forth the specific terms and conditions,
including pricing, applicable to the provision by the Company to AT&T of the
particular Products, Licensed Materials and Services covered by each
Supplemental Agreement. Under certain circumstances, including a Change of
Control of the Company that AT&T determines will have a material adverse impact
on particular AT&T programs, AT&T will have the right to require the Company to
transfer to AT&T certain personnel and certain information, technology and
software used by the Company in connection with specified Products, Licensed
Materials and Services provided by the Company to AT&T. The pricing terms for
the Products, Licensed Materials and Services covered by the Supplemental
Agreements reflect negotiated prices taking into account the size of AT&T's
purchase commitment and AT&T's position as one of the Company's largest
customers. Any purchases by AT&T Wireless Services, Inc. ("AT&T Wireless") under
separate agreements with the Company will also be included in determining
whether AT&T's $3,000 million commitment under the General Purchase Agreement is
met.
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EMPLOYEE BENEFITS AGREEMENT
AT&T and the Company have entered into an Employee Benefits Agreement,
dated as of February 1, 1996 (the "Employee Benefits Agreement") that governs
the employee benefit obligations of the Company, including both compensation and
benefits, with respect to active employees and retirees assigned to the Company.
Pursuant to the Employee Benefits Agreement, the Company assumes and agrees to
pay, perform, fulfill and discharge, in accordance with their respective terms,
all Liabilities to, or relating to, former employees of AT&T or its affiliates
who will be employed by the Company and its affiliates and certain former
employees of AT&T or its affiliates (including retirees) who either were
employed in the Company Business or who otherwise are assigned to the Company
for purposes of allocating employee benefit obligations (including all retirees
of Bell Labs). Until the Distribution Date, the employees and former employees
assigned to the Company will continue to participate in AT&T's pension and other
employee benefit plans, although the Company will bear its allocable share of
the costs of benefits and administration of such plans. Effective immediately
after the Distribution, the Company will establish its own pension and employee
benefit plans, which generally will be the same as AT&T's plans as in effect at
that time. The Employee Benefits Agreement does not preclude the Company from
discontinuing or changing such plans at any time thereafter, with certain
exceptions noted below. The Company's plans generally will assume all
liabilities under AT&T's plans to employees and former employees assigned to the
Company, and certain assets funding such liabilities, including assets held in
trusts constituting Voluntary Employee Beneficiary Associations (VEBAs), will be
transferred from trusts and other funding vehicles associated with AT&T's plans
to the corresponding trusts and other funding vehicles associated with the
Company's plans.
Assets of trusts under qualified pension plans will be divided, immediately
after the Distribution Date, between the trusts for AT&T qualified pension plans
and the new Company qualified pension plans. Each such trust will receive the
legally required funding minimum and, if greater, a sufficient amount of
additional trust assets to ensure continued compliance with the existing AT&T
pension funding policy. Any trust assets in excess of the funding policy level
will be divided equally between the trusts of AT&T and the Company for such
qualified pension plans. Consistent with existing collective bargaining
agreements and applicable law, there will be a specified period of portability
of benefits under certain pension and other employee benefit plans for
occupational employees who move from AT&T to the Company or from the Company to
AT&T after the Distribution Date. For management employees, there will be a
limited period of portability of such benefits after the Distribution Date if
such employees move between the companies. In addition, during a transitional
period, AT&T or its affiliates will provide certain benefit plan administrative
services, investment management services, and actuarial services to the Company
and will share the administration of contracts with third parties to support
certain welfare benefit plans of both AT&T and the Company. During the period of
joint administration of welfare benefit plans, changes to the plans may only be
made in accordance with procedures specified in the Employee Benefits Agreement
so that any such changes will not materially increase the costs of the other
company.
AT&T Stock Awards
General. Pursuant to the Employee Benefits Agreement, the Company will
issue Substitute Awards under the 1996 LTIP in substitution for awards
(collectively, "AT&T Stock Awards") under the 1987 Plan and under other
stock-based plans of AT&T as of the Distribution Date and held by individuals
employed by the Company as of such date (the "Company Employees"). With certain
exceptions, AT&T Stock Awards held by individuals employed by AT&T as of the
Distribution Date and AT&T Stock Awards held by individuals who will not
continue their employment after the Distribution Date with any of AT&T, the
Company or any of their subsidiaries, including individuals who have retired
prior to such date, will remain outstanding as AT&T Stock Awards, with an
appropriate antidilution adjustment to reflect the Distribution.
In the case of AT&T Stock Awards consisting of stock options, the
Substitute Award will provide for the purchase of a number of shares of the
Common Stock equal to the number of shares of AT&T Common Stock subject to such
AT&T Stock Award as of the Distribution Date, multiplied by the Ratio (as
defined herein), rounded down to the nearest whole share. The per share exercise
price of the Substitute Award will equal the per share exercise price of such
AT&T Stock Award as of the Distribution Date divided by the Ratio. The Company
will pay the holder of the Substitute Award cash in lieu of any fractional
share. The
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Substitute Award for each AT&T Stock Award consisting of performance shares,
stock units, restricted stock or restricted stock units will be a new award
consisting of Company performance shares, stock units, restricted stock or
restricted stock units, respectively, representing a number of shares of Common
Stock equal to the number of shares of AT&T Common Stock represented by such
AT&T Stock Award multiplied by the Ratio rounded down to the nearest whole
share. The Company will pay to the holder of such Substitute Award cash in lieu
of any fractional share. The other terms and conditions of each Substitute
Award, will be the same as those of the surrendered AT&T Stock Award. The
"Ratio" means the amount obtained by dividing (i) the average of the daily high
and low per share prices of the AT&T Common Stock as listed on the NYSE during
each of the five trading days immediately preceding the ex-dividend date for the
Distribution by (ii) the average of the daily high and low per share prices of
the Common Stock as listed on the NYSE during each of the five trading days
immediately preceding the ex-dividend date for the Distribution.
Shares Subject to Substitute Awards
It is not possible to specify how many shares of Common Stock will be
subject to Substitute Awards. It is expected that some AT&T Stock Awards
consisting of stock options and SARs held by Company Employees will be
exercised, other AT&T Stock Awards will vest and other AT&T Stock Awards could
be granted, prior to the Distribution Date. In addition, the remaining balance
of unexercised AT&T Stock Awards will be converted into Substitute Awards by
reference to the Ratio, which will not be known until after the Distribution is
completed. Stockholders of the Company are, however, likely to experience some
dilutive impact from the above-described adjustments. Under the Employee
Benefits Agreement, in the event that the market value of the shares of Common
Stock subject to Substitute Awards (based on the same measurement period used to
calculate the Ratio) plus the amounts paid by the Company or Company Employees
in connection with the exercise of AT&T stock options, as described below,
exceeds seven percent of the total market value of the shares of Common Stock
outstanding as of the Distribution Date (based on the same measurement period),
AT&T will make a cash payment to the Company in the amount of such excess.
Treatment of AT&T Stock Awards Pending the Distribution
Pending the Distribution, AT&T Stock Awards held by Company Employees will
remain outstanding as AT&T Stock Awards. Pursuant to the Employee Benefits
Agreement, however, the Company will pay AT&T (i) upon the exercise of an AT&T
Stock Award consisting of stock options by a Company Employee whether prior to,
on or after the Distribution, in an amount equal to the excess, if any, of the
Market Value (as defined below) of the purchased shares on the date of exercise
of such option or the date of such purchase, as applicable, over the price paid
for such shares; and (ii) upon the vesting or delivery of shares of AT&T Common
Stock pursuant to an Award (other than an option) held by a Company Employee in
an amount equal to the Market Value of such AT&T Common Stock on the date of
such vesting or delivery. The "Market Value" of a share of AT&T Common Stock on
a given date means the average of the high and the low per share price of the
AT&T Common Stock as listed on the NYSE on such date, or if there is no trading
on the NYSE on such date, on the most recent previous date on which such trading
takes place.
Outstanding AT&T Stock Awards Held by Employees of the Company
As of March 1, 1996, there were approximately 8.7 million shares of AT&T
Common Stock subject to options for AT&T Common Stock (approximately 4.9 million
of which were exercisable as of March 1, 1996) and approximately 638,000 shares
of AT&T Common Stock represented by other AT&T Stock Awards, in each case held
by Company Employees. If the Ratio were determined using the closing price of
the AT&T Common Stock on April 2, 1996, on the NYSE ($64 1/8 per share) and the
initial public offering price per share of Common Stock set forth on the cover
page of this Prospectus, the foregoing number of shares subject to AT&T stock
options and other AT&T Stock Awards would be replaced by options on
approximately 20.7 million shares of Common Stock and other stock awards
covering approximately 1.5 million shares of Common Stock.
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BRAND LICENSE AND RELATED MATTERS
The Company and AT&T have entered into a license agreement (the "Brand
License Agreement") pursuant to which the Company will have rights, on a
royalty-free basis, to continue to use the AT&T brand (including the AT&T globe
design) for specified transition periods following the Closing Date. Under the
Brand License Agreement, the Company will be entitled to use the AT&T brand,
alone or in combination with the Company's brand, for the sale of consumer
products and services and business communications systems and services for a
period of one year following the Closing Date. After the initial one-year
period, the Company will be entitled to continue to use the AT&T brand on these
products, systems and services, but only in combination with the Company's
brand, for an additional three-year period. The right to use the AT&T brand,
alone or in combination with the Company's brand, in connection with certain
leased products or maintenance contracts will extend for 66 months after the
Closing Date. The Brand License Agreement permits the Company to use the AT&T
brand on the Company's other products, systems and services until the earlier of
the Distribution or six months after the Closing Date. In addition, the Company
may use the AT&T brand after these time periods to the extent necessary to
deplete pre-existing inventory. Subject to certain conditions set forth in the
Brand License Agreement, the Company may also extend these rights to use the
AT&T brand to authorized dealers of the Company's products, systems and
services.
The Brand License Agreement provides that the Company will comply with
specified quality, customer care and marketing standards in connection with the
use of the AT&T brand. It also provides that neither the Company nor any of its
authorized dealers will, during the period it is using the AT&T brand, provide,
offer or market telecommunications services provided by any person other than
AT&T (with certain exceptions, including to permit specified authorized dealers
to continue existing practices). AT&T has agreed in the Brand License Agreement
that, for a period of one year after the Closing Date, it will not license the
AT&T brand or trade dress to third parties (other than AT&T's affiliates) for
use in connection with products or services that compete with the Company's
consumer products and services or business communications systems and services.
AT&T may terminate the Brand License Agreement in the event of a significant
breach (as defined therein), including in the event of a change of control of
the Company.
Pursuant to separate assignments, AT&T has also assigned to the Company all
rights in specified other trademarks, service marks and trade dress used in the
Company's business.
PATENT LICENSES AND RELATED MATTERS
The Company, AT&T and NCR have executed and delivered assignments and other
agreements, including a patent license agreement, related to patents currently
owned or controlled by AT&T and its subsidiaries. The patent assignments divide
ownership of patents, patent applications and foreign counterparts among the
Company, AT&T and NCR, with the substantial portion of those currently owned or
controlled by AT&T and its subsidiaries (other than NCR) being assigned to the
Company. A small number of the patents assigned to the Company are jointly owned
with either AT&T or NCR. Certain of the patents that the Company jointly owns
with AT&T are subject to a joint ownership agreement under which each of the
Company and AT&T has full ownership rights in the patents. The other patents
that the Company jointly owns with AT&T, and the patents that the Company
jointly owns with NCR, are subject to defensive protection agreements with AT&T
and NCR, respectively, under which the Company holds most ownership rights in
the patents exclusively. Under these defensive protection agreements, AT&T or
NCR, as the case may be, has the ability, subject to specified restrictions, to
assert infringement claims under the patents against companies that assert
patent infringement claims against them, and has consent rights in the event the
Company wishes to license the patents to certain third parties or for certain
fields of use under specified circumstances. The defensive protection agreements
also provide for one-time payments from AT&T and NCR to the Company.
The patent license agreement entered into by the Company, AT&T and NCR
provides for royalty-free cross-licenses to each company, under each of the
other company's patents that are covered by the licenses, to use, lease, sell
and import any and all products and services of the businesses in which the
licensed company (including specified related companies) is now or hereafter
engaged. The cross-licenses also permit each
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company, subject to specified limitations, to have third parties make items
under the other companies' patents, as well as to pass through to customers
certain rights under the other companies' patents with respect to products and
services furnished to customers by the licensed company. In addition, the rights
granted to the Company and AT&T include the right to license third parties under
each of the other company's patents to the extent necessary to meet existing
patent licensing obligations and AT&T has the right, subject to specified
restrictions and procedures, to seek sublicensing of a limited number of
identified patents to be assigned to the Company.
The cross-licenses between the Company and AT&T cover all of each company's
patents, including patents issued on patent applications filed on or before
December 31, 1996, except for certain patents and patents on filed applications
owned or controlled by AT&T Wireless. The cross-licenses between the Company and
NCR cover all of each company's patents, including patents issued on patent
applications filed on or before December 31, 1999.
TECHNOLOGY LICENSES AND RELATED MATTERS
The Company, AT&T and NCR have executed and delivered assignments and other
agreements, including the Technology License Agreement, related to technology
currently owned or controlled by AT&T and its subsidiaries. Technology includes
copyrights, mask works and other intellectual property other than trademarks,
trade names, trade dress, service marks and patent rights. The technology
assignments divide ownership of technology among the Company, AT&T and NCR, with
the Company and AT&T owning technology that was developed by or for, or
purchased by, the Company's business or AT&T's services business, respectively,
and NCR owning technology that was developed by or for, or purchased by, NCR.
Technology that is not covered by any of these categories is owned jointly by
the Company and AT&T or, in the case of certain specified technology, owned
jointly by the Company, AT&T and NCR.
The Technology License Agreement entered into by the Company, AT&T and NCR
provides for royalty-free cross-licenses to each company to use the other
companies' technology existing as of the Closing Date, except for specified
portions of each company's technology as to which use by the other companies is
restricted or prohibited.
TAX AGREEMENTS
Tax Allocation Agreements
The parties have entered into agreements to govern the allocation of
consolidated or combined federal and state and local income tax liability (the
"Tax Allocation Agreements") among AT&T, the Company, NCR and all other domestic
subsidiaries of AT&T for the period before the Distribution Date. No party will
pay an amount of income tax greater than the income tax it would have paid had
it filed its income tax return as a separate entity (prior to credits), except
in cases in which the consolidated or combined group as a whole realizes a
detriment from consolidation or combination. The Tax Allocation Agreements also
provide that profitable entities will compensate loss entities to the extent
that the losses are utilized in the consolidated tax return. No loss entity,
however, will be compensated for an amount of losses in excess of the amount of
losses that it would have shown had it filed its income tax return separately.
Consolidated or combined credits allowed against tax on a consolidated or
combined income tax return will be allocated to each entity in proportion to the
creditable expenditures by such entity (or, in the case of credits not based on
expenditures, in proportion to its contribution to such credits). To the extent
that the consolidated or combined group is subject to alternative minimum tax
("AMT"), such AMT will be allocated proportionately among those members of the
group that would have owed AMT had they filed their income tax return
separately.
Tax Sharing Agreement
The Tax Sharing Agreement, by and among the Company, AT&T and NCR (the "Tax
Sharing Agreement"), governs contingent tax liabilities and benefits, tax
contests and other tax matters with respect to
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tax returns filed with respect to tax periods, in the case of the Company,
ending or deemed to end on or before the Distribution Date. Under the Tax
Sharing Agreement, Adjustments (as defined in the Tax Sharing Agreement) to
Taxes that are clearly attributable to the business of one party will be borne
solely by that party. Adjustments to all other Tax liabilities will be borne 75%
by AT&T, 22% by the Company and 3% by NCR.
Notwithstanding the above, if as a result of the acquisition of all or a
portion of the capital stock or assets of the Company, the Distribution fails to
qualify as a tax-free distribution under Section 355 of the Code, then the
Company will be liable for any and all increases in Tax attributable thereto.
REAL ESTATE AGREEMENTS
AT&T, the Company and NCR have executed a series of instruments that assign
AT&T's worldwide real estate portfolio, consisting of both owned and leased
property, among the parties. Generally, such real estate was assigned by
reference to which party was the dominant tenant in the applicable facility. The
parties also have agreed to share, pursuant to intercompany leases, subleases
and sub-subleases, certain facilities, consisting predominantly of office space
and laboratory sites.
With certain exceptions the terms of such leases, subleases and
sub-subleases are substantially the same regardless of which company is tenant
or landlord. In the case of owned real estate to be leased, the lease terms will
be either two or three years, except that a limited number of leases may be
terminated on 90 days' notice by the tenant. In the case of subleases or
sub-subleases of property, the lease term will generally coincide with the
remaining term of the primary lease or sublease, respectively. In the case of
owned property, rent payments are generally determined by reference to
prevailing market rents or previously specified internal budget levels. In the
case of subleases of third-party leases, or sub-subleases, rent payments are
generally determined by reference to the rent specified in the underlying lease
or sublease, plus an administrative fee. The leases, subleases and sub-subleases
provide generally that owner, landlord or sub-landlord will provide property
services for specified fees.
OTHER AGREEMENTS
AT&T and the Company have entered into the Virtual Telecommunications
Network Service Agreement pursuant to which the Company has committed to
purchase a minimum of $62.5 million of telecommunication services from AT&T
under a publicly filed tariff (without regard to actual volume requirements of
the Company) over a three-year term. In addition, NCR and the Company have
entered into the Volume Purchase Agreement under which the Company has committed
to purchase at least $150 million of products and services from NCR (without
regard to actual volume requirements of the Company) by December 31, 1998.
CERTAIN DEFINITIONS
Set forth below are certain defined terms contained in the Separation and
Distribution Agreement.
AT&T Group means AT&T and each Person (other than any member of the Company
Group) that is an Affiliate of AT&T immediately after the Closing Date
(including any member of the NCR Group).
AT&T Services Business means: (a) the business and operations of the
telecommunications services divisions and Subsidiaries and the financial
services and leasing divisions and Subsidiaries of AT&T consisting principally
of the Communications Services Group, AT&T Wireless Services and its
Subsidiaries, Universal Card Services, Inc. and its Subsidiaries, AT&T Capital
and its Subsidiaries, AT&T Solutions, the Assets of Bell Labs that are being
retained by AT&T, Submarine Systems and, subject to the terms of the Separation
and Distribution Agreement, AT&T Ventures; (b) except as otherwise expressly
provided in the Separation and Distribution Agreement, any terminated, divested
or discontinued businesses or operations that at the time of termination,
divestiture or discontinuation primarily related to the AT&T Services Business
as then conducted; and (c) certain terminated, divested or discontinued
businesses and operations specified pursuant to the Separation and Distribution
Agreement.
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AT&T Services Group means each member of the AT&T Group other than any
member of the NCR Group.
Company Assets means (without duplication): (a) any and all Assets that are
expressly contemplated by the Separation and Distribution Agreement or any
Ancillary Agreement as Assets to be transferred to the Company or any other
member of the Company Group; (b) all issued and outstanding capital stock of
AT&T International Inc. ("ATTI") and any and all Assets owned by ATTI or its
Subsidiaries as of the date of the transfer of such capital stock to the Company
pursuant to the Separation and Distribution Agreement, except for the Assets
contemplated to be sold or otherwise transferred to any member of the AT&T Group
pursuant to the Non-U.S. Plan; (c) any Exclusive Company Contingent Gain and any
Shared Company Percentage of any Shared Contingent Gain; (d) certain rights in
respect of Insurance Policies and specified indemnification agreements; (e) (i)
specified tangible property, (ii) Company Contracts, and (iii) the Company's
Subsidiaries; (f) any Assets reflected in the Company's audited consolidated
Balance Sheet as of December 31, 1995, including the notes thereto, as Assets of
the Company and its Subsidiaries, subject to any dispositions of such Assets
subsequent to the date thereof; and (g) except as contemplated by the Separation
and Distribution Agreement, any and all Assets owned or held immediately prior
to the Closing Date by AT&T or any of its Subsidiaries that are used primarily
in the Company Business; provided, however, that the intention of such clause
(g) is only to rectify any inadvertent omission of transfer or conveyance of any
Assets that, had the parties given specific consideration to such Asset as of
the date thereof, would have otherwise been classified as a Company Asset; and
provided, further that no Asset will be deemed to be a Company Asset solely as a
result of such clause (g) if such Asset is within the category or type of Asset
expressly covered by the subject matter of an Ancillary Agreement and unless a
claim with respect thereto is made by the Company on or prior to the first
anniversary of the Distribution.
Notwithstanding the foregoing, the Company Assets will not in any event
include (collectively, "Excluded Assets"): (a) the Retained Receivables and
certain other specified Assets; (b) any and all Assets that are expressly
contemplated by the Separation and Distribution Agreement or any Ancillary
Agreement as Assets to be retained by AT&T or any other member of the AT&T Group
(including the NCR Group); and (c) certain specified contracts and agreements.
Company Business means: (a) the business and operations of the
telecommunications equipment divisions and Subsidiaries of AT&T consisting
principally of the Network Systems Group, the Global Business Communications
Systems Group, the Consumer Products Group, the Microelectronics Group, AT&T
Paradyne and the Assets of Bell Labs that are being transferred to the Company;
and (b) any terminated, divested or discontinued businesses or operations that
at the time of termination, divestiture or discontinuation primarily related to
the Company Business as then conducted.
Company Group means the Company, each Subsidiary of the Company and each
other Person that is either controlled directly or indirectly by the Company
immediately after the Closing Date or that is contemplated to be controlled by
the Company pursuant to the Non-U.S. Plan (other than any Person that is
contemplated not to be controlled by the Company pursuant to the Non-U.S. Plan).
Company Liabilities means (without duplication):
(a) any and all Liabilities that are expressly contemplated by the
Separation and Distribution Agreement or any Ancillary Agreement as
Liabilities to be assumed by the Company or any member of the Company
Group, and all agreements, obligations and Liabilities of any member of the
Company Group under the Separation and Distribution Agreement or any of the
Ancillary Agreements;
(b) all Liabilities (other than Taxes based on, or measured by
reference to, net income), including any employee-related Liabilities and
Environmental Liabilities, primarily relating to, arising out of or
resulting from:
(i) the operation of the Company Business, as conducted at any time
prior to, on or after the Closing Date (including any Liability relating
to, arising out of or resulting from any act or failure to act by any
director, officer, employee, agent or representative (whether or not
such act or failure to act is or was within such Person's authority));
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(ii) the operation of any business conducted by any member of the
Company Group at any time after the Closing Date (including any
Liability relating to, arising out of or resulting from any act or
failure to act by any director, officer, employee, agent or
representative (whether or not such act or failure to act is or was
within such Person's authority)); or
(iii) any Company Assets (including any Company Contracts and any
real property and leasehold interests);
in any such case whether arising before, on or after the Closing Date;
(c) subject to the terms of the Separation and Distribution Agreement,
all Exclusive Company Contingent Liabilities and the Shared Company
Percentage of any Shared Contingent Liabilities;
(d) all Liabilities relating to, arising out of or resulting from the
Working Capital Facility and, as of the Closing Date, the Commercial Paper
Program;
(e) all Liabilities relating to, arising out of or resulting from any
of certain specified terminated, divested or discontinued businesses and
operations;
(f) all Liabilities of ATTI or its Subsidiaries, as of the date of the
transfer of the capital stock of ATTI to the Company pursuant to the
Separation and Distribution Agreement, except for the Liabilities
contemplated to be assumed by any member of the AT&T Group pursuant to the
Non-U.S. Plan, and all Liabilities of any other member of the Company
Group; and
(g) all Liabilities reflected as Liabilities or obligations of the
Company in the Company's audited consolidated balance sheet, including the
notes thereto, as of December 31, 1995, subject to any discharge of such
Liabilities subsequent to the date thereof.
Notwithstanding the foregoing, the Company Liabilities will not include
(collectively, "Excluded Liabilities"): (a) any and all Liabilities that are
expressly contemplated by the Separation and Distribution Agreement or any
Ancillary Agreement as Liabilities to be retained or assumed by AT&T or any
other member of the AT&T Group (including the NCR Group), and all agreements and
obligations of any member of the AT&T Group under the Separation and
Distribution Agreement or any of the Ancillary Agreements; (b) subject to the
terms of the Separation and Distribution Agreement, all Exclusive AT&T Services
Contingent Liabilities and Exclusive NCR Contingent Liabilities and the Shared
AT&T Percentage and the Shared NCR Percentage of any Shared Contingent
Liabilities; and (c) certain specified Liabilities.
Contingent Gain means any claim or other right of AT&T, the Company, NCR or
any their respective Affiliates, whenever arising, against any Person other than
AT&T, the Company, NCR or any of their respective Affiliates, if and to the
extent that (a) such claim or right has accrued as of the Closing Date (based on
then existing law) and (b) the existence or scope of the obligation of such
other Person as of the Closing Date was not acknowledged, fixed or determined in
any material respect, due to a dispute or other uncertainty as of the Closing
Date or as a result of the failure of such claim or other right to have been
discovered or asserted as of the Closing Date, with certain specified exceptions
and as more fully set forth in the Separation and Distribution Agreement.
Contingent Liability means any Liability, other than Liabilities for Taxes
(which are governed by the Tax Sharing Agreement), of AT&T, the Company, NCR or
any of their respective Affiliates, whenever arising, to any Person other than
AT&T, the Company, NCR or any of their respective Affiliates, if and to the
extent that (a) such Liability has accrued as of the Closing Date (based on then
existing law) and (b) the existence or scope of the obligation of AT&T, the
Company, NCR or any of their respective Affiliates as of the Closing Date with
respect to such Liability was not acknowledged, fixed or determined in any
material respect, due to a dispute or other uncertainty as of the Closing Date
or as a result of the failure of such Liability to have been discovered or
asserted as of the Closing Date (it being understood that the existence of a
litigation or other reserve with respect to any Liability will not be sufficient
for such Liability to be considered acknowledged, fixed or determined), in the
case of any Liability a portion of which had accrued as of the Closing Date and
a portion of which accrues after the Closing Date, only that portion that had
accrued as of the Closing Date will be considered a Contingent Liability. For
purposes of the foregoing, a Liability will be deemed to have accrued
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as of the Closing Date if all the elements necessary for the assertion of a
claim with respect to such Liability have occurred on or prior to the Closing
Date, such that the claim, were it asserted in an Action on or prior to the
Closing Date, would not be dismissed by a court on ripeness or similar grounds.
For purposes of clarification of the foregoing, the parties agree that no
Liability relating to, arising out of or resulting from any obligation of any
Person to perform the executory portion of any contract or agreement existing as
of the Closing Date, or to satisfy any obligation accrued under any Plan (as
defined in the Employee Benefits Agreement) as of the Closing Date, will be
deemed to be a Contingent Liability.
NCR Business means: (a) the computer products, computer systems, data
processing and information solutions business and operations as conducted by NCR
and its Subsidiaries; (b) except as otherwise expressly provided in the
Separation and Distribution Agreement, any terminated, divested or discontinued
businesses or operations (i) that at the time of termination, divestiture or
discontinuation primarily related to the NCR Business as then conducted, or (ii)
that were conducted by NCR, or any Person that at any time was an Affiliate of
NCR, prior to the acquisition of NCR by AT&T; and (c) specified terminated,
divested or discontinued businesses and operations.
NCR Covered Liabilities means Liabilities relating to, arising out of or
resulting from any of the following items (without duplication): (a) the failure
of NCR or any member of the NCR Group or any other Person to pay, perform or
otherwise promptly discharge any Exclusive NCR Contingent Liability or any
Shared NCR Percentage of any Shared Contingent Liability, whether prior to or
after the Closing Date or the date of the Separation and Distribution Agreement;
and (b) any breach by NCR or any member of the NCR Group of the Separation and
Distribution Agreement or any of the Ancillary Agreements, or any other
agreement that is not contemplated to be terminated as of the Closing Date
pursuant to the Separation and Distribution Agreement.
NCR Group means NCR, each Subsidiary of NCR and each other Person that is
either controlled directly or indirectly by NCR immediately after the Closing or
that is contemplated to be controlled by NCR pursuant to the Non-U.S. Plan.
PRINCIPAL STOCKHOLDER
Prior to the Offerings, all of the outstanding shares of Common Stock will
be owned by AT&T. After the Offerings, AT&T will own approximately 82.4% of the
Common Stock then outstanding. Except as described above, the Company is not
aware of any person or group that will beneficially own more than 5% of the
outstanding shares of Common Stock following the Offerings.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Immediately after the Offerings, the Company's authorized capital stock
will consist of 250 million shares of preferred stock, par value $1.00 per share
(the "Preferred Stock"), and 3,000 million shares of Common Stock. Immediately
following the Offerings, 636,661,931 shares of Common Stock will be outstanding.
All of the shares of Common Stock that will be outstanding immediately following
the Offerings, including the shares of Common Stock sold in the Offerings, will
be validly issued, fully paid and nonassessable.
COMMON STOCK
The holders of Common Stock will be entitled to one vote for each share on
all matters voted on by stockholders, including elections of directors, and,
except as otherwise required by law or provided in any resolution adopted by the
Company Board with respect to any series of Preferred Stock, the holders of such
shares will possess all voting power. The Certificate does not provide for
cumulative voting in the election of directors. Subject to any preferential
rights of any outstanding series of Preferred Stock created by the Company Board
from time to time, the holders of Common Stock will be entitled to such
dividends as may be declared from time to time by the Company Board from funds
available therefor, and upon liquidation will be entitled to receive pro rata
all assets of the Company available for distribution to such holders. See
"Dividend Policy."
PREFERRED STOCK
The Certificate authorizes the Company Board to establish one or more
series of Preferred Stock and to determine, with respect to any series of
Preferred Stock, the terms and rights of such series, including (i) the
designation of the series, (ii) the number of shares of the series, which number
the Company Board may thereafter (except where otherwise provided in the
applicable certificate of designation) increase or decrease (but not below the
number of shares thereof then outstanding), (iii) whether dividends, if any,
will be cumulative or noncumulative, and, in the case of shares of any series
having cumulative dividend rights, the date or dates or method of determining
the date or dates from which dividends on the shares of such series shall be
cumulative, (iv) the rate of any dividends (or method of determining such
dividends) payable to the holders of the shares of such series, any conditions
upon which such dividends will be paid and the date or dates or the method for
determining the date or dates upon which such dividends will be payable; (v) the
redemption rights and price or prices, if any, for shares of the series, (vi)
the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series, (vii) the amounts payable on and the
preferences, if any, of shares of the series in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, (viii) whether the shares of the series will be convertible or
exchangeable into shares of any other class or series, or any other security, of
the Company or any other corporation, and, if so, the specification of such
other class or series or such other security, the conversion or exchange price
or prices or rate or rates, any adjustments thereof, the date or dates as of
which such shares will be convertible or exchangeable and all other terms and
conditions upon which such conversion or exchange may be made, (ix) restrictions
on the issuance of shares of the same series or of any other class or series,
(x) the voting rights, if any, of the holders of the shares of the series, and
(xi) any other relative rights, preferences and limitations of such series.
The Company believes that the ability of the Company Board to issue one or
more series of Preferred Stock will provide the Company with flexibility in
structuring possible future financings and acquisitions, and in meeting other
corporate needs which might arise. The authorized shares of Preferred Stock, as
well as shares of Common Stock, will be available for issuance without further
action by the Company's stockholders, unless such action is required by
applicable law or the rules of any stock exchange or automated quotation system
on which the Company's securities may be listed or traded. The NYSE currently
requires stockholder approval as a prerequisite to listing shares in several
instances, including where the present or potential issuance of shares could
result in an increase in the number of shares of common stock, or in the amount
of voting securities, outstanding of at least 20%. If the approval of the
Company's stockholders is not required for
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the issuance of shares of Preferred Stock or Common Stock, the Board may
determine not to seek stockholder approval.
Although the Company Board has no intention at the present time of doing
so, it could issue a series of Preferred Stock that could, depending on the
terms of such series, impede the completion of a merger, tender offer or other
takeover attempt. The Company Board will make any determination to issue such
shares based on its judgment as to the best interests of the Company and its
stockholders. The Company Board, in so acting, could issue Preferred Stock
having terms that could discourage an acquisition attempt through which an
acquirer may be able to change the composition of the Company Board, including a
tender offer or other transaction that some, or a majority, of the Company's
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then current
market price of such stock.
As of the Closing Date, 7,500,000 Junior Preferred Shares (as defined
herein) will be reserved for issuance upon exercise of the Rights. See
"-- Rights Plan."
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CERTIFICATE AND BY-LAWS
Board of Directors
The Certificate provides that except as otherwise fixed by or pursuant to
the provisions of a Certificate of Designations setting forth the rights of the
holders of any class or series of Preferred Stock, the number of the directors
of the Company will be fixed from time to time exclusively pursuant to a
resolution adopted by a majority of the total number of directors which the
Company would have if there were no vacancies (the "Whole Board") (but shall not
be less than three). The directors, other than those who may be elected by the
holders of Preferred Stock, will be classified, with respect to the time for
which they severally hold office, into three classes, as nearly equal in number
as possible, one class to be originally elected for a term expiring at the
annual meeting of stockholders to be held in 1997, another class to be
originally elected for a term expiring at the annual meeting of stockholders to
be held in 1998 and another class to be originally elected for a term expiring
at the annual meeting of stockholders to be held in 1999, with each director to
hold office until its successor is duly elected and qualified. Commencing with
the 1997 annual meeting of stockholders, directors elected to succeed directors
whose terms then expire will be elected for a term of office to expire at the
third succeeding annual meeting of stockholders after their election, with each
director to hold office until such person's successor is duly elected and
qualified.
The Certificate provides that except as otherwise provided for or fixed by
or pursuant to a Certificate of Designations setting forth the rights of the
holders of any class or series of Preferred Stock, newly created directorships
resulting from any increase in the number of directors and any vacancies on the
Company Board resulting from death, resignation, disqualification, removal or
other cause will be filled by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum of the
Company Board, and not by the stockholders. Any director elected in accordance
with the preceding sentence will hold office for the remainder of the full term
of the class of directors in which the new directorship was created or the
vacancy occurred and until such director's successor shall have been duly
elected and qualified. No decrease in the number of directors constituting the
Company Board will shorten the term of any incumbent director. Subject to the
rights of holders of Preferred Stock, any director may be removed from office
only for cause by the affirmative vote of the holders of at least a majority of
the voting power of all Voting Stock then outstanding, voting together as a
single class; provided, however, that prior to the Trigger Date (as defined
herein), any director or directors may be removed from office by the affirmative
vote of the holders of at least 80% of the voting power of all Voting Stock then
outstanding, voting together as a single class.
These provisions would preclude a third party from removing incumbent
directors and simultaneously gaining control of the Company Board by filling the
vacancies created by removal with its own nominees. Under the classified board
provisions described above, it would take at least two elections of directors
for any individual or group to gain control of the Company Board. Accordingly,
these provisions could discourage a third party from initiating a proxy contest,
making a tender offer or otherwise attempting to gain control of the Company.
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No Stockholder Action by Written Consent; Special Meetings
The Certificate and By-Laws provide that as of the time at which AT&T and
its affiliates cease to be the beneficial owner of an aggregate of at least a
majority of the then outstanding shares of Common Stock (the "Trigger Date"),
any action required or permitted to be taken by the stockholders of the Company
must be effected at a duly called annual or special meeting of such holders and
may not be effected by any consent in writing by such holders. Effective as of
the Trigger Date, except as otherwise required by law and subject to the rights
of the holders of any Preferred Stock, special meetings of stockholders of the
Company for any purpose or purposes may be called only by the Company Board
pursuant to a resolution stating the purpose or purposes thereof approved by a
majority of the Whole Board or by the Chairman of the Company Board and,
effective as of the Trigger Date, any power of stockholders to call a special
meeting is specifically denied. No business other than that stated in the notice
shall be transacted at any special meeting. In addition, prior to the Trigger
Date, the Company will call a special meeting of stockholders promptly upon
request by AT&T, or any of its affiliates, in each case, if such entity is a
stockholder of the Company. These provisions may have the effect of delaying
consideration of a stockholder proposal until the next annual meeting unless a
special meeting is called by the Company Board or the Chairman of the Board.
Advance Notice Procedures
The By-Laws establish an advance notice procedure for stockholders to make
nominations of candidates for election as directors or to bring other business
before an annual meeting of stockholders of the Company (the "Stockholder Notice
Procedure"). The Stockholder Notice Procedure provides that only persons who are
nominated by, or at the direction of, the Chairman of the Board, or by a
stockholder who has given timely written notice to the Secretary of the Company
prior to the meeting at which directors are to be elected, will be eligible for
election as directors of the Company. The Stockholder Notice Procedure also
provides that at an annual meeting only such business may be conducted as has
been brought before the meeting by, or at the direction of, the Chairman of the
Board or the Company Board, or by a stockholder who has given timely written
notice to the Secretary of the Company of such stockholder's intention to bring
such business before such meeting. Under the Stockholder Notice Procedure, for
notice of stockholder nominations to be made at an annual meeting to be timely,
such notice must be received by the Company not later than the close of business
on the 90th calendar day nor earlier than the close of business on the 120th
calendar day prior to the first anniversary of the preceding year's annual
meeting (except that, in the event that the date of the annual meeting is more
than 30 calendar days before or more than 60 calendar days after such
anniversary date, notice by the stockholder to be timely must be so delivered
not earlier than the close of business on the 120th calendar day prior to such
annual meeting and not later than the close of business on the later of the 90th
calendar day prior to such annual meeting or the 10th calendar day following the
day on which public announcement of a meeting date is first made by the
Company).
Notwithstanding the foregoing, in the event that the number of directors to
be elected to the Company Board is increased and there is no public announcement
by the Company naming all of the nominees for director or specifying the size of
the increased Company Board at least 100 calendar days prior to the first
anniversary of the preceding year's annual meeting, a stockholder's notice also
will be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered not later than the
close of business on the 10th calendar day following the day on which such
public announcement is first made by the Company. Under the Stockholder Notice
Procedure, for notice of a stockholder nomination to be made at a special
meeting at which directors are to be elected to be timely, such notice must be
received by the Company not earlier than the close of business on the 120th
calendar day prior to such special meeting and not later than the close of
business on the later of the 90th calendar day prior to such special meeting or
the 10th calendar day following the day on which public announcement is first
made of the date of the special meeting and of the nominees proposed by the
Company Board to be elected at such meeting.
In addition, under the Stockholder Notice Procedure, a stockholder's notice
to the Company proposing to nominate a person for election as a director or
relating to the conduct of business other than the nomination of directors must
contain certain specified information. If the chairman of a meeting determines
that an individual was not nominated, or other business was not brought before
the meeting, in accordance with the
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Stockholder Notice Procedure, such individual will not be eligible for election
as a director, or such business will not be conducted at such meeting, as the
case may be.
The Stockholder Notice Procedure does not apply to AT&T and its affiliates
prior to the Trigger Date.
Amendment
The Certificate provides that the affirmative vote of the holders of at
least 80% of the Voting Stock, voting together as a single class, is required to
amend provisions of the Certificate relating to stockholder action without a
meeting; the calling of special meetings; the number, election and term of the
Company's directors; the filling of vacancies; and the removal of directors. The
Certificate further provides that the related By-Laws described above (including
the Stockholder Notice Procedure) may be amended only by the Company Board or by
the affirmative vote of the holders of at least 80% of the voting power of the
outstanding shares of Voting Stock, voting together as a single class.
Rights Plan
The Company Board currently expects to adopt a Share Purchase Rights Plan
(the "Rights Plan") on or prior to the Closing Date. Pursuant to the Rights
Plan, the Company Board will cause to be issued one preferred share purchase
right (a "Right") for each outstanding share of Common Stock. Each Right will
entitle the registered holder to purchase from the Company one one-hundredth of
a share of a new series of junior preferred stock, par value $1.00 per share
(the "Junior Preferred Shares"), of the Company at a price of $90 per share (the
"Purchase Price"), subject to adjustment. The description and terms of the
Rights will be set forth in a Rights Agreement (the "Rights Agreement"), between
the Company and the designated Rights Agent (the "Rights Agent"). The
description set forth below is intended as a summary only and is qualified in
its entirety by reference to the form of the Rights Agreement, which will be
filed as an exhibit to the Registration Statement. See "Available Information."
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") have acquired beneficial ownership of 10% or more of the outstanding
shares of Common Stock or (ii) 10 business days (or such later date as may be
determined by action of the Company Board prior to such time as any person
becomes an Acquiring Person) following the commencement of, or announcement of
an intention to make, a tender offer or exchange offer the consummation of which
would result in the beneficial ownership by a person or group of 10% or more of
such outstanding shares of Common Stock (the earlier of such dates being called
the "Rights Distribution Date"), the Rights will be evidenced by the
certificates representing the Common Stock.
The Rights Agreement will provide that, until the Rights Distribution Date
(or earlier redemption or expiration of the Rights), the Rights will be
transferred with and only with the Common Stock. Until the Rights Distribution
Date (or earlier redemption or expiration of the Rights), the Common Stock
certificates will contain a notation incorporating the Rights Agreement by
reference. As soon as practicable following the Rights Distribution Date,
separate certificates evidencing the Rights (the "Right Certificates") will be
mailed to holders of record of the Common Stock as of the close of business on
the Rights Distribution Date and such separate Right Certificates alone will
evidence the Rights.
The Rights will not be exercisable until the Rights Distribution Date. The
Rights will expire on the 10th anniversary of the date of issuance (the "Final
Expiration Date"), unless the Final Expiration Date is extended or unless the
Rights are earlier redeemed or exchanged by the Company, in each case, as
summarized below.
In the event that any person or group of affiliated or associated persons
become an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights beneficially owned by the Acquiring Person (which
will thereafter be void), will thereafter have the right to receive upon
exercise that number of shares of Common Stock having a market value of two
times the exercise price of the Right. In the event that the Company is acquired
in a merger or other business combination transaction or 50% or more of its
consolidated assets or earning power are sold after a person or group of
affiliated or associated persons
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becomes an Acquiring Person, proper provision will be made so that each holder
of a Right will thereafter have the right to receive, upon the exercise thereof
at the then-current exercise price of the Right, that number of shares of common
stock of the acquiring company which at the time of such transaction will have a
market value of two times the exercise price of the Right.
At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 10% or more of the then
outstanding Common Stock and prior to the acquisition by such person or group of
50% or more of the outstanding Common Stock, the Company Board may exchange the
Rights (other than Rights owned by such person or group which have become void),
in whole or in part, at an exchange ratio of one share of Common Stock, or one
one-hundredth of a Junior Preferred Share, per Right (subject to adjustment).
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 10% or more of the then
outstanding Common Stock, the Company Board may redeem the Rights in whole, but
not in part, at a price of $.01 per Right (the "Redemption Price"). The
redemption of the Rights may be made effective at such time on such basis and
with such conditions as the Company Board, in its sole discretion, may
establish. Immediately upon any redemption of the Rights, the right to exercise
the rights will terminate and the only right of the holders of the Rights will
be eligible to receive the Redemption Price.
The terms of the Rights may be amended by the Company Board without the
consent of the holders of the Rights; provided, however, that, from and after
such time as any person or group of affiliated or associated persons becomes an
Acquiring Person, no such amendment may adversely affect the interests of the
holders of the Rights. Until a Right is exercised, the holder thereof, as such,
will have no rights as a stockholder of the Company, including, without
limitation, the right to vote or to receive dividends.
The number of outstanding Rights and the number of one one-hundredths of a
Junior Preferred Share issuable upon exercise of each Right also will be subject
to adjustment in the event of a stock split of the Common Stock or a stock
dividend on the Common Stock payable in Common Stock or subdivisions,
consolidations or combinations of the Common Stock occurring, in any such case,
prior to the Rights Distribution Date. The Purchase Price payable, and the
number of Junior Preferred Shares or other securities or property issuable, upon
exercise of the Rights will be subject to adjustment from time to time to
prevent dilution (i) in the event of a stock dividend on, or a subdivision,
combination or reclassification of, the Junior Preferred Shares, (ii) upon the
grant to holders of the Junior Preferred Shares of certain rights or warrants to
subscribe for or purchase Junior Preferred Shares at a price, or securities
convertible into Junior Preferred Shares with a conversion price, less than the
then-current market price of the Junior Preferred Shares or (iii) upon the
distribution to holders of the Junior Preferred Shares of evidences of
indebtedness or assets (excluding regular periodic cash dividends paid out of
earnings or retained earnings or dividends payable in Junior Preferred Shares)
or of subscription rights or warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least one
percent in such Purchase Price. No fractional Junior Preferred Shares will be
issued (other than fractions which are integral multiples of one one-hundredth
of a Junior Preferred Share, which may, at the election of the Company, be
evidenced by depositary receipts) and in lieu thereof, an adjustment in cash
will be made based on the market price of the Junior Preferred Shares on the
last trading day prior to the date of exercise.
Junior Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Junior Preferred Share will be entitled to a minimum
preferential quarterly dividend payment of $1.00 per share but will be entitled
to an aggregate dividend of 100 times the dividend declared per share of Common
Stock. In the event of liquidation, the holders of the Junior Preferred Shares
will be entitled to a minimum preferential liquidation payment of $100 per share
but will be entitled to an aggregate payment of 100 times the payment made per
share of Common Stock. Each Junior Preferred Share will have 100 votes voting
together with the Common Stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of Common Stock are
exchanged, each Junior Preferred Share will be entitled to receive 100 times the
amount received per Common Stock. These rights are protected by customary
anti-dilution provisions.
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Due to the nature of the Junior Preferred Shares' dividend, liquidation and
voting rights, the value of the one one-hundredth interest in a Junior Preferred
Share purchasable upon exercise of each Right should approximate the value of
one share of Common Stock.
The Rights have certain antitakeover effects. The Rights will cause
substantial dilution to a person or group of persons that attempts to acquire
the Company on terms not approved by the Company Board. The Rights should not
interfere with any merger or other business combination approved by the Company
Board prior to the time that a person or group has acquired beneficial ownership
of 10% percent or more of the Common Stock since the Rights may be redeemed by
the Company at the Redemption Price until such time.
The Rights contain certain provisions to exclude AT&T and its affiliates
and associates from the operative provisions thereof.
DELAWARE BUSINESS COMBINATION STATUTE
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, an "interested stockholder" of a Delaware corporation shall
not engage in any business combination, including mergers or consolidations or
acquisitions of additional shares of the corporation, with the corporation for a
three-year period following the date that such stockholder becomes an interested
stockholder unless (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
"interested stockholder," the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares), or (iii) on or subsequent to such date,
the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder. Except as otherwise specified in
Section 203, an interested stockholder is defined to include (x) any person that
is the owner of 15% or more of the outstanding voting stock of the corporation,
or is an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within three
years immediately prior to the date of determination and (y) the affiliates and
associates of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. The Company has not
elected to be exempt from the restrictions imposed under Section 203. However,
AT&T and its affiliates are excluded from the definition of "interested
stockholder" pursuant to the terms of Section 203. The provisions of Section 203
may encourage persons interested in acquiring the Company to negotiate in
advance with the Company Board, since the stockholder approval requirement would
be avoided if a majority of the directors then in office approves either the
business combination or the transaction which results in any such person
becoming an interested shareholder. Such provisions also may have the effect of
preventing changes in the management of the Company. It is possible that such
provisions could make it more difficult to accomplish transactions which the
Company's stockholders may otherwise deem to be in their best interests.
LIABILITY OF DIRECTORS; INDEMNIFICATION
The Certificate provides that a director of the Company will not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except, if required by the DGCL as
amended from time to time, for liability (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL, which concerns unlawful payments of
dividends, stock purchases or redemptions, or (iv) for any transaction from
which the director derived an improper personal benefit. Neither the amendment
nor repeal of such provision will eliminate or reduce the effect of such
provision in respect of any matter occurring, or any cause of action, suit or
claim that, but for such provision, would accrue or arise prior to such
amendment or repeal.
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While the Certificate provides directors with protection from awards for
monetary damages for breaches of their duty of care, it does not eliminate such
duty. Accordingly, the Certificate will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care.
The Certificate provides that each person who was or is made a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person, or a person of whom such person is the legal
representative, is or was a director or officer of the Company or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, will be indemnified and held harmless by
the Company to the fullest extent authorized by the DGCL, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment), against all expense, liability and loss reasonably incurred or
suffered by such person in connection therewith. Such right to indemnification
includes the right to have the Company pay the expenses incurred in defending
any such proceeding in advance of its final disposition, subject to the
provisions of the DGCL. Such rights are not exclusive of any other right which
any person may have or thereafter acquire under any statute, provision of the
Certificate, By-Law, agreement, vote of stockholders or disinterested directors
or otherwise. No repeal or modification of such provision will in any way
diminish or adversely affect the rights of any director, officer, employee or
agent of the Company thereunder in respect of any occurrence or matter arising
prior to any such repeal or modification. The Certificate also specifically
authorizes the Company to maintain insurance and to grant similar
indemnification rights to employees or agents of the Company.
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York will be the transfer agent and
registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 636,661,931 shares of Common Stock to be outstanding as of the
Closing Date the 112,037,037 shares of Common Stock sold in the Offerings will
be freely tradable without restriction under the Securities Act of 1933, as
amended (the "1933 Act"), except for any such shares which be may acquired by an
affiliate of the Company (an "Affiliate"), as that term is defined in Rule 144
promulgated under the 1933 Act ("Rule 144"). AT&T has announced that, subject to
certain conditions, AT&T intends to distribute to its shareholders by December
31, 1996 all of the Common Stock of the Company owned by AT&T by means of the
Distribution. Shares of Common Stock distributed to AT&T shareholders in the
Distribution generally will be freely transferable, except for shares of Common
Stock received by persons who may be deemed to be Affiliates. Persons who may be
deemed to be Affiliates generally include individuals or entities that control,
are controlled by, or are under common control with, the Company and may include
directors and certain officers of the Company as well as significant
stockholders of the Company, if any. Persons who are Affiliates will be
permitted to sell the shares of Common Stock that are issued in the Offerings or
that they receive in the Distribution only pursuant to an effective registration
statement under the 1933 Act or an exemption from the registration requirements
of the 1933 Act, including exemptions provided by Rule 144.
The shares of Common Stock held by AT&T are deemed "restricted securities"
as defined in Rule 144, and may not be sold other than through registration
under the 1933 Act or pursuant to an exemption from the regulations thereunder,
including exceptions provided by Rule 144. The Company and AT&T have agreed not
to offer or sell any shares of Common Stock, subject to certain exceptions
(including the Distribution), for a
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period of 180 days after the date of this Prospectus, without the prior written
consent of the Underwriters. See "Underwriting."
Under the 1996 LTIP, the Company will issue Substitute Awards in
substitution for AT&T Stock Awards outstanding under various AT&T employee
benefit plans. See "Arrangements Between the Company and AT&T -- Employee
Benefits Agreement". In addition to such Substitute Awards, the Company may
grant shares of Common Stock and non-stock awards pursuant to the 1996 LTIP
subject to certain restrictions. See "Management -- 1996 Company Long Term
Incentive Plan." The Company currently expects to file in 1996 a registration
statement under the 1933 Act to register shares reserved for issuance under the
1996 LTIP. Shares issued pursuant to Awards after the effective date of such
registration statement (other than shares issued to Affiliates) generally will
be freely tradeable without restriction or further registration under the 1933
Act.
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CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of the
Common Stock applicable to Non-United States Holders of such Common Stock. For
the purpose of this discussion, a "Non-United States Holder" is any holder that
is, as to the United States, a foreign corporation, a non-resident alien
individual, a foreign partnership or a non-resident fiduciary of a foreign
estate or trust as such terms are defined in the Code. This discussion does not
deal with all aspects of United States federal income and estate taxation and
does not deal with foreign, state and local tax consequences that may be
relevant to Non-United States Holders in light of their personal circumstances.
Furthermore, the following discussion is based on current provisions of the Code
and administrative and judicial interpretations as of the date hereof, all of
which are subject to change. PROSPECTIVE FOREIGN INVESTORS ARE URGED TO CONSULT
THEIR TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND
NON-UNITED STATES INCOME AND OTHER TAX CONSEQUENCES OF OWNING AND DISPOSING OF
COMMON STOCK.
DIVIDENDS
Generally, any dividend paid to a Non-United States Holder of Common Stock
will be subject to United States withholding tax either at a rate of 30% of the
gross amount of the dividend or such lower rate as may be specified by an
applicable tax treaty. Under current United States Treasury Regulations (the
"U.S. Regulations"), dividends paid to an address outside the United States are
presumed to be paid to a resident of such country (absent knowledge that such
presumption is not warranted) for purposes of the withholding discussed above
and, under the current interpretation of the U.S. Regulations, for purposes of
determining applicability of a tax treaty rate. However, under proposed U.S.
Regulations not currently in effect, a Non-United States Holder of Common Stock
who wishes to claim the benefit of an applicable treaty rate would be required
to satisfy applicable certification and other requirements. Dividends received
by a Non-United States Holder that are effectively connected with a United
States trade or business conducted by such Non-United States Holder are exempt
from such withholding tax. However, such effectively connected dividends, net of
certain deductions and credits, are taxed at the same graduated rates applicable
to United States person. A Non-United States Holder may claim exemption from
withholding under the effectively connected income exception by filing Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected With the
Conduct of Business in the United States) each year with the Company or its
paying agent prior to the payment of the dividends for such year.
In addition to the graduated tax described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a United
States trade or business of the corporate Non-United States Holder may also be
subject to a branch profits tax at a rate of 30% or such lower rate as may be
specified by an applicable tax treaty.
A Non-United States Holder of Common Stock eligible for a reduced rate of
United States withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate claim for refund
with the IRS. In the event that dividends from the Company are not out of
current or accumulated earnings and profits (see "Dividend Policy"), a
Non-United States Holder of Common Stock may obtain a refund of any excess
amounts withheld by filing an appropriate claim for refund with the IRS.
GAIN OR DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
his Common Stock unless: (i) such gain is effectively connected with a United
States trade or business of the Non-United States Holder; (ii) the Non-United
States Holder is an individual who holds such Common Stock as a capital asset
and who is present in the United States for a period or periods aggregating 183
days or more during the calendar year in which such sale or disposition occurs
and certain other conditions are met; or (iii) the Company is or has been a
"United
97
<PAGE> 228
States real property holding corporation" for federal income tax purposes at any
time within the shorter of the five-year period preceding such disposition or
such holder's holding period. The Company has determined that it is not and does
not believe that it will become a "United States real property holding
corporation" for federal income tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, the Company must report to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax withheld.
A similar report is sent to the holder. Pursuant to tax treaties or other
agreements, the IRS may make its reports available to tax authorities in the
recipient's country of residence.
Dividends paid to a Non-United States Holder at an address within the
United States may be subject to backup withholding at a rate of 31% if the
Non-United States Holder fails to establish that it is entitled to an exemption
or to provide a correct taxpayer identification number and other information to
the payer. Backup withholding will generally not apply to dividends paid to
Non-United States Holders at an address outside the United States (unless the
payer has knowledge that the payee is a U.S. person).
The payment of the proceeds of the disposition of Common Stock to or
through the United States office of a broker is subject to information reporting
and backup withholding at a rate of 31% unless the holder certified its
non-United States status under penalties of perjury or otherwise establishes an
exemption. Generally, the payment of the proceeds of the disposition by a
Non-United States Holder of Common Stock outside the United States through a
foreign office of a broker will not be subject to backup withholding. However,
information reporting requirements (but not backup withholding) will apply to a
payment of disposition proceeds outside the United States through an office
outside the United States of a broker that is (a) a United States person, (b) a
United States "controlled foreign corporation" for U.S. tax purposes or (c) a
foreign person 50% or more of whose gross income for certain periods is from the
conduct of a United States trade or business unless such broker has documentary
evidence in its files of the owner's foreign status and has no actual knowledge
to the contrary or the holder otherwise establishes an exemption.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
ESTATE TAX
An individual Non-United States Holder who owns Common Stock at the time of
his death or has made certain lifetime transfers of an interest in Common Stock
will be required to include the value of such Common Stock in such holder's
gross estate for United States federal estate tax purposes, unless an applicable
estate tax treaty provides otherwise.
98
<PAGE> 229
UNDERWRITING
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement"), the U.S. Underwriters
named below for whom Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as U.S.
Representatives, and the International Underwriters named below for whom Morgan
Stanley & Co. International Limited, Goldman, Sachs International and Merrill
Lynch International Limited are acting as International Representatives, have
severally agreed to purchase, and the Company has agreed to sell to them,
severally, the respective numbers of shares of Common Stock set forth opposite
the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---------------------------------------------------------------- -----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated............................. 13,694,992
Goldman, Sachs & Co. ......................................... 13,694,992
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... 13,694,991
Bear, Stearns & Co. Inc. ..................................... 6,812,703
CS First Boston Corporation................................... 6,812,703
J.P. Morgan Securities Inc. .................................. 6,812,703
PaineWebber Incorporated...................................... 6,812,703
Advest, Inc................................................... 415,000
Arnhold & S. Bleichroeder, Inc................................ 415,000
Robert W. Baird & Co. Incorporated............................ 415,000
M. R. Beal & Company.......................................... 208,750
Sanford C. Bernstein & Co., Inc............................... 415,000
William Blair & Company, L.L.C................................ 415,000
J. C. Bradford & Co........................................... 415,000
Alex. Brown & Sons Incorporated............................... 810,000
Cowen & Company............................................... 415,000
Crowell, Weedon & Co.......................................... 208,750
Dain Bosworth Incorporated.................................... 415,000
Dean Witter Reynolds Inc...................................... 810,000
Deutsche Morgan Grenfell/C. J. Lawrence Inc................... 810,000
Dillon, Read & Co. Inc........................................ 810,000
Donaldson, Lufkin & Jenrette Securities Corporation........... 810,000
A. G. Edwards & Sons, Inc..................................... 810,000
EVEREN Securities, Inc........................................ 415,000
Fahnestock & Co. Inc.......................................... 208,750
First Manhattan Co............................................ 208,750
First of Michigan Corporation................................. 415,000
Furman Selz LLC............................................... 415,000
Gabelli & Company, Inc........................................ 208,750
Gerard Klauer Mattison & Co., LLC............................. 208,750
Gruntal & Co., Incorporated................................... 415,000
Guzman & Company.............................................. 208,750
Hambrecht & Quist LLC......................................... 810,000
Interstate/Johnson Lane Corporation........................... 415,000
Janney Montgomery Scott Inc................................... 415,000
Edward D. Jones & Co., L.P.................................... 415,000
WR Lazard, Laidlaw & Luther................................... 208,750
Lazard Freres & Co. LLC....................................... 810,000
Legg Mason Wood Walker, Incorporated.......................... 415,000
</TABLE>
99
<PAGE> 230
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---------------------------------------------------------------- -----------
<S> <C>
Lehman Brothers Inc........................................... 810,000
McDonald & Company Securities, Inc............................ 415,000
Montgomery Securities......................................... 810,000
Needham & Company, Inc........................................ 415,000
Oppenheimer & Co., Inc........................................ 810,000
Paribas Corporation........................................... 810,000
Parker/Hunter Incorporated.................................... 208,750
Piper Jaffray Inc............................................. 415,000
Prudential Securities Incorporated............................ 810,000
Pryor, McClendon, Counts & Co., Inc........................... 208,750
Ragen Mackenzie Incorporated.................................. 415,000
Rauscher Pierce Refsnes, Inc.................................. 415,000
Raymond James & Associates, Inc............................... 415,000
Robertson, Stephens & Company LLC............................. 810,000
The Robinson-Humphrey Company, Inc............................ 415,000
Salomon Brothers Inc.......................................... 810,000
SBC Capital Markets Inc....................................... 810,000
Schroder Wertheim & Co. Incorporated.......................... 810,000
Scott & Stringfellow, Inc..................................... 415,000
Muriel Siebert & Co., Inc..................................... 208,750
Smith Barney Inc.............................................. 810,000
Stifel, Nicholas & Company Incorporated....................... 415,000
Sutro & Co. Incorporated...................................... 415,000
UBS Securities Inc............................................ 810,000
Wasserstein Perella Securities, Inc........................... 810,000
Wheat, First Securities, Inc.................................. 415,000
----------
Subtotal................................................... 98,037,037
----------
International Underwriters:
Morgan Stanley & Co. International Limited.................... 1,973,334
Goldman Sachs International................................... 1,973,334
Merrill Lynch International Limited........................... 1,973,332
Banque Paribas................................................ 1,120,000
Morgan Grenfell & Co. Limited................................. 1,120,000
Swiss Bank Corporation........................................ 1,120,000
UBS Limited................................................... 1,120,000
Bear, Stearns International Limited........................... 700,000
CS First Boston Limited....................................... 700,000
J.P. Morgan Securities Ltd. .................................. 700,000
PaineWebber International (U.K.) Ltd.......................... 700,000
ABN AMRO Bank N.V............................................. 50,000
Argentaria Bolsa, S.V.B., S.A................................. 50,000
Cazenove & Co................................................. 50,000
CIBC Wood Gundy plc........................................... 50,000
Commerzbank Aktiengesellschaft................................ 50,000
Credit Lyonnais Securities.................................... 50,000
Daiwa Europe Limited.......................................... 50,000
Kleinwort Benson Limited...................................... 50,000
Robert Fleming & Co. Limited.................................. 50,000
HSBC Investment Bank Limited.................................. 50,000
ING Bank N.V.................................................. 50,000
</TABLE>
100
<PAGE> 231
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---------------------------------------------------------------- -----------
<S> <C>
Nikko Europe Plc.............................................. 50,000
Nomura International plc...................................... 50,000
RBC Dominion Securities Inc................................... 50,000
J. Henry Schroder & Co. Limited............................... 50,000
Societe Generale.............................................. 50,000
----------
Subtotal................................................... 14,000,000
----------
Total................................................. 112,037,037
==========
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively referred
to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several Underwriters
to pay for and accept delivery of the shares of Common Stock offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of the
shares of Common Stock offered hereby if any such shares are taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (a)
it is not purchasing any U.S. Shares (as defined herein) for the account of
anyone other than a United States or Canadian Person (as defined herein) and (b)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any U.S. Shares or distribute any prospectus relating to the U.S. Shares outside
of the United States or Canada or to anyone other than a United States or
Canadian Person. Pursuant to the Agreement between U.S. and International
Underwriters, each International Underwriter has represented and agreed that,
with certain exceptions: (i) it is not purchasing any International Shares (as
defined herein) for the account of any United States or Canadian Person and (ii)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any International Shares or distribute any prospectus relating to the
International Shares in the United States or in any province or territory of
Canada or to any United States or Canadian Person. The foregoing limitations do
not apply to stabilization transactions or to certain other transactions
specified in the Agreement between U.S. and International Underwriters. As used
herein, "United States or Canadian Person" means any national or resident of the
United States or of any province or territory of Canada, or any corporation,
pension, profit-sharing or other trust or other entity organized under the laws
of the United States or Canada or of any political subdivision thereof (other
than a branch located outside the United States and Canada of any United States
or Canadian Person) and includes any United States or Canadian branch of a
person who is otherwise not a United States or Canadian Person. All shares of
Common Stock to be purchased by the U.S. Underwriters and the International
Underwriters are referred to herein as the "U.S. Shares" and the "International
Shares," respectively.
Pursuant to the Agreement between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of shares of Common Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price of any
shares sold shall be the Price to Public set forth on the cover page hereof, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares of Common Stock, directly or indirectly, in any
province or territory of Canada in contravention of the securities laws thereof
and has represented that any offer of Common Stock in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
shares of Common Stock a notice stating in substance that, by purchasing such
Common Stock, such dealer represents and agrees that it has not offered or sold,
and will not offer or sell, directly or indirectly, any of such Common Stock in
any province or territory of Canada or to, or for the benefit of, any resident
of any province or territory of Canada in contravention of the securities laws
thereof and that any offer of Common Stock in Canada will be made
101
<PAGE> 232
only pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer is made, and that such
dealer will deliver to any other dealer to whom it sells any of such Common
Stock a notice to the foregoing effect.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and during the period of six months after the date hereof will not offer
to sell any shares of Common Stock to persons in the United Kingdom except to
persons whose ordinary activities involve them in acquiring, holding, managing
or disposing of investments (as principal or agent) for the purposes of their
business or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995 (the "U.K. Regulations"); (ii) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the U.K. Regulations with respect to anything done by it
in relation to the shares of Common Stock offered hereby in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and will
only issue or pass on to any person in the United Kingdom any document received
by it in connection with the issue of the shares of Common Stock, other than any
document which consists of, or is a part of, listing particulars, supplementary
listing particulars or any other document required or permitted to be published
by listing rules under Article IV of the Financial Services Act 1986, if that
person is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1995, or is a person to whom
the document may otherwise lawfully be issued or passed on.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the Price to Public set forth on the cover page
hereof and part to certain dealers at a price which represents a concession not
in excess of $.65 per share under the public offering price. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $.10 per
share to other Underwriters or to certain dealers. After the initial offering of
the shares of Common Stock, the offering price and other selling terms may from
time to time be varied by the Representatives.
The Common Stock has been approved for listing, subject to official notice
of issuance, on the NYSE under the symbol "LU."
The Company has agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated, it will not (a) register for sale or offer, issue,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (b) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences of ownership of
Common Stock, whether any such transaction described in clause (a) or (b) of
this sentence is to be settled by delivery of Common Stock or other securities,
in cash or otherwise, for a period of 180 days after the date of this
Prospectus, other than: (i) the shares of Common Stock offered hereby; (ii) any
shares of Common Stock issued upon the exercise, exchange or conversion of a
security outstanding on the date of this Prospectus; and (iii) any shares of
Common Stock issued pursuant to employee benefit, director or shareholder plans
or other continuous offerings of the same type of the Company (including in
connection with any Substitute Awards). In addition, except for the Distribution
and as set forth above, AT&T has agreed not to (a) offer, pledge, sell, contract
to sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
or (b) enter into any swap or other agreement that transfers, in whole or in
part, the economic consequences of ownership of Common Stock, whether any such
transaction described in clause (a) or (b) of this sentence is to be settled by
delivery of Common Stock or other securities, in cash or otherwise, for a period
of 180 days after the date of this Prospectus without the prior written consent
of Morgan Stanley & Co. Incorporated.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
102
<PAGE> 233
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the 1933 Act.
From time to time, each of Morgan Stanley & Co. Incorporated, Goldman,
Sachs & Co. and Merrill Lynch & Co. provide certain financial advisory services
to each of the Company and AT&T.
PRICING OF THE OFFERING
Prior to the Offerings, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock was determined by
negotiations between the Company and the Representatives. Among the factors
considered in determining the initial public offering price were the sales,
earnings and certain other pro forma financial and operating information of the
Company in recent periods, the future prospects of the Company and its industry
in general, and certain ratios and market prices of securities and certain
financial and operating information of companies engaged in activities similar
to those of the Company.
LEGAL MATTERS
The validity of the Common Stock offered hereby and certain other legal
matters will be passed upon for the Company by Richard J. Rawson, Senior Vice
President and General Counsel of the Company, and by Wachtell, Lipton, Rosen &
Katz, New York, New York. Certain legal matters will be passed upon for the
Underwriters by Davis Polk & Wardwell, New York, New York.
EXPERTS
The audited consolidated financial statements and financial statement
schedule included in this Prospectus and in the Registration Statement of which
this Prospectus forms a part have been included herein in reliance on the report
of Coopers & Lybrand L.L.P., independent auditors, given on the authority of
that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the 1933 Act with respect to the Common
Stock offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain parts of which have been omitted in accordance with the rules
and regulations of the Commission. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete, and, in each instance, reference is made to the copy of the document
filed as an exhibit to the Registration Statement. The Registration Statement
can be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; and at
the Commission's regional offices at Suite 1400, Northwest Atrium Center, 500
West Madison Street, Chicago, Illinois 60661, and 7 World Trade Center (13th
Floor), New York, New York 10048. Copies of such material can also be obtained
from the Commission at prescribed rates through its Public Reference Section at
450 Fifth Street, N.W., Washington, D.C. 20549.
The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934 (the "1934 Act"). As a result of the
Offerings, the Company will become subject to the informational requirements of
the 1934 Act. The Company will fulfill its obligations with respect to such
requirements by filing periodic reports and other information with the
Commission. In addition, the Company intends to furnish to its stockholders
annual reports containing consolidated financial statements examined by an
independent public accounting firm.
103
<PAGE> 234
FOR FLORIDA RESIDENTS
AT&T, the parent of the Company, provides telecommunications services
between the United States and Cuba jointly with Empresa de Telecomunicaciones
Internacionales de Cuba ("EMTELCUBA"), the Cuban telephone company, pursuant to
all applicable U.S. laws and regulations. All payments due EMTELCUBA are handled
in accordance with the provisions of the Cuban Assets Control Regulations and
the Cuban Democracy Act of 1992 and specific licenses issued thereunder. AT&T is
the sole owner of the Cuban American Telephone and Telegraph Company ("CATT"), a
Cuban corporation. CATT owns cable facilities between the United States and Cuba
that were activated on November 25, 1994.
This information is accurate as of the date hereof. Current information
concerning the Company's and its affiliates' business dealings with the
government of Cuba or with any person or affiliate located in Cuba may be
obtained from the Division of Securities and Investor Protection of the Florida
Department of Banking and Finance, the Capitol, Tallahassee, Florida 32399-0350,
telephone number (904) 488-9805.
104
<PAGE> 235
LUCENT TECHNOLOGIES INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Statements of Operations for the three years ended December 31, 1995..... F-3
Consolidated Balance Sheets at December 31, 1995 and 1994............................. F-4
Consolidated Statements of Changes in Stockholder's Equity for the three years ended
December 31, 1995................................................................... F-5
Consolidated Statements of Cash Flows for the three years ended December 31, 1995..... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 236
REPORT OF INDEPENDENT AUDITORS
To the Stockholder of Lucent Technologies Inc.:
We have audited the consolidated financial statements of Lucent
Technologies Inc. and subsidiaries (the "Company") listed in the index on page
F-1 of this Form S-1. We have also audited the financial statement schedule of
the Company appearing on page S-1 of this Form S-1. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lucent
Technologies Inc. and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations, changes in their stockholder's equity
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles. In
addition, in our opinion the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
As discussed in Note 3 to the consolidated financial statements, in 1993
the Company changed its methods of accounting for postretirement benefits,
postemployment benefits and income taxes.
Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, New York
January 25, 1996
(Note 14 is dated February 1, 1996)
F-2
<PAGE> 237
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1995 1994 1993
------- ------- -------
(IN MILLIONS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES (includes $2,119 in 1995, $2,137 in 1994, and $1,967
in 1993 from AT&T) (Note 12)................................ $21,413 $19,765 $17,734
COSTS......................................................... 12,945 11,337 10,088
------- ------- -------
GROSS MARGIN.................................................. 8,468 8,428 7,646
------- ------- -------
OPERATING EXPENSES
Selling, general and administrative expenses (Note 12)........ 7,083 5,360 5,016
Research and development expenses............................. 2,385 2,097 1,961
------- ------- -------
TOTAL OPERATING EXPENSES...................................... 9,468 7,457 6,977
------- ------- -------
OPERATING INCOME (LOSS)....................................... (1,000) 971 669
Other income -- net (Note 4).................................. 164 83 193
Interest expense (includes $237 in 1995, $203 in 1994, and
$162 in 1993 to AT&T) (Note 7).............................. 302 270 243
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECTS OF
ACCOUNTING CHANGES.......................................... (1,138) 784 619
Provision (benefit) for income taxes (Note 6)................. (271) 302 189
------- ------- -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECTS OF ACCOUNTING
CHANGES..................................................... (867) 482 430
Cumulative effects of accounting changes, net of taxes (Note
3).......................................................... -- -- (4,208)
------- ------- -------
NET INCOME (LOSS)............................................. $ (867) $ 482 $(3,778)
======= ======= =======
UNAUDITED PRO FORMA NET INCOME (LOSS) PER COMMON SHARE (Note
1).......................................................... $ (1.65)
=======
</TABLE>
The notes on pages F-7 through F-23 are an integral part of the consolidated
financial statements.
F-3
<PAGE> 238
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------
1995 1994
------- -------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Cash and cash equivalents (Note 14)................................... $ 448 $ 580
Accounts receivable, less allowances of $248 in 1995, and $206 in
1994................................................................ 5,354 4,191
Inventories (Note 4).................................................. 3,222 2,405
Deferred income taxes -- net (Note 6)................................. 1,482 1,028
Other current assets.................................................. 173 288
------- -------
TOTAL CURRENT ASSETS.................................................. 10,679 8,492
Property, plant and equipment -- net (Note 4)......................... 4,338 4,676
Prepaid pension costs (Note 8)........................................ 2,522 2,252
Deferred income taxes -- net (Note 6)................................. 872 685
Capitalized software.................................................. 387 420
Other assets.......................................................... 924 815
------- -------
TOTAL ASSETS.......................................................... $19,722 $17,340
======= =======
LIABILITIES
Accounts payable...................................................... $ 1,229 $ 945
Payroll and benefit-related liabilities............................... 3,026 1,931
Postretirement and postemployment benefit liabilities (Notes 3 and
9).................................................................. 227 594
Debt sharing amount in anticipation of assumption of the Commercial
Paper Program (Notes 7 and 14)...................................... 3,842 2,961
Debt maturing within one year......................................... 49 49
Other current liabilities............................................. 2,690 1,766
------- -------
TOTAL CURRENT LIABILITIES............................................. 11,063 8,246
Postretirement and postemployment benefit liabilities (Notes 3 and
9).................................................................. 5,569 5,566
Long-term debt........................................................ 123 154
Other liabilities..................................................... 1,533 898
Commitments and contingencies (Note 13)
------- -------
TOTAL LIABILITIES..................................................... 18,288 14,864
STOCKHOLDER'S EQUITY
Common stock: 1,000 shares, without par value, authorized, issued
and outstanding at December 31, 1995............................. -- --
Additional paid-in capital.......................................... 1,406 --
Foreign currency translation........................................ 28 92
Stockholder's net investment........................................ -- 2,384
------- -------
TOTAL STOCKHOLDER'S EQUITY............................................ 1,434 2,476
------- -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............................ $19,722 $17,340
======= =======
</TABLE>
The notes on pages F-7 through F-23 are an integral part of the consolidated
financial statements.
F-4
<PAGE> 239
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C>
Common Stock
Balance -- Beginning of Year..................................... $ -- $ -- $ --
Issuance of 1,000 shares without par value.......................
------- ------ -------
Balance -- End of Year........................................... $ -- $ -- $ --
------- ------ -------
Additional Paid-in-Capital
Balance -- Beginning of Year..................................... $ -- $ -- $ --
Contribution from AT&T........................................... 1,406 -- --
------- ------ -------
Balance -- End of Year........................................... 1,406 -- --
------- ------ -------
Foreign Currency Translation
Balance -- Beginning of Year..................................... $ 92 $ (10) $ (26)
Translation adjustments.......................................... (64) 102 16
------- ------ -------
Balance -- End of Year........................................... $ 28 $ 92 $ (10)
------- ------ -------
Stockholder's Net Investment
Balance -- Beginning of Year..................................... $ 2,384 $2,590 $ 3,124
Net income (loss)................................................ (867) 482 (3,778)
Transfers from (to) AT&T......................................... (111) (688) 3,244
Transfer to Additional Paid-in-Capital........................... (1,406) -- --
------- ------ -------
Balance -- End of Year........................................... $ -- $2,384 $ 2,590
------- ------ -------
Total Stockholder's Equity......................................... $ 1,434 $2,476 $ 2,580
------- ------ -------
</TABLE>
The notes on pages F-7 through F-23 are an integral part of the consolidated
financial statements.
F-5
<PAGE> 240
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1995 1994 1993
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................. $ (867) $ 482 $ (3778)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Business restructuring charge............................... 2,613 -- --
Asset impairment and other charges.......................... 188 -- --
Cumulative effects of accounting changes.................... -- -- 4,208
Depreciation and amortization............................... 1,493 1,311 1,213
Deferred income taxes....................................... (653) 338 64
Provision for uncollectibles................................ 69 83 68
Other adjustments for noncash items, net.................... (103) (177) (375)
Increase in accounts receivable............................. (1,203) (159) (645)
Increase in inventories..................................... (1,089) (26) (409)
Increase in accounts payable................................ 271 291 42
Net increase in other operating assets and liabilities...... (241) (564) (1,656)
------- ------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES........... 478 1,579 (1,268)
------- ------- -------
INVESTING ACTIVITIES
Capital expenditures.......................................... (1,277) (878) (577)
Proceeds from sale or disposal of property, plant and
equipment................................................... 118 15 38
Purchases of equity investments............................... (86) (38) (48)
Sales of equity investments................................... -- 290 3
(Acquisitions) dispositions, net of cash acquired............. 10 119 (170)
Other investing activities, net............................... (107) (75) (333)
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES......................... (1,342) (567) (1,087)
------- ------- -------
FINANCING ACTIVITIES
Repayments of long-term debt.................................. (46) (22) (109)
Proceeds (repayments) of debt sharing agreement -- net........ 881 53 (624)
Transfers from (to) AT&T...................................... (111) (688) 3,244
Decrease in short-term borrowings -- net...................... -- (84) (1)
------- ------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES........... 724 (741) 2,510
------- ------- -------
Effect of exchange rate changes on cash....................... 8 13 (5)
------- ------- -------
Net increase (decrease) in cash and cash equivalents.......... (132) 284 150
Cash and cash equivalents at beginning of year................ 580 296 146
------- ------- -------
Cash and cash equivalents at end of year...................... $ 448 $ 580 $ 296
======= ======= =======
</TABLE>
Interest paid was $303, $274 and $353 during 1995, 1994 and 1993,
respectively. Income taxes paid were $224, $46 and $98, during 1995, 1994 and
1993 respectively.
The notes on pages F-7 through F-23 are an integral part of the
consolidated financial statements.
F-6
<PAGE> 241
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
Lucent Technologies Inc. (the "Company") is currently a wholly owned
subsidiary of AT&T. On September 20, 1995, AT&T announced its intention to
create a separate company comprised of the AT&T businesses and operations that
now comprise the Company, and the associated assets and liabilities of such
businesses and operations and Bell Laboratories (the "Separation"). AT&T also
announced its intention to distribute to its shareholders by December 31, 1996,
subject to certain conditions, all of its interest in the Company following the
Offerings (the "Distribution"). The Company was incorporated on November 29,
1995 with 1,000 shares of Common Stock, without par value, authorized and
outstanding, all of which are owned by AT&T. Beginning February 1, 1996, AT&T is
planning to transfer to the Company substantially all of the assets and
liabilities related to the Company's operations, except that AT&T is retaining
approximately $2,000 in accounts receivable.
BASIS OF PRESENTATION
The consolidated financial statements reflect the results of operations,
financial position, changes in stockholder's equity and cash flows of the
businesses that will be transferred to the Company from AT&T in the Separation
(the "Company Businesses") as if the Company were a separate entity for all
periods presented. The consolidated financial statements have been prepared
using the historical basis in the assets and liabilities and historical results
of operations related to the Company Businesses. Changes in additional paid-in
capital and stockholder's net investment represent AT&T's contribution of its
net investment after giving effect to the net income (loss) of the Company plus
net cash transfers to or from AT&T. The Company will begin accumulating its
retained earnings on February 1, 1996, the date on which AT&T will begin to
transfer to the Company substantially all of the assets and liabilities relating
to the Company's operations.
Additionally, the consolidated financial statements include allocations of
certain AT&T corporate headquarters assets (including prepaid pension assets),
liabilities (including debt and benefit obligations, pension and postretirement
benefits), and expenses relating to the Company Businesses that will be
transferred to the Company from AT&T. Management believes these allocations are
reasonable. All material intercompany transactions and balances between the
Company Businesses have been eliminated.
The liabilities of the Company include outstanding direct third-party
indebtedness and the amounts of debt and related interest expense determined
under the Debt Sharing Agreement discussed in Note 7.
Interest expense shown in the consolidated financial statements reflects
the interest expense associated with the aggregate borrowings for each period
presented principally based on a blend of AT&T's short-term and long-term
weighted average interest rates for the applicable period. General corporate
overhead related to AT&T's corporate headquarters and common support divisions
has been allocated to the Company based on the ratio of the Company's external
costs and expenses to AT&T's external costs and expenses. Management believes
these allocations are reasonable. However, the costs of these services charged
to the Company are not necessarily indicative of the costs that would have been
incurred if the Company had performed these functions as a stand-alone entity.
Subsequent to the Separation, the Company will perform these functions using its
own resources or purchased services and will be responsible for the costs and
expenses associated with the management of a public corporation. Additionally,
income taxes are calculated on a separate tax return basis.
The Company's financial statements include the costs experienced by the
AT&T pension and postretirement benefit plans for employees and retirees for
whom the Company will assume responsibility.
F-7
<PAGE> 242
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. BACKGROUND AND BASIS OF PRESENTATION -- (CONTINUED)
The financial information included herein may not necessarily reflect the
consolidated results of operations, financial position, changes in stockholder's
equity and cash flows of the Company in the future or what they would have been
had it been a separate, stand-alone entity during the periods presented.
EARNINGS (LOSS) PER COMMON SHARE
The Company has 1,000 shares of Common Stock outstanding, all of which are
owned by AT&T. Immediately prior to the Offerings, the Company will effect a
stock split or other issuance of shares resulting in 524,624,894 shares
outstanding. The pro forma net loss per common share was calculated by dividing
the 1995 net loss of $867 million by the 524,624,894 shares of Common Stock.
Subsequent to the Offerings of 112,037,037 shares, 636,661,931 shares will be
outstanding. Replacement stock options and awards have not been considered in
calculating the pro forma net loss per common share because their effect would
be anti-dilutive.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include all majority-owned
subsidiaries of the Company. Investments in which the Company exercises
significant influence but which it does not control (generally a 20% - 50%
ownership interest) are accounted for under the equity method of accounting.
Investments in which the Company has less than a 20% ownership interest are
accounted for under the cost method of accounting.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenue and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used when accounting for
long-term contracts, allowance for uncollectible accounts receivable, inventory
obsolescence, product warranty, depreciation, employee benefit plans, taxes,
restructuring reserves and contingencies.
CURRENCY TRANSLATION
For operations outside the United States that prepare financial statements
in currencies other than the United States dollar, income statement amounts are
translated at average exchange rates during the year, and assets and liabilities
are translated at year-end exchange rates. These translation adjustments are
included as a separate component of stockholder's equity.
REVENUE RECOGNITION
Revenue is generally recognized on the sales of products or services when
the products are delivered or the services performed, all substantial
contractual obligations have been satisfied, and the collection of the resulting
receivable is deemed probable. Revenue from sales of software products is
generally recognized upon product delivery, acceptance, and completion of all
significant vendor obligations. Revenue from rental sales is recognized
proportionately over the contract period. Revenues and estimated profits on
long-term construction type contracts are recognized under the percentage of
completion method of accounting using either a units of delivery or a cost to
cost methodology. Revisions of profit estimates are reflected in the period in
which the facts that require the revision to the estimate become known. Any
losses on contracts are immediately recognized when determinable.
F-8
<PAGE> 243
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred except
for costs incurred for the development of computer software that will be sold,
leased or otherwise marketed which are capitalized when technological
feasibility has been established. These capitalized costs are recorded as
capitalized software and are subject to an ongoing assessment of recoverability
based upon anticipated future revenues and changes in hardware and software
technologies. Costs capitalized include direct labor and related overhead.
Amortization of capitalized software development costs begins when the
product is available for general release. Amortization is provided on a
product-by-product basis on either the straight-line method over periods not
exceeding two years or the sales ratio method. Unamortized capitalized software
development costs determined to be in excess of net realizable value of the
product are expensed at the date of such determination.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses various financial instruments, including derivative
financial instruments, for purposes other than trading. The Company does not
enter into derivative financial instruments for speculative purposes.
Derivatives, used as part of the Company's risk management strategy, must be
designated at inception as a hedge, and measured for effectiveness both at
inception and on an ongoing basis. For qualifying foreign currency hedges, the
gains and losses are deferred and recognized as adjustments of carrying amounts
when the underlying hedged transaction is recorded. Interest rate swap
agreements involve the periodic exchange of payments without the exchange of the
underlying principal or notional amounts. Net payments are recognized as an
adjustment to income or expense of the underlying hedged transaction. Gains and
losses on interest rate swap agreements that do not qualify as hedges are
recorded at fair value and recognized in other income or expense. If the Company
terminates a swap agreement, the gain or loss is recorded as an adjustment to
the basis of the underlying asset or liability and amortized over the remaining
life.
INCOME TAXES
Historically, the Company's operations have been included in the
consolidated income tax returns filed by AT&T. Income tax expense in the
Company's consolidated financial statements has been calculated on a separate
tax return basis.
INVESTMENT TAX CREDITS
For financial reporting purposes, investment tax credits are amortized as a
reduction to the provision for income taxes over the useful lives of the
property that produced the credits.
CASH AND CASH EQUIVALENTS
All highly liquid investments with original maturities of three months or
less are considered to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market (i.e., net realizable
value or replacement cost). Cost includes material, labor and manufacturing
overhead. Cost is determined principally on a first-in, first-out ("FIFO")
basis. Inventories also include unbilled costs and fees on contracts in process
net of progress payments.
F-9
<PAGE> 244
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is determined primarily using the unit method. The
group method is used for certain facilities and equipment, except factory
machinery which is depreciated using the unit method. When assets that were
depreciated using the unit method are sold, the gains or losses are included in
operating results. When assets that were depreciated using the group method are
sold or retired, the original cost is deducted from the plant account and from
accumulated depreciation and any proceeds are applied against accumulated
depreciation. Buildings are depreciated over a 30 year life and equipment is
depreciated over a range of 3 to 10 years.
Accelerated depreciation methods are used for certain high technology
computer processing equipment. All other facilities and equipment are
depreciated on a straight-line basis over their estimated useful lives.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for as purchases. Goodwill is
amortized on a straight-line basis over the periods benefited, principally in
the range of 10 to 15 years. Goodwill is reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows is less
than the carrying amount of the asset, a loss is recognized immediately.
3. CHANGES IN ACCOUNTING PRINCIPLES
POSTRETIREMENT BENEFITS
AT&T adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," effective January 1, 1993. This standard requires
accrual of estimated future retiree benefits during the years employees are
working and accumulating these benefits. Previously, health care benefits were
expensed as claims were incurred and life insurance benefits were expensed as
plans were funded. AT&T recorded a one-time pretax charge for the unfunded
portions of these liabilities of $11,317 ($7,023 after taxes).
For purposes of preparing these consolidated financial statements,
estimates were made (see Note 9) of the Company's share of the unfunded portions
of postretirement benefit obligations and a one-time pretax charge of $6,142
($3,722 after taxes) was recorded. The impact of this change on 1993 operating
income was immaterial. This change in accounting does not affect cash flows.
POSTEMPLOYMENT BENEFITS
AT&T also adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," effective January 1, 1993. Analogous to SFAS No. 106, this standard
requires the Company to accrue for estimated future postemployment benefits,
including separation payments, during the years employees are working and
accumulating these benefits, and for disability payments when the disabilities
occur. Before this change in accounting, costs for separations were recognized
when approved and disability benefits were recognized when paid. AT&T recorded a
one-time pretax charge for the unprovided portion of these liabilities of $1,809
($1,128 after taxes).
For purposes of preparing these consolidated financial statements,
estimates were made of the Company's share of the unprovided portion of
postemployment liabilities and a one-time pretax charge of $875 ($530 after
taxes) was recorded. This change reduced 1993 operating income by $229 and net
income by $139. This change in accounting does not affect cash flows.
F-10
<PAGE> 245
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CHANGES IN ACCOUNTING PRINCIPLES -- (CONTINUED)
INCOME TAXES
The Company adopted SFAS No. 109, "Accounting for Income Taxes," effective
January 1, 1993. Among other provisions, this standard requires the computation
of deferred tax amounts using the enacted corporate income tax rates for the
years in which the taxes will be paid or refunds received. Before this change in
accounting, deferred tax accounts reflected rates in effect when the deferrals
were made.
The change in calculating deferred tax amounts required by this standard
resulted in a one-time benefit of $44 in the first quarter of 1993. This change
in accounting does not affect cash flows. The impact of this change on 1993
income before cumulative effect of accounting change was a $54 increase in net
income due to the increase in the federal statutory tax rate to 35% from 34%
during 1993. See Note 6. This change will only affect net income in future
periods if applicable tax rates change.
IMPAIRMENT OF LONG-LIVED ASSETS
Effective October 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." This standard requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The adoption of the standard did not materially impact
the Company's consolidated results of operations, financial condition or cash
flows because this was essentially the method the Company used in the past to
measure and record asset impairments. The 1995 restructuring and other charges
did include recognition of asset impairments.
STOCK-BASED COMPENSATION
In 1996, SFAS No. 123, "Accounting for Stock-Based Compensation," will be
adopted. This standard establishes a fair value method for accounting for or
disclosing stock-based compensation plans. This standard will be adopted by
disclosing the pro forma consolidated net income and earnings per share amounts
assuming the fair value method was effective on January 1, 1995. The adoption of
this standard will not impact consolidated results of operations, financial
position, or cash flows.
F-11
<PAGE> 246
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
1995 1994 1993
------ ---- ----
<S> <C> <C> <C>
INCLUDED IN COSTS
Amortization of software development costs.......................... $ 312 $345 $314
INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Amortization of goodwill............................................ $ 40 $ 31 $ 22
INCLUDED IN COSTS AND OPERATING EXPENSES
Depreciation and amortization of property, plant and equipment...... $1,109 $891 $836
OTHER INCOME
Interest income..................................................... $ 44 $ 24 $ 20
Minority interests in (earnings) losses of subsidiaries............. (20) (14) 21
Net equity (losses) earnings from investments....................... (25) 21 29
Increase in cash surrender value of life insurance.................. 40 30 32
Gain/loss on foreign currency transactions.......................... (26) (48) (13)
Miscellaneous -- net................................................ 151 70 104
------ ---- ----
Total other income -- net........................................... $ 164 $ 83 $193
====== ==== ====
</TABLE>
SUPPLEMENTARY BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
INVENTORIES
Completed goods......................................................... $ 1,673 $ 1,297
Unbilled costs and fees on contracts in process (net of progress
payments of $355 in 1995)............................................. 371 43
Work in process and raw materials....................................... 1,178 1,065
-------- -------
Inventories............................................................. $ 3,222 $ 2,405
======== =======
PROPERTY, PLANT AND EQUIPMENT -- NET
Land and improvements................................................... $ 273 $ 258
Buildings and improvements.............................................. 2,668 2,613
Machinery, electronic and other equipment............................... 8,096 8,355
Total property, plant and equipment..................................... 11,037 11,226
Less: Accumulated depreciation.......................................... (6,699) (6,550)
-------- -------
Property, plant and equipment -- net.................................... $ 4,338 $ 4,676
======== =======
</TABLE>
5. BUSINESS RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1995, a pre-tax charge of $2,801 was recorded to
cover restructuring costs of $2,613 and asset impairment and other charges of
$188. The Company's fourth quarter restructuring plans include the following
items: restructuring its consumer products business to implement major process
improvements in how it designs, manufactures and distributes those products,
including closing all of its Company-owned retail phone center stores,
consolidating and reengineering numerous corporate and business unit operations
during the next two years, and selling its Microelectronics interconnect
business and Paradyne business. Accordingly, the fourth quarter restructuring
charge of $2,613 included the separation costs, both voluntary and involuntary,
for nearly 22,000 employees, comprised of about 11,000 management and 11,000
F-12
<PAGE> 247
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. BUSINESS RESTRUCTURING AND OTHER CHARGES -- (CONTINUED)
occupational employees. Approximately 1,000 additional management employees are
employed by businesses that the Company has announced plans to sell. As of
December 31, 1995, approximately 4,100 management employees of the 22,000 total
employees have accepted a voluntary severance package and the majority of these
employees will leave the Company in early 1996. The Company expects
approximately 70% of all separations to be completed by the end of 1996, with
the majority of the remaining separations being completed during 1997. The
restructuring charge also included costs associated with early termination of
building leases and asset write-downs as part of the plan to sell certain
businesses and restructure its operations.
The pre-tax total of the fourth quarter charge for restructuring,
impairments and other charges of $2,801 for 1995 was recorded as $892 of costs,
$1,645 of selling, general and administrative expenses, and $264 of research and
development expenses. The charges include $1,509 for employee separations; $627
for asset write-downs; $202 for closing, selling and consolidating facilities;
and $463 for other items. The total charges reduced net income by approximately
$1,847.
The following table displays a rollforward of the liabilities for business
restructuring from December 31, 1993 to December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31,
1993 -------------------------------- 1994
TYPE OF COST BALANCE ADDITIONS OTHER PAYMENTS BALANCE
- ------------------------------------ ------------ --------- ----- -------- ------------
<S> <C> <C> <C> <C> <C>
Employee Separation................. 112 (4) (56) 52
Facility closings................... 80 15 (25) 70
Other............................... 13 0 15 (17) 11
--- --------- ----- --- ------
Total............................. 205 0 26 (98) 133
========== ======= ==== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31,
1994 -------------------------------- 1995
TYPE OF COST BALANCE ADDITIONS OTHER PAYMENTS BALANCE
- ------------------------------------ ------------ --------- ----- -------- ------------
<S> <C> <C> <C> <C> <C>
Employee Separation................. 52 1,167 1,219
Facility closings................... 70 202 272
Other............................... 11 405 416
--- --------- ----- --- ------
Total............................. 133 1,774 1,907
========== ======= ==== ======= ==========
</TABLE>
The December 31, 1993 business restructuring balance included reserves
primarily for real estate. As of December 31, 1995, $133 of the $205 December
31, 1993 balance remained. The majority of this balance is related to excess
space at some locations and is expected to be fully utilized over the remaining
terms of the leases,
Management believes that the liabilities for business restructuring of
$1,907, at December 31, 1995 are adequate to complete its plans.
In 1995 in addition to restructuring liabilities of $1,774, asset
impairments of $497 (which were credited directly to the related asset balances)
and $342 of benefit plan losses were included in the total restructure costs of
$2,613. Benefit plan losses relate to pension and other employee benefit plans
and primarily represent losses in the current year for actuarial changes that
otherwise might have been amortized over future periods.
The 1995 charges also included $188 primarily for other asset impairments.
Of the total combined charges, $1,788 will result in cash payments in the
future and approximately $1,013 related to non cash items.
F-13
<PAGE> 248
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The following table presents the principal reasons for the difference
between the effective tax rate and the United States federal statutory income
tax rate:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
U.S. federal statutory income tax rate........................ 35% 35% 35%
------- ------- -------
Federal income tax provision (benefit) at statutory rate...... $ (398) $ 274 $ 217
State and local income taxes, net of federal income tax
effect...................................................... (57) 23 23
Amortization of intangibles................................... 29 12 6
Foreign rate differential..................................... 66 (64) (17)
Taxes on foreign income....................................... 74 100 38
Research credits.............................................. (3) (27) (20)
Effect of tax rate change on deferred tax assets.............. -- -- (54)
Other differences -- net...................................... 18 (16) (4)
------- ------- -------
Provision (benefit) for income taxes.......................... $ (271) $ 302 $ 189
======= ======= =======
Effective income tax rate..................................... 23.8% 38.5% 30.5%
</TABLE>
The following table presents the U.S. and foreign components of income
before income taxes and the provision for income taxes:
<TABLE>
<CAPTION>
1995 1994 1993
------- ----- ----
<S> <C> <C> <C>
INCOME (LOSS) BEFORE INCOME TAXES
United States................................................. $(1,253) $ 405 $405
Foreign....................................................... 115 379 214
------- ----- ----
$(1,138) $ 784 $619
======= ===== ====
PROVISION (BENEFIT) FOR INCOME TAXES
CURRENT
Federal....................................................... $ 199 $(119) $ 44
State and local............................................... 42 (40) 4
Foreign....................................................... 141 123 77
------- ----- ----
382 (36) 125
------- ----- ----
DEFERRED
Federal....................................................... (523) 267 34
State and local............................................... (130) 76 32
Foreign....................................................... 1 (4) (1)
------- ----- ----
(652) 339 65
Deferred investment tax credits............................... (1) (1) (1)
------- ----- ----
Provision (benefit) for income taxes.......................... $ (271) $ 302 $189
======= ===== ====
</TABLE>
The foreign deferred income tax provision is shown net of valuation
allowance increases of $46 and $39 in 1995 and 1993, respectively, and a
valuation allowance decrease of $27 in 1994.
Deferred income tax liabilities are taxes the Company expects to pay in
future periods. Similarly, deferred income tax assets are taxes recognized for
expected reductions in taxes payable. Deferred income taxes arise
F-14
<PAGE> 249
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES -- (CONTINUED)
because of differences in the book and tax bases of certain assets and
liabilities. Deferred income tax assets/ liabilities consist of the following:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
CURRENT DEFERRED INCOME TAX ASSETS:
Business restructuring................................................. $ 519 $ 57
Employee pensions and other benefits................................... 516 540
Reserves and allowances................................................ 537 474
Valuation allowance.................................................... (117) --
Other.................................................................. 143 45
------- -------
Total current deferred income tax assets................................. 1,598 1,116
------- -------
CURRENT DEFERRED INCOME TAX LIABILITIES:
Other.................................................................. $ 116 $ 88
------- -------
Total current deferred income tax liabilities............................ $ 116 $ 88
------- -------
Net current deferred income tax assets................................... $ 1,482 $ 1,028
======= =======
LONG-TERM DEFERRED INCOME TAX ASSETS:
Employee pensions and other benefits, net.............................. $ 1,425 $ 1,478
Business restructuring................................................. 267 68
Net operating losses/credit carryforwards.............................. 28 96
Reserves and allowances................................................ 9 31
Valuation allowance.................................................... (25) (96)
Other.................................................................. 270 199
------- -------
Total long-term deferred income tax assets............................... 1,974 1,776
------- -------
LONG-TERM DEFERRED INCOME TAX LIABILITIES:
Property, plant and equipment.......................................... $ 738 $ 806
Other.................................................................. 364 285
------- -------
Total long-term deferred income tax liabilities.......................... 1,102 1,091
------- -------
Net long-term deferred income tax assets................................. $ 872 $ 685
======= =======
</TABLE>
The Company has not provided for United States federal income taxes or
foreign withholding taxes on $1,004 and $765 of undistributed earnings of its
non-United States subsidiaries as of December 31, 1995 and December 31, 1994,
respectively, because such earnings are intended to be reinvested indefinitely.
It is not practicable to determine the amount of applicable taxes.
7. DEBT SHARING AGREEMENT
As discussed in Note 1, the Company's consolidated financial statements
include an allocation of AT&T's consolidated debt and the related interest
expense. The allocation was based on the capital structure of the Company
anticipated at the Closing Date. At that date, the Company will assume up to
approximately $4,000 of Commercial Paper issued by AT&T, which is estimated to
be the amount of debt necessary to support the Company's assets and operations.
An allocation methodology was used to reflect the capital structure through each
historic period presented based on cash flows for those periods, adjusted for
interest expense. To formalize the allocations, the Company and AT&T entered
into a Debt Sharing Agreement which is effective from January 1, 1991 through
December 31, 1995.
F-15
<PAGE> 250
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEBT SHARING AGREEMENT -- (CONTINUED)
Amounts shown as outstanding under the Debt Sharing Agreement were $3,842
and $2,961 at December 31, 1995 and 1994, respectively. Such amounts were
classified as short-term given the Company's plans to replace the amounts shown
as outstanding under the Debt Sharing Agreement with Commercial Paper issued by
AT&T. The Company expects that, over time, the Company may refinance all or part
of the Commercial Paper Program from the proceeds of short- or long-term
borrowings, as market conditions permit. The amount, timing and pricing of such
debt issues are uncertain.
Interest expense of $237, $203 and $162 for the years ended December 31,
1995, 1994 and 1993, respectively, was determined based on a blend of AT&T's
short-term and long-term weighted average interest rates of 6.8%, 6.9% and 6.2%
for each of the respective years.
The Company believes these allocations are reasonable estimates of the cost
of financing the Company's assets and operations in the past. However, the
Company may not be able to obtain financing with interest rates as favorable as
those enjoyed by AT&T, with the result that the Company's cost of capital will
be higher than that reflected in its historical consolidated financial
statements.
8. EMPLOYEE BENEFIT PLANS
At the Distribution, the Company will assume responsibility for pension and
post-retirement benefits for retirees whose last work assignment was a unit of
the Company, for other retirees assigned to the Company and for the employees of
the Company. Until the Distribution, the Company's financial statements will
include the costs experienced by the AT&T plans for employees and retirees for
whom the Company will assume responsibility.
PENSION PLANS
The majority of the Company's employees participate in AT&T's
noncontributory defined benefit plans. Benefits for management employees are
principally based on career-average pay. Benefits for occupational employees are
not directly pay-related. Pension contributions are principally determined using
the aggregate cost method and are primarily made to trust funds held for the
sole benefit of plan participants.
Immediately following the Distribution, the Company will establish separate
defined benefit plans for the employees and retirees of the Company. Pension
assets will be transferred from AT&T's pension trust to the Company's pension
trust pursuant to a specified formula. Assets of trusts under qualified pension
plans will be divided, immediately after the Distribution Date, between the
trusts for AT&T qualified pension plans and the new Company qualified pension
plans. Each such trust will receive the legally required funding minimum and, if
greater, a sufficient amount of additional trust assets to ensure continued
compliance with the existing AT&T pension funding policy. Any trust assets in
excess of the funding policy level will be divided equally between the trusts of
AT&T and the Company for such qualified pension plans. For purposes of preparing
these financial statements, estimates were made, as of December 31, 1995, of the
assets and pension obligations that will be transferred to the Company. As of
December 31, 1995, the projected benefit obligation is estimated at $23,410 and
the assets to be transferred are estimated at $29,092. The actual amounts
transferred will be measured at the Distribution Date, using the same
methodology, and will likely be different from these estimates. The estimated
December 31, 1995 assets and pension obligations were also the basis for
estimating the Company's assets and pension obligations for 1994 and 1993.
As of December 31, 1995 and 1994, AT&T had a prepaid pension asset of
$4,664 and $4,151, respectively. Based on the estimates described in this note,
the Company's share of the prepaid pension asset as of December 31, 1995 and
1994 is $2,522 and $2,252, respectively.
F-16
<PAGE> 251
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
Pension cost is computed using the projected unit credit method. The
Company recorded pension income related to the AT&T plans of $135, $288 and $284
in 1995, 1994 and 1993, respectively. The 1995 consolidated statement of
operations includes a charge of $97 for curtailment loss.
The following information relates to the entire AT&T noncontributory
defined benefit plans. The Company's share of the amounts shown below for net
pension credit, actuarial present value of the accumulated plan benefit
obligation, plan assets at fair value, and prepaid pension costs have not been
determined at this time.
AT&T sponsors noncontributory defined benefit plans covering the majority
of its employees. Benefits for management employees are principally based on
career-average pay. Benefits for occupational employees are not directly related
to pay.
Pension contributions are principally determined using the aggregate cost
method and are primarily made to trust funds held for the sole benefit of plan
participants. AT&T computes pension cost using the projected unit credit method
and assumed a long-term rate of return on plan assets of 9.0% in 1995, 1994 and
1993.
Pension cost includes the following components:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Service cost -- benefits earned during the period............. $ 570 $ 669 $ 536
Interest cost on projected benefit obligation................. 2,551 2,400 2,294
Amortization of unrecognized prior service costs.............. 280 230 251
Credit for expected return on plan assets*.................... (3,318) (3,260) (3,110)
Amortization of transition asset.............................. (500) (501) (500)
Charges for special pension options........................... 213 -- 74
------- ------- -------
Net pension credit............................................ $ (204) $ (462) $ (455)
======= ======= =======
</TABLE>
- ---------------
* The actual return on plan assets was $9,484 in 1995, $582 in 1994 and $5,068
in 1993.
The net pension credit of $204 in 1995 was reduced by a one-time charge of
$213 for early retirement options and curtailments.
This table shows the funded status of the entire AT&T noncontributory
defined benefit plans:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Actuarial present value of accumulated benefit obligation, including
vested benefits of $32,726 and $26,338, respectively................... $36,052 $28,801
------- -------
Plan assets at fair value................................................ $47,634 $40,131
Less: Actuarial present value of projected benefit obligation............ 37,989 30,125
------- -------
Excess of assets over projected benefit obligation....................... 9,645 10,006
Unrecognized prior service costs......................................... 2,297 2,319
Unrecognized transition asset............................................ (2,961) (3,460)
Unrecognized net gain.................................................... (4,528) (4,928)
Net minimum liability of nonqualified plans.............................. (166) (103)
Prepaid pension costs.................................................... $ 4,287 $ 3,834
</TABLE>
F-17
<PAGE> 252
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
AT&T used these rates and assumptions to calculate the projected benefit
obligation:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------
1995 1994
---- ----
<S> <C> <C>
Weighted-average discount rate............................. 7.0 % 8.7 %
Rate of increase in future compensation levels............. 5.0 % 5.0 %
</TABLE>
The prepaid pension costs shown above are net of pension liabilities for
plans where accumulated plan benefits exceed assets. Such liabilities are
included in other liabilities in AT&T's consolidated balance sheets.
AT&T is amortizing over approximately 15.9 years the unrecognized
transition asset related to its 1986 adoption of SFAS No. 87, "Employers'
Accounting for Pensions." AT&T amortizes prior service costs primarily on a
straight-line basis over the average remaining service period of active
employees. AT&T's plan assets consist primarily of listed stocks (including $259
and $216 of AT&T common stock at December 31, 1995 and 1994, respectively),
corporate and governmental debt, real estate investments, and cash and cash
equivalents.
SAVINGS PLANS
The majority of the Company's employees are eligible to participate in
savings plans sponsored by AT&T. The plans allow employees to contribute a
portion of their pre-tax and/or after-tax income in accordance with specified
guidelines. AT&T matches a certain percentage of employee contributions, up to
certain limits. The Company's expense related to the AT&T savings plans was $196
in 1995, $178 in 1994 and $167 in 1993. The Company expects to establish similar
plans following the Distribution.
9. POSTRETIREMENT BENEFITS
The majority of the Company's employees and retirees participate in AT&T's
benefit plans for retirees, which currently include health care benefits, life
insurance coverage and telephone concessions.
Immediately following the Distribution, the Company will establish separate
postretirement benefit plans for the employees and retirees of the Company.
Postretirement benefit assets will be transferred from AT&T to the Company pro
rata on the basis of the present value of future benefit obligations of the
applicable plan. For purposes of preparing these financial statements, estimates
were made, as of December 31, 1995, of the assets and postretirement benefit
obligations that will be transferred to the Company. As of December 31, 1995,
the accumulated postretirement benefit obligation is estimated at $8,368 and the
assets to be transferred are estimated at $3,462. The actual amounts transferred
will be measured at the Distribution date, using the same methodology, and will
likely be different from these estimates. The estimated December 31, 1995 assets
and postretirement benefit obligations were also the basis for estimating the
Company's assets and postretirement benefit obligations for 1994 and 1993.
As of December 31, 1995 and 1994, AT&T had an accrued postretirement
benefit liability of $7,389 and $7,816, respectively. Based on the estimates
described in this note, the Company's share of the accrued postretirement
benefit liability as of December 31, 1995 and 1994 is $4,635 and $5,006,
respectively.
The Company recorded postretirement benefit expense related to the AT&T
plans of $468, $461 and $529 in 1995, 1994 and 1993, respectively. It is
estimated that increasing the assumed health care cost trend rate by 1% would
raise the Company's portion of the accumulated postretirement benefit obligation
as of December 31, 1995 by $423 and 1995 postretirement benefit costs by $35.
The following information relates to the entire AT&T Postretirement Benefit
Plan. The Company's share of the amounts shown below for net postretirement
benefit cost, accumulated postretirement benefit
F-18
<PAGE> 253
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. POSTRETIREMENT BENEFITS -- (CONTINUED)
obligation, plan assets at fair value and accrued postretirement benefit
obligation have not been determined at this time.
AT&T's benefit plans for retirees include health care benefits, life
insurance coverage and telephone concessions. This table shows the components of
the net postretirement benefit cost:
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
Service cost -- benefits earned during the period................. $ 98 $ 108
Interest cost on accumulated postretirement benefit obligation.... 888 852
Expected return on plan assets*................................... (298) (243)
Amortization of unrecognized prior service costs.................. 67 14
Amortization of net loss (gain)................................... (14) 1
Charge for special options........................................ 11 --
----- -----
Net postretirement benefit cost................................... $ 752 $ 732
===== =====
</TABLE>
- ---------------
* The actual return on plan assets was $962 and ($30) in 1994.
AT&T had approximately 146,700 retirees in 1995, 144,900 in 1994 and
142,200 in 1993.
AT&T's plan assets consist primarily of listed stocks, corporate and
governmental debt, cash and cash equivalents, and life insurance contracts. The
following table shows the funded status of AT&T's postretirement benefit plans
reconciled with the amounts recognized in AT&T's consolidated balance sheets:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1995 1994
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees..................................................... $ 8,250 $ 7,476
Fully eligible active plan participants...................... 1,453 822
Other active plan participants............................... 2,869 1,751
------- -------
Accumulated postretirement benefit obligation.................. 12,572 10,049
Plan assets at fair value...................................... 4,704 3,291
------- -------
Unfunded postretirement obligation............................. 7,868 6,758
Less:
Unrecognized prior service costs............................. 771 (46)
Unrecognized net (gain) loss................................. (292) (1,012)
------- -------
Accrued postretirement benefit obligation...................... $ 7,389 $ 7,816
======= =======
</TABLE>
AT&T made these assumptions in valuing its postretirement benefit
obligation at December 31:
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
Weighted-average discount rate...................................... 7.0% 8.8%
Expected long-term rate of return on plan assets.................... 9.0% 9.0%
Assumed rate of increase in the per capita cost of covered
health care benefits.............................................. 6.1% 8.6%
</TABLE>
AT&T assumed that the growth in the per capita cost of covered health care
benefits (the health care cost trend rate) would gradually decline after 1995 to
4.9% by the year 2005 and then remain level. This assumption greatly affects the
amounts reported. To illustrate, increasing the assumed trend rate by 1% in each
year would raise AT&T's accumulated postretirement benefit obligation at
December 31, 1995 by $646 and AT&T's 1995 postretirement benefit costs by $53.
F-19
<PAGE> 254
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SEGMENT INFORMATION
INDUSTRY SEGMENT
The Company operates in the global telecommunications networking industry
segment. This segment includes systems, software and products used for voice
data and video communications.
GEOGRAPHIC SEGMENTS
Transfers between geographic areas are on terms and conditions comparable
with sales to external customers. The methods followed in developing the
geographic area data require the use of estimation techniques and do not take
into account the extent to which product development, manufacturing and
marketing depend upon each other. Thus the information may not be indicative of
results if the geographic areas were independent organizations.
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
REVENUES
United States..................................................... $17,826 $17,207 $16,213
Other geographic areas............................................ 3,587 2,558 1,521
------- ------- -------
$21,413 $19,765 $17,734
======= ======= =======
TRANSFERS BETWEEN GEOGRAPHIC AREAS (ELIMINATED IN CONSOLIDATION)
United States..................................................... $ 1,081 $ 1,338 $ 946
Other geographic areas............................................ 911 1,041 892
------- ------- -------
$ 1,992 $ 2,379 $ 1,838
======= ======= =======
OPERATING INCOME (LOSS)
United States..................................................... $ (679) $ 1,241 $ 1,123
Other geographic areas............................................ (67) (5) (242)
Corporate, eliminations and nonoperating.......................... (392) (452) (262)
------- ------- -------
Income (loss) before income taxes................................. $(1,138) $ 784 $ 619
======= ======= =======
ASSETS
United States..................................................... $15,043 $14,114 $14,955
Other geographic areas............................................ 4,696 3,493 2,289
Corporate assets.................................................. 738 696 458
Eliminations...................................................... (755) (963) (593)
------- ------- -------
$19,722 $17,340 $17,109
======= ======= =======
</TABLE>
Corporate assets are principally cash and temporary cash investments. Data
on other geographic areas pertain to operations that are located outside the
United States. Revenues from all international activities, including those in
the table and exports, provided 23.3%, 19.1%, and 16.9% of consolidated revenues
in 1995, 1994 and 1993, respectively.
CONCENTRATIONS
Historically, the Company has relied on a limited number of customers for a
substantial portion of its total revenues. In terms of total revenues, the
Company's largest customer has been AT&T, although other large customers may
purchase more of any particular system or product line. The Company expects that
a significant portion of its future revenues will continue to be generated by a
limited number of customers. The loss of any of these customers or any
substantial reduction in orders by any of these customers could materially
F-20
<PAGE> 255
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SEGMENT INFORMATION -- (CONTINUED)
adversely affect the Company's operating results. The Company does not have a
concentration of available sources of supply of materials, labor, services or
other rights that, if suddenly eliminated, could severely impact its operations.
11. FINANCIAL INSTRUMENTS
In the normal course of business, AT&T has entered into various financial
instruments, including derivative financial instruments, for purposes other than
trading. A portion of such financial instruments related to the Company's
Businesses have, as between AT&T and the Company, been assumed by the Company.
Derivative financial instruments are not entered into for speculative purposes.
These instruments include letters of credit, commitments to extend credit,
guarantees of debt and foreign currency exchange contracts. Unless otherwise
noted, the Company generally does not require collateral to support these
financial instruments.
By their nature, all such instruments involve risk, including the credit
risk of nonperformance by counterparties, and the maximum potential loss may
exceed the amount recognized in the balance sheet. The contract or notional
amount of the financial instruments reflects the maximum amount of the Company's
commitments to extend credit or the extent of involvement that the Company has
in particular classes of financial instruments. At December 31, 1995 and 1994,
the Company's maximum exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
financial guarantees is represented by the amount drawn and outstanding on those
instruments. For forward and futures contracts, and option contracts, the
contract or notional amounts do not represent exposure to credit loss.
At December 31, 1995 and 1994, in management's opinion, there was no
significant risk of loss in the event of nonperformance of the counterparties to
these financial instruments. Exposure to credit risk is controlled through
credit approvals, credit limits and monitoring procedures and management
believes that the reserves for losses are adequate. The Company had no
significant exposure to any individual customer or counterparty at December 31,
1995 and December 31, 1994. Letters of credit, commitments to extend credit and
guarantees of debt may exist or expire without being drawn upon. Therefore, the
total notional or contract amounts do not necessarily represent future cash
flows.
Requests for providing commitments to extend credit and financial
guarantees are reviewed and approved by the senior management of the Company.
Management conducts regular reviews of all outstanding commitments, letters of
credit and financial guarantees, and the results of these reviews are considered
in assessing the adequacy of the Company's reserve for possible credit and
guarantee losses.
For the years ended December 31, 1995 and December 31, 1994, no interest
rate cap agreements had been entered into for the benefit of the Company. The
Company may, in the future, enter into these or other types of derivative
transactions as it judges prudent for the proper management of its business.
LETTERS OF CREDIT
Letters of credit are purchased guarantees that ensure the Company's
performance or payment to third parties in accordance with specified terms and
conditions.
COMMITMENTS TO EXTEND CREDIT
Commitments to extend credit are legally binding, conditional agreements
generally having fixed expiration or termination dates and specified interest
rates and purposes.
F-21
<PAGE> 256
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. FINANCIAL INSTRUMENTS -- (CONTINUED)
GUARANTEES OF DEBT
From time to time, the Company guarantees the financing for product
purchases by customers and the debt of certain unconsolidated joint ventures.
Requests for providing such guarantees are reviewed and approved by the senior
management of the Company. The Company seeks to limit its exposure to credit
risks in any single country or region. Certain financial guarantees are backed
by amounts held in trust for the Company.
FOREIGN CURRENCY EXCHANGE CONTRACTS
Foreign currency exchange contracts, including forward, option and swap
contracts are used to manage exposure to changes in currency exchange rates,
principally Dutch guilders, Deutsche marks, and Japanese yen. Some of the
contracts involve the exchange of two foreign currencies, according to local
needs in foreign subsidiaries. The use of derivative financial instruments
allows the Company to reduce its exposure to the risk that the eventual dollar
net cash inflows and outflows resulting from the sale of products to foreign
customers and purchases from foreign suppliers will be adversely affected by
changes in exchange rates. The foreign exchange contracts are designated for
firmly committed or forecasted purchases and sales. These transactions are
generally expected to occur in less than one year for firmly committed sales and
purchases. These gains and losses are deferred in other current assets and
liabilities. Deferred gains and losses are recognized as adjustments to the
underlying hedged transactions when the future sales or purchases are
recognized, or immediately, if the commitment is canceled. Gains and losses on
foreign exchange contracts that are designated for forecasted transactions are
recognized in other income as the exchange rates change. At December 31, 1995
and 1994, deferred unrealized gains were $8 and $3 and deferred unrealized
losses were $6 and $7, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS INCLUDING DERIVATIVE FINANCIAL INSTRUMENTS
The tables below present the valuation methods and the carrying or notional
amounts and estimated fair values of material financial instruments. The
notional amounts represent agreed-upon amounts on which calculations of dollars
to be exchanged are based. They do not represent amounts exchanged by the
parties and, therefore, are not a measure of the instruments. The Company's
exposure is limited to the fair value of the contracts with a positive fair
value at the reporting date plus interest receivable, if any, at the reporting
date.
<TABLE>
<CAPTION>
FINANCIAL INSTRUMENT VALUATION METHOD
<S> <C>
Short-term debt............................. The carrying amount is a reasonable estimate
of fair value.
Letters of credit........................... Fees paid to obtain the obligations.
Guarantees of debt.......................... Costs to terminate agreements.
Commitments to extend credit................ Costs to terminate agreements.
Foreign currency exchange contracts......... Market quotes.
</TABLE>
<TABLE>
<CAPTION>
1995 1994
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
ON BALANCE SHEET
Liabilities:
Debt sharing amount in anticipation of assumption of
the commercial paper program......................... $3,842 $3,842 $2,961 $2,961
</TABLE>
F-22
<PAGE> 257
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. FINANCIAL INSTRUMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AMOUNTS DRAWN
1995 1994 DOWN AND
CONTRACT/ CONTRACT/ OUTSTANDING
NOTIONAL NOTIONAL ---------------
AMOUNT AMOUNT 1995 1994
--------- --------- ----- -----
<S> <C> <C> <C> <C>
DERIVATIVES AND OFF BALANCE SHEET INSTRUMENTS
Foreign exchange:.......................................
Forward contracts.....................................
Dutch guilders..................................... $ 324 $ 108
Deutsche marks..................................... 131 27
Japanese yen....................................... 304 393
Other.............................................. 327 262
---- ----
1,086 790
Swap contracts........................................ -- 118
Option contracts...................................... 4 --
Letters of credit....................................... 659 640
Commitments to extend credit............................ 16 119 $ 13 $ 34
Guarantees of debt...................................... 598 368 296 280
</TABLE>
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
--------------------- ---------------------
ASSET LIABILITY ASSET LIABILITY
------- --------- ------- ---------
<S> <C> <C> <C> <C>
1995
Foreign exchange forward contracts.................. $ 16 $ 10 $ 11 $ 15
Letters of credit................................... -- -- 2 --
1994
Foreign exchange forward contracts.................. $ 7 $ 12 $ 9 $ 28
Foreign exchange swap contracts..................... -- 5 5 4
Letters of credit................................... -- -- 1 --
</TABLE>
12. TRANSACTIONS WITH AT&T
For the years 1995, 1994 and 1993, the Company had $2,119, $2,137, and
$1,967, respectively, of revenues from AT&T. At December 31, 1995 and 1994, the
related receivables amounted to $291 and $81, respectively.
AT&T has allocated general corporate overhead expenses amounting to $372,
$358 and $312 in 1995, 1994 and 1993, respectively. Additionally, the Company
incurred expenses for long distance services provided by AT&T of $80, $93 and
$92 for the years ended December 31, 1995, 1994 and 1993, respectively. Amounts
payable to AT&T were $25 at December 31, 1995 and 1994.
Rights, title and interest in certain lease receivables for business
communication equipment are sold at a discount to AT&T's finance subsidiary,
AT&T Capital Corporation. The Company acts as an agent to bill and collect such
receivables. The Company has agreed to repurchase certain of these lease
receivables in the event of a default thereon. At December 31, 1995 and 1994,
$206 and $208, respectively, of such receivables had recourse to the Company in
the event of default.
In connection with the Separation, AT&T has agreed to prepay prior to the
closing of the Offerings $500 to the Company, which amount will be applied to
accounts receivable from AT&T that are due and payable on or after January 1,
1997 for the purchase of products, services and licensed materials from the
Company.
F-23
<PAGE> 258
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is subject to proceedings,
lawsuits and other claims, including proceedings under government laws and
regulations related to environmental and other matters. Such matters are subject
to many uncertainties, and outcomes are not predictable with assurance.
Consequently, the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at December 31, 1995 cannot be ascertained.
While these matters could affect the operating results of any one quarter when
resolved in future periods, and while there can be no assurance with respect
thereto, management believes that after final disposition, any monetary
liability or financial impact to the Company beyond that provided for at
year-end would not be material to the annual consolidated financial statements.
The Company's current and historical manufacturing and research operations
are subject to a wide range of environmental protection laws in the United
States and other countries. In the United States, these laws often require
parties to fund remedial action regardless of fault. The Company has remedial
and investigatory activities, including assessment and cleanup work, underway at
46 current and former manufacturing, laboratory and recycling facilities to
comply, or to determine compliance, with applicable environmental protection
laws. AT&T and its subsidiaries have been listed as potentially responsible
parties ("PRPs") at numerous "Superfund" sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or
comparable state statutes, either by a government agency (which may have either
sought information concerning AT&T's connection to the site, or may have sought
from AT&T participation in site cleanup work or contribution toward the cost of
site cleanup), or by a private party seeking contribution to site cleanup costs.
Under the terms of the Separation and Distribution Agreement the Company will
assume or indemnify AT&T for all liabilities primarily relating to, arising out
of or resulting from (i) the operation of the Company Business as conducted at
any time prior to, on or after the Closing Date or (ii) any Company Assets
including, without limitation, those associated with these sites.
It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. The Company records an environmental
reserve when it is probable that a liability has been incurred and the amount of
the liability is reasonably estimable. This practice is followed whether the
claims are asserted or unasserted. Management expects that the amounts reserved
for will be paid out over the period of remediation for the applicable site
which ranges from 5 to 30 years. Reserves for estimated losses from
environmental remediation are, depending on the site, based primarily upon
internal or third party environmental studies, and estimates as to the number,
participation level and financial viability of any other PRPs, the extent of the
contamination and the nature of required remedial actions. Accruals are adjusted
as further information develops or circumstances change. The amounts provided
for in the Company's consolidated financial statements in respect of
environmental reserves are the gross undiscounted amount of such reserves,
without deductions for insurance or third party indemnity claims. In those cases
where insurance carriers or third party indemnitors have agreed to pay any
amounts and management believes that collectibility of such amounts is probable,
the amounts are reflected as receivables in the financial statements. Although
the Company believes that its reserves are adequate, there can be no assurance
that the amount of capital expenditures and other expenses which will be
required to complete remedial actions and to comply with applicable
environmental laws will not exceed the amounts reflected in the Company's
reserves or will not have a material adverse effect on the financial condition
of the Company or on the Company's results of operations or cash flows. Any
amounts of environmental costs that may be incurred in excess of those provided
for at December 31, 1995 cannot be determined.
One of the Company's multi-year contracts is with Pacific Bell for the
provision of a broadband network based on hybrid fiber-coaxial cable technology.
Implementation difficulties and cost overruns have arisen under this contract,
which may result in claims being made by the parties under the contract. The
Company and Pacific Bell are conducting negotiations in an effort to resolve
outstanding issues and potential claims. The Company's historical financial
statements reflect a reserve relating to this contract. Based on the future
negotiations with Pacific Bell, the Company will continue to assess the adequacy
of this reserve.
F-24
<PAGE> 259
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
The Company leases land, buildings and equipment through contracts that
expire in various years, through 2004. Rental expense under operating leases was
$209 in 1995, $183 in 1994 and $202 in 1993. The table below shows the future
minimum lease payments due under noncancelable operating leases at December 31,
1995. Such payments total $245.
<TABLE>
<CAPTION>
LATER
1996 1997 1998 1999 2000 YEARS
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Operating leases........................ $85 $59 $40 $26 $13 $22
</TABLE>
14. SUBSEQUENT EVENTS
In connection with the Separation and Distribution, the Company, AT&T and
NCR Corporation, a wholly owned subsidiary ("NCR"), executed and delivered the
Separation and Distribution Agreement, dated as of February 1, 1996 (the
"Separation and Distribution Agreement"), and certain related agreements which
are summarized below. This summary is qualified in all respects by the terms of
the Separation and Distribution Agreement and such related agreements.
SEPARATION AND DISTRIBUTION AGREEMENT
Pursuant to the Separation and Distribution Agreement, AT&T will transfer
to the Company substantially all of the assets and liabilities associated with
the Company's Business, other than accounts receivable having a face amount of
approximately $2,000.
The Separation and Distribution Agreement, among other things, provides
that the Company will indemnify AT&T and NCR for all liabilities relating to the
Company's business and operations and for all contingent liabilities relating to
the Company's business and operations or otherwise assigned to the Company. In
addition to contingent liabilities relating to present or former businesses of
the Company, any contingent liabilities related to AT&T's discontinued computer
operations (other than those of NCR) have been assigned to the Company. In
addition, the Separation and Distribution Agreement provides for the sharing of
contingent liabilities not allocated to one of the parties, in the following
proportions: AT&T: 75%, the Company: 22%, and NCR: 3%. The Separation and
Distribution Agreement also provides that each party will share specified
portions of contingent liabilities related to the business of any of the other
parties that exceed specified levels.
EMPLOYEE BENEFITS AGREEMENT
The Company entered into an agreement which governs its employee benefit
obligations with respect to actual employees as well as retirees assigned to the
Company. This agreement provides that, from the Separation until the
Distribution, the Company will be a "Participating Company" in AT&T employee
benefit plans and will bear its allocable share of costs for benefits and
administration under these plans. Immediately after the Distribution, pension
plan assets will be divided between AT&T pension plans and the Company's pension
plans so that each plan will receive the legally required minimum and a
sufficient amount of additional assets to ensure continued compliance with the
existing AT&T pension funding policy. Any trust assets in excess of the funding
policy level will be divided equally between the trusts of AT&T and the Company
with respect to such qualified plans. Liability under the AT&T plans relating to
the Company's employees or retirees will be assumed by the Company's plans.
FEDERAL, STATE AND LOCAL TAX ALLOCATION AGREEMENTS
The Company has entered into agreements with AT&T and its other domestic
subsidiaries that apply to income taxes attributable to the period from the
Company's incorporation through the Distribution. The
F-25
<PAGE> 260
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBSEQUENT EVENTS -- (CONTINUED)
agreements set forth principles to be applied in allocating tax liability among
those entities filing returns on a consolidated or combined basis.
TAX SHARING AGREEMENT
The Company has entered into an agreement with AT&T and NCR that governs
contingent tax liabilities and benefits, tax contests and other tax matters with
respect to tax periods ending or deemed to end on the date of the Distribution.
Under such agreement, adjustments to taxes that are clearly attributable to the
business of one party will be borne solely by that party. Adjustments to all
other tax liabilities generally will be borne 75% by AT&T, 22% by the Company
and 3% by NCR.
GENERAL PURCHASE AGREEMENT
The Company and AT&T have entered into the General Purchase Agreement and
various related and supplemental agreements which govern transactions pursuant
to which the Company provides products, licensed materials and services to AT&T
and certain designated AT&T affiliates. AT&T commits therein that payments made
to the Company (commencing January 1, 1996) for purchases of products, licensed
materials and services by AT&T and such designated affiliates will total at
least $3,000 cumulatively for the calendar years 1996, 1997 and 1998. If that
commitment is not fulfilled by December 31, 1998, interest is payable on the
shortfall until the $3,000 purchase commitment is met. Such interest is the sole
remedy for any shortfall.
INTERIM SERVICES AND SYSTEMS REPLICATION AGREEMENT; REAL ESTATE
SHARING
The Company, AT&T and NCR have entered into an agreement governing the
provision by each to one or more of the others on an interim basis of certain
data processing and telecommunications services and certain corporate support
services on specified terms. Specified charges are generally intended to allow
the providing company to recover the fully allocated direct costs of providing
the services, plus all out-of-pocket costs and expenses, but without any profit.
Such agreement also provides for the replication and transfer of certain
computer systems on specified terms. With limited exceptions, these interim
services are not expected to extend beyond January 1, 1998 and many are expected
to terminate at or prior to the Distribution. AT&T, the Company and NCR also
have entered into various leases and sublease arrangements for the sharing of
certain facilities for a transitional period on commercial terms. In the case of
owned real estate to be leased, the lease terms will be either two or three
years, except that a limited number of leases may be terminated on 90 days'
notice by the tenant. In the case of subleases or sub-subleases of property, the
lease term will generally coincide with the remaining term of the primary lease
or sublease, respectively.
BRAND LICENSE AGREEMENT
The Company and AT&T have entered into the Brand License Agreement,
pursuant to which the Company will have rights, on a royalty-free basis, to
continue to use the AT&T brand for specified transition periods following the
closing of the Offerings. Under the Brand License Agreement, the Company will be
entitled to use the AT&T brand, alone or in combination with the Company's
brand, for the sale of consumer products and services and business
communications systems and services for a period of one year following the
closing of the Offerings. After the initial one-year period, the Company will be
entitled to continue to use the AT&T brand on these products, systems and
services, but only in combination with the Company's brand, for an additional
three-year period. The right to use the AT&T brand, alone or in combination with
the Company's brand, in connection with certain leased products or maintenance
contracts will extend for 66 months after the closing of the Offerings. The
Brand License Agreement permits the Company to use the AT&T brand on the
Company's other products, systems and services until the earlier of the
Distribution or six
F-26
<PAGE> 261
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBSEQUENT EVENTS -- (CONTINUED)
months after the closing of the Offerings. In addition, the Company may use the
AT&T brand after these time periods to the extent necessary to deplete
pre-existing inventory.
FINANCING
The Company entered into a Competitive Advance and Revolving Credit
Facility Agreement, dated as of February 1, 1996, with Chemical Bank, as agent
(the "Initial Working Capital Facility"), pursuant to which the Company may
borrow up to $1,000 subject to the terms and conditions thereof. In addition,
AT&T intends to issue up to approximately $4,000 of short-term debt under a
commercial paper facility ("Commercial Paper Program"), which will be assumed by
the Company in respect of the debt sharing amount under the Debt Sharing
Agreement.
ACQUISITIONS OF CERTAIN PHILIPS OPERATIONS
On February 7, 1996, the Company will acquire several operations of Philips
Electronics, N.V. for approximately $260. This acquisition augments the
Company's global position in the development, manufacturing and marketing of
Synchronous Digital Hierarchy, Global System Mobile and Fixed Wireless Systems.
This acquisition is not expected to have a material impact on the Company's
results of operations.
LONG TERM INCENTIVE PLAN
The Company intends to adopt the 1996 Long Term Incentive Plan, under which
stock options, stock appreciation rights ("SARs") and other awards would be
granted. Details of the Plan are described elsewhere in this prospectus. No
grants under this Plan have been made at December 31, 1995.
Under AT&T's Long Term Incentive Program, certain employees of the Company
are eligible for the grant of stock options, SARs, either in tandem with stock
options or free standing, and other awards. Pending AT&T's distribution of all
of its interest in the Company, AT&T stock awards held by Company employees will
remain outstanding as AT&T stock awards. If any such AT&T stock options are
exercised or any such AT&T stock awards vest or are delivered, the Company will
reimburse AT&T for the difference between the exercise price and AT&T's common
stock market price on the date of exercise, in the case of stock options, and
for the market value of AT&T common stock on the date of vesting or delivery, in
the case of stock awards.
Immediately following the Distribution, outstanding awards under the AT&T
Long Term Incentive Program held by Company employees will be replaced by
substitute awards under the Company's 1996 Stock Plan. The substitute awards
will have the same ratio of the exercise price per option to the market value
per share, the same aggregate difference between market value and exercise price
and the same vesting provisions, option periods and other terms and conditions
as the AT&T options and SARs they replace. The formula for determining the total
number of substitute awards to be issued to Company employees depends on an
average of the respective market values of AT&T's and the Company's common stock
during the five trading days immediately preceding the ex-dividend date for the
Distribution. The formula is a fraction, with the average market value of AT&T's
common stock as the numerator and with the average market value of the Company's
common stock as the denominator, multiplied by the number of AT&T stock options,
SARs and other stock awards held by Company employees at the Distribution date.
Accordingly, the Company cannot currently determine the number of shares of its
common stock that will be subject to substitute awards after the Distribution.
At December 31, 1995, there were approximately 7.8 million shares of AT&T
Common Stock subject to options and other stock awards for AT&T Common Stock
held by Company employees. Approximately 4.7 million of such options and awards
were exercisable at December 31, 1995. Using AT&T's closing price at December
31, 1995 ($64.75) and the initial public offering price of $27.00 per share of
the Company's
F-27
<PAGE> 262
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBSEQUENT EVENTS -- (CONTINUED)
Common Stock, the foregoing number of shares subject to AT&T stock options and
other awards would be replaced by options and other awards on 18.7 million
shares of the Company's common stock.
15. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH(1) TOTAL
------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
1995
Total revenues.............................. $4,159 $ 5,083 $4,744 $7,427 $21,413
Gross margin................................ 1,850 2,251 2,042 2,325 8,468
Net income (loss)........................... (22) 159 13 (1,017) (867)
1994
Total revenues.............................. $4,052 $ 4,665 $4,776 $6,272 $19,765
Gross margin................................ 1,740 2,028 2,006 2,654 8,428
Net income (loss)........................... (43) 78 44 403 482
</TABLE>
- ---------------
(1) 1995 includes pre-tax charges of $2,801 ($1,847 after taxes), to cover
restructuring costs of $2,613 and asset impairment and other charges of
$188. (See Note 5.)
F-28
