<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 12, 1996
REGISTRATION NO. 333-00703
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
LUCENT TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3661 22-3408857
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
600 MOUNTAIN AVENUE
MURRAY HILL, NJ 07974
(908) 582-8500
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
RICHARD J. RAWSON
SENIOR VICE PRESIDENT & GENERAL COUNSEL
600 MOUNTAIN AVENUE
MURRAY HILL, NJ 07974
(908) 582-8500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
<TABLE>
<S> <C>
STEVEN A. ROSENBLUM CHARLES S. WHITMAN III
WACHTELL, LIPTON, ROSEN & KATZ DAVIS POLK & WARDWELL
51 WEST 52ND STREET 450 LEXINGTON AVENUE
NEW YORK, NY 10019 NEW YORK, NY 10020
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
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<S> <C> <C> <C> <C>
PROPOSED PROPOSED
TITLE OF EACH CLASS MAXIMUM MAXIMUM AMOUNT OF
OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE(3)
- -----------------------------------------------------------------------------------------------------------
Common Stock, par value
$.01 per share.................. $3,191,250,000 $1,100,432
- -------------------------------------------
Preferred Share Purchase
Rights(4).......................
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Total............................. $3,191,250,000 $1,100,432
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</TABLE>
(1) Includes shares to be sold pursuant to the overallotment option granted to
the U.S. Underwriters.
(2) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457(o) promulgated under the Securities Act of 1933.
(3) Of the amount shown, $34,483 was paid at the time of the original filing of
this Registration Statement on February 5, 1996.
(4) Rights initially will trade together with the Common Stock. The value
attributable to the Rights, if any, is reflected in the market price of the
Common Stock.
THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
LUCENT TECHNOLOGIES INC.
CROSS-REFERENCE SHEET PURSUANT TO REGULATION S-K, ITEM 501(b)
<TABLE>
<CAPTION>
ITEM LOCATION
NO. IN PROSPECTUS
- ------ ------------------------------------------
<S> <C> <C>
I. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Outside Front Cover Page
II. Inside Front and Outside Back Cover
Pages of Prospectus....................... Inside Front Cover Page; Table of Contents
III. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges........ Prospectus Summary; Risk Factors;
The Company
IV. Use of Proceeds........................... Use of Proceeds
V. Determination of Offering Price........... Underwriting
VI. Dilution.................................. Not Applicable
VII. Selling Security Holders.................. Not Applicable
VIII. Plan of Distribution...................... Outside Front Cover Page; Underwriting
IX. Description of Securities to be
Registered................................ Outside Front Cover Page; Description of
Capital Stock
X. Interests of Named Experts and Counsel.... Not Applicable
XI. Information with respect to the
Registrant................................ Outside Front Cover Page; Prospectus
Summary; Risk Factors; The Company; Use of
Proceeds; Dividend Policy; Certain
Transactions in Connection with the
Offerings; Capitalization; Selected
Financial Data; Pro Forma Condensed
Financial Statements; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Arrangements Between
the Company and AT&T; Principal
Stockholder; Description of Capital Stock;
Shares Eligible for Future Sale; Financial
Statements
XII. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Not Applicable
</TABLE>
<PAGE> 3
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with a United States and Canadian offering (the "U.S.
Prospectus") and one to be used in connection with a concurrent offering outside
the United States and Canada (the "International Prospectus"). The prospectuses
are identical in all respects except for the front cover page and the inside
front cover page. In addition, the International Prospectus contains a section
entitled "Certain United States Tax Consequences to Non-United States Holders."
Pages included in the International Prospectus and not in the U.S. Prospectus
are marked "Alternate Page for International Prospectus."
<PAGE> 4
PROSPECTUS (Subject to Completion)
Issued March 12, 1996
111,000,000 Shares
LUCENT TECHNOLOGIES
COMMON STOCK
------------------------
LOGO
OF THE 111,000,000 SHARES OF COMMON STOCK BEING OFFERED, 97,000,000 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. PRIOR TO
THE OFFERINGS, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON
STOCK. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING
PRICE WILL BE BETWEEN $22 AND $25 PER SHARE. SEE "UNDERWRITING"
FOR A DISCUSSION OF THE FACTORS CONSIDERED IN DETERMINING THE
INITIAL PUBLIC OFFERING PRICE.
AFTER THE OFFERINGS, AT&T WILL OWN APPROXIMATELY 82.5% (80.4% IF THE U.S.
UNDERWRITERS EXERCISE THEIR OVERALLOTMENT OPTION IN FULL) 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.
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PRICE $ A SHARE
----------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) THE COMPANY(2)
---------------- ---------------- ----------------
<S> <C> <C> <C>
Per Share(3).................. $ $ $
Total(4)...................... $ $ $
</TABLE>
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(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.
(3) Each Share will have attached one Preferred Share Purchase Right which
will initially trade together with the Share.
(4) The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
16,650,000 additional shares of Common Stock at the Price to Public less
Underwriting Discounts and Commissions for the purpose of covering
overallotments, if any. If the U.S. Underwriters exercise such option in
full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------
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 , 1996 at the office
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor
in same-day 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
, 1996
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
<PAGE> 5
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 , 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
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<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 9
The Company........................... 15
Use of Proceeds....................... 17
Dividend Policy....................... 17
Certain Transactions in Connection
with the Offerings.................. 18
Capitalization........................ 20
Selected Financial Data............... 21
Pro Forma Condensed Financial
Statements.......................... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
<CAPTION>
PAGE
-----
<S> <C>
Business.............................. 36
Management............................ 54
Arrangements Between the Company and
AT&T................................ 72
Principal Stockholder................. 87
Description of Capital Stock.......... 88
Shares Eligible for Future Sale....... 94
Underwriting.......................... 96
Legal Matters......................... 99
Experts............................... 99
Available Information................. 99
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> 6
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.
Unless otherwise indicated, all data in this Prospectus (i) are based on the
assumption that the U.S. Underwriters do not exercise their overallotment option
and (ii) give effect to a stock split or other issuance of shares which will
result in AT&T owning 524,624,894 shares of Common Stock prior to the closing of
the Offerings.
------------------------
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> 7
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> 8
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 82.5% of
the outstanding shares of common stock, par value $.01 per share (the "Common
Stock"), of the Company (80.4% if the U.S. Underwriters exercise their
overallotment option in full). 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> 9
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock Offered
U.S. Offering......................... 97,000,000 shares
International Offering................ 14,000,000 shares
Total Offerings.................... 111,000,000 shares(1)(3)
Common Stock to be outstanding
immediately after the Offerings....... 635,624,894 shares(1)(2)
Common Stock to be held by AT&T
immediately after the Offerings....... 524,624,894 shares(1)(3)
Use of Proceeds......................... The net proceeds to the Company from the Offerings
are estimated to be approximately $2,500 million
($2,875 million if the U.S. Underwriters exercise
their overallotment option in full) (assuming an
initial public offering price of $23.50 per share,
the mid-point of the range set forth on the cover
page of this Prospectus, after deducting estimated
underwriting discounts and commissions and
estimated offering expenses). Such net proceeds
will be used to repay approximately $2,500 million
of the $3,000 million of indebtedness expected to
be outstanding under the Working Capital Facility
(as defined herein) and any excess over $2,500
million 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 up to 16,650,000 shares of Common Stock which the U.S.
Underwriters have the option to purchase solely to cover overallotments. If
the U.S. Underwriters exercise their overallotment option in full,
652,274,894 shares of Common Stock will be outstanding after the Offerings.
(2) 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."
(3) The Company currently has 1,000 shares of Common Stock outstanding, all of
which are held by AT&T. The Company will effect a stock split or other
issuance of shares which will result in AT&T owning 524,624,894 shares of
Common Stock immediately prior to the Closing Date.
6
<PAGE> 10
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
-------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
(IN MILLIONS)
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) (UNAUDITED) (UNAUDITED)
<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> 11
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, assuming an initial public offering price of $23.50 per share
(the mid-point of the range 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
$3,000 million and the repayment of approximately $2,500 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
--------------------------------------
ADJUSTMENTS PRO FORMA
HISTORICAL (UNAUDITED) (UNAUDITED)
---------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
BALANCE SHEET DATA
Total assets................................................ $ 19,722 $ 1,500 $21,222
Working capital............................................. (384) 500 116
Total debt.................................................. 4,014 500 4,514
Stockholders' equity........................................ 1,434 500 1,934
STATEMENT OF OPERATIONS DATA
Revenues.................................................... $ 21,413 $ -- $21,413
Net loss.................................................... (867) (18) (885)
Pro forma net loss per share................................ (1.65) (1.39)
</TABLE>
8
<PAGE> 12
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 82.5% of
the outstanding shares of Common Stock (80.4% if the U.S. Underwriters exercise
their overallotment option in full). 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."
9
<PAGE> 13
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.
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
10
<PAGE> 14
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.
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 is being assigned ownership of the substantial majority
of the current AT&T patents. Pursuant to the patent license agreement to be
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 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
11
<PAGE> 15
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.
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
12
<PAGE> 16
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 an interest rate applicable to short-term debt of AT&T. 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 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.
13
<PAGE> 17
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 ("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 will
be determined through negotiations between the Company and the Underwriters. See
"Underwriting."
14
<PAGE> 18
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 82.5% of the outstanding shares of Common Stock (80.4% if
the U.S. Underwriters exercise their overallotment option in full). 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."
15
<PAGE> 19
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 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. 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
16
<PAGE> 20
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.
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 $2,500 million ($2,875 million if the U.S. Underwriters exercise
their overallotment option in full) after deducting estimated underwriting
discounts and commissions and offering expenses, assuming an initial public
offering price of $23.50 per share, the mid-point of the range set forth on the
cover page of this Prospectus. Such proceeds will be used to repay approximately
$2,500 million of indebtedness outstanding under the Working Capital Facility
and any excess over this amount will be used for general corporate purposes. As
of March 8, 1996, the Company had borrowed $420 million under the Working
Capital Facility, all of which was used for general working capital purposes.
However, the Company anticipates borrowing up to $3,000 million prior to the
closing of the Offerings. 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."
17
<PAGE> 21
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 of AT&T may be held by the
Company or its subsidiaries at the Closing Date subject to agreements to
transfer these assets to AT&T upon receipt of necessary consents or approvals.
Such AT&T assets have not been reflected in the Company's financial statements.
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 or will, on or
prior to the Closing Date, enter 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 expects to repay approximately $2,500 million of the amounts drawn
under the Working Capital Facility with the proceeds of the Offerings.
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
18
<PAGE> 22
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."
In deciding upon the initial capitalization of the Company, which is being
established in part by the retention by AT&T of accounts receivable and the
assumption by the Company of the Commercial Paper Program, a number of factors
were considered. These factors 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. 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."
19
<PAGE> 23
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 (assuming an
initial public offering price of $23.50 per share, the mid-point of the range
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........................................ -- 500
-------- ------- -
Total short-term debt................................... $ 3,891 $ 4,391
======== ========
LONG-TERM DEBT.................................................... $ 123 $ 123
STOCKHOLDERS' EQUITY:
Common stock.................................................... -- 6
Additional paid-in capital...................................... 1,406 1,900
Foreign currency translation.................................... 28 28
-------- ------- -
Total stockholders' equity.............................. 1,434 1,934
-------- ------- -
TOTAL CAPITALIZATION.............................................. $ 1,557 $ 2,057
======== ========
</TABLE>
20
<PAGE> 24
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
-------- -------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(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
-------- -------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(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).
21
<PAGE> 25
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
---------------------------------------------
ADJUSTMENTS PRO FORMA
HISTORICAL (UNAUDITED) (UNAUDITED)
---------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................... $ 448 $ 3,500(2)(5) $ 3,948
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 1,500 12,179
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 $ 1,500 $21,222
======= =========== =========
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................................ 500(1)(5) 500
Debt maturing within one year........................... 49 49
Other current liabilities............................... 2,690 500(2) 3,190
---------- -----------
Total current liabilities............................. 11,063 12,063
Postretirement and postemployment benefit liabilities... 5,569 5,569
Long-term debt.......................................... 123 123
Other liabilities....................................... 1,533 1,533
---------- -------------- -----------
Total liabilities..................................... 18,288 1,000 19,288
Stockholders' equity
Common Stock.......................................... -- 6(1) 6
Additional paid-in capital............................ 1,406 494(1)(3) 1,900
Foreign currency translation.......................... 28 28
---------- -------------- -----------
Total stockholders' equity.............................. 1,434 500 1,934
---------- -------------- -----------
Total liabilities and stockholders' equity.... $ 19,722 $ 1,500 $21,222
======= =========== =========
</TABLE>
- ---------------
(1) Reflects the sale of 111,000,000 shares in the Offerings assuming a purchase
price of $23.50 per share (the mid-point of the range set forth on the cover
page of this Prospectus). As set forth under "Use of
22
<PAGE> 26
Proceeds," the Company expects to use the proceeds of the Offerings to repay
approximately $2,500 million of the $3,000 of indebtedness expected to be
outstanding under the Working Capital Facility as of the Closing Date and any
excess over $2,500 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 $3,000 under the Working Capital Facility prior to the Offerings. For
purposes of the Pro Forma Condensed Balance Sheet, the Company has assumed
that $2,500 of the $3,000 will be repaid from the proceeds of the Offerings.
The interest rate on the borrowings under the Working Capital Facility was
assumed to be 5.75% per annum, resulting in interest expense of $14.4. A
change in the assumed interest rate of 1/8% per annum would increase or
decrease interest expense by $.3.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
----------------------------------------
ADJUSTMENTS PRO FORMA
HISTORICAL (UNAUDITED) (UNAUDITED)
---------- ----------- ---------
(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)
Interest expense........................................... 302 29(1) 331
Income (loss) before income taxes and cumulative effects of
accounting changes....................................... (1,138) (29) (1,167)
Cumulative effects of accounting changes................... -- --
Net income (loss).......................................... (867) (18) (885)
Loss per share
(Historical -- based on 524,624,894 shares
outstanding).......................................... (1.65)
(Pro forma -- based on 635,624,894 shares outstanding)... (1.39)(2)
</TABLE>
- ---------------
(1) As discussed in Note 5 to the Pro Forma Condensed Balance Sheet, the Company
has entered into a $4,000 Working Capital Facility to fund working capital
subsequent to February 1, 1996. For purposes of the Pro Forma Condensed
Statement of Operations, the Company has assumed the Offerings and
borrowings occurred on January 1, 1995, resulting in net borrowings of $500.
The interest rate on the borrowings is assumed to be 5.75% per annum, based
on federal funds rates plus twenty-five basis points, resulting in annual
interest expense of $29 million. A change in the assumed interest rate of
1/8% per annum would increase or decrease interest expense by $.4 million.
(2) Reflects the sale of an additional 111,000,000 shares of Common Stock in the
Offerings. Does not include up to 16,650,000 shares of Common Stock which
the U.S. Underwriters have the option to purchase solely to cover
overallotments. If the U.S. Underwriters exercise their overallotment option
in full, the pro forma net loss per share for 1995 would be $1.36.
23
<PAGE> 27
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 of AT&T may be held by the
Company or its subsidiaries at the Closing Date subject to agreements to
transfer these assets to AT&T upon receipt of necessary consents or approvals.
Such AT&T assets have not been reflected in the Company's financial statements.
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 82.5% of the outstanding shares of Common Stock (80.4% if
the U.S. Underwriters exercise their overallotment option in full). The Company
and AT&T and, in certain cases, NCR have entered into or will, on or prior to
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."
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 AT&T's blended borrowing rate. The average borrowings
assumed to be outstanding for 1995, 1994, and 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
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<PAGE> 28
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, approximately $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.
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
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<PAGE> 29
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.
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)................. (44) 77 44 405 482
</TABLE>
- ---------------
(1) Includes restructuring charges of $892 of costs.
(2) Includes restructuring and other charges of $2,801 ($1,847 after taxes).
26
<PAGE> 30
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 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,
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<PAGE> 31
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>
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 1994 1993
1995 ----- ----- -----
-------------
(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
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<PAGE> 32
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.
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.
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<PAGE> 33
Interest expense in 1995 was $301 million, an increase of $31 million or
11% 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. See Note 4 of Notes to
Consolidated Financial Statements.
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 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
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<PAGE> 34
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 11.1% 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 and increased 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.
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.
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<PAGE> 35
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. The Company has accrued for such liabilities when it is probable
that such liability will be incurred and the amount of such costs can be
reasonably estimated. However, it is often difficult to estimate the future
impact of environmental matters, including potential liabilities. Although the
Company believes that its reserves are adequate, there can be no assurance that
the amount of capital expenditures and other expenses 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 the Company's results of
operations.
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)
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<PAGE> 36
$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 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
70.0%. If the U.S. Underwriters exercise their overallotment option in full, the
pro forma debt to capital ratio as of December 31, 1995 will be approximately
66.2%.
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.
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<PAGE> 37
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. 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
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 March 8, 1996, the Company had borrowed $420 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. However, the
Company anticipates borrowing up to $3,000 million prior to the Closing Date.
The Company expects to repay approximately $2,500 million of the amount
outstanding with proceeds of the Offerings.
In addition, AT&T has commenced issuance of $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."
In deciding upon the initial capitalization of the Company, which is being
established in part by the retention by AT&T of accounts receivable and the
assumption by the Company of the Commercial Paper Program, a number of factors
were considered. These factors include the Company's pro forma debt to capital
ratio, the Company's prospective financing requirements, the Company's desired
credit rating, the Company's working capital and capital expenditure
requirements 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. The Company believes that the proceeds of
the Offerings, as well as the Working Capital Facility, cash flow from operating
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.
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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 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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Economic Factors
The Company expects network operators and business enterprises in general
to pursue growth opportunities through acquisitions and investment around the
world. Multinational enterprises are demanding telecommunications systems and
services in foreign locations similar to those to which they are accustomed in
their home market. To attract these businesses and their investments, countries
are under pressure to upgrade their communications infrastructure. In developing
countries there is growing demand for an increase in teledensity (the number of
telephones per capita) following increases in the standard of living.
Network operators around the world are under increased pressure to increase
revenues and operating margins. As a result, they are demanding new networking
systems and software which permit them to satisfy end-user demands and reduce
operating expenses through the automation of previously labor intensive
activities or other increases in the efficiency of their networks.
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.
The Company intends to pursue the above strategies through a strong
management emphasis on the rapid commercialization of customer-focused
technological innovations. See "The Company -- Strategic Reorganization." 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.
Wireless Networks
Wireless communications is a fast growing segment of the global
telecommunications market with the number of global subscribers increasing from
16 million in 1991 to 53 million in 1994. From 1993 to 1995, the Company's sales
of wireless infrastructure systems grew as a percent of total revenues from 6.1%
to 10.3%. New and upgraded digital wireless networks are being deployed by
network operators to meet the mobility needs of end-users, to expand their
networks into areas unserved by traditional telephony services and to provide a
wireless alternative to traditional wireline network access. In addition,
businesses are deploying wireless telecommunications systems and data networks
to improve the flexibility and connectivity of their office designs.
An important element of the Company's strategy is to provide network
operators and businesses with complete, flexible wireless networks which will
complement, and, in the case of network operators, compete over time with
wireline networks. As a result, the Company's networks are designed to
interoperate with existing local networks and to be upgraded with new software,
thereby enabling network operators to offer new services or to change standards
as end-user demand dictates. To accomplish this, the Company's wireless
infrastructure systems, which utilize the 5ESS(R)-2000 switch (the "5ESS
switch"), are compatible with the following air interface standards: advanced
mobile telephone service ("AMPS"), the analog standard which is currently the
leading standard in North America; GSM, the pan-European digital standard;
cellular digital packet data ("CDPD"), a leading standard for data transmission
in North America; and the emerging digital standards code division multiple
access ("CDMA") and time division multiple access ("TDMA"). The Company believes
that its implementation of CDMA technology provides superior digital voice
quality,
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greater capacity utilization and allows for lower power handsets than other
wireless technologies. The Company currently is deploying what will be the first
national CDMA network in the United States and one of the world's largest AMPS
networks in Korea. The Company has recently entered the GSM market with the
acquisition of the Philips Businesses and with the award from the Ministry of
Post and Telecommunications of Saudi Arabia to build an infrastructure system
based on the GSM standard which, when completed, will be one of the world's
largest GSM-based networks.
For business customers, the Company's strategy is to respond to its
customers' needs for mobility by offering wireless voice and data communication
networks within a building or campus. The Company has sought to accomplish this
by applying its radio frequency expertise to traditional PBX and local area
networking ("LAN") applications. For example, the Company was the first to offer
enhanced PBX and key system products which will support both traditional and
cordless handsets. Further, the Company recently announced its FREEWORKS(TM)
family of wireless business systems which includes a cellular PBX.
The Company believes that enhancements to wireless communications will
continue to be generated by microelectronic advances and software innovations.
The Company will seek to remain in the forefront of these technologies by
building upon its Bell Labs expertise through continued research and development
investments in DSPs and networking software.
Multifunctional Systems
Network operators are demanding networks that allow them to expand the
breadth of their service offerings, and businesses are demanding networks which
allow them to integrate voice and data communications within and between their
facilities.
The Company intends to utilize its expertise in digital switching, digital
transmission and optical technologies to continue to enable network operators
and businesses to deploy multifunctional networks which simultaneously can
support any combination of voice, data and video communications through various
combinations of copper, coaxial, wireless and fiber transmission media. An
important element of the Company's strategy is to seek to remain in the
forefront of these innovations by continuing its investments in critical
software and microelectronic technologies. The Company is also seeking to
capitalize on the convergence of voice and data networks with the 5E10 software
release, the introduction of its wide area network GLOBEVIEW(R)-2000, an ATM
switch for network operators, and its recently introduced MultiMedia
Communications eXchange ("MMCX") for business customers, which integrates PBX
and LAN capabilities.
Networking Software
As part of its strategy the Company seeks to continue to build upon its
software expertise as networks become more software intensive. Networking
software is used to create, provision and manage services and to support the
efficient, cost-effective operation of networks. Networking software is also
used by network operators and businesses to offer new services which will
differentiate them in the marketplace and which will automate labor intensive
service management and provisioning tasks. 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's intelligent network and application
software enables network operators to offer a broad array of enhanced and
differentiated services such as toll free calling (800 and 888 service in the
United States) and call waiting. In addition, the Company is a leader in
operation support systems for telephone networks with systems like its Advanced
System for Operations Support ("ASOS"), which is one of the first systems to
enable network operators to manage the work flow, planning, surveillance,
provisioning and continuous testing of their multifunctional networks. Further,
the Company intends to continue to develop customized business applications like
call centers, which permit the routing and administration of a large volume of
incoming calls and the integration with business databases of customer and
product information.
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<PAGE> 43
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. 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.
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,
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<PAGE> 56
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 executive officers of
the Company and the individuals who are expected to be elected to the Company
Board prior to the Closing Date to serve as directors of the Company following
the Closing Date. 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 will be 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." The Company currently has
three directors, all of whom are AT&T officers and two of whom will resign as
directors prior to the Closing Date.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
- ----------------------------------- --------- --------------------------------------------
<S> <C> <C>
Henry B. Schacht................... 61 Chairman of the Board Nominee and Chief
Executive Officer
Richard A. McGinn.................. 49 President and Chief Operating Officer, and a
Director Nominee
Carla A. Hills..................... 61 Director Nominee
Drew Lewis......................... 64 Director Nominee
Donald S. Perkins.................. 68 Director Nominee
Franklin A. Thomas................. 61 Director Nominee
Ephraim M. Brecher*................ 49 Director Nominee
Jim G. Kilpatric*.................. 57 Director Nominee
Marc E. Manly*..................... 44 Director Nominee
S. Lawrence Prendergast*........... 54 Director Nominee
Maureen B. Tart*................... 40 Director
Florence L. Walsh*................. 34 Director Nominee
Paul J. Wondrasch*................. 52 Director Nominee
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.
Mr. Schacht was named Chief Executive Officer of the Company effective
February 1, 1996 and will become Chairman of the Board of the Company prior to
the Closing Date. He has been a member of the
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<PAGE> 58
AT&T Board since 1981 but will resign from the AT&T Board effective no later
than the Closing Date. Mr. Schacht is a 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 will become a director prior to the Closing Date.
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 will become a director prior to the Closing Date. 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 will become a director prior to the Closing Date. 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 will become a director prior to the Closing Date. 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 will become a director prior to the Closing Date. 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 will become a director of the Company prior to the Closing
Date. 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 will become a director of the Company prior to the Closing
Date. 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 will become a director of the Company prior to the Closing Date.
Mr. Manly has held the position of Vice President -- Law & Solicitor General of
AT&T since January 1995. Prior to that time,
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<PAGE> 59
Mr. Manly was a 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 will become a director of the Company prior to the Closing
Date. 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 will become a director of the Company prior to the Closing Date.
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 will become a director of the Company prior to the Closing
Date. 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.
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<PAGE> 60
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.
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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> 62
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.
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.
59
<PAGE> 63
<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.
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
60
<PAGE> 64
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) ($)(4) SARS(#) ($)(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 and 1994 0 0 0 0 0 0 0
Chief Executive Officer 1993 0 0 0 0 0 0 0
Richard A. McGinn 1995 469,400 517,200 70,637 0 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 659,000 440,500 176,782 571,500 138,484 523,783 62,500
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 1,079,500 219,692 108,450 28,169
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 44,617 838,200 70,330 92,598 23,985
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) On December 31, 1995, Mr. McGinn held an outstanding grant of restricted
stock of 5,000 shares with a value of $323,750. 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 AT&T special equity
incentive/retention program in the amounts of 9,000 units, 17,000 units and
13,200 units, respectively, with a value at December 31, 1995 of $582,750,
$1,100,750 and $854,700, respectively. These grants vest four years after
the date of grant and carry stringent penalties for competition and other
specified adverse activities. The value at grant of these shares and units
is reflected in the table above. Dividends on such shares are paid in cash
to the holders thereof.
(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 $4,834).
(7) Mr. Schacht became Chief Executive Officer of the Company on February 1,
1996. For a description of Mr. Schacht's 1995 and 1996 compensation
arrangements, see "-- Other Employment Arrangements."
61
<PAGE> 65
OPTION AND SAR GRANTS OF AT&T COMMON STOCK TO EXECUTIVE OFFICERS
The following tables disclose information regarding stock options and stock
appreciation rights granted to the executive officers named in the above Summary
Compensation Table in respect of shares of AT&T Common Stock under the AT&T 1987
Long Term Incentive Plan (the "1987 Plan").
AGGREGATED OPTION/STOCK APPRECIATION RIGHTS
EXERCISES IN 1995 AND YEAR-END VALUES
<TABLE>
<CAPTION>
VALUE OF
IN-THE-MONEY
UNEXERCISED OPTIONS/SARS
OPTIONS/SARS AT YEAR END
AT YEAR END ($)
(#) -------------------------
SHARES ACQUIRED VALUE REALIZED ------------------------- EXERCISABLE/UNEXERCISABLE
NAME(1) ON EXERCISE(#) ($) 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.
LONG-TERM INCENTIVE PLANS -- AWARDS IN 1995
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
OF PERFORMANCE SHARES
PERFORMANCE UNDER NON-STOCK PRICE
NUMBER OF PERIOD UNTIL BASED PLAN
PERFORMANCE MATURATION TARGET
NAME(1) SHARES OR PAYOUT (#)
- ------------------------------------------------- ----------- ------------ ------------------------
<S> <C> <C> <C>
Henry B. Schacht................................. 0 -- 0
Richard A. McGinn................................ 9,988 1995-1997 9,988
William B. Marx, Jr.............................. 10,555 1995-1997 10,555
Daniel C. Stanzione.............................. 5,581 1995-1997 5,581
Patricia F. Russo................................ 3,089 1995-1997 3,089
</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) In January 1995, the Performance Shares listed in the table were awarded.
Normally, the payout of awards is 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.
62
<PAGE> 66
OPTION GRANTS WITH RESPECT TO SERVICES PERFORMED IN 1995
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------
NUMBER OF
SHARES GRANT
UNDERLYING % OF TOTAL DATE
OPTIONS OPTIONS EXERCISE PRESENT
GRANTED GRANTED TO PRICE EXPIRATION VALUE(2)
NAME(1) # EMPLOYEES(2) ($/SH) DATE ($)(3)
- ---------------------------------------- ---------- ------------ -------- ---------- ----------
<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 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
63
<PAGE> 67
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 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, 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.
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<PAGE> 68
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 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.
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
65
<PAGE> 69
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").
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
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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.
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
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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.
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.
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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 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.
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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.
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.
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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, is expected to enter into a comparable operating agreement with AT&T
Capital prior to the Closing Date. 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 during such year. The loans carry rates of 5.19% and 5.21% per annum,
respectively, payable annually, and mature in 1999.
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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 or, on or prior to the Closing
Date, will enter 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."
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.
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
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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 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
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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.
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
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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 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
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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.
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
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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 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,
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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.
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
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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 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
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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 March 11, 1996, on the NYSE ($62 1/8 per share) and a
price of $23.50 per share of Common Stock (the mid-point of the range 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 23 million shares of Common Stock and other stock awards covering
approximately 1.68 million shares of Common Stock.
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
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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 Separation and Distribution Agreement provides that, on or prior to the
Closing Date, the Company, AT&T and NCR will execute and deliver 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 will 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 will be jointly owned with either AT&T or NCR. Certain of the
patents that the Company will jointly own with AT&T will be subject to a joint
ownership agreement under which each of the Company and AT&T will have full
ownership rights in the patents. The other patents that the Company will jointly
own with AT&T, and the patents that the Company will jointly own with NCR, will
be subject to defensive protection agreements with AT&T and NCR, respectively,
under which the Company will hold most ownership rights in the patents
exclusively. Under these defensive protection agreements, AT&T or NCR, as the
case may be, will have the ability, subject to specified restrictions, to assert
infringement claims under the patents against companies that assert patent
infringement claims against them, and will have 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 to be 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 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.
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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 Separation and Distribution Agreement provides that, on or prior to the
Closing Date, the Company, AT&T and NCR will execute and deliver 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 will 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
will be 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 to be 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 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.
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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
(subject to certain conditions not relating to actual volume requirements of the
Company) over a three-year term at specified tariffs. 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 (subject to certain conditions not relating 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.
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
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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));
(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;
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(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 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.
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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 82.5% (80.4%
if the U.S. Underwriters exercise their overallotment option in full) 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, 635,624,894 shares of Common Stock (652,274,894 shares
if the U.S. Underwriters exercise their overallotment option in full) 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 $.01 per share (the
"Junior Preferred Shares"), of the Company at a price of $ (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 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 (or of a share of a class or series of
the Preferred Stock having equivalent rights, preferences and privileges), 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 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 Co. of NY will be the transfer agent and registrar for
the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 635,624,894 shares of Common Stock to be outstanding as of the
Closing Date (652,274,894 shares if the U.S. Underwriters exercise their
overallotment option in full) the 111,000,000 shares of Common Stock sold in the
Offerings (127,650,000 shares if the U.S. Underwriters exercise their
overallotment option in full) 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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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.............................
Goldman, Sachs & Co. .........................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated............
Bear, Stearns & Co. Inc. .....................................
CS First Boston Corporation...................................
J.P. Morgan Securities Inc. ..................................
PaineWebber Incorporated......................................
Subtotal................................................... 97,000,000
----------
International Underwriters:
Morgan Stanley & Co. International Limited....................
Goldman Sachs International...................................
Merrill Lynch International Limited...........................
Morgan Grenfell & Co. Limited.................................
Banque Paribas................................................
Swiss Bank Corporation........................................
UBS Limited...................................................
Bear, Stearns International Limited...........................
CS First Boston Limited.......................................
J.P. Morgan Securities Ltd. ..................................
PaineWebber International (U.K.) Ltd. ........................
Subtotal................................................... 14,000,000
----------
Total................................................. 111,000,000
==========
</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 (other than those covered by the U.S.
Underwriters' overallotment option described below) 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
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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 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 $ per share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to other Underwriters or to
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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."
Pursuant to the Underwriting Agreement, the Company has granted to the U.S.
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to 16,650,000 additional shares of Common Stock at
the public offering price set forth on the cover page hereof, less underwriting
discounts and commissions. The U.S. Underwriters may exercise such option to
purchase solely for the purpose of covering overallotments, if any, made in
connection with the offering of the shares of Common Stock offered hereby. To
the extent such option is exercised, each U.S. Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number set forth next to such U.S.
Underwriter's name in the preceding table bears to the total number of shares of
Common Stock offered by the U.S. Underwriters in the Offerings.
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 exchange or the 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.
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.
98
<PAGE> 102
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.
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.
99
<PAGE> 103
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
Schedule of Valuation and Qualifying Accounts......................................... S-1
</TABLE>
F-1
<PAGE> 104
REPORT OF INDEPENDENT AUDITORS
To the Stockholder of Lucent Technologies Inc.:
We have audited the consolidated financial statements and the financial
statement schedule of Lucent Technologies Inc. and subsidiaries (the "Company")
listed in the index on page F-1 of this 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 January 1, 1996.
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 using AT&T's average commercial paper 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.
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.
F-7
<PAGE> 110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. BACKGROUND AND BASIS OF PRESENTATION -- (CONTINUED)
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 111,000,000 shares, 635,624,894 shares will be
outstanding.
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.
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
F-8
<PAGE> 111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.
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
F-9
<PAGE> 112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.
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
F-10
<PAGE> 113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CHANGES IN ACCOUNTING PRINCIPLES -- (CONTINUED)
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.
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>
F-11
<PAGE> 114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SUPPLEMENTARY FINANCIAL INFORMATION -- (CONTINUED)
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
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.
F-12
<PAGE> 115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. BUSINESS RESTRUCTURING AND OTHER CHARGES -- (CONTINUED)
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................... 70 201 271
Other............................... 11 420 431
--- --------- ----- --- ------
Total............................. 133 1,788 1,921
========== ======= ==== ======= ==========
</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
$1,921, at December 31, 1995 are adequate to complete its plans.
In 1995 in addition to restructuring liabilities of $1,788, asset
impairments of $439 (which were credited directly to the related asset
balances), $342 of benefit plan losses and $44 of other charges 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 charges 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
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.
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.
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.
F-16
<PAGE> 119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
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 (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.
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.
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.
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>
F-24
<PAGE> 127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-25
<PAGE> 128
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBSEQUENT EVENTS -- (CONTINUED)
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 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.
F-26
<PAGE> 129
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBSEQUENT EVENTS -- (CONTINUED)
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 a price of $23.50 per share of the Company's Common Stock
(the mid-point of the range set forth on the cover page of this Prospectus), the
foregoing number of shares subject to AT&T stock options and other awards would
be replaced by options and other awards on 21.5 million shares of the Company's
common stock.
F-27
<PAGE> 130
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
SCHEDULE II
LUCENT TECHNOLOGIES INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
IN MILLIONS
<TABLE>
<CAPTION>
COLUMN C
-------------------------
COLUMN B ADDITIONS COLUMN E
------------ ------------------------- ----------
COLUMN A BALANCE AT CHARGED TO CHARGED TO COLUMN D BALANCE AT
- ------------------------------- BEGINNING COSTS & OTHER ---------- END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ------------------------------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year 1995
Allowance for Doubtful
Accounts.................. 206 94 (3) 49 248
Reserves related to business
restructuring and facility
consolidation............. 133 1,788 0 0 1,921
Deferred tax asset valuation
allowance................. 96 46 0 0 142
Inventory valuation
reserves.................. 591 336(a) 0 137 790
Year 1994
Allowance for Doubtful
Accounts.................. 143 82 17 36 206
Reserves related to business
restructuring and facility
consolidation............. 205 0 26 98 133
Deferred tax asset valuation
allowance................. 123 0 0 27 96
Inventory valuation
reserves.................. 521 174 0 104 591
Year 1993
Allowance for Doubtful
Accounts.................. 139 67 (2) 61 143
Reserves related to business
restructuring and facility
consolidation............. 233 37 (53) 12 205
Deferred tax asset valuation
allowance................. 84 39 0 0 123
Inventory valuation
reserves.................. 488 137 0 104 521
</TABLE>
- ---------------
(a) Includes $194 related to business restructuring in the fourth quarter of
1995.
S-1
<PAGE> 132
[Alternate Cover Page for International Prospectus]
PROSPECTUS (Subject to Completion)
Issued March 12, 1996
111,000,000 Shares
LUCENT TECHNOLOGIES
COMMON STOCK
------------------------
LOGO
OF THE 111,000,000 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 97,000,000 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.
PRIOR TO THE OFFERINGS, THERE HAS BEEN NO PUBLIC MARKET FOR THE
COMMON STOCK. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC
OFFERING PRICE WILL BE BETWEEN $22 AND $25 PER SHARE. SEE
"UNDERWRITING" FOR A DISCUSSION OF THE FACTORS CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
AFTER THE OFFERINGS, AT&T WILL OWN APPROXIMATELY 82.5% (80.4% IF THE U.S.
UNDERWRITERS EXERCISE THEIR OVERALLOTMENT OPTION IN FULL) 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 $ A SHARE
----------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) THE COMPANY(2)
---------------- ---------------- ----------------
<S> <C> <C> <C>
Per Share(3).................. $ $ $
Total(4)...................... $ $ $
</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.
(3) Each Share will have attached one Preferred Share Purchase Right which
will initially trade together with the Share.
(4) The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
16,650,000 additional shares of Common Stock at the Price to Public less
Underwriting Discounts and Commissions for the purpose of covering
overallotments, if any. If the U.S. Underwriters exercise such option in
full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------
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 , 1996 at the office of Morgan Stanley & Co.
Incorporated, New York, N.Y., against payment therefor in same-day 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
, 1996
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
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[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
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.
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UNTIL , 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.
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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.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................... 3
Risk Factors.......................... 9
The Company........................... 15
Use of Proceeds....................... 17
Dividend Policy....................... 17
Certain Transactions in Connection
with the Offerings.................. 18
Capitalization........................ 20
Selected Financial Data............... 21
Pro Forma Condensed Financial
Statements.......................... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Business.............................. 36
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PAGE
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Management............................ 54
Arrangements Between the Company and
AT&T................................ 72
Principal Stockholder................. 87
Description of Capital Stock.......... 88
Shares Eligible for Future Sale....... 94
Certain United States Tax Consequences
to Non-United States Holders........ 95
Underwriting.......................... 96
Legal Matters......................... 99
Experts............................... 99
Available Information................. 99
Index to Financial Statements......... F-1
</TABLE>
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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.
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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.
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[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
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
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[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
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 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.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered hereby, other than
underwriting discounts and commissions. All amounts are estimated except the
Securities and Exchange Commission (the "Commission") registration fee, the
National Association of Securities Dealers, Inc. ("NASD") registration fee and
the New York Stock Exchange listing fee.
<TABLE>
<CAPTION>
PAYABLE BY
THE REGISTRANT
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SEC registration fee............................................ $ 1,100,432
NASD registration fee........................................... 30,500
New York Stock Exchange listing fee............................. 455,600*
Blue Sky fees and expenses...................................... 20,000*
Accounting fees and expenses.................................... 2,800,000*
Legal fees and expenses......................................... 4,000,000*
Printing and engraving expenses................................. 3,500,000*
Miscellaneous fees and expenses................................. 93,468*
--------
Total................................................. $ 12,000,000*
</TABLE>
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* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers as well as other
employees and individuals against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation, a
"derivative action") if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, if they had no reasonable
cause to believe their conduct was unlawful. A similar standard is applicable in
the case of derivative actions, except that indemnification only extends to
expenses (including attorneys' fees) incurred in connection with the defense or
settlement of such actions, and the statute requires court approval before there
can be any indemnification where the person seeking indemnification has been
found liable to the corporation. The statute provides that it is not exclusive
of other indemnification that may be granted by a corporation's bylaws,
disinterested director vote, stockholder vote, agreement or otherwise.
The Restated Certificate of Incorporation of the Company (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
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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.
The DGCL permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be personally liable
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability for (i) any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) payments of unlawful dividends or unlawful stock
repurchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit.
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.
The Underwriting Agreements provide for indemnification by the Underwriters
of the registrant, its Directors and officers, and by the registrant of the
Underwriters, for certain liabilities, including liabilities arising under the
Act, and affords certain rights of contribution with respect thereto.
The Separation and Distribution Agreement by and among the Company, AT&T
Corp. ("AT&T") and NCR Corporation ("NCR") provides for indemnification by the
Company of AT&T and its directors, officers and employees for certain
liabilities, including liabilities under the Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
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EXHIBIT
NUMBER DESCRIPTION
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1.1 Form of Underwriting Agreement.*
3.1 Form of Restated Certificate of Incorporation of the Company.**
3.2 Form of By-Laws of the Company.
4.1 Form of the Company's Common Stock certificate.*
4.2 Rights Agreement between the Company and First Chicago Trust Co. of NY, as Rights
Agent, dated as of March , 1996.*
5.1 Opinions re: legality of shares being registered.*
10.1 Separation and Distribution Agreement by and among the Company, AT&T and NCR, dated
as of February 1, 1996.**
10.2 Form of Employee Benefits Agreement by and between AT&T and the Company, dated as of
February 1, 1996.
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EXHIBIT
NUMBER DESCRIPTION
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</TABLE>
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10.3 General Purchase Agreement by and between AT&T and the Company, dated as of February
1, 1996.**
10.4 Interim Services and Systems Replication Agreement by and among AT&T, the Company
and NCR, dated as of February 1, 1996.**
10.5 Brand License Agreement by and between the Company and AT&T, dated as of February 1,
1996.**
10.6 Tax Sharing Agreement by and among the Company, AT&T and NCR, dated as of February
1, 1996.**
10.7 Form of Patent License Agreement among AT&T, NCR and the Company.
10.8 Form of Technology License Agreement among AT&T, NCR and the Company.
21.1 Subsidiaries of the Company.*
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule.
99.1 Consent of Carla A. Hills to be named as a director nominee.**
99.2 Consent of Drew Lewis to be named as a director nominee.**
99.3 Consent of Richard A. McGinn to be named as a director nominee.**
99.4 Consent of Donald S. Perkins to be named as a director nominee.**
99.5 Consent of Henry B. Schacht to be named as a director nominee.**
99.6 Consent of Franklin A. Thomas to be named as a director nominee.**
99.7 Consent of Ephraim M. Brecher to be named as a director nominee.*
99.8 Consent of Jim G. Kilpatric to be named as a director nominee.
99.9 Consent of Marc E. Manly to be named as a director nominee.
99.10 Consent of S. Lawrence Prendergast to be named as a director nominee.
99.11 Consent of Florence L. Walsh to be named as a director nominee.
99.12 Consent of Paul J. Wondrasch to be named as a director nominee.
</TABLE>
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* To be filed by amendment.
** Filed previously.
(b) Financial Statement Schedules.
The following financial statement schedules are filed herewith:
Schedule of Valuation and Qualifying Accounts.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing of the Offerings specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling
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person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on the 12th day of March, 1996.
LUCENT TECHNOLOGIES INC.
By /s/ HENRY B. SCHACHT
------------------------------------
Henry B. Schacht
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
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SIGNATURES TITLE DATE
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<C> <C> <S>
/s/ HENRY B. SCHACHT Chief Executive Officer March 12, 1996
- ---------------------------------------------
Henry B. Schacht
/s/ DONALD K. PETERSON Chief Financial Officer and March 12, 1996
- --------------------------------------------- Chief Accounting Officer
Donald K. Peterson
/s/ PAMELA F. CRAVEN Director March 12, 1996
- ---------------------------------------------
Pamela F. Craven
/s/ MAUREEN B. TART Director March 12, 1996
- ---------------------------------------------
Maureen B. Tart
/s/ MARILYN J. WASSER Director March 12, 1996
- ---------------------------------------------
Marilyn J. Wasser
</TABLE>
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Form of Restated Certificate of Incorporation of the Company.**
3.2 Form of By-Laws of the Company.
4.1 Form of the Company's Common Stock certificate.*
4.2 Rights Agreement between the Company and First Chicago Trust of New York, as Rights
Agent, dated March , 1996.*
5.1 Opinions re: legality of shares being registered.*
10.1 Separation and Distribution Agreement by and among the Company, AT&T and NCR, dated
as of February 1, 1996.**
10.2 Form of Employee Benefits Agreement by and between AT&T and the Company, dated as of
February 1, 1996.
10.3 General Purchase Agreement by and between AT&T and the Company, dated as of February
1, 1996.**
10.4 Interim Services and Systems Replication Agreement by and among AT&T, the Company
and NCR, dated as of February 1, 1996.**
10.5 Brand License Agreement by and between the Company and AT&T, dated as of February 1,
1996.**
10.6 Tax Sharing Agreement by and among the Company, AT&T and NCR, dated as of February
1, 1996.**
10.7 Form of Patent License Agreement among AT&T, NCR and the Company.
10.8 Form of Technology License Agreement among AT&T, NCR and the Company.
21.1 Subsidiaries of the Company.*
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule.
99.1 Consent of Carla A. Hills to be named as a director nominee.**
99.2 Consent of Drew Lewis to be named as a director nominee.**
99.3 Consent of Richard A. McGinn to be named as a director nominee.**
99.4 Consent of Donald S. Perkins to be named as a director nominee.**
99.5 Consent of Henry B. Schacht to be named as a director nominee.**
99.6 Consent of Franklin A. Thomas to be named as a director nominee.**
99.7 Consent of Ephraim M. Brecher to be named as a director nominee.*
99.8 Consent of Jim G. Kilpatric to be named as a director nominee.
99.9 Consent of Marc E. Manly to be named as a director nominee.
99.10 Consent of S. Lawrence Prendergast to be named as a director nominee.
99.11 Consent of Florence L. Walsh to be named as a director nominee.
99.12 Consent of Paul J. Wondrasch to be named as a director nominee.
</TABLE>
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* To be filed by amendment.
** Filed previously.
<PAGE> 1
EXHIBIT 3.2
FORM OF BY-LAWS
OF
LUCENT TECHNOLOGIES INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
ARTICLE I
OFFICES AND RECORDS
SECTION 1.1. DELAWARE OFFICE. The principal office of the Corporation in the
State of Delaware shall be located in the City of Wilmington, County of New
Castle, and the name and address of its registered agent is ___________________.
SECTION 1.2. OTHER OFFICES. The Corporation may have such other offices, either
within or without the State of Delaware, as the Board of Directors may designate
or as the business of the Corporation may from time to time require.
SECTION 1.3. BOOKS AND RECORDS. The books and records of the Corporation may be
kept outside the State of Delaware at such place or places as may from time to
time be designated by the Board of Directors.
ARTICLE II
STOCKHOLDERS
SECTION 2.1. ANNUAL MEETING. The annual meeting of the stockholders of the
Corporation shall be held on such date and at such time as may be fixed by
resolution of the Board of Directors.
SECTION 2.2. SPECIAL MEETING. Except as otherwise required by law and subject to
the rights of the holders of any class or series of stock having a preference
over the Common Stock as to dividends or upon liquidation, special meetings of
stockholders of the Corporation for any purpose or purposes may be called only
by (i) the Board of Directors pursuant to a resolution stating the purpose or
purposes thereof approved by a majority of the total number of Directors which
the Corporation would have if there were no vacancies (the "Whole Board"), or
(ii) by the Chairman of the Board of Directors of the Corporation. In addition,
prior to the Trigger Date (as defined in the Certificate of Incorporation), the
Corporation will call a special meeting of stockholders promptly upon request by
AT&T Corp., a New York corporation ("AT&T"), or any of its affiliates, in each
case, if such entity is a stockholder of the Corporation. No business other than
that stated in the notice shall be transacted at any special meeting.
SECTION 2.3. PLACE OF MEETING. The Board of Directors or the Chairman of the
Board, as the case may be, may designate the place of meeting for any annual
meeting or for any special meeting of the stockholders. If no designation is so
made, the place of meeting shall be the principal office of the Corporation.
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<PAGE> 2
SECTION 2.4. NOTICE OF MEETING. Written or printed notice, stating the place,
day and hour of the meeting and the purpose or purposes for which the meeting is
called, shall be delivered by the Corporation not less than 10 calendar days nor
more than 60 calendar days before the date of the meeting, either personally or
by mail, to each stockholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail with postage thereon prepaid, addressed to the stockholder at such
person's address as it appears on the stock transfer books of the Corporation.
Such further notice shall be given as may be required by law. Only such business
shall be conducted at a special meeting of stockholders as shall have been
brought before the meeting pursuant to the Corporation's notice of meeting.
Meetings may be held without notice if all stockholders entitled to vote are
present, or if notice is waived by those not present in accordance with Section
6.4 of these By-Laws. Any previously scheduled meeting of the stockholders may
be postponed, and any special meeting of the stockholders may be canceled, by
resolution of the Board of Directors upon public notice given prior to the date
previously scheduled for such meeting of stockholders.
SECTION 2.5. QUORUM AND ADJOURNMENT; VOTING. Except as otherwise provided by law
or by the Certificate of Incorporation, the holders of a majority of the voting
power of all outstanding shares of the Corporation entitled to vote generally in
the election of directors (the "Voting Stock"), represented in person or by
proxy, shall constitute a quorum at a meeting of stockholders, except that when
specified business is to be voted on by a class or series of stock voting as a
class, the holders of a majority of the shares of such class or series shall
constitute a quorum of such class or series for the transaction of such
business. The Chairman of the meeting may adjourn the meeting from time to time,
whether or not there is such a quorum. No notice of the time and place of
adjourned meetings need be given except as required by law. The stockholders
present at a duly called meeting at which a quorum is present may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
SECTION 2.6. PROXIES. At all meetings of stockholders, a stockholder may vote by
proxy executed in writing (or in such manner prescribed by the General
Corporation Law of the State of Delaware (the "DGCL")) by the stockholder, or by
such person's duly authorized attorney in fact.
SECTION 2.7. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS.
(A) Annual Meetings of Stockholders.
(1) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (a) pursuant to the
Corporation's notice of meeting pursuant to Section 2.4 of these By-Laws, (b) by
or at the direction of the Board of Directors, (c) by any stockholder of the
Corporation who was a stockholder of record at the time of giving of notice
provided for in this By-Law, who is entitled to vote at the meeting and who
complies with the notice procedures set forth in this By-Law, or (d) prior to
the Trigger Date, by AT&T or any of its affiliates that is a stockholder of the
Corporation.
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(2) For nominations or other business to be properly brought before an annual
meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this
By-Law, the stockholder must have given timely notice thereof in writing to the
Secretary of the Corporation and such other business must otherwise be a proper
matter for stockholder action. To be timely, a stockholder's notice shall be
delivered to the Secretary at the principal executive offices of the Corporation
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; provided, however, 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 calendar day on which public announcement of
the date of such meeting is first made by the Corporation. For purposes of
determining whether a stockholder's notice shall have been delivered in a timely
manner for the annual meeting of stockholders in 1997, the first anniversary of
the previous year's meeting shall be deemed to be April 16, 1997. In no event
shall the public announcement of an adjournment of an annual meeting commence a
new time period for the giving of a stockholder's notice as described above.
Such stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); (b) as to any other
business that the stockholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
(i) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (ii) the class and number
of shares of the Corporation which are owned beneficially and of record by such
stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this
By-Law to the contrary, in the event that the number of directors to be elected
to the Board of Directors of the Corporation is increased and there is no public
announcement by the Corporation naming all of the nominees for director or
specifying the size of the increased Board of Directors at least 100 calendar
days prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this By-Law shall also be considered timely,
but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the Secretary at the principal executive
offices of the Corporation 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 Corporation.
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(B) Special Meetings of Stockholders. Only such business shall be conducted at a
special meeting of stockholders as shall have been brought before the meeting
pursuant to the Corporation's notice of meeting under Section 2.4 of these
By-Laws. Nominations of persons for election to the Board of Directors may be
made at a special meeting of stockholders at which directors are to be elected
pursuant to the Corporation's notice of meeting (a) by or at the direction of
the Board of Directors, (b) provided that the Board of Directors has determined
that directors shall be elected at such meeting, by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice
provided for in this By-Law, who shall be entitled to vote at the meeting and
who complies with the notice procedures set forth in this By-Law, or (c) by AT&T
or any of its affiliates that is a stockholder of the Corporation. In the event
the Corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board of Directors, any stockholder may
nominate a person or persons (as the case may be), for election to such
position(s) as specified in the Corporation's notice of meeting pursuant to such
clause (b), if the stockholder's notice required by paragraph (A)(2) of this
By-Law shall be delivered to the Secretary at the principal executive offices of
the Corporation 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 Board of
Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment of a special meeting commence a new time period
for the giving of a stockholder's notice as described above.
(C) General.
(1) Only such persons who are nominated in accordance with the procedures set
forth in this By-Law shall be eligible to serve as directors and only such
business shall be conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
By-Law. Except as otherwise provided by law, the Certificate of Incorporation or
these By-Laws, the Chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting was made or proposed, as the case may be, in accordance with the
procedures set forth in this By-Law and, if any proposed nomination or business
is not in compliance with this By-Law, to declare that such defective proposal
or nomination shall be disregarded.
(2) For purposes of this By-Law, "public announcement" shall mean disclosure in
a press release reported by the Dow Jones News Service, Associated Press or
comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this By-Law, a stockholder shall
also comply with all applicable requirements of the Exchange Act and the rules
and regulations thereunder with respect to the matters set forth in this By-Law.
Nothing in this By-Law shall be deemed to affect any rights (i) of stockholders
to request inclusion of proposals in the Corporation's proxy statement pursuant
to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of
Preferred Stock to elect directors under an applicable Preferred Stock
Designation (as defined in the Corporation's Certificate of Incorporation).
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SECTION 2.8. PROCEDURE FOR ELECTION OF DIRECTORS; REQUIRED VOTE. Election of
directors at all meetings of the stockholders at which directors are to be
elected shall be by ballot, and, subject to the rights of the holders of any
series of Preferred Stock to elect directors under an applicable Preferred Stock
Designation, a plurality of the votes cast thereat shall elect directors. Except
as otherwise provided by law, the Certificate of Incorporation, Preferred Stock
Designation, or these By-Laws, in all matters other than the election of
directors, the affirmative vote of a majority of the voting power of the shares
present in person or represented by proxy at the meeting and entitled to vote on
the matter shall be the act of the stockholders.
SECTION 2.9. INSPECTORS OF ELECTIONS; OPENING AND CLOSING THE POLLS. The Board
of Directors by resolution shall appoint, or shall authorize an officer of the
Corporation to appoint, one or more inspectors, which inspector or inspectors
may include individuals who serve the Corporation in other capacities,
including, without limitation, as officers, employees, agents or
representatives, to act at the meetings of stockholders and make a written
report thereof. One or more persons may be designated as alternate inspector(s)
to replace any inspector who fails to act. If no inspector or alternate has been
appointed to act or is able to act at a meeting of stockholders, the Chairman of
the meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before discharging such person's duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of such person's ability. The inspector(s) shall have the
duties prescribed by law. The Chairman of the meeting shall fix and announce at
the meeting the date and time of the opening and the closing of the polls for
each matter upon which the stockholders will vote at a meeting.
SECTION 2.10. NO STOCKHOLDER ACTION BY WRITTEN CONSENT. Effective as of the
Trigger Date, any action required or permitted to be taken by the stockholders
of the Corporation 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.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.1. GENERAL POWERS. The business and affairs of the Corporation shall
be managed under the direction of the Board of Directors. In addition to the
powers and authorities by these By-Laws expressly conferred upon them, the Board
of Directors may exercise all such powers of the Corporation and do all such
lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these By-Laws required to be exercised or done by the
stockholders.
SECTION 3.2. NUMBER AND TENURE. Except as otherwise fixed by or pursuant to the
provisions of Article IV of the Certificate of Incorporation relating to the
rights of the holders of any class or series of stock having a preference over
the Common Stock as to dividends or upon liquidation to elect additional
directors under specified circumstances,
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the number of the Directors of the Corporation shall be fixed from time to time
exclusively pursuant to a resolution adopted by a majority of the Whole Board
(but shall not be less than three). The Directors, other than those who may be
elected by the holders of any class or series of stock having a preference over
the Common Stock as to dividends or upon liquidation, shall 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 class to hold office until its successor is duly elected and qualified. At
each succeeding annual meeting of stockholders, directors elected to succeed
those directors whose terms then expire shall 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 shall
have been duly elected and qualified.
SECTION 3.3. REGULAR MEETINGS. A regular meeting of the Board of Directors shall
be held without other notice than this By-Law immediately after, and at the same
place as, the annual meeting of stockholders. The Board of Directors may, by
resolution, provide the time and place for the holding of additional regular
meetings without other notice than such resolution.
SECTION 3.4. SPECIAL MEETINGS. Special meetings of the Board of Directors shall
be called at the request of the Chairman of the Board, the President or a
majority of the Board of Directors then in office. The person or persons
authorized to call special meetings of the Board of Directors may fix the place
and time of the meetings.
SECTION 3.5. NOTICE. Notice of any special meeting of directors shall be given
to each director at such person's business or residence in writing by hand
delivery, first-class or overnight mail or courier service, telegram or
facsimile transmission, or orally by telephone. If mailed by first-class mail,
such notice shall be deemed adequately delivered when deposited in the United
States mails so addressed, with postage thereon prepaid, at least 5 calendar
days before such meeting. If by telegram, overnight mail or courier service,
such notice shall be deemed adequately delivered when the telegram is delivered
to the telegraph company or the notice is delivered to the overnight mail or
courier service company at least 24 hours before such meeting. If by facsimile
transmission, such notice shall be deemed adequately delivered when the notice
is transmitted at least 12 hours before such meeting. If by telephone or by hand
delivery, the notice shall be given at least 12 hours prior to the time set for
the meeting. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice of such meeting, except for amendments to these By-Laws, as provided
under Section 8.1. A meeting may be held at any time without notice if all the
directors are present or if those not present waive notice of the meeting either
before or after such meeting.
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SECTION 3.6. ACTION BY CONSENT OF BOARD OF DIRECTORS. Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
SECTION 3.7. CONFERENCE TELEPHONE MEETINGS. Members of the Board of Directors or
any committee thereof may participate in a meeting of the Board of Directors or
such committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at such meeting.
SECTION 3.8. QUORUM. Subject to Section 3.9, a whole number of directors equal
to at least a majority of the Whole Board shall constitute a quorum for the
transaction of business, but if at any meeting of the Board of Directors there
shall be less than a quorum present, a majority of the directors present may
adjourn the meeting from time to time without further notice. The act of the
majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors. The directors present at a duly
organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough directors to leave less than a quorum.
SECTION 3.9. VACANCIES. Except as otherwise provided for or fixed by or pursuant
to the provisions of Article IV of the Certificate of Incorporation relating to
the rights of the holders of any class or series of stock having a preference
over the Common Stock as to dividends or upon liquidation to elect directors
under specified circumstances, newly created directorships resulting from any
increase in the number of Directors and any vacancies on the Board of Directors
resulting from death, resignation, disqualification, removal or other cause
shall be filled by the affirmative vote of a majority of the remaining Directors
then in office, even though less than a quorum of the Board of Directors. Any
Director elected in accordance with the preceding sentence shall 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 Board of Directors shall shorten the term of any
incumbent Director.
SECTION 3.10. EXECUTIVE AND OTHER COMMITTEES. (a) The Board of Directors may, by
resolution adopted by a majority of the Whole Board, designate an Executive
Committee to exercise, subject to applicable provisions of law, all the powers
of the Board in the management of the business and affairs of the Corporation
when the Board is not in session, including without limitation the power to
declare dividends, to authorize the issuance of the Corporation's capital stock
and to adopt a certificate of ownership and merger pursuant to Section 253 of
the General Corporation Law of the State of Delaware, and may, by resolution
similarly adopted, designate one or more other committees. The Executive
Committee and each such other committee shall consist of two or more directors
of the Corporation. The Board may designate one or more directors as alternate
members of any
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committee, who may replace any absent or disqualified member at any meeting of
the committee. Any such committee, other than the Executive Committee (the
powers of which are expressly provided for herein), may to the extent permitted
by law exercise such powers and shall have such responsibilities as shall be
specified in the designating resolution. In the absence or disqualification of
any member of such committee or committees, the member or members thereof
present at any meeting and not disqualified from voting, whether or not
constituting a quorum, may unanimously appoint another member of the Board to
act at the meeting in the place of any such absent or disqualified member. Each
committee shall keep written minutes of its proceedings and shall report such
proceedings to the Board when required.
(b) A majority of any committee may determine its action and fix the time and
place of its meetings, unless the Board shall otherwise provide. Notice of such
meetings shall be given to each member of the committee in the manner provided
for in Section 3.5 of these By-Laws. The Board shall have power at any time to
fill vacancies in, to change the membership of, or to dissolve any such
committee. Nothing herein shall be deemed to prevent the Board from appointing
one or more committees consisting in whole or in part of persons who are not
directors of the Corporation; provided, however, that no such committee shall
have or may exercise any authority of the Board.
SECTION 3.11. REMOVAL. Subject to the rights of any class or series of stock
having a preference over the Common Stock as to dividends or upon liquidation to
elect Directors under specified circumstances, 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.
SECTION 3.12. RECORDS. The Board of Directors shall cause to be kept a record
containing the minutes of the proceedings of the meetings of the Board and of
the stockholders, appropriate stock books and registers and such books of
records and accounts as may be necessary for the proper conduct of the business
of the Corporation.
ARTICLE IV
OFFICERS
SECTION 4.1. ELECTED OFFICERS. The elected officers of the Corporation shall be
a Chairman of the Board of Directors, a President, a Secretary, a Treasurer, and
such other officers (including, without limitation, Senior Vice Presidents and
Executive Vice Presidents and Vice Presidents) as the Board of Directors from
time to time may deem proper. The Chairman of the Board shall be chosen from
among the directors. All officers elected by the Board of Directors shall each
have such powers and duties as generally pertain to their respective offices,
subject to the specific provisions of this Article IV. Such officers shall also
have such powers and duties as from time to time may be conferred by the Board
of Directors or by any committee thereof. The Board or any committee thereof may
from time to time elect, or the Chairman of the Board or President may appoint,
such other officers (including one or more Vice Presidents, Controllers,
Assistant Secretaries and Assistant
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Treasurers), as may be necessary or desirable for the conduct of the business of
the Corporation. Such other officers and agents shall have such duties and shall
hold their offices for such terms as shall be provided in these By-Laws or as
may be prescribed by the Board or such committee or by the Chairman of the Board
or President, as the case may be.
SECTION 4.2. ELECTION AND TERM OF OFFICE. The elected officers of the
Corporation shall be elected annually by the Board of Directors at the regular
meeting of the Board of Directors held after the annual meeting of the
stockholders. If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as convenient. Each officer shall
hold office until such person's successor shall have been duly elected and shall
have qualified or until such person's death or until he shall resign or be
removed pursuant to Section 4.8.
SECTION 4.3. CHAIRMAN OF THE BOARD; CHIEF EXECUTIVE OFFICER. The Chairman of the
Board shall preside at all meetings of the stockholders and of the Board of
Directors and shall be the Chief Executive Officer of the Corporation. The
Chairman of the Board shall be responsible for the general management of the
affairs of the Corporation and shall perform all duties incidental to such
person's office which may be required by law and all such other duties as are
properly required of him by the Board of Directors. He shall make reports to the
Board of Directors and the stockholders, and shall see that all orders and
resolutions of the Board of Directors and of any committee thereof are carried
into effect. The Chairman of the Board may also serve as President, if so
elected by the Board. The Directors also may elect a Vice-Chairman to act in the
place of the Chairman upon his or her absence or inability to act.
SECTION 4.4. PRESIDENT. The President shall act in a general executive capacity
and shall assist the Chairman of the Board in the administration and operation
of the Corporation's business and general supervision of its policies and
affairs. The President, if he or she is also a Director, shall, in the absence
of or because of the inability to act of the Chairman of the Board, perform all
duties of the Chairman of the Board and preside at all meetings of stockholders
and of the Board of Directors.
SECTION 4.5. VICE PRESIDENTS. Each Senior Vice President and Executive Vice
President and any Vice President shall have such powers and shall perform such
duties as shall be assigned to him by the Board of Directors.
SECTION 4.6. TREASURER. The Treasurer shall exercise general supervision over
the receipt, custody and disbursement of corporate funds. The Treasurer shall
cause the funds of the Corporation to be deposited in such banks as may be
authorized by the Board of Directors, or in such banks as may be designated as
depositories in the manner provided by resolution of the Board of Directors. The
Treasurer shall have such further powers and duties and shall be subject to such
directions as may be granted or imposed from time to time by the Board of
Directors, the Chairman of the Board or the President.
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SECTION 4.7. SECRETARY. (a) The Secretary shall keep or cause to be kept in one
or more books provided for that purpose, the minutes of all meetings of the
Board, the committees of the Board and the stockholders; the Secretary shall see
that all notices are duly given in accordance with the provisions of these
By-Laws and as required by law; shall be custodian of the records and the seal
of the Corporation and affix and attest the seal to all stock certificates of
the Corporation (unless the seal of the Corporation on such certificates shall
be a facsimile, as hereinafter provided) and affix and attest the seal to all
other documents to be executed on behalf of the Corporation under its seal; and
shall see that the books, reports, statements, certificates and other documents
and records required by law to be kept and filed are properly kept and filed;
and in general, shall perform all the duties incident to the office of Secretary
and such other duties as from time to time may be assigned to the Secretary by
the Board, the Chairman of the Board or the President.
(b) Assistant Secretaries shall have such of the authority and perform such of
the duties of the Secretary as may be provided in these By-Laws or assigned to
them by the Board of Directors or the Chairman of the Board or by the Secretary.
During the Secretary's absence or inability, the Secretary's authority and
duties shall be possessed by such Assistant Secretary or Assistant Secretaries
as the Board of Directors, the Chairman of the Board, the President or a Vice
Chairman of the Board may designate.
SECTION 4.8. REMOVAL. Any officer elected, or agent appointed, by the Board of
Directors may be removed by the affirmative vote of a majority of the Whole
Board whenever, in their judgment, the best interests of the Corporation would
be served thereby. Any officer or agent appointed by the Chairman of the Board
or the President may be removed by him whenever, in such person's judgment, the
best interests of the Corporation would be served thereby. No elected officer
shall have any contractual rights against the Corporation for compensation by
virtue of such election beyond the date of the election of such person's
successor, such person's death, such person's resignation or such person's
removal, whichever event shall first occur, except as otherwise provided in an
employment contract or under an employee deferred compensation plan.
SECTION 4.9. VACANCIES. A newly created elected office and a vacancy in any
elected office because of death, resignation, or removal may be filled by the
Board of Directors for the unexpired portion of the term at any meeting of the
Board of Directors. Any vacancy in an office appointed by the Chairman of the
Board or the President because of death, resignation, or removal may be filled
by the Chairman of the Board or the President.
ARTICLE V
STOCK CERTIFICATES AND TRANSFERS
SECTION 5.1. STOCK CERTIFICATES AND TRANSFERS. The interest of each stockholder
of the Corporation shall be evidenced by certificates for shares of stock in
such form as the appropriate officers of the Corporation may from time to time
prescribe. The shares of the stock of the Corporation shall be transferred on
the books of the Corporation by the holder thereof in person or by such person's
attorney, upon surrender for cancellation of
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certificates for at least the same number of shares, with an assignment and
power of transfer endorsed thereon or attached thereto, duly executed, with such
proof of the authenticity of the signature as the Corporation or its agents may
reasonably require. The certificates of stock shall be signed, countersigned and
registered in such manner as the Board of Directors may by resolution prescribe,
which resolution may permit all or any of the signatures on such certificates to
be in facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he were such
officer, transfer agent or registrar at the date of issue.
SECTION 5.2. LOST, STOLEN OR DESTROYED CERTIFICATES. No certificate for shares
of stock in the Corporation shall be issued in place of any certificate alleged
to have been lost, destroyed or stolen, except on production of such evidence of
such loss, destruction or theft and on delivery to the Corporation of a bond of
indemnity in such amount, upon such terms and secured by such surety, as the
Board of Directors or any financial officer may in its or such person's
discretion require.
ARTICLE VI
MISCELLANEOUS PROVISIONS
SECTION 6.1. FISCAL YEAR. The fiscal year of the Corporation shall begin on the
first day of January and end on the thirty-first day of December of each year.
SECTION 6.2. DIVIDENDS. The Board of Directors may from time to time declare,
and the Corporation may pay, dividends on its outstanding shares in the manner
and upon the terms and conditions provided by law and the Certificate of
Incorporation.
SECTION 6.3. SEAL. The corporate seal shall have inscribed thereon the words
"Corporate Seal," the year of incorporation and around the margin thereof the
words "Delaware."
SECTION 6.4. WAIVER OF NOTICE. Whenever any notice is required to be given to
any stockholder or director of the Corporation under the provisions of the DGCL
or these By-Laws, a waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent to the giving of such notice. Neither the business to be
transacted at, nor the purpose of, any annual or special meeting of the
stockholders or the Board of Directors or committee thereof need be specified in
any waiver of notice of such meeting.
SECTION 6.5. AUDITS. The accounts, books and records of the Corporation shall be
audited upon the conclusion of each fiscal year by an independent certified
public accountant selected by the Board of Directors, and it shall be the duty
of the Board of Directors to cause such audit to be done annually.
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SECTION 6.6. RESIGNATIONS. Any director or any officer, whether elected or
appointed, may resign at any time by giving written notice of such resignation
to the Chairman of the Board, the President, or the Secretary, and such
resignation shall be deemed to be effective as of the close of business on the
date said notice is received by the Chairman of the Board, the President, or the
Secretary, or at such later time as is specified therein. No formal action shall
be required of the Board of Directors or the stockholders to make any such
resignation effective.
ARTICLE VII
CONTRACTS, PROXIES, ETC.
SECTION 7.1. CONTRACTS. Except as otherwise required by law, the Certificate of
Incorporation, a Preferred Stock Designation, or these By-Laws, any contracts or
other instruments may be executed and delivered in the name and on the behalf of
the Corporation by such officer or officers of the Corporation as the Board of
Directors may from time to time direct. Such authority may be general or
confined to specific instances as the Board may determine. The Chairman of the
Board, the President or any Senior Vice President, Executive Vice President or
Vice President may execute bonds, contracts, deeds, leases and other instruments
to be made or executed for or on behalf of the Corporation. Subject to any
restrictions imposed by the Board of Directors or the Chairman of the Board, the
President or any Senior Vice President, Executive Vice President or Vice
President of the Corporation may delegate contractual powers to others under
such person's jurisdiction, it being understood, however, that any such
delegation of power shall not relieve such officer of responsibility with
respect to the exercise of such delegated power.
SECTION 7.2. PROXIES. Unless otherwise provided by resolution adopted by the
Board of Directors, the Chairman of the Board, the President or any Senior Vice
President, Executive Vice President or Vice President may from time to time
appoint an attorney or attorneys or agent or agents of the Corporation, in the
name and on behalf of the Corporation, to cast the votes which the Corporation
may be entitled to cast as the holder of stock or other securities in any other
corporation, any of whose stock or other securities may be held by the
Corporation, at meetings of the holders of the stock or other securities of such
other corporation, or to consent in writing, in the name of the Corporation as
such holder, to any action by such other corporation, and may instruct the
person or persons so appointed as to the manner of casting such votes or giving
such consent, and may execute or cause to be executed in the name and on behalf
of the Corporation and under its corporate seal or otherwise, all such written
proxies or other instruments as he may deem necessary or proper in the premises.
21
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ARTICLE VIII
AMENDMENTS
SECTION 8.1. AMENDMENTS. The By-Laws may be altered or repealed and new By-Laws
may be adopted (1) at any annual or special meeting of stockholders by the
affirmative vote of the holders of a majority of the voting power of the stock
issued and outstanding and entitled to vote thereat, provided, however, that any
proposed alteration or repeal of, or the adoption of any By-Law inconsistent
with, Section 2.2, 2.7 or 2.10 of Article II or Section 3.2, 3.9 or 3.11 of
Article III of the By-Laws by the stockholders shall require 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, and provided, further, however,
that, in the case of any such stockholder action at a special meeting of
stockholders, notice of the proposed alteration, repeal or adoption of the new
By-Law or By-Laws must be contained in the notice of such special meeting, or
(2) by the affirmative vote of a majority of the Whole Board.
22
<PAGE> 1
EXHIBIT 10.2
EMPLOYEE BENEFITS AGREEMENT
BETWEEN
AT&T CORP.
AND
LUCENT TECHNOLOGIES INC.
DATED AS OF
FEBRUARY 1, 1996
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TABLE OF CONTENTS
<TABLE>
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ARTICLE I DEFINITIONS................................................... 1
1.1 414(l)(1) Amount........................................... 1
1.2 1992 Collective Bargaining Agreement....................... 1
1.3 Agreement.................................................. 1
1.4 ASA........................................................ 1
1.5 Aggregate Lucent Stock Value............................... 1
1.6 ASA Agreement.............................................. 1
1.7 ASO Contract............................................... 1
1.8 Assigned Split Dollar Policies............................. 1
1.9 ATTIMCO.................................................... 1
1.10 AT&T Deferred Severance Account............................ 2
1.11 AT&T Entity................................................ 2
1.12 AT&T Executive............................................. 2
1.13 AT&T Group Pension Trust................................... 2
1.14 AT&T Leave of Absence Programs............................. 2
1.15 AT&T LTD Plans............................................. 2
1.16 AT&T Management Savings Group Trust........................ 2
1.17 AT&T MPP................................................... 2
1.18 AT&T Occupational Savings Group Trust...................... 2
1.19 AT&T PP.................................................... 2
1.20 AT&T SADBP................................................. 2
1.21 AT&T Special Executive Deferral Account.................... 2
1.22 AT&T Stock Value........................................... 3
1.23 AT&T Transferred Employee.................................. 3
1.24 AT&T WCP................................................... 3
1.25 Auditing Party............................................. 3
1.26 Award...................................................... 3
1.27 BDEC....................................................... 3
1.28 BDS........................................................ 3
1.29 CECRA...................................................... 3
1.30 Change..................................................... 3
1.31 Close of the Distribution Date............................. 3
1.32 COBRA...................................................... 4
1.33 Code....................................................... 4
1.34 Collective Bargaining Agreement............................ 4
1.35 Corporate-Owned Life Insurance............................. 4
1.36 Covered AT&T Awards........................................ 4
1.37 CWA........................................................ 4
1.38 Deferral Plan.............................................. 4
1.39 DOL........................................................ 4
1.40 ERISA...................................................... 4
1.41 ESOP....................................................... 4
1.42 ESOP Trust................................................. 4
1.43 Executive Benefit Plans.................................... 4
1.44 Existing Acquisition Loan.................................. 5
1.45 FMLA....................................................... 5
1.46 Foreign Plan............................................... 5
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1.47 Funding Policy Amount...................................... 5
1.48 Gross Value of the Assumed Stock Awards.................... 5
1.49 Group Insurance Policies................................... 5
1.50 Group Life Program......................................... 5
1.51 HCFA....................................................... 5
1.52 HCRA Plan.................................................. 5
1.53 Health and Welfare Plans................................... 5
1.54 Health Plans............................................... 5
1.55 Health Plans Benefit Trust................................. 6
1.56 Health Trusts.............................................. 6
1.57 HMO........................................................ 6
1.58 HMO Agreements............................................. 6
1.59 HPSS....................................................... 6
1.60 HWLI Committee............................................. 6
1.61 IBEW....................................................... 6
1.62 Immediately after the Distribution Date.................... 6
1.63 Initial Allocation Amount.................................. 6
1.64 Individual Agreement....................................... 6
1.65 IRS........................................................ 6
1.66 Legally Permissible........................................ 6
1.67 Legally Permitted.......................................... 6
1.68 LESOP...................................................... 7
1.69 LESOP Trust................................................ 7
1.70 Long Term Incentive Plan................................... 7
1.71 LTD VEBA................................................... 7
1.72 LTSPME..................................................... 7
1.73 LTSSP...................................................... 7
1.74 Lucent Acquisition Loan.................................... 7
1.75 Lucent Administrative Employees............................ 7
1.76 Lucent Entity.............................................. 7
1.77 Lucent Individual.......................................... 7
1.78 Lucent Stock Value......................................... 7
1.79 Lucent WCP Claims.......................................... 8
1.80 Management Employee........................................ 8
1.81 Management Transition Period............................... 8
1.82 Management VEBA............................................ 8
1.83 Material Feature........................................... 8
1.84 Medical Plans.............................................. 8
1.85 MPA........................................................ 8
1.86 Non-Employee Director...................................... 9
1.87 Non-Employee Director Plans................................ 9
1.88 Non-parties................................................ 9
1.89 Occupational Employee...................................... 9
1.90 Occupational Transition Period............................. 9
1.91 Option..................................................... 9
1.92 Outsource.................................................. 9
1.93 Participating Company...................................... 9
1.94 Participation Commencement Date............................ 9
1.95 PBGC....................................................... 9
1.96 Pension Plans.............................................. 9
1.97 Plan....................................................... 9
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1.98 QDRO....................................................... 10
1.99 QMCSO...................................................... 10
1.100 Rabbi Trust................................................ 10
1.101 Rabbi Trust Determination Date............................. 10
1.102 Ratio...................................................... 10
1.103 RFA........................................................ 10
1.104 RSPSP...................................................... 10
1.105 Savings Plans.............................................. 10
1.106 Separation and Distribution Agreement...................... 10
1.107 Short Term Incentive Plan.................................. 10
1.108 Split Dollar Life Insurance................................ 10
1.109 Spread..................................................... 10
1.110 Stock Purchase Plan........................................ 10
1.111 Transferred Individual..................................... 11
1.112 Transition Individual...................................... 11
1.113 Transition Period.......................................... 12
1.114 Trust-Owned Life Insurance (VEBA).......................... 12
1.115 Unfunded Cost Sharing Agreements........................... 12
1.116 Union VEBA................................................. 12
1.117 U.S........................................................ 12
1.118 Value...................................................... 12
1.119 VEBA....................................................... 12
1.120 VEBA Plans................................................. 13
ARTICLE II GENERAL PRINCIPLES........................................... 13
2.1 Assumption of Liabilities.................................. 13
(a) Lucent Liabilities................................. 13
(b) Excluded Liabilities............................... 13
2.2 Lucent Participation in AT&T Plans......................... 13
(a) Participation in AT&T Pension, Savings,
Health and Welfare and Executive
Benefit Plans.................................... 13
(b) Participation in AT&T Stock Purchase Plan.......... 14
(c) AT&T's General Obligations as Plan Sponsor......... 14
(d) Lucent's General Obligations as
Participating Company............................ 14
(e) Termination of Participating Company
Status........................................... 14
2.3 Establishment of Lucent Plans.............................. 14
2.4 Terms of Participation by Transferred
Individuals in Lucent Plans and Lucent
Non-Employee Directors in Lucent
Non-Employee Director Plans.............................. 15
(a) Lucent Plans....................................... 15
(b) Lucent Non-Employee Director Plans................. 15
2.5 Transition Individuals..................................... 15
(a) Mandatory Portability Agreement.................... 16
(b) Management Interchange Agreement................... 16
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(c) Occupational Interchange Agreement................. 16
(d) Terms of the Management and Occupational
Interchange Agreements........................... 16
(e) Restriction on Plan Amendments..................... 17
ARTICLE III DEFINED BENEFIT PLANS....................................... 17
3.1 Establishment of Mirror Pension Trusts..................... 17
3.2 Assumption of Pension Plan Liabilities
and Allocation of Interests in the AT&T
Master Pension Trust..................................... 17
(a) Assumption of Liabilities by Lucent
Pension Plan..................................... 17
(b) Asset Allocations and Transfers.................... 18
ARTICLE IV DEFINED CONTRIBUTION PLANS................................... 19
4.1 LTSPMEs and RSPSPs......................................... 19
(a) Management Savings Plan Trusts..................... 19
(b) Assumption of Liabilities and
Transfer of Assets............................... 19
4.2 LTSSPs and LESOPs.......................................... 20
(a) Occupational Savings Plan Trusts................... 20
(b) Assumption of LTSSP Liabilities.................... 20
(c) Leveraged Stock Ownership Plan..................... 20
4.3 ESOPs ................................................... 22
(a) ESOP Trust......................................... 22
(b) Assumption of Liabilities and
Transfer of Assets............................... 22
ARTICLE V HEALTH AND WELFARE PLANS...................................... 23
5.1 Establishment of Mirror Health and
Welfare Plan Trusts...................................... 23
5.2 Assumption of Health and Welfare
Plan Liabilities......................................... 23
5.3 VEBA Asset Transfers....................................... 24
5.4 Transfer of Retirement Funding Account Assets.............. 24
5.5 VEBAs Funded with Trust-Owned Life Insurance............... 24
(a) General Provisions................................. 24
(b) AT&T Management VEBA: Trust-Owned
Life Insurance (VEBA)............................ 25
(c) Other Asset Transfers.............................. 25
(d) Administration..................................... 25
5.6 Contributions to, Investments of and Distributions
from VEBAs............................................... 25
5.7 Vendor Contracts........................................... 26
(a) Third-Party ASO Contracts.......................... 26
(b) Group Insurance Policies........................... 26
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(c) HMO Agreements..................................... 27
(d) Effect of Change in Rates.......................... 28
5.8 Procedures for Amendments to Plans, Plan
Designs, Administrative Practices, and
Vendor Contracts......................................... 28
(a) Amendments to Plan Documents....................... 28
(b) Changes in Vendor Contracts, Group
Insurance Policies, Plan Design, and
Administration Practices and Procedures.......... 29
(c) Employee Contributions............................. 29
5.9 Health, Welfare and Life Insurance Committee............... 30
5.10 AT&T Sickness and Accident Disability, Long Term
Disability and Pension Disability Benefits............... 30
(a) Administration of AT&T SADBP Claims................ 30
(b) Outsourcing of Claims.............................. 30
5.11 Post-Retirement Health and Life Insurance
Benefits................................................. 31
5.12 Group Life Programs........................................ 31
5.13 COBRA and Direct Pay....................................... 31
5.14 Leave of Absence Programs and FMLA......................... 31
5.15 AT&T Workers' Compensation Program......................... 32
(a) Administration of Claims........................... 32
(b) Self-Insurance Status.............................. 33
(c) Insurance Policy................................... 33
5.16 American Transtech Inc. and Benefit Directions
Enrollment Center........................................ 34
5.17 AT&T Employee Assistance Program........................... 34
5.18 AT&T Work and Family Program............................... 34
5.19 World Wide Web............................................. 35
5.20 Unemployment Insurance Tax Management Program.............. 35
5.21 Post-Distribution Transitional Arrangements................ 35
(a) Continuance of Elections, Co-Payments and
Maximum Benefits................................. 35
(b) Administration..................................... 36
(c) Other Post-Distribution Transitional Rules......... 37
5.22 Application of Article V to Lucent Entities................ 37
ARTICLE VI EXECUTIVE BENEFITS AND NON-EMPLOYEE DIRECTOR
BENEFITS ............................................................... 38
6.1 Assumption of Obligations.................................. 38
6.2 Consents and Notifications................................. 38
6.3 AT&T Short Term Incentive Plan............................. 38
6.4 AT&T Long Term Incentive Plans............................. 38
(a) Transferred Individuals Who Are Active
Employees of Lucent.............................. 39
(b) Transferred Individuals Who Are Not Active
Employees of Lucent.............................. 40
</TABLE>
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6.5 AT&T Senior Management Incentive Award
Deferral Plan............................................ 40
6.6 Non-Employee Director Benefits............................. 40
(a) Non-Employee Director Plans........................ 40
(b) Deferred Compensation Plan for
Non-Employee Directors........................... 40
6.7 Non-Competition Guidelines................................. 41
(a) AT&T Non-Competition Guideline..................... 41
(b) Lucent Non-Competition Guideline................... 41
(c) Confidentiality and Proprietary Information........ 41
6.8 Rabbi Trust and Corporate-Owned
Life Insurance........................................... 41
(a) Establishment of Mirror Rabbi Trust................ 41
(b) Funding of Lucent Rabbi Trust...................... 41
(c) Corporate-Owned Life Insurance..................... 42
6.9 AT&T Split Dollar Life Insurance........................... 42
ARTICLE VII MISCELLANEOUS BENEFITS...................................... 43
7.1 Transfer of Stock Purchase Plan
Recordkeeping Accounts................................... 43
7.2 Concession Telephone Service............................... 43
7.3 Service Anniversary and Retirement Award
Program.................................................. 43
7.4 Shares For Growth Program.................................. 44
7.5 Theodore N. Vail Award Trust Assets........................ 44
7.6 1996 Management Incentive Compensation Payments............ 44
ARTICLE VIII GENERAL AND ADMINISTRATIVE................................. 45
8.1 Payment of 1996 Administrative Costs and
Expenses................................................. 45
(a) Shared Costs........................................ 45
(b) Additional Unanticipated Expenses................... 45
(c) Administrative Personnel............................ 45
(d) Post-Distribution Administration in 1996............ 45
8.2 Payment of Liabilities, Plan Expenses and
Related Matters.......................................... 46
(a) Actuarial and Accounting Methodologies
and Assumptions................................... 46
(b) Payment of Liabilities;
Determination of Employee Status.................. 46
(c) Contributions to Trusts............................. 46
(d) Participant Contributions; Settlements,
Refunds and Similar Payments...................... 47
(e) Administrative Expenses Not Chargeable
to a Trust........................................ 47
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(f) Stock Award Chargebacks............................. 48
8.3 1984 AT&T Unfunded Divestiture Reimbursement
Agreements............................................... 49
8.4 Sharing of Participant Information......................... 49
8.5 Reporting and Disclosure and Communications
to Participants.......................................... 49
8.6 Non-Termination of Employment; No Third-Party
Beneficiaries............................................ 49
8.7 Plan Audits................................................ 50
(a) Audit Rights with Respect to the
Allocation or Transfer of Plan Assets............. 50
(b) Audit Rights With Respect to Information
Provided.......................................... 50
(c) Audits Regarding Vendor Contracts................... 51
8.8 Beneficiary Designations................................... 51
8.9 Requests for IRS Rulings and DOL Opinions.................. 51
(a) Cooperation......................................... 51
(b) Applications........................................ 51
(c) Life Insurance...................................... 52
8.10 Fiduciary Matters.......................................... 52
(a) Fiduciary Status.................................... 52
(b) Independent Fiduciary............................... 52
8.11 Agreement With Actuarial Sciences
Associates, Inc.......................................... 52
8.12 Collective Bargaining...................................... 52
8.13 Consent of Third Parties................................... 52
8.14 Post-Distribution Benefit Delivery/
Administration........................................... 53
8.15 Quiet Periods.............................................. 53
ARTICLE IX MISCELLANEOUS................................................ 53
9.1 Foreign Plans.............................................. 53
9.2 Resource Link Employees.................................... 53
9.3 Effect If Distribution Does Not Occur...................... 53
9.4 Relationship of Parties.................................... 53
9.5 Affiliates................................................. 53
9.6 Incorporation of Separation and Distribution
Agreement Provisions..................................... 54
9.7 Governing Law.............................................. 54
Signatures ................................................... 54
Schedule I AT&T Executive Benefit Plans
Schedule II AT&T Health and Welfare Plans
Schedule III AT&T Pension Plans
Schedule IV AT&T Savings Plans
</TABLE>
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Schedule V Codes for Certain Transferred Individuals
Schedule VI Summary of AT&T Funding Policy Methodology for Pension Benefits
Schedule VII H.R. Benefits and Compensation 1996 Budget Estimates
Exhibit A Form of Actuarial Services and Benefits Consulting Agreement
Exhibit B Foreign Plans
</TABLE>
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EMPLOYEE BENEFITS AGREEMENT
This EMPLOYEE BENEFITS AGREEMENT, dated as of February 1, 1996, is by
and between AT&T and Lucent. Capitalized terms used herein (other than the
formal names of AT&T Plans (as defined below) and related trusts of AT&T) and
not otherwise defined shall have the respective meanings assigned to them in
Article I hereof or as assigned to them in the Separation and Distribution
Agreement (as defined below).
WHEREAS, the Board of Directors of AT&T has determined that it is in
the best interests of AT&T and its shareholders to separate AT&T's existing
businesses into three independent businesses;
WHEREAS, in furtherance of the foregoing, AT&T, Lucent and NCR have
entered into a Separation and Distribution Agreement, dated as of the date
hereof (the "Separation and Distribution Agreement") and certain other
agreements that will govern certain matters relating to the Separation, the IPO,
the Distribution and the relationship of AT&T, Lucent and NCR and their
respective Subsidiaries following the IPO and the Distribution; and
WHEREAS, pursuant to the Separation and Distribution Agreement, AT&T
and Lucent have agreed to enter into this agreement allocating assets,
liabilities and responsibilities with respect to certain employee compensation
and benefit plans and programs between them.
NOW, THEREFORE, the parties, intending to be legally bound, agree as
follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement the following terms shall have the
following meanings:
1.1 414(L)(1) AMOUNT is defined in Section 3.2(b)(i)(A).
1.2 1992 COLLECTIVE BARGAINING AGREEMENT is defined in Section 5.18.
1.3 AGREEMENT means this Employee Benefits Agreement, including all the
Schedules and Exhibits hereto.
1.4 AGGREGATE LUCENT STOCK VALUE means the Lucent Stock Value
multiplied by the number of shares of Lucent Common Stock issued and outstanding
as of Immediately after the Distribution Date.
1.5 ASA is defined in Section 8.11.
1.6 ASA AGREEMENT means the agreement with ASA described in Section
8.11.
1.7 ASO CONTRACT is defined in Section 5.7(a)(i).
1.8 ASSIGNED SPLIT DOLLAR POLICIES is defined in Section 6.9.
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1.9 ATTIMCO means the AT&T Investment Management Corporation, a
Delaware corporation.
1.10 AT&T DEFERRED SEVERANCE ACCOUNT means an account established on
the financial books and records of AT&T or an AT&T Entity to reflect a liability
to pay a deferred severance benefit to an AT&T Executive.
1.11 AT&T ENTITY means any Person that is, at the relevant time, an
Affiliate of AT&T, except that, for periods beginning on and after the
Participation Commencement Date, the term "AT&T Entity" shall not include Lucent
or a Lucent Entity.
1.12 AT&T EXECUTIVE means an employee or former employee of AT&T, an
AT&T Entity, Lucent or a Lucent Entity, who immediately before the Close of the
Distribution Date is eligible to participate in or receive a benefit under any
AT&T Executive Benefit Plan.
1.13 AT&T GROUP PENSION TRUST is defined in Section 3.1.
1.14 AT&T LEAVE OF ABSENCE PROGRAMS means the Local Leave, Disability
Leave, Educational Leave of Absence, Accompanying AT&T Employed Spouse-Foreign
Assignment Leave, Personal Leave, Union Business Leave, Anticipated Disability
Leave, Care of Newborn/Newly Adopted Child Leave, Family Care Leave, Military
Leave, Transition Leave, Special Leave, Enhanced Leave, and ELOA Plus Leave
Programs offered from time to time under the personnel policies and practices of
AT&T.
1.15 AT&T LTD PLANS means the AT&T Long-Term Disability Plan for
Management Employees and the AT&T Long Term Disability Plan for Occupational
Employees.
1.16 AT&T MANAGEMENT SAVINGS GROUP TRUST means the group trust under
IRS Rev. Rul. 81-100 established in connection with the AT&T LTSPME and the AT&T
RSPSP pursuant to a group trust agreement between AT&T and Fidelity Management
Trust Company.
1.17 AT&T MPP means the AT&T Management Pension Plan. Unless the
context indicates otherwise, AT&T MPP includes disability pensions payable from
the AT&T LTD VEBA and death benefits payable under the AT&T Special Accidental
Death Insurance Policy.
1.18 AT&T OCCUPATIONAL SAVINGS GROUP TRUST means the group trust under
IRS Rev. Rul. 81-100 established in connection with the AT&T LTSSP pursuant to a
group trust agreement between AT&T and Bankers Trust Company.
1.19 AT&T PP means the AT&T Pension Plan. Unless the context indicates
otherwise, AT&T PP includes disability pensions payable from the AT&T LTD VEBA
and death benefits payable under the AT&T Special Accidental Death Insurance
Policy.
1.20 AT&T SADBP means the AT&T Sickness and Accident Disability Benefit
Plan.
1.21 AT&T SPECIAL EXECUTIVE DEFERRAL ACCOUNT means an account
established on the financial books and records of any member of the AT&T Group
to reflect a liability to
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pay a special pension enhancement, hiring bonus or benefit to an AT&T Executive
pursuant to an Individual Agreement.
1.22 AT&T STOCK VALUE means 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.
1.23 AT&T TRANSFERRED EMPLOYEE means an individual who (a) on the
Participation Commencement Date, is either actively employed by or on leave of
absence from Lucent or a Lucent Entity (including for purposes of this
definition any division or business unit of AT&T on the Participation
Commencement Date that is part of the Lucent Business), if such individual is
part of a work group or organization that, at any time before the Close of the
Distribution Date, moves to the employ of AT&T or an AT&T Entity and that, after
such move, performs substantially the same functions as before such move; (b) on
the Participation Commencement Date, is either actively employed by or on leave
of absence from a Subsidiary of AT&T that becomes a Lucent Entity before the
Close of the Distribution Date, if such individual, at any time before the Close
of the Distribution Date, moves to the employ of AT&T or an AT&T Entity that
does not become a Lucent Entity before the Close of the Distribution Date; or
(c) on the Participation Commencement Date, is either actively employed by or on
leave of absence from Lucent or a Lucent Entity in a common support function, is
at any time before the Close of the Distribution Date designated by AT&T for
transfer to AT&T or an AT&T Entity and, at any time after the Participation
Commencement Date and before the Close of the Distribution Date, moves to the
employ of AT&T or an AT&T Entity. In addition, AT&T and Lucent may designate, by
mutual agreement, any other individual or group of individuals as AT&T
Transferred Employees.
1.24 AT&T WCP means the AT&T Workers' Compensation Program, comprised
of the various arrangements established by AT&T or an AT&T Entity to comply with
the workers' compensation requirements of the states in which AT&T and its
Affiliates conduct business.
1.25 AUDITING PARTY is defined in Section 8.7(b)(i).
1.26 AWARD means an award under a Long Term Incentive Plan or a Short
Term Incentive Plan.
1.27 BDEC is defined in Section 5.16(a).
1.28 BDS is defined in Section 5.16(a).
1.29 CECRA, when immediately preceded by "AT&T," means the AT&T
Child/Elder Care Reimbursement Account Plan. When immediately preceded by
"Lucent," CECRA means the child/elder care reimbursement account plan to be
established by Lucent pursuant to Section 2.3.
1.30 CHANGE is defined in Section 5.8(b)(i).
1.31 CLOSE OF THE DISTRIBUTION DATE means 11:59:59 P.M., Eastern
Standard Time or Eastern Daylight Time (whichever shall then be in effect), on
the Distribution Date.
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1.32 COBRA means the continuation coverage requirements for "group
health plans" under Title X of the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended, and as codified in Code Section 4980B and ERISA
Section Section 601 through 608.
1.33 CODE means the Internal Revenue Code of 1986, as amended, or any
successor federal income tax law. Reference to a specific Code provision also
includes any proposed, temporary, or final regulation in force under that
provision.
1.34 COLLECTIVE BARGAINING AGREEMENT means the National AT&T/CWA/IBEW
Memorandum of Understanding, including all Attachments, National Items and
letters included as a part thereof, executed by AT&T and the CWA and IBEW as of
May 28, 1995, and such local collective bargaining agreements into which the
National AT&T/CWA/IBEW Memorandum of Understanding has been incorporated.
1.35 CORPORATE-OWNED LIFE INSURANCE means the life insurance policies
owned by AT&T insuring the lives of certain AT&T Executives and certain other
highly compensated employees of AT&T or an AT&T Entity that were purchased by
AT&T between the years 1985 and 1992.
1.36 COVERED AT&T AWARDS means any AT&T Options or non-vested AT&T
performance shares, stock units, restricted stock or restricted stock units held
as of the Close of the Distribution Date by Transferred Individuals who as of
the Distribution Date are either active employees of or on a leave of absence
from Lucent or a Lucent Entity.
1.37 CWA means the Communication Workers of America, AFL-CIO.
1.38 DEFERRAL PLAN, when immediately preceded by "AT&T," means the AT&T
Senior Management Incentive Award Deferral Plan. When immediately preceded by
"Lucent," Deferral Plan means the senior management incentive award deferral
plan to be established by Lucent pursuant to Section 2.3.
1.39 DOL means the United States Department of Labor.
1.40 ERISA means the Employee Retirement Income Security Act of 1974,
as amended. Reference to a specific provision of ERISA also includes any
proposed, temporary, or final regulation in force under that provision.
1.41 ESOP, when immediately preceded by "AT&T," means the AT&T Employee
Stock Ownership Plan. When immediately preceded by "Lucent," ESOP means the
employee stock ownership plan to be established by Lucent pursuant to Section
2.3.
1.42 ESOP TRUST, when immediately preceded by "AT&T," means the trust
established by AT&T forming part of the AT&T ESOP. When immediately preceded by
"Lucent," ESOP Trust has the meaning set forth in Section 4.3(a).
1.43 EXECUTIVE BENEFIT PLANS, when immediately preceded by "AT&T,"
means the executive benefit and nonqualified plans, programs, and arrangements
established, maintained, agreed upon, or assumed by AT&T or an AT&T Entity for
the benefit of employees and former employees of AT&T or an AT&T Entity before
the Close of the Distribution Date, including the plans listed in Schedule 1.
When immediately preceded by "Lucent," Executive Benefit Plans means the
executive benefit plans and programs to be established
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by Lucent pursuant to Section 2.3 that correspond to the respective AT&T
Executive Benefit Plans.
1.44 EXISTING ACQUISITION LOAN is defined in Section 4.2(c)(ii).
1.45 FMLA means the Family and Medical Leave Act of 1993, as amended.
1.46 FOREIGN PLAN means a Plan maintained by AT&T, an AT&T Entity,
Lucent, or a Lucent Entity for the benefit of employees outside the U.S.
1.47 FUNDING POLICY AMOUNT is defined in Section 3.2(b)(i)(A).
1.48 GROSS VALUE OF THE ASSUMED STOCK AWARDS means the sum of (a) the
Lucent Stock Value multiplied by the number of shares of Lucent Common Stock
that Immediately after the Distribution Date would be issuable in respect of
then outstanding Covered AT&T Awards, assuming all then outstanding Covered AT&T
Awards were converted into replacement Awards as of such time in accordance with
the terms of Section 6.4(a), plus (b) the aggregate amount paid to AT&T by
Lucent on or after the Closing Date and prior to the Close of the Distribution
Date pursuant to Section 8.2(f)(i) and (iii), plus (c) the aggregate of the
exercise prices paid to AT&T on or after the Closing Date and prior to the Close
of the Distribution Date in respect of the exercise of all AT&T Options that
constitute Covered AT&T Awards and for which payments are made by Lucent to AT&T
pursuant to Section 8.2(f)(i) as a result of such exercise.
1.49 GROUP INSURANCE POLICIES is defined in Section 5.7(b)(i).
1.50 GROUP LIFE PROGRAM, when immediately preceded by "AT&T," means the
AT&T Dependent Accidental Loss Insurance Plan, the AT&T Dependent Group Life
Insurance Plan, the AT&T Group Life Insurance Plan, the AT&T Supplementary
Accidental Loss Insurance Plan and the AT&T Supplementary Life Insurance Plan.
When immediately preceded by "Lucent," Group Life Program means the life
insurance plans and programs to be established by Lucent pursuant to Section 2.3
that correspond to the respective AT&T Group Life Programs.
1.51 HCFA means the Health Care Financing Administration.
1.52 HCRA PLAN, when immediately preceded by "AT&T," means the AT&T
Health Care Reimbursement Account Plan. When immediately preceded by "Lucent,"
HCRA Plan means the Health Care Reimbursement Account Plan to be established by
Lucent pursuant to Section 2.3.
1.53 HEALTH AND WELFARE PLANS, when immediately preceded by "AT&T,"
means the health and welfare plans listed on Schedule II established and
maintained by AT&T for the benefit of employees and retirees of AT&T and certain
AT&T Entities, and such other welfare plans or programs as may apply to such
employees and retirees as of the Distribution Date. When immediately preceded by
"Lucent," Health and Welfare Plans means the health and welfare plans to be
established by Lucent pursuant to Section 2.3 that correspond to the respective
AT&T Health and Welfare Plans.
1.54 HEALTH PLANS, when immediately preceded by "AT&T," means the AT&T
Dental Expense Plan for Active Employees, the AT&T Dental Expense Plan for
Retired Employees, the AT&T Medical Plans, the AT&T HCRA Plan and the AT&T
Vision Care
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Plan. When immediately preceded by "Lucent," Health Plans means the health plans
to be established by Lucent pursuant to Section 2.3 that correspond to the
respective AT&T Health Plans.
1.55 HEALTH PLANS BENEFIT TRUST, when immediately preceded by "AT&T,"
means the American Telephone and Telegraph Company Health Plans Benefit Trust.
When immediately preceded by "Lucent," Health Plans Benefit Trust means the
trust to be established by Lucent pursuant to Section 5.1 that corresponds to
the AT&T Health Plans Benefit Trust.
1.56 HEALTH TRUSTS, when immediately preceded by "AT&T," means the AT&T
Health Plans Benefit Trust, the AT&T Management VEBA, and the AT&T Union VEBA.
When immediately preceded by "Lucent," Health Trusts means the trusts to be
established by Lucent pursuant to Section 5.1 that correspond to the respective
AT&T Health Trusts.
1.57 HMO means a health maintenance organization that provides benefits
under the AT&T Medical Plans or the Lucent Medical Plans.
1.58 HMO AGREEMENTS is defined in Section 5.7(c)(i).
1.59 HPSS is defined in Section 5.21(c)(v).
1.60 HWLI COMMITTEE means the Health, Welfare and Life Insurance
Committee established pursuant to Section 5.9.
1.61 IBEW means the International Brotherhood of Electrical Workers.
1.62 IMMEDIATELY AFTER THE DISTRIBUTION DATE means 12:00 A.M., Eastern
Standard Time or Eastern Daylight Time (whichever shall then be in effect), on
the day after the Distribution Date.
1.63 INITIAL ALLOCATION AMOUNT is defined in Section 3.2(b)(i)(A).
1.64 INDIVIDUAL AGREEMENT means an individual contract or agreement
(whether written or unwritten) entered into between AT&T, an AT&T Entity, Lucent
or a Lucent Entity and an AT&T Executive that establishes the right of such
individual to special executive compensation or benefits, including a
supplemental pension benefit, hiring bonus, loan, guaranteed payment, special
allowance, tax equalization or disability benefit, or share units granted (and
payable in the form of cash or otherwise) under individual phantom share
agreements, or that provides benefits similar to those identified in Schedule I.
1.65 IRS means the Internal Revenue Service.
1.66 LEGALLY PERMISSIBLE is defined in Section 5.15(a)(iv).
1.67 LEGALLY PERMITTED is defined in Section B.4 of Exhibit B.
1.68 LESOP, when immediately preceded by "AT&T," means the portion of
the AT&T LTSSP that is a leveraged employee stock ownership plan. When
immediately preceded by "Lucent," LESOP means the portion of the Lucent LTSSP
that is a leveraged employee stock ownership plan.
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1.69 LESOP TRUST, when immediately preceded by "AT&T," means the trust
established by AT&T under Article 20 of the AT&T LTSSP. When immediately
preceded by "Lucent," LESOP Trust has the meaning set forth in Section
4.2(c)(i).
1.70 LONG TERM INCENTIVE PLAN, when immediately preceded by "AT&T,"
means any of the AT&T 1984 Stock Option Plan, the AT&T 1987 Long Term Incentive
Program, and such other stock-based incentive plans assumed by AT&T by reason of
merger, acquisition, or otherwise, including incentive plans of NCR, Teradata
Corporation, AT&T Wireless Services, Inc. (formerly McCaw Cellular
Communications, Inc.), and Lin Broadcasting Corporation. When immediately
preceded by "Lucent," Long Term Incentive Plan means the long term incentive
plan to be established by Lucent pursuant to Section 2.3.
1.71 LTD VEBA, when immediately preceded by "AT&T," means the American
Telephone & Telegraph Company Long-Term Disability Plans Benefit Trust. When
immediately preceded by "Lucent," LTD VEBA means the welfare benefit fund to be
established by Lucent pursuant to Section 5.1 that corresponds to the AT&T LTD
VEBA.
1.72 LTSPME, when immediately preceded by "AT&T," means the AT&T Long
Term Savings Plan for Management Employees. When immediately preceded by
"Lucent," LTSPME means the management savings plan to be established by Lucent
pursuant to Section 2.3 that corresponds to the AT&T LTSPME.
1.73 LTSSP, when immediately preceded by "AT&T," means the AT&T Long
Term Savings and Security Plan. When immediately preceded by "Lucent," LTSSP
means the occupational savings plan to be established by Lucent pursuant to
Section 2.3 that corresponds to the AT&T LTSSP.
1.74 LUCENT ACQUISITION LOAN is defined in Section 4.2(c)(ii).
1.75 LUCENT ADMINISTRATIVE EMPLOYEES is defined in Section 8.1(c).
1.76 LUCENT ENTITY means any Person that is, at the relevant time, a
Subsidiary of Lucent or is otherwise controlled, directly or indirectly, by
Lucent.
1.77 LUCENT INDIVIDUAL means any individual who (a) on the
Participation Commencement Date, is either actively employed by or on leave of
absence from Lucent or a Lucent Entity (including for purposes of this
definition any division or business unit of AT&T or an AT&T Entity on the
Participation Commencement Date that is part of the Lucent Business), other than
any AT&T Transferred Employee; (b) on the Participation Commencement Date, is
either actively employed by or on leave of absence from AT&T or an AT&T Entity
as part of a work group or organization that, at any time after the
Participation Commencement Date and before the Close of the Distribution Date,
moves to the employ of Lucent or a Lucent Entity from the employ of AT&T or an
AT&T Entity and that, after such move, performs substantially the same functions
as before such move; (c) on the Participation Commencement Date, is either
actively employed by or on leave of absence from AT&T or an AT&T Entity in a
common support function, is at any time before the Close of the Distribution
Date designated by AT&T for transfer to Lucent or a Lucent Entity and, at any
time after the Participation Commencement Date and before the Close of the
Distribution Date, moves to the employ of Lucent or a Lucent Entity from the
employ of AT&T or an AT&T Entity; (d) on the Participation Commencement Date, is
either actively employed by or on leave of absence from a Subsidiary of AT&T
that becomes a Lucent Entity before the Close of the Distribution Date, other
than any AT&T
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Transferred Employee; (e) at any time after the Participation Commencement Date
and before the Close of the Distribution Date both (i) is declared to be surplus
by AT&T or an AT&T Entity and (ii) applies for, obtains and accepts employment
with Lucent or a Lucent Entity; or (f) is a Lucent Administrative Employee. In
addition, AT&T and Lucent may designate, by mutual agreement, any other
individual or group of individuals as Lucent Individuals.
1.78 LUCENT STOCK VALUE means the average of the daily high and low
per-share prices of the Lucent Common Stock as listed on the NYSE during each of
the five trading days immediately preceding the ex-dividend date for the
Distribution.
1.79 LUCENT WCP CLAIMS is defined in Section 5.15(a)(i).
1.80 MANAGEMENT EMPLOYEE means any individual who is an "Employee" as
defined under the terms of the AT&T MPP or the Pension Plan to be established by
Lucent pursuant to Section 2.3 that corresponds to the AT&T MPP.
1.81 MANAGEMENT TRANSITION PERIOD means the period beginning
Immediately after the Distribution Date and ending on the earlier of December
31, 1997 and the end of the third calendar month that ends after the
Distribution Date.
1.82 MANAGEMENT VEBA, when immediately preceded by "AT&T," means The
American Telephone and Telegraph Company Management and Nonrepresented Employees
Postretirement Health Benefits Trust. When immediately preceded by "Lucent,"
Management VEBA means the welfare benefit fund to be established by Lucent
pursuant to Section 5.1 that corresponds to the AT&T Management VEBA.
1.83 MATERIAL FEATURE means any feature of a Plan that could reasonably
be expected to be of material importance to the sponsoring employer or the
participants and beneficiaries of the Plan, which could include, depending on
the type and purpose of the particular Plan, the class or classes of employees
eligible to participate in such Plan, the nature, type, form, source, and level
of benefits provided by the employer under such Plan and the amount or level of
contributions, if any, required to be made by participants (or their dependents
or beneficiaries) to such Plan.
1.84 MEDICAL PLANS, when immediately preceded by "AT&T," means the AT&T
Medical Expense Plan for Management Employees, the AT&T Medical Expense Plan for
Occupational Employees and the AT&T Medical Expense Plan for Retired Employees.
When immediately preceded by "Lucent," Medical Plans means the medical plans to
be established by Lucent pursuant to Section 2.3 that correspond to the
respective AT&T Medical Plans.
1.85 MPA means the Mandatory Portability Agreement established as of
January 1, 1985 among AT&T, American Information Technologies Corporation, Bell
Atlantic Corporation, Bell Communications Research, Inc., BellSouth Corporation,
Cincinnati Bell Telephone Company, NYNEX Corporation, Pacific Telesis Group,
Inc., The Southern New England Telephone Company, Southwestern Bell Corporation
and US WEST, Inc. that provides, in accordance with Section 559 of the Tax
Reform Act of 1984, for the mutual recognition of service credit and the
transfer of benefit obligations for specified employees who terminate employment
with one "Interchange Company" as defined under such agreement and subsequently
commence employment with another such Interchange Company.
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1.86 NON-EMPLOYEE DIRECTOR, when immediately preceded by "AT&T," means
a member of AT&T's Board of Directors who is not an employee of AT&T, an AT&T
Entity, Lucent, or a Lucent Entity. When immediately preceded by "Lucent,"
Non-Employee Director means a member of Lucent's Board of Directors who is not
an employee of AT&T, an AT&T Entity, Lucent or a Lucent Entity.
1.87 NON-EMPLOYEE DIRECTOR PLANS, when immediately preceded by "AT&T,"
means the AT&T Deferred Compensation Plan for Non-Employee Directors, the AT&T
Directors' Individual Life Insurance Program and the AT&T Pension Plan for
Non-Employee Directors. When immediately preceded by "Lucent," Non-Employee
Director Plans means the plans and programs to be established by Lucent pursuant
to Section 2.3 that correspond to the AT&T Non-Employee Director Plans.
1.88 NON-PARTIES is defined in Section 8.7(b)(ii).
1.89 OCCUPATIONAL EMPLOYEE means any individual who is an "Employee" as
defined under the terms of the AT&T PP or the Pension Plan to be established by
Lucent pursuant to Section 2.3 that corresponds to the AT&T PP.
1.90 OCCUPATIONAL TRANSITION PERIOD means the period beginning
Immediately after the Distribution Date and ending on May 30, 1998, the
scheduled expiration date of the Collective Bargaining Agreement as in effect on
the date hereof.
1.91 OPTION, when immediately preceded by "AT&T," means an option to
purchase AT&T Common Stock. When immediately preceded by "Lucent," Option means
an option to purchase Lucent Common Stock, in each case pursuant to a Long Term
Incentive Plan.
1.92 OUTSOURCE is defined in Sections 5.10(b) and 5.15(a)(iii) for
purposes of such respective sections.
1.93 PARTICIPATING COMPANY means (a) AT&T, (b) any Person that AT&T has
approved for participation in, and which is participating in, a Plan sponsored
by AT&T, and (c) any Person (other than an individual) which, by the terms of
such a Plan, participates in such Plan or any employees of which, by the terms
of such Plan, participate in or are covered by such Plan.
1.94 PARTICIPATION COMMENCEMENT DATE means February 1, 1996.
1.95 PBGC means the Pension Benefit Guaranty Corporation.
1.96 PENSION PLANS, when immediately preceded by "AT&T," means the AT&T
MPP and the AT&T PP. When immediately preceded by "Lucent," Pension Plans means
the respective management and occupational pension plans to be established by
Lucent pursuant to Section 2.3 that correspond to the AT&T Pension Plans.
1.97 PLAN, when immediately preceded by "AT&T" or "Lucent," means any
plan, policy, program, payroll practice, on-going arrangement, contract, trust,
insurance policy or other agreement or funding vehicle providing benefits to
employees, former employees or Non-Employee Directors of AT&T or an AT&T Entity,
or Lucent or a Lucent Entity, as applicable.
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<PAGE> 19
1.98 QDRO means a domestic relations order which qualifies under Code
Section 414(p) and ERISA Section 206(d) and which creates or recognizes an
alternate payee's right to, or assigns to an alternate payee, all or a portion
of the benefits payable to a participant under any of the AT&T Pension Plans,
the AT&T Savings Plans, or the AT&T ESOP.
1.99 QMCSO means a medical child support order which qualifies under
ERISA Section 609(a) and which creates or recognizes the existence of an
alternate recipient's right to, or assigns to an alternate recipient the right
to, receive benefits for which a participant or beneficiary is eligible under an
AT&T Health Plan.
1.100 RABBI TRUST, when immediately preceded by "AT&T," means the
American Telephone and Telegraph Company Benefits Protection Trust. When
immediately preceded by "Lucent," Rabbi Trust means the grantor trust to be
established by Lucent pursuant to Section 6.8(a) that corresponds to the AT&T
Rabbi Trust.
1.101 RABBI TRUST DETERMINATION DATE is defined in Section 6.8(b)(i).
1.102 RATIO means the amount obtained by dividing the AT&T Stock Value
by the Lucent Stock Value.
1.103 RFA means Retirement Funding Account.
1.104 RSPSP, when immediately preceded by "AT&T," means the AT&T
Retirement Savings and Profit Sharing Plan. When immediately preceded by
"Lucent," RSPSP means the savings plan to be established by Lucent pursuant to
Section 2.3 that corresponds to the AT&T RSPSP.
1.105 SAVINGS PLANS, when immediately preceded by "AT&T," means the
AT&T LTSPME, the AT&T LTSSP and the AT&T RSPSP. When immediately preceded by
"Lucent," Savings Plans means the Lucent LTSPME, the Lucent LTSSP and the Lucent
RSPSP.
1.106 SEPARATION AND DISTRIBUTION AGREEMENT is defined in the third
paragraph of the preamble of this Agreement.
1.107 SHORT TERM INCENTIVE PLAN, when immediately preceded by "AT&T,"
means the AT&T Short Term Incentive Plan. When immediately preceded by "Lucent,"
Short Term Incentive Plan means the AT&T Short Term Incentive Plan to be
established by Lucent pursuant to Section 2.3.
1.108 SPLIT DOLLAR LIFE INSURANCE means the life insurance policies
purchased by AT&T on behalf of certain AT&T Executives and AT&T Non-Employee
Directors under (a) the AT&T Senior Management Individual Life Insurance
Program, (b) the AT&T Senior Management Basic Life Insurance Program and (c) the
AT&T Directors' Individual Life Insurance Program, with respect to which such
AT&T Executives or AT&T Non-Employee Directors (or their assignees or
delegates), respectively, have executed collateral assignments for the benefit
of AT&T.
1.109 SPREAD is defined in Section 8.2(f).
1.110 STOCK PURCHASE PLAN, when immediately preceded by "AT&T," means
the AT&T 1996 Employee Stock Purchase Plan. When immediately preceded by
"Lucent,"
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Stock Purchase Plan means the employee stock purchase plan to be established by
Lucent pursuant to Section 2.3.
1.111 TRANSFERRED INDIVIDUAL means any individual who, as of the Close
of the Distribution Date: (a) is either then actively employed by, or then on a
leave of absence from, Lucent or a Lucent Entity; or (b) is neither then
actively employed by, nor then on a leave of absence from, Lucent or a Lucent
Entity, but who was a Lucent Individual or whose most recent active employment
with AT&T or a past or present Affiliate of AT&T was with an entity or a
corporate division having a "Company Code," "Managed Entity Code" or "Legal
Entity Code" set forth in Schedule V, and who has not had an intervening period
of employment covered by an interchange agreement under which assets and
liabilities with respect to the individual were or are to be transferred from an
AT&T Pension Plan. Transferred Individuals shall also include the Lucent
Administrative Employees and the individuals designated as such pursuant to
Section 9.2. An alternate payee under a QDRO, alternate recipient under a QMCSO,
beneficiary or covered dependent, in each case, of an employee or former
employee described in either of the preceding two sentences shall also be a
Transferred Individual with respect to that employee's or former employee's
benefit under the applicable Plans. Such an alternate payee, alternate
recipient, beneficiary, or covered dependent shall not otherwise be considered a
Transferred Individual with respect to his or her own benefits under any
applicable Plans unless he or she is a Transferred Individual by virtue of
either of the first two sentences of this definition. In addition, AT&T and
Lucent may designate, by mutual agreement, any other individuals, or group of
individuals, as Transferred Individuals. An individual may be a Transferred
Individual pursuant to this definition regardless of whether such individual is
or was a Lucent Individual and regardless of whether such individual is, as of
the Distribution Date, alive, actively employed, on a temporary leave of absence
from active employment, on layoff, terminated from employment, retired or on any
other type of employment or post-employment status relative to an AT&T Plan, and
regardless of whether, as of the Close of the Distribution Date, such individual
is then receiving any benefits from an AT&T Plan. Notwithstanding the foregoing,
if the Distribution does not occur on or before December 31, 1997, references in
this definition to the Close of the Distribution Date shall be deemed to refer
to the close of business on the earlier of the date AT&T publicly announces that
the Distribution will not occur and December 31, 1997.
1.112 TRANSITION INDIVIDUAL means any individual who:
(a) is a Transferred Individual who during the applicable
Transition Period becomes an employee of AT&T or an AT&T Entity without an
intervening period of employment covered by an interchange agreement under which
assets and liabilities with respect to the individual were or are to be
transferred from an AT&T Pension Plan; or
(b) is an employee or former employee of AT&T or an AT&T
Entity as of the Distribution Date (but is not a Transferred Individual) who
during the applicable Transition Period becomes an employee of Lucent or a
Lucent Entity without an intervening period of employment covered by an
interchange agreement under which assets and liabilities with respect to the
individual were or are to be transferred from an AT&T Pension Plan; or
(c) is an individual described in clause (a) or (b) of this
definition whose employer changes during the applicable Transition Period either
(i) from AT&T or an AT&T Entity to Lucent or a Lucent Entity, or (ii) from
Lucent or a Lucent Entity to AT&T or an AT&T Entity without an intervening
period of employment covered by an interchange
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agreement under which assets and liabilities with respect to the individual were
or are to be transferred from an AT&T Pension Plan.
For these purposes, the applicable Transition Period is determined by the
positions (Management Employee or Occupational Employee) from which and into
which the individual is hired as more fully set forth in Sections 2.5(b) and
2.5(c). An alternate payee under a QDRO, alternate recipient under a QMCSO,
beneficiary or covered dependent, in each case, of an individual described in
clause (a), (b), or (c) of this definition shall also be a Transition Individual
with respect to that individual's benefit under the applicable Plans. Such an
alternate payee, alternate recipient, beneficiary, and covered dependent shall
not otherwise be considered a Transition Individual with respect to his or her
own benefits under any applicable Plans unless he or she is a Transition
Individual by virtue of clause (a), (b), or (c) of this definition.
1.113 TRANSITION PERIOD means the Management Transition Period or the
Occupational Transition Period, as applicable.
1.114 TRUST-OWNED LIFE INSURANCE (VEBA) means the group life insurance
policies purchased from The Prudential Insurance Company of America by the
trustee of the AT&T Management VEBA.
1.115 UNFUNDED COST SHARING AGREEMENTS means the 1983 Force Adjustment
Cost Reimbursement and Indemnification Agreement established as of January 1,
1984 among AT&T, American Information Technologies Corporation, Bell Atlantic
Corporation, BellSouth Corporation, NYNEX Corporation, Pacific Telesis Group,
Inc., Southwestern Bell Corporation, and US WEST, Inc., which provides for
reimbursement by AT&T and certain AT&T Entities to the other parties of certain
expenses for medical and dental benefits and certain post-retirement pension
increases for employees designated for reassignment from the other parties to
AT&T on or about January 1, 1984, and the Unfunded Post-Retirement Benefits Cost
Sharing Agreement established as of January 1, 1984 among AT&T, Advanced Mobile
Phone Service, Inc., American Information Technologies Corporation, Bell
Atlantic Corporation, BellSouth Corporation, Central Services Organization,
NYNEX Corporation, Pacific Telesis Group, Inc., Southwestern Bell Corporation,
and US WEST, Inc., which provides for the allocation of expenses relating to
post-retirement medical, dental, specified disability and future contingent
pension increases with respect to Bell System employees who retired before
January 1, 1984 or who otherwise left the service of a Bell System Company
before that date with eligibility to continue any such benefits on or after
January 1, 1984.
1.116 UNION VEBA, when immediately preceded by "AT&T," means the
American Telephone and Telegraph Company Represented Employees Post-Retirement
Health Benefits Trust. When immediately preceded by "Lucent," Union VEBA means
the welfare benefit fund to be established by Lucent pursuant to Section 5.1
that corresponds to the AT&T Union VEBA.
1.117 U.S. means the 50 United States and the District of Columbia.
1.118 VALUE is defined in Section 8.2(f).
1.119 VEBA, when immediately preceded by "AT&T," means any voluntary
employees' beneficiary association trust sponsored by AT&T. When immediately
preceded
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by "Lucent," VEBA means any voluntary employees' beneficiary association trust
sponsored by Lucent.
1.120 VEBA PLANS is defined in Section 5.3.
ARTICLE II
GENERAL PRINCIPLES
2.1 ASSUMPTION OF LIABILITIES.
(a) LUCENT LIABILITIES. Lucent hereby assumes and agrees to
pay, perform, fulfill and discharge, in accordance with their respective terms,
all of the following (regardless of when or where such Liabilities arose or
arise or were or are incurred): (i) all Liabilities to or relating to Lucent
Individuals and Transferred Individuals, and their respective dependents and
beneficiaries, in each case relating to, arising out of or resulting from
employment by AT&T or an AT&T Entity before becoming Lucent Individuals or
Transferred Individuals, respectively (including Liabilities under AT&T Plans
and Lucent Plans); (ii) all other Liabilities to or relating to Lucent
Individuals, Transferred Individuals and other employees or former employees of
Lucent or a Lucent Entity, and their dependents and beneficiaries, to the extent
relating to, arising out of or resulting from future, present or former
employment with Lucent or a Lucent Entity (including Liabilities under AT&T
Plans and Lucent Plans); (iii) all Liabilities relating to, arising out of or
resulting from any other actual or alleged employment relationship with Lucent
or a Lucent Entity; (iv) all Liabilities relating to, arising out of or
resulting from the imposition of withdrawal liability under Subtitle E of Title
IV of ERISA as a result of a complete or partial withdrawal of AT&T Network
Construction Services, Inc. from a "multiemployer plan" within the meaning of
ERISA Section 4021, except to the extent that such withdrawal liability is
imposed solely as a result of the Separation, the IPO, or the Distribution; and
(v) all other Liabilities relating to, arising out of or resulting from
obligations, liabilities and responsibilities expressly assumed or retained by
Lucent, a Lucent Entity, or a Lucent Plan pursuant to this Agreement.
Notwithstanding the foregoing, Lucent shall not, by virtue of any provision of
this Agreement or the Separation and Distribution Agreement, be deemed to have
assumed any Excluded Liability or to have agreed to alter or amend any provision
of Article VI of the Separation and Distribution Agreement.
(b) EXCLUDED LIABILITIES. All Liabilities to or relating to
AT&T Transferred Employees and their respective dependents and beneficiaries
relating to, arising out of or resulting from employment by Lucent or a Lucent
Entity before becoming AT&T Transferred Employees or employment by AT&T or an
AT&T Entity (including Liabilities under AT&T Plans) shall be "Excluded
Liabilities" within the meaning of the Separation and Distribution Agreement.
2.2 LUCENT PARTICIPATION IN AT&T PLANS.
(a) PARTICIPATION IN AT&T PENSION, SAVINGS, HEALTH AND WELFARE
AND EXECUTIVE BENEFIT PLANS. Effective as of the Participation Commencement Date
and subject to the terms and conditions of this Agreement, Lucent shall become a
Participating Company in the AT&T Plans in effect as of the Participation
Commencement Date. Each Lucent Entity that is, as of the date of this Agreement,
a Participating Company in any of the AT&T Plans shall continue as such.
Effective as of any date on or after the Participation Commencement Date and
before the Distribution Date, a Lucent Entity not described in
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the preceding sentence may, at its request and with the consent of AT&T (which
shall not be unreasonably withheld), become a Participating Company in any or
all of the AT&T Plans. Without Lucent consent, neither Lucent nor any Lucent
Entity shall become a Participating Company in an AT&T Plan established after
the Participation Commencement Date.
(b) PARTICIPATION IN AT&T STOCK PURCHASE PLAN. If the AT&T
Stock Purchase Plan is approved by the shareholders of AT&T at the 1996 annual
meeting, then (i) effective as of July 1, 1996, Lucent shall become a
Participating Company in the AT&T Stock Purchase Plan; and (ii) effective as of
July 1, 1996, any Lucent Entity may (at the discretion of AT&T in accordance
with the terms of the AT&T Stock Purchase Plan) become a Participating Company
in the AT&T Stock Purchase Plan.
(c) AT&T'S GENERAL OBLIGATIONS AS PLAN SPONSOR. AT&T shall
continue through the Close of the Distribution Date to administer, or cause to
be administered, in accordance with their terms and applicable law, the AT&T
Plans, and shall have the sole discretion and authority to interpret the AT&T
Plans as set forth therein. Before the Close of the Distribution Date, AT&T
shall not, without first consulting with Lucent (on behalf of itself and each
Lucent Entity which is a Participating Company), amend any Material Feature of
any AT&T Plan in which Lucent or a Lucent Entity is a Participating Company,
except to the extent such amendment would not affect any benefits of Lucent
Individuals or Transferred Individuals under such Plan or as may be necessary or
appropriate to comply with any collective bargaining agreement or applicable
law.
(d) LUCENT'S GENERAL OBLIGATIONS AS PARTICIPATING COMPANY.
Lucent shall perform with respect to its participation in the AT&T Plans, and
shall cause each other Lucent Entity that is a Participating Company in any AT&T
Plan to perform, the duties of a Participating Company as set forth in such
Plans or any procedures adopted pursuant thereto, including: (i) assisting in
the administration of claims, to the extent requested by the claims
administrator of the applicable AT&T Plan; (ii) cooperating fully with AT&T Plan
auditors, benefit personnel and benefit vendors; (iii) preserving the
confidentiality of all financial arrangements AT&T has or may have with any
vendors, claims administrators, trustees or any other entity or individual with
whom AT&T has entered into an agreement relating to the AT&T Plans; and (iv)
preserving the confidentiality of participant health information (including
health information in relation to FMLA leaves).
(e) TERMINATION OF PARTICIPATING COMPANY STATUS. Effective as
of the Close of the Distribution Date, Lucent and each Lucent Entity shall cease
to be a Participating Company in the AT&T Plans, except that Lucent and each
Lucent Entity shall cease to be a Participating Company in the AT&T Rabbi Trust
as of the Rabbi Trust Determination Date.
2.3 ESTABLISHMENT OF LUCENT PLANS. Effective Immediately after the
Distribution Date, Lucent shall adopt, or cause to be adopted, the Lucent
Pension Plans, the Lucent Savings Plans, the Lucent ESOP, the Lucent Stock
Purchase Plan (if the AT&T Stock Purchase Plan is then in existence), the Lucent
Health and Welfare Plans, and the Lucent Executive Benefit Plans for the benefit
of the Transferred Individuals and other current, future, and former employees
of Lucent and the Lucent Entities. Except for the Lucent Long Term Incentive
Plan and the Lucent Stock Purchase Plan, the foregoing Lucent Plans as in effect
Immediately after the Distribution Date shall be substantially identical in all
Material Features to the corresponding AT&T Plans as in effect as of the Close
of the Distribution Date. The Lucent Long Term Incentive Plan and the Lucent
Stock Purchase Plan
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shall be adopted by Lucent and approved by AT&T as sole shareholder of Lucent,
before the Closing Date, to become effective Immediately after the Distribution
Date. Effective as of the Closing Date, Lucent shall adopt, or cause to be
adopted, the Lucent Non-Employee Director Plans, for the benefit of Lucent
Non-Employee Directors who were, immediately before the Closing Date, AT&T
Non-Employee Directors. The Lucent Non-Employee Director Plans shall be
substantially identical in all Material Features to the corresponding AT&T
Non-Employee Director Plans as in effect on the Closing Date, except that they
need not provide for the accrual of additional benefits after the Closing Date.
In addition, before the Closing Date, Lucent may adopt, and in that event AT&T
shall approve as sole shareholder of Lucent, a plan or other arrangement for the
payment of compensation of the Lucent Non-Employee Directors in Lucent Common
Stock, under which the number of shares permitted to be issued before the Close
of the Distribution Date shall not exceed 10,000 in the aggregate.
2.4 TERMS OF PARTICIPATION BY TRANSFERRED INDIVIDUALS IN LUCENT PLANS
AND LUCENT NON-EMPLOYEE DIRECTORS IN LUCENT NON-EMPLOYEE DIRECTOR PLANS.
(a) LUCENT PLANS. The Lucent Plans shall be, with respect to
Transferred Individuals, in all respects the successors in interest to, and
shall not provide benefits that duplicate benefits provided by, the
corresponding AT&T Plans. AT&T and Lucent shall agree on methods and procedures,
including amending the respective Plan documents, to prevent Transferred
Individuals from receiving duplicative benefits from the AT&T Plans and the
Lucent Plans. Lucent shall not permit any Lucent Plan to commence benefit
payments to any Transferred Individual until it receives notice from AT&T
regarding the date on which payments under the corresponding AT&T Plan shall
cease. With respect to Transferred Individuals, each Lucent Plan shall provide
that all service, all compensation and all other benefit-affecting
determinations that, as of the Close of the Distribution Date, were recognized
under the corresponding AT&T Plan shall, as of Immediately after the
Distribution Date, receive full recognition, credit, and validity and be taken
into account under such Lucent Plan to the same extent as if such items occurred
under such Lucent Plan, except to the extent that duplication of benefits would
result. The provisions of this Agreement for the transfer of assets from certain
trusts relating to AT&T Plans (including Foreign Plans) to the corresponding
trusts relating to Lucent Plans (including Foreign Plans) are based upon the
understanding of the parties that each such Lucent Plan will assume all
Liabilities of the corresponding AT&T Plan to or relating to Transferred
Individuals, as provided for herein. If any such Liabilities are not effectively
assumed by the appropriate Lucent Plan, then the amount of assets transferred to
the trust relating to such Lucent Plan from the trust relating to the
corresponding AT&T Plan shall be recomputed, ab initio, as set forth below but
taking into account the retention of such Liabilities by such AT&T Plan, and
assets shall be transferred by the trust relating to such Lucent Plan to the
trust relating to such AT&T Plan so as to place each such trust in the position
it would have been in, had the initial asset transfer been made in accordance
with such recomputed amount of assets.
(b) LUCENT NON-EMPLOYEE DIRECTOR PLANS. The Lucent
Non-Employee Director Plans shall be, with respect to the Lucent Non-Employee
Directors who participated in the corresponding AT&T Non-Employee Director
Plans, in all respects the successors in interest to, and shall not provide
benefits that duplicate benefits provided by such AT&T Plans.
2.5 TRANSITION INDIVIDUALS. Portability of benefits (without
duplication thereof) for Transition Individuals shall be set forth in the
separate agreements provided for below.
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(a) MANDATORY PORTABILITY AGREEMENT. Effective as of the
Participation Commencement Date, AT&T shall designate Lucent as, and Lucent
shall become, an Interchange Company under the MPA, with all the applicable
rights and obligations of such an Interchange Company. Each Lucent Entity that
is an Interchange Company as of the date of this Agreement shall continue as
such. Effective as of any date on or after the Participation Commencement Date,
any other Lucent Entity that becomes a Participating Company in the AT&T Pension
Plans pursuant to Section 2.2 may, at its request and with the consent of AT&T
(which shall not be unreasonably withheld), become an Interchange Company.
Effective Immediately after the Distribution Date, the Lucent Pension Plans
shall be "Interchange Company Pension Plans" under, and subject to the terms of,
the MPA. AT&T shall use its reasonable best efforts to seek an amendment of the
MPA to allow Lucent to become a "Tier II Signatory Company" under the MPA with
the same rights and obligations as have been granted to AirTouch International,
Inc. as a Tier II Signatory Company. Lucent shall take any and all action,
including any action reasonably requested by AT&T, to become a Tier II Signatory
Company under the MPA. During the applicable Transition Periods, neither AT&T
nor Lucent shall permit any Transition Individual covered by the Interchange
Agreements described above to waive portability under the MPA with respect to
movement as a Transition Individual.
(b) MANAGEMENT INTERCHANGE AGREEMENT. On or before the Closing
Date, AT&T and Lucent shall enter into an Interchange Agreement providing for
(among other things) the portability of benefits and mutual recognition of
service during the Management Transition Period with respect to Transition
Individuals who terminate employment with AT&T or an AT&T Entity and who become
Management Employees (or employees covered by an alternate benefit program) of
Lucent or a Lucent Entity and Transition Individuals who terminate employment
with Lucent or a Lucent Entity and who become Management Employees (or employees
covered by an alternate benefit program) of AT&T or an AT&T Entity after the
Distribution Date, as more fully described in Section 2.5(d).
(c) OCCUPATIONAL INTERCHANGE AGREEMENT. On or before the
Closing Date, AT&T and Lucent shall enter into an Interchange Agreement
providing for the portability of benefits and mutual recognition of service
during the Occupational Transition Period with respect to Transition Individuals
who cease employment with AT&T or an AT&T Entity and who become Occupational
Employees of Lucent or a Lucent Entity and Transition Individuals who cease
employment with Lucent or a Lucent Entity and who become Occupational Employees
of AT&T or an AT&T Entity after the Distribution Date, as more fully described
in Section 2.5(d).
(d) TERMS OF THE MANAGEMENT AND OCCUPATIONAL INTERCHANGE
AGREEMENTS. The Interchange Agreements described in Sections 2.5(b) and 2.5(c)
shall provide in a mutually agreeable manner for the following with respect to
Transition Individuals: (i) prohibition of the commencement of benefits under
any transferor AT&T or Lucent Pension Plan, and suspension of any benefits
already commenced, with respect to any individual for whom the liability for
benefits is transferred either from the AT&T Pension Plans to the Lucent Pension
Plans or from the Lucent Pension Plans to the AT&T Pension Plans; (ii) transfer
of service credit between the AT&T Plans and the Lucent Plans, where
appropriate; (iii) transfer of assets and liabilities between the AT&T Pension
Plans and the Lucent Pension Plans in the same manner and in accordance with the
same methods and assumptions as prescribed by the MPA, regardless of whether
such employees are covered by the MPA (but in no event shall a Transition
Individual be entitled to obtain overlapping benefits under both the MPA and the
Interchange Agreement); (iv) transfer of accounts between the AT&T Savings Plans
and the Lucent Savings Plans; (v) transfer of accounts between the
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AT&T ESOP and the Lucent ESOP; (vi) transfer of accounts between the AT&T Stock
Purchase Plan and the Lucent Stock Purchase Plan; (vii) mutual maintenance and
recognition by the AT&T Health and Welfare Plans and the Lucent Health and
Welfare Plans of the coverage elections and all amounts applied to deductibles
and out-of-pocket maximums met under the other company's Health and Welfare
Plans for plan years in the applicable Transition Period; (viii) mutual
maintenance and recognition by the AT&T Health and Welfare Plans and the Lucent
Health and Welfare Plans of all lifetime maximum benefits reached under the
other company's Health and Welfare Plans; (ix) transfer of service credit,
assets, and liabilities between the AT&T Executive Benefit Plans and the Lucent
Executive Benefit Plans and the related trusts, insurance policies and other
funding vehicles; (x) allocation and transfer of RFA assets and liabilities
between the applicable AT&T Health and Welfare Plans and the applicable Lucent
Health and Welfare Plans and the related trusts, insurance policies and other
funding vehicles; and (xi) assumption of Individual Agreements. Each of the
service crediting provisions described above shall be subject to any applicable
"service bridging" or "break in service" rules under the AT&T Plans and the
Lucent Plans.
(e) RESTRICTION ON PLAN AMENDMENTS. During the Management
Transition Period, neither AT&T nor Lucent shall adopt any amendment, or allow
any amendment to be adopted, to any of their respective Pension Plans, Savings
Plans or ESOPs that would violate Code Section 411(d)(6) or that would create an
optional form of benefit subject to Code Section 411(d)(6).
ARTICLE III
DEFINED BENEFIT PLANS
3.1 ESTABLISHMENT OF MIRROR PENSION TRUSTS. Before the Close of the
Distribution Date, AT&T shall cause the trust presently established under the
AT&T Pension Plans to be amended and restated as a group trust under IRS Rev.
Rul. 81-100 (the "AT&T Group Pension Trust") in a form reasonably satisfactory
to Lucent. AT&T shall establish, or cause to be established, a new master
pension trust under the AT&T Pension Plans, which shall be substantially
identical in all Material Features to the trust established under the AT&T
Pension Plans as in effect before such amendment and restatement and which shall
be a participating trust in the AT&T Group Pension Trust. Effective Immediately
after the Distribution Date, Lucent shall establish, or cause to be established,
a master pension trust qualified in accordance with Code Section 401(a), exempt
from taxation under Code Section 501(a)(1), and forming part of the Lucent
Pension Plans, which shall be a participating trust in the AT&T Group Pension
Trust, subject to ratification of such participation by the Board of Directors
of Lucent or its authorized delegate after the Close of the Distribution Date
(and Lucent shall seek such ratification within 60 days after the Close of the
Distribution Date).
3.2 ASSUMPTION OF PENSION PLAN LIABILITIES AND ALLOCATION OF INTERESTS
IN THE AT&T MASTER PENSION TRUST.
(a) ASSUMPTION OF LIABILITIES BY LUCENT PENSION PLAN.
Immediately after the Distribution Date, all Liabilities to or relating to
Transferred Individuals under the AT&T MPP or AT&T PP, as applicable, shall
cease to be Liabilities of the AT&T MPP or AT&T PP, as applicable, and shall be
assumed by the corresponding Lucent Pension Plan.
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(b) ASSET ALLOCATIONS AND TRANSFERS.
(i) CALCULATION OF ASSET ALLOCATION.
(A) As soon as practicable after the Close
of the Distribution Date, AT&T shall cause to be calculated, for the AT&T MPP
and the corresponding Lucent Pension Plan, as of Immediately after the
Distribution Date, (1) the "Funding Policy Amount," which shall be consistent
with the minimum amount necessary to satisfy AT&T's pension funding policy as
set forth in Schedule VI, as applied to the AT&T MPP and the corresponding
Lucent Pension Plan; (2) the "414(l)(1) Amount," which shall equal the minimum
amount necessary to fully fund benefits under the AT&T MPP and the corresponding
Lucent Pension Plan on a "termination basis" (as that term is defined in Treas.
Reg. Section 1.414(l)-1(b)(5)); and (3) the "Initial Allocation Amount," which
shall equal the Funding Policy Amount for that particular Pension Plan, plus
one-half times the difference (positive or negative) between (x) the amount of
assets as of the Close of the Distribution Date of the AT&T MPP and (y) the sum
of the Funding Policy Amounts for the AT&T MPP and the corresponding Lucent
Pension Plan. The assumptions used in determining the 414(l)(1) Amount for each
Pension Plan shall be those used in the determination of the minimum required
contribution under ERISA for the Plan year beginning January 1, 1996, except
that the discount rates shall be the rates issued by the PBGC for valuing
annuities in terminating single-employer pension plans during the month
containing the Close of the Distribution Date.
(B) If the aggregate amount of the assets
of the AT&T MPP as of the Close of the Distribution Date is not less than the
sum of the 414(l)(1) Amounts for the AT&T MPP and the corresponding Lucent
Pension Plan, then such assets shall be allocated between the AT&T MPP and the
corresponding Lucent Pension Plan in accordance with the following: (1) if the
Initial Allocation Amount is greater than or equal to the 414(l)(1) Amount for
the AT&T MPP, and the Initial Allocation Amount is greater than or equal to the
414(l)(1) Amount for the corresponding Lucent Pension Plan, then the amounts of
assets allocated to the AT&T MPP and the corresponding Lucent Pension Plan shall
equal their respective Initial Allocation Amounts; (2) if the Initial Allocation
Amount is greater than or equal to the 414(l)(1) Amount for the AT&T MPP, but
the Initial Allocation Amount is less than the 414(l)(1) Amount for the
corresponding Lucent Pension Plan, then the amount of assets allocated to the
Lucent Pension Plan shall equal the 414(l)(1) Amount for that Pension Plan, and
the amount of assets allocated to the AT&T MPP shall equal the excess of (x) the
total amount of assets, as of the Close of the Distribution Date, of the AT&T
MPP over (y) the 414(l)(1) Amount for the corresponding Lucent Pension Plan; and
(3) if the Initial Allocation Amount is less than the 414(l)(1) Amount for the
AT&T MPP, but the Initial Allocation Amount is greater than or equal to the
414(l)(1) Amount for the corresponding Lucent Pension Plan, then the amount of
assets allocated to the AT&T MPP shall equal the 414(l)(1) Amount for the AT&T
MPP, and the amount of assets allocated to the corresponding Lucent Pension Plan
shall equal the excess of (x) the total amount of assets, as of the Close of the
Distribution Date, of the AT&T MPP over (y) the 414(l)(1) Amount for the AT&T
MPP.
(C) If the aggregate amount of the assets
of the AT&T MPP as of the Close of the Distribution Date is less than the sum of
the 414(l)(1) Amounts for the AT&T MPP and the corresponding Lucent Pension
Plan, then such assets shall be allocated between the AT&T MPP and the
corresponding Lucent Pension Plan as follows: (i) AT&T
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and Lucent shall obtain a quote from a mutually agreeable insurance company for
the provision of immediate and deferred annuities payable under the AT&T MPP and
the corresponding Lucent Pension Plan for all accrued benefits under the AT&T
MPP as of the Close of the Distribution Date; (ii) if the amount of assets as of
the Close of the Distribution Date is not less than the amount of such quote,
the amount of assets allocated to the AT&T MPP and the corresponding Lucent
Pension Plan shall equal the portion of the quote allocable to each plan plus
one-half of the excess, if any, over such quote; and (iii) if the amount of
assets as of the Close of the Distribution Date is less than the amount of such
quote, the amount of assets allocated to the AT&T MPP and the corresponding
Lucent Pension Plan shall be determined on a plan termination basis in
accordance with ERISA Section 4044 using the same assumptions as those used in
computing the 414(l)(1) Amounts.
(ii) CALCULATION OF THE AT&T PP'S ASSET
ALLOCATION. The asset allocation of the AT&T PP and the corresponding Lucent
Pension Plan shall be determined by applying Section 3.2(b)(i) but substituting
"AT&T PP" for "AT&T MPP" wherever it appears in that section.
(iii) SEGREGATION OF LUCENT PENSION PLANS'
INTERESTS WITHIN THE AT&T GROUP PENSION TRUST. The actual segregation of the
interests of the Lucent Pension Plans in the AT&T Group Pension Trust into
separate trust accounts shall occur as soon as practicable after the calculation
of such interests pursuant to Section 3.2(b)(i) and (ii), but in no event before
AT&T determines that the calculation and the data on which it is based are
acceptably complete, accurate and consistent. In addition, the interests so
calculated shall be adjusted as of the date of the actual segregation by AT&T to
the extent necessary or appropriate to reasonably and appropriately reflect
additional pension contributions, interest, investment gains and losses, and
benefit payments and data corrections, enhancements, and computational
refinements from Immediately after the Distribution Date through the date of the
actual segregation of such interests. If the master pension trust established by
Lucent pursuant to the last sentence of Section 3.1 is for any reason not then a
participating trust in the AT&T Group Pension Trust, such master pension trust
shall be entitled to receive its allocable share of the assets of the AT&T Group
Pension Trust as determined pursuant to the foregoing provisions of this Section
3.2(b) in redemption of the interests therein of the Lucent Pension Plans as
promptly as prudently practicable. Such allocable share shall consist of
Lucent's allocable share of each class of assets in the AT&T Group Pension
Trust, unless AT&T and Lucent agree otherwise.
ARTICLE IV
DEFINED CONTRIBUTION PLANS
4.1 LTSPMEs AND RSPSPs.
(a) MANAGEMENT SAVINGS PLAN TRUSTS. Effective Immediately
after the Distribution Date, Lucent shall establish, or cause to be established,
separate trusts qualified under Code Section 401(a), exempt from taxation under
Code Section 501(a)(1), and forming part of the Lucent LTSPME and Lucent RSPSP,
which shall be participating trusts in the AT&T Management Savings Group Trust.
(b) ASSUMPTION OF LIABILITIES AND TRANSFER OF ASSETS.
Effective Immediately after the Distribution Date: (i) the Lucent LTSPME and the
Lucent RSPSP shall assume and be solely responsible for all Liabilities to or
relating to Transferred Individuals under the AT&T LTSPME and the AT&T RSPSP,
respectively; and (ii) AT&T shall cause
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the accounts of the Transferred Individuals under the AT&T LTSPME and the AT&T
RSPSP which are held by their related trusts as of the Close of the Distribution
Date to be transferred to the Lucent LTSPME and the Lucent RSPSP, respectively,
and their related trusts, and Lucent shall cause such transferred accounts to be
accepted by such plans and trusts. Effective no later than Immediately after the
Distribution Date, Lucent shall use its reasonable best efforts to enter into
such agreements satisfactory to Lucent to accomplish such assumptions and
transfers, the maintenance of the necessary participant records, the appointment
of Fidelity Institutional Trust Company as initial trustee under the Lucent
LTSPME and the Lucent RSPSP, and the engagement of Fidelity Records Management
Company as initial recordkeeper under such plans.
4.2 LTSSPs AND LESOPs.
(a) OCCUPATIONAL SAVINGS PLAN TRUSTS. Effective Immediately
after the Distribution Date, Lucent shall establish, or cause to be established,
a separate trust, qualified in accordance with Code Section 401(a), exempt from
taxation under Code Section 501(a)(1), and forming part of the Lucent LTSSP,
which shall be a participating trust in the AT&T Occupational Savings Group
Trust.
(b) ASSUMPTION OF LTSSP LIABILITIES. Effective Immediately
after the Distribution Date: (i) the Lucent LTSSP shall assume and be solely
responsible for all Liabilities to or relating to Transferred Individuals under
the AT&T LTSSP, other than Liabilities referred to in Section 4.2(c); and (ii)
AT&T shall cause the accounts of the Transferred Individuals under the AT&T
LTSSP which are held by its related trust as of the Close of the Distribution
Date to be transferred to the Lucent LTSSP and its related trust, and Lucent
shall cause such transferred accounts to be accepted by such plans and trusts.
Effective no later than Immediately after the Distribution Date, Lucent shall
use its reasonable best efforts to enter into agreements satisfactory to Lucent
to accomplish such assumption and transfer, the maintenance of the necessary
participant records, the appointment of the then-current trustee under the AT&T
LTSSP as initial trustee under the Lucent LTSSP, and the engagement of the
then-current recordkeeper of the AT&T LTSSP as initial recordkeeper under such
plans.
(c) LEVERAGED STOCK OWNERSHIP PLAN.
(i) Effective Immediately after the Distribution
Date, Lucent shall establish, or cause to be established, a separate trust (the
"Lucent LESOP Trust"), qualified in accordance with Code Section 401(a), exempt
from taxation under Code Section 501(a), and forming part of the Lucent LTSSP.
(ii) Before the Distribution Date, AT&T and
Lucent shall use their reasonable best efforts to renegotiate the note agreement
between Bankers Trust Company, as trustee of the AT&T LESOP, and various lenders
dated March 9, 1990 (the "Existing Acquisition Loan") so that it is restructured
into two note agreements for two loans, the principal amount of one being
attributable to the accounts to be transferred to the Lucent LESOP Trust
pursuant to Section 4.2(c)(iii) (the "Lucent Acquisition Loan") and the
principal amount of the other being attributable to the accounts remaining in
the AT&T LESOP (the "AT&T Acquisition Loan"). The principal amount of the Lucent
Acquisition Loan shall be determined by multiplying the principal amount of the
Existing Acquisition Loan as of the Distribution Date by the fraction described
in Section 4.2(c)(iii). AT&T and Lucent shall use their reasonable best efforts
to cause the terms of the AT&T Acquisition Loan and the Lucent Acquisition Loan
to be as favorable to Lucent and AT&T, respectively, as the
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terms of the Existing Acquisition Loan, and, to the extent permitted by
applicable law, including Code Section 133, the terms of the Lucent Acquisition
Loan to be no less favorable to Lucent and the Lucent LESOP Trust than the terms
of the AT&T Acquisition Loan are to AT&T and the AT&T LESOP Trust.
(iii) Effective Immediately after the Distribution
Date: (A) the Lucent LTSSP shall assume and be solely responsible for all
Liabilities to or relating to Transferred Individuals under the AT&T LTSSP that
relate to, arise out of or result from the AT&T LESOP; (B) AT&T shall cause the
accounts of the Transferred Individuals under the AT&T LTSSP which are held by
the AT&T LESOP Trust as of the Close of the Distribution Date to be transferred
to the Lucent LTSSP and the Lucent LESOP Trust; (C) if the Existing Acquisition
Loan has been restructured into, and subject to the terms of, the AT&T
Acquisition Loan and the Lucent Acquisition Loan, AT&T shall cause the trustee
of the AT&T LESOP Trust to transfer to the Lucent LESOP Trust a portion of the
assets held in the "Suspense Account" (as defined in Article 20 of the AT&T
LTSSP) attributable to the Transferred Individuals, determined by multiplying
the number of shares of AT&T Common Stock and the fair market value of any other
assets held in such suspense account as of the Close of the Distribution Date by
a fraction, the numerator of which is the amount deemed to be employer matching
contributions attributable to Lucent Individuals and other employees of Lucent
and the Lucent Entities for the latest calendar month that ends on or before the
Distribution Date, and the denominator of which is the total amount deemed to be
employer matching contributions for all participants in the AT&T LTSSP for such
calendar month; and (D) Lucent shall cause all accounts transferred pursuant to
clauses (B) and (C) to be accepted by such plan and trust. Effective no later
than Immediately after the Distribution Date, Lucent shall use its reasonable
best efforts to enter into agreements acceptable to Lucent to accomplish such
assumption and transfers, the maintenance of the necessary participant and
suspense account records, the appointment of Bankers Trust Company as initial
trustee of the Lucent LESOP Trust, and the engagement of the then-current
recordkeeper of the AT&T LESOP as initial recordkeeper of the Lucent LESOP.
(iv) The parties intend that, as the result of
the above-described transactions, after the Close of the Distribution Date, each
of them will be the sponsor of an "employee stock ownership plan" as defined in
Code Section 4975(e)(7), and that the AT&T Acquisition Loan and Lucent
Acquisition Loan will be exempt from the prohibited transaction rules of the
Code and ERISA pursuant to Code Section 4975(d)(3).
(v) The parties acknowledge that, as a result of
the transfer of assets described in Section 4.2(c)(iii) and the Distribution,
both the AT&T LESOP and the Lucent LESOP will, after the Close of the
Distribution Date, hold shares of both AT&T Common Stock and Lucent Common
Stock. The parties further acknowledge that applicable law generally prohibits
such plans from holding securities that are not "qualifying employer securities"
within the meaning of Code Section 409 for more than a reasonable time after the
Distribution Date unless the IRS grants an extension of time. Accordingly, AT&T
and Lucent shall each request the IRS to grant an extension of such holding
period as their financial advisors shall deem prudent to allow the AT&T LESOP to
dispose of the shares of Lucent Common Stock received by it as a result of the
Distribution and to allow the Lucent LESOP to dispose of the shares of AT&T
Common Stock it holds as a result of the transfer of accounts pursuant to
Section 4.2(c)(iii), and, in each case, to reinvest in qualifying employer
securities, in a manner consistent with the best interests of the LESOP
participants. In furtherance of such dispositions and reinvestments, AT&T and
Lucent shall take all actions necessary or appropriate to permit the exchange of
shares of Lucent Common Stock held by the AT&T LESOP Trust for shares of AT&T
Common Stock held by the Lucent
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LESOP Trust, including the engagement of a fiduciary not affiliated with either
AT&T or Lucent to advise the parties regarding the time and manner (including
the exchange ratio) of such exchange. If the restructuring of the Existing
Acquisition Loan results in any prepayment or "make whole" penalty, or if the
interest rate payable pursuant to the Lucent Acquisition Loan exceeds the
interest rate payable pursuant to the AT&T Acquisition Loan or vice versa, then
Lucent and AT&T and their respective LESOPs shall bear the cost of such
penalties and the excess interest expense so incurred in proportion to the
relative initial principal amounts of the Lucent Acquisition Loan and the AT&T
Acquisition Loan, taking into account any tax benefits realized or tax
detriments suffered in connection therewith.
(vi) Notwithstanding the foregoing, if it is
determined by AT&T or Lucent before the Distribution Date that the restructuring
of the Existing Acquisition Loan is not practicable on commercially reasonable
terms and conditions, then, unless AT&T and Lucent agree otherwise, AT&T shall
terminate the AT&T LESOP and its related trust before the Distribution Date, and
shall direct the trustee of the AT&T LESOP trust to sell sufficient shares of
AT&T Common Stock held under the AT&T LESOP trust to repay the Existing
Acquisition Loan. Any remaining "Financed Shares" (as defined in the AT&T LESOP)
that are released after repayment of the loan and not the subject of any
subsequent refinancing shall be used by the Participating Companies to make
matching contributions with respect to periods before the Close of the
Distribution Date to the AT&T LTSSP in accordance with their obligations under
the AT&T LTSSP.
4.3 ESOPs.
(a) ESOP TRUST. Effective Immediately after the Distribution
Date, Lucent shall establish, or cause to be established, a separate trust (the
"Lucent ESOP Trust"), qualified in accordance with Code Section 401(a), exempt
from taxation under Code Section 501(a), and forming part of the Lucent ESOP.
(b) ASSUMPTION OF LIABILITIES AND TRANSFER OF ASSETS.
(i) Effective Immediately after the Distribution
Date, the Lucent ESOP shall assume and be solely responsible for all Liabilities
to or relating to Transferred Individuals under the AT&T ESOP, and AT&T shall
cause the accounts of the Transferred Individuals under the AT&T ESOP as of the
Close of the Distribution Date to be transferred to the Lucent ESOP and the
Lucent ESOP Trust, and Lucent shall cause such plan and trust to accept such
assets. Effective no later than Immediately after the Distribution Date, Lucent
shall use its reasonable best efforts to enter into agreements acceptable to
Lucent to accomplish such assumptions and transfers, the maintenance of the
necessary participant records, the appointment of Midlantic Bank as initial
trustee of the Lucent ESOP Trust and the engagement of American Transtech Inc.
as initial recordkeeper of the Lucent ESOP.
(ii) The parties acknowledge that, as a result of
the transfer of assets described in Section 4.3(b)(i) and the Distribution, both
the AT&T ESOP and the Lucent ESOP will, after the Distribution Date, hold shares
of both AT&T Common Stock and Lucent Common Stock and that, in order to continue
to qualify as employee stock ownership plans, each such plan will be required to
dispose of securities that are not qualifying employer securities and reinvest
in qualifying employer securities. The parties further acknowledge that
applicable law generally prohibits such plans from holding securities that are
not "qualifying employer securities" within the meaning of Code Section 409 for
more than a reasonable time after the Distribution Date unless the IRS grants an
extension of time. Accordingly, AT&T and Lucent shall each request the IRS to
grant an extension of such
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holding period as their financial advisors shall deem prudent to allow the AT&T
ESOP to dispose of the shares of Lucent Common Stock received by it as a result
of the Distribution and to allow the Lucent ESOP to dispose of the shares of
AT&T Common Stock it holds as a result of the transfer of accounts pursuant to
Section 4.3(b)(i), and, in each case, to reinvest in qualifying employer
securities, in a manner consistent with the best interests of the ESOP
participants. In furtherance of such dispositions and reinvestments, AT&T and
Lucent shall take all actions necessary or appropriate to permit the exchange of
shares of Lucent Common Stock held by the AT&T ESOP Trust for shares of AT&T
Common Stock held by the Lucent ESOP Trust, including the engagement of a
fiduciary not affiliated with either AT&T or Lucent to advise the parties
regarding the time and manner (including the exchange ratio) of such exchange.
ARTICLE V
HEALTH AND WELFARE PLANS
5.1 ESTABLISHMENT OF MIRROR HEALTH AND WELFARE PLAN TRUSTS. On or
before the Distribution Date, Lucent shall establish, or cause to be
established: (a) the Lucent Health Plans Benefit Trust, for the purpose of
funding claims, other than for post-retirement benefits, under the Lucent Health
Plans; (b) the Lucent Management VEBA, for the purpose of funding claims for
post-retirement benefits of employees not covered by any collective bargaining
agreement under the Lucent Health Plans; (c) the Lucent Union VEBA, for the
purpose of funding claims for post-retirement benefits under the Lucent Health
Plans of employees covered by a collective bargaining agreement; and (d) the
Lucent LTD VEBA, for the purpose of funding long-term disability and disability
pension benefits under the Lucent Health and Welfare Plans. Such trusts shall
meet the requirements of Code Section Section 419, 419A, 501(a), and 501(c)(9).
Lucent shall use its reasonable best efforts to enter into agreements
satisfactory to Lucent for the appointment as initial trustee under each such
trust of the trustee of the corresponding AT&T trust.
5.2 ASSUMPTION OF HEALTH AND WELFARE PLAN LIABILITIES.
(a) Immediately after the Distribution Date, all Liabilities
to or relating to Transferred Individuals under the AT&T Health and Welfare
Plans shall cease to be Liabilities of the AT&T Health and Welfare Plans and
shall be assumed by the corresponding Lucent Health and Welfare Plans.
(b) Notwithstanding Section 5.2(a), all treatments which have
been pre-certified for or are being provided to a Transferred Individual as of
the Close of the Distribution Date shall be provided without interruption under
the appropriate AT&T Health and Welfare Plan until such treatment is concluded
or discontinued pursuant to applicable plan rules and limitations, but Lucent
shall continue to be responsible for all Liabilities relating to, arising out of
or resulting from such on-going treatments as of the Close of the Distribution
Date.
(c) Lucent shall assume, effective Immediately after the
Distribution Date, all Liabilities relating to, arising out of or resulting from
special commitments made by AT&T before the Close of the Distribution Date to
provide benefits to or with respect to Transferred Individuals for custodial
care or other services not covered by any AT&T Health and Welfare Plans (but
only if such special commitments were made with the prior written consent of the
Lucent Senior Vice President, Human Resources or his delegate, to
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the extent such commitments are made after the Participation Commencement Date).
Before the Close of the Distribution Date, AT&T shall transfer to Lucent copies
of all documentation, and a complete written description, of the terms of all
such special commitments to Transferred Individuals.
5.3 VEBA ASSET TRANSFERS. This Section 5.3 shall govern the transfer of
assets from the AT&T Health Trusts (other than the AT&T Health Plans Benefit
Trust) to the corresponding Lucent Health Trusts and from the AT&T LTD VEBA to
the Lucent LTD VEBA, except to the extent that Section 5.5 is applicable. As
soon as practicable after the Close of the Distribution Date, AT&T shall
determine the aggregate present value, as of the Close of the Distribution Date,
of the future benefit obligations of each AT&T Plan funded by a VEBA ("VEBA
Plans"), with respect to Transferred Individuals who are eligible to receive
benefits under the applicable VEBA Plan as of the Close of the Distribution Date
(and, in the case of any post-retirement health benefits, who have terminated
employment as of the Close of the Distribution Date). As soon as practicable
after such determination is made, there shall be transferred from each AT&T VEBA
to the corresponding Lucent VEBA an amount of assets having a fair market value
on the date of transfer equal to the amount determined by dividing such
aggregate present value of future benefit obligations for the applicable VEBA
Plans of Lucent by the aggregate of all such present values of all the
applicable VEBA Plans of AT&T and all the applicable VEBA Plans of Lucent,
multiplied by the fair market value of the assets of the AT&T VEBA on the date
of transfer, adjusted to take into account the extent to which AT&T and/or
Lucent has opted to forego reimbursement from the applicable VEBA of any benefit
obligation that was paid by AT&T or Lucent, as applicable, on or after the
Participation Commencement Date and before the Close of the Distribution Date.
5.4 TRANSFER OF RETIREMENT FUNDING ACCOUNT ASSETS. This Section 5.4
shall apply to AT&T Health and Welfare Plans with group term life insurance
policies that have RFAs maintained for the purpose of accumulating, through
employer contributions in advance of employee retirements, a fund to be used to
pay all or a portion of the costs for continuing life insurance protection for
employees after their retirement. As soon as practicable after the Close of the
Distribution Date, there shall be transferred to the corresponding RFA of Lucent
an amount of assets (determined by AT&T subject to audit by Coopers & Lybrand)
having a fair market value as of the Close of the Distribution Date equal to the
product of (a) the present value, as of the Close of the Distribution Date, of
the future benefit obligation with respect to Transferred Individuals to be
discharged from the RFA, divided by the present value of the future benefit
obligations with respect to all individuals whose benefits are to be discharged
from the RFA assets as of the Close of the Distribution Date times (b) the fair
market value of all RFA assets as of the Close of the Distribution Date. AT&T
and Lucent shall adopt, and shall use their reasonable best efforts to cause
their insurers to adopt, procedures to implement such asset transfers in a
reasonable and expeditious manner that is consistent with the underlying group
life insurance contracts and applicable legal requirements. Nothing in this
Agreement shall be interpreted to provide that any assets so transferred have
reverted to AT&T or Lucent.
5.5 VEBAS FUNDED WITH TRUST-OWNED LIFE INSURANCE. This Section 5.5
shall govern transfers of assets of AT&T VEBAs that are funded, in whole or in
part, with trust-owned life insurance policies.
(a) GENERAL PROVISIONS. As soon as practicable after the Close
of the Distribution Date, AT&T shall cause each such AT&T VEBA to transfer to
the corresponding Lucent VEBA such assets as are attributable to Transferred
Individuals who are eligible to
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receive post-retirement health benefits under the AT&T Health Plans with respect
to such AT&T VEBA; provided, that AT&T shall not be required to cause such
transfer to occur before AT&T has obtained appropriate rulings from regulatory
agencies indicating that the transfers do not contravene any statute,
regulation, or technical pronouncement.
(b) AT&T MANAGEMENT VEBA: TRUST-OWNED LIFE INSURANCE (VEBA).
To accomplish the transfers required by Section 5.5(a), all or a portion of the
Trust-Owned Life Insurance (VEBA) policies and any residual assets in the AT&T
Management VEBA shall be allocated between the trustee of the AT&T Management
VEBA, and the trustee of the Lucent Management VEBA, in accordance with the
following procedures.
(i) AT&T shall determine the extent to which the
assets of the AT&T Management VEBA are sufficient to satisfy all Liabilities to
or relating to Transferred Individuals who have terminated employment and are
eligible to receive post-retirement health benefits under the AT&T Health Plans
with respect to the AT&T Management VEBA as of the Close of the Distribution
Date.
(ii) AT&T shall instruct the trustee of the AT&T
Management VEBA to transfer one of the Trust-Owned Life Insurance (VEBA)
policies to the Lucent Management VEBA. AT&T shall determine which policy shall
be transferred based on the present values of relative post-retirement health
liabilities (benefit obligations) retained by AT&T and assumed by Lucent
pursuant to this Agreement, without regard to which entity employs the insured
individuals, provided, that before such transfer, AT&T shall instruct the
trustee of the AT&T Management VEBA to adjust and/or allocate the cash values
under the Trust-Owned Life Insurance (VEBA) policies such that the policy to be
transferred to the Lucent Management VEBA shall have a proportionate cash value
consistent with the proportion of post-retirement health liabilities (benefit
obligations) to be assumed by Lucent. Upon such assignment, the trustee of the
Lucent Management VEBA shall assume and be solely responsible for all
Liabilities relating to, arising out of or resulting from such policy, including
the payment of any premiums and any loan repayments required, and shall be
entitled to all benefits, under the policy.
(c) OTHER ASSET TRANSFERS. To accomplish the transfers
required by Section 5.5(a), a portion of the assets of the AT&T Management VEBA
(other than Trust-Owned Life Insurance (VEBA) policies) shall be transferred to
the Lucent Management VEBA to the extent necessary so that immediately after
such transfer and the transfer pursuant to Section 5.5(b), the ratio of the
assets of each such VEBA trust to the liabilities payable therefrom as described
in Section 5.5(b)(i), is equal.
(d) ADMINISTRATION. Lucent and AT&T shall share all
information necessary to determine when and whether any individuals insured by
the Trust-Owned Life Insurance (VEBA) policies owned by the trustees of the AT&T
Management VEBA and Lucent Management VEBA, respectively, are deceased, and as
otherwise necessary to administer their respective Management VEBAs.
5.6 CONTRIBUTIONS TO, INVESTMENTS OF AND DISTRIBUTIONS FROM VEBAS.
Before the Close of the Distribution Date, AT&T shall have sole authority to
direct the trustee of the AT&T Health Trusts and AT&T LTD VEBA as to the timing
and manner of any contributions to the AT&T Health Trusts and AT&T LTD VEBA, the
investment of any trust assets, and the distributions and/or transfers of trust
assets to AT&T, Lucent, any Participating Company in the trusts, any paying
agent, any successor trustee, or any other Person.
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5.7 VENDOR CONTRACTS.
(a) THIRD-PARTY ASO CONTRACTS.
(i) AT&T shall use its reasonable best efforts
to amend each administrative services only contract with a third-party
administrator that relates to any of the AT&T Health and Welfare Plans (an "ASO
Contract") in existence as of the date of this Agreement to permit Lucent to
participate in the terms and conditions of such ASO Contract from Immediately
after the Distribution Date until the expiration of the financial fee guarantees
in effect under such ASO Contract as of the Close of the Distribution Date. AT&T
shall use its reasonable best efforts to cause all ASO Contracts into which AT&T
enters after the date of this Agreement but before the Close of the Distribution
Date (including contracts with a subrogation vendor, a COBRA administration
vendor and a Disability 2000 vendor) to allow Lucent to participate in the terms
and conditions thereof effective Immediately after the Distribution Date on the
same basis as AT&T.
(ii) AT&T shall have the right to determine, and
shall promptly notify Lucent of, the manner in which Lucent's participation in
the terms and conditions of ASO Contracts as set forth above shall be
effectuated. The permissible ways in which Lucent's participation may be
effectuated include automatically making Lucent a party to the ASO Contracts or
obligating the third party to enter into a separate ASO Contract with Lucent
providing for the same terms and conditions as are contained in the ASO
Contracts to which AT&T is a party. Such terms and conditions shall include the
financial and termination provisions, performance standards, methodology,
auditing policies, quality measures, reporting requirements and target claims.
Lucent hereby authorizes AT&T to act on its behalf to extend to Lucent the terms
and conditions of the ASO Contracts. Lucent shall fully cooperate with AT&T in
such efforts, and Lucent shall not perform any act, including discussing any
alternative arrangements with any third party, that would prejudice AT&T's
efforts.
(iii) If AT&T determines that it will not be
successful in negotiating contract language that will permit compliance with
Sections 5.7(a)(i) and 5.7(a)(ii), AT&T shall so notify Lucent promptly, but in
no event later than July 20, 1996, and after such notification, Lucent shall be
released from the restriction contained in the last sentence of Section
5.7(a)(ii). In such case, AT&T shall offer a contingency plan for the
administration of the portion of the Lucent Health and Welfare Plans affected by
the unavailability of such ASO Contract, including, if possible, an offer by the
third-party administrator under the relevant ASO Contract of its services under
a separate contract with Lucent, with terms and conditions as similar as
practicable to those of the ASO Contract with AT&T. Lucent shall, effective
Immediately after the Distribution Date, either adopt its own contingency plan
or the contingency plan established by AT&T for such arrangement.
(b) GROUP INSURANCE POLICIES.
(i) This Section 5.7(b) applies to group
insurance policies not subject to allocation or transfer pursuant to the
foregoing provisions of this Article V ("Group Insurance Policies").
(ii) AT&T shall use its reasonable best efforts
to amend each Group Insurance Policy in existence as of the date of this
Agreement for the provision or administration of benefits under the AT&T Health
and Welfare Plans to permit Lucent to
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participate in the terms and conditions of such policy from Immediately after
the Distribution Date until the expiration of the financial fee and rate
guarantees in effect under such Group Insurance Policy as of the Close of the
Distribution Date. AT&T shall use its reasonable best efforts to cause all Group
Insurance Policies into which AT&T enters or which AT&T renews after the date of
this Agreement but before the Close of the Distribution Date to allow Lucent to
participate in the terms and conditions thereof effective Immediately after the
Distribution Date on the same basis as AT&T.
(iii) Lucent's participation in the terms and
conditions of each such Group Insurance Policy shall be effectuated by
obligating the insurance company that issued such insurance policy to AT&T to
issue one or more separate policies to Lucent. Such terms and conditions shall
include the financial and termination provisions, performance standards and
target claims. Lucent hereby authorizes AT&T to act on its behalf to extend to
Lucent the terms and conditions of such Group Insurance Policies. Lucent shall
fully cooperate with AT&T in such efforts, and Lucent shall not perform any act,
including discussing any alternative arrangements with third parties, that would
prejudice AT&T's efforts.
(iv) If AT&T determines that it will not be
successful in negotiating policy provisions that will permit compliance with
Sections 5.7(b)(ii) and 5.7(b)(iii), AT&T shall so notify Lucent promptly, but
in no event later than July 20, 1996, and after such notification, Lucent shall
be released from the restriction contained in the last sentence of Section
5.7(b)(iii). In such case, AT&T shall use its reasonable best efforts to either
continue to cover Lucent under its Group Insurance Policies or procure a
separate policy for Lucent until Lucent has procured such separate insurance
policy or made other arrangements for replacement coverage, and Lucent shall
bear all costs incurred by AT&T to continue such coverage.
(c) HMO AGREEMENTS.
(i) Before the Distribution Date, AT&T shall use
its reasonable best efforts to amend all letter agreements with HMOs that
provide medical services under the AT&T Medical Plans for 1996 ("HMO
Agreements") in existence as of the date of this Agreement to permit Lucent to
participate in the terms and conditions of such HMO Agreements, in each case,
from Immediately after the Distribution Date until December 31, 1996. AT&T shall
use its reasonable best efforts to cause all HMO Agreements into which AT&T
enters after the date of this Agreement but before the Close of the Distribution
Date to allow Lucent to participate in the terms and conditions of such HMO
Agreements from Immediately after the Distribution Date until December 31, 1996
on the same basis as AT&T.
(ii) AT&T shall have the right to determine, and
shall promptly notify Lucent of, the manner in which Lucent's participation in
the terms and conditions of all HMO Agreements as set forth above shall be
effectuated. The permissible ways in which Lucent's participation may be
effectuated include automatically making Lucent a party to the HMO Agreements or
obligating the HMOs to enter into letter agreements with Lucent which are
identical to the HMO Agreements. Such terms and conditions shall include the
financial and termination provisions of the HMO Agreements. Lucent hereby
authorizes AT&T to act on its behalf to extend to Lucent the terms and
conditions of the HMO Agreements. Lucent shall fully cooperate with AT&T in such
efforts, and Lucent shall not perform any act, including discussing any
alternative arrangements with any third-party, that would prejudice AT&T's
efforts.
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(iii) If AT&T determines that it will not be
successful in negotiating arrangements that will permit compliance with Sections
5.7(c)(i) and 5.7(c)(ii), AT&T shall so notify Lucent promptly, but no event
later than July 20, 1996, and after such notification, Lucent shall be released
from the restriction contained in the last sentence of Section 5.7(c)(ii). In
such case, Lucent shall enter into letter agreements with one or more HMOs to
provide benefits under the Lucent Medical Plans, at least through December 31,
1996, in the geographic area serviced by the HMOs covered by AT&T's notice. AT&T
shall, if requested by Lucent and permitted by the HMOs, arrange for the
continued provision under its HMO Agreements of medical services to Lucent
Medical Plan participants from Immediately after the Distribution Date through
December 31, 1996, and Lucent shall bear all costs incurred by AT&T to continue
such services.
(iv) Notwithstanding anything in this Article V
to the contrary, Lucent shall have the sole discretion to determine which HMOs
to offer to the participants in the Lucent Medical Plans for 1997 and subsequent
years, and all HMO Agreements in which Lucent participates pursuant to this
Section 5.7(c) shall provide Lucent with the right to discontinue its
participation effective January 1, 1997.
(d) EFFECT OF CHANGE IN RATES. AT&T and Lucent shall use their
reasonable best efforts to cause each of the insurance companies, HMOs,
point-of-service vendors and third-party administrators providing services and
benefits under the AT&T Health and Welfare Plans and the Lucent Health and
Welfare Plans to maintain the premium and/or administrative rates based on the
aggregate number of participants in both the AT&T Health and Welfare Plans and
the Lucent Health and Welfare Plans through the expiration of the financial fee
or rate guarantees in effect as of the Close of the Distribution Date under the
respective ASO Contracts, Group Insurance Policies, and HMO Agreements. To the
extent they are not successful in such efforts, AT&T and Lucent shall each bear
the revised premium or administrative rates attributable to the individuals
covered by their respective Health and Welfare Plans.
5.8 PROCEDURES FOR AMENDMENTS TO PLANS, PLAN DESIGNS, ADMINISTRATIVE
PRACTICES, AND VENDOR CONTRACTS.
(a) AMENDMENTS TO PLAN DOCUMENTS. From Immediately after the
Distribution Date through December 31, 1998, no amendment to any AT&T Health and
Welfare Plan or Lucent Health and Welfare Plan shall be effective unless the
party intending to amend its Health and Welfare Plan has: (i) given the other
party written notice of the intention to amend, accompanied by a copy of the
proposed amendment, at least 30 days in advance of the earlier of (A) the
proposed amendment effective date, or (B) the proposed amendment adoption date;
(ii) agreed to bear all of the costs of implementing the amendment incurred by
third-party administrators, insurance companies and other vendors and passed
through to one or both of the parties; and (iii) certified to the other party,
and provided to the other party the written concurrence of all third-party
administrators, insurance companies and other vendors providing services in
connection with such Plan, that (after taking into account the effect of clause
(ii)) the proposed amendment to the Health and Welfare Plan will have no
material adverse impact (financial, administrative or otherwise) on the
corresponding Health and Welfare Plan sponsored by the other party.
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(b) CHANGES IN VENDOR CONTRACTS, GROUP INSURANCE POLICIES,
PLAN DESIGN, AND ADMINISTRATION PRACTICES AND PROCEDURES.
(i) From Immediately after the Distribution Date
through the earlier of the expiration of the financial fee or rate guarantees in
effect as of the Close of the Distribution Date under the applicable ASO
Contract, Group Insurance Policy or HMO Agreement, and December 31, 1998,
neither AT&T nor Lucent shall materially modify, or take other action which
would have a material effect on, any of the following (each such modification, a
"Change") without complying with Section 5.8(b)(ii): (A) the termination date,
administration, or operation of (1) an ASO contract between AT&T or Lucent and a
third-party administrator, (2) a Group Insurance Policy issued to AT&T or
Lucent, or (3) an HMO Agreement with AT&T or Lucent, in each case, the material
terms and conditions of which contracts and policies are extended to Lucent or
to which Lucent becomes a party pursuant to Section 5.7; (B) the design of
either an AT&T Health and Welfare Plan or a Lucent Health and Welfare Plan; or
(C) the financing, operation, administration or delivery of benefits under
either an AT&T Health and Welfare Plan or a Lucent Health and Welfare Plan.
(ii) Neither AT&T nor Lucent shall make any
Change unless the party intending to make the Change has: (A) given the other
party written notice of the intention to make the Change, accompanied by a
written description of the Change, at least 180 days in advance of the proposed
effective date of the Change; (B) agreed to bear all of the costs of
implementing the Change which are incurred by all third-party administrators,
insurance companies, HMOs and other vendors and passed through to one or both of
the parties; and (C) certified to the other party, and provided to the other
party the written concurrence of each third-party administrator, insurance
company, HMO or other vendor associated with or performing services in
connection with the Health and Welfare Plan affected by the Change, that (after
taking into account the effect of clause (B)) the proposed Change will have no
material adverse impact (financial, administrative or otherwise) on the
corresponding Health and Welfare Plan sponsored by the other party.
(iii) SUBMISSION TO HEALTH, WELFARE AND LIFE
INSURANCE COMMITTEE. If AT&T or Lucent desires to make a Change that requires
compliance with, but cannot satisfy all of the conditions of, Section
5.8(b)(ii), the party desiring to make the Change may submit a written request
for approval of the Change, accompanied by a written description of the Change,
to the HWLI Committee. If such a request is made, the desired Change may be
implemented only after the Change is approved in writing by the HWLI Committee.
(c) EMPLOYEE CONTRIBUTIONS. Notwithstanding the provisions of
Sections 5.8(a) and 5.8(b), as of the first January 1 after the Distribution
Date, AT&T and Lucent shall each have the independent right, in its sole
discretion and without compliance with Sections 5.8(a) and 5.8(b), to increase
or decrease the amount of employee contributions under their respective Health
and Welfare Plans.
5.9 HEALTH, WELFARE AND LIFE INSURANCE COMMITTEE. From the date of this
Agreement through December 31, 1998, the management of the ASO Contracts, Group
Insurance Policies, and HMO Agreements and other vendor contracts that are
subject to Section 5.8 and the administration of the AT&T Health and Welfare
Plans and the Lucent Health and Welfare Plans associated therewith shall be
conducted under the supervision of the HWLI Committee. The HWLI Committee shall
be comprised of an equal number of representatives from AT&T and Lucent at the
District Manager or equivalent level, and shall provide
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strategic oversight and direction of the cohesive administration of the AT&T
Health and Welfare Plans and the Lucent Health and Welfare Plans. Issues that
cannot be resolved by the HWLI Committee shall be decided, at the request of
either party, by the Executive Oversight Committee comprised of the Lucent
Senior Vice President-Human Resources and the AT&T Senior Vice
President-Benefits and Compensation.
5.10 AT&T SICKNESS AND ACCIDENT DISABILITY, LONG TERM DISABILITY AND
PENSION DISABILITY BENEFITS.
(a) ADMINISTRATION OF AT&T SADBP CLAIMS. AT&T shall administer
claims incurred under the AT&T SADBP by Transferred Individuals, Lucent
Individuals and other employees and former employees of Lucent and the Lucent
Entities on or after the Participation Commencement Date but before the Close of
the Distribution Date, to the extent such claims are not administered by Lucent
pursuant to the terms of the AT&T SADBP as in effect on the date of this
Agreement. Any determination made or settlements entered into by AT&T with
respect to such claims shall be final and binding. If claims incurred before the
Close of the Distribution Date under the AT&T SADBP by Transferred Individuals,
Lucent Individuals and other employees and former employees of Lucent and the
Lucent Entities were administered by Lucent before the Close of the Distribution
Date, such claims shall continue to be administered by Lucent after the Close of
the Distribution Date, unless outsourced pursuant to Section 5.10(b). AT&T shall
transfer to Lucent, effective Immediately after the Distribution Date,
responsibility for administering all claims incurred by Transferred Individuals,
Lucent Individuals and other employees and former employees of Lucent and the
Lucent Entities before the Close of the Distribution Date that are administered
by AT&T as of the Close of the Distribution Date. Lucent shall administer such
claims in the same manner, and using the same methods and procedures, as AT&T
used in administering such claims. Lucent shall have sole discretionary
authority to make any necessary determinations with respect to such claims,
including entering into settlements with respect to such claims.
(b) OUTSOURCING OF CLAIMS. AT&T, pursuant to its Disability
2000 project or otherwise, shall have the right to engage a third-party
administrator or insurance company to administer ("outsource") claims incurred
under the AT&T SADBP that are being administered by AT&T pursuant to Section
5.10(a), claims incurred under the AT&T LTD Plans, and claims incurred under the
pension disability provisions of the AT&T Pension Plans, including claims
incurred by Transferred Individuals, Lucent Individuals and other employees and
former employees of Lucent and the Lucent Entities before the Close of the
Distribution Date. AT&T may determine the manner and extent of such outsourcing,
including the selection of one or more third-party administrators or insurance
companies and the ability to transfer the liability for such claims to one or
more independent insurance companies. AT&T shall promptly notify Lucent of its
intent to outsource such claims, and the material terms and condition of the
outsourcing, before the effective date thereof. Lucent shall have the right to
notify AT&T, within a reasonable period of time after Lucent receives AT&T's
notice of intent to outsource, of Lucent's desire to participate in the proposed
outsourcing. If Lucent gives such notice, all claims incurred by Transferred
Individuals, Lucent Individuals and other employees and former employees of
Lucent and the Lucent Entities before the Close of the Distribution Date that
are administered by Lucent pursuant to Section 5.10(a) shall be included in the
proposed outsourcing. In the event Lucent elects to participate in such
outsourcing, Lucent shall be bound by the terms and conditions thereof
(including all consequences of any transfer of liability) and to any
determinations and settlements entered into by the third-party administrator
pursuant thereto.
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5.11 POST-RETIREMENT HEALTH AND LIFE INSURANCE BENEFITS.
(a) As soon as practicable after the Distribution Date, AT&T
shall provide Lucent with a list of all Transferred Individuals who are, to the
best knowledge of AT&T, eligible to receive retiree medical or dental coverage
under the AT&T Health Plans as of the Distribution Date and/or post-retirement
life insurance coverage under the AT&T Group Life Program, and the type of
retiree medical or dental coverage and the level of life insurance coverage for
which they are eligible, as applicable.
(b) Effective Immediately after the Distribution Date, Lucent
shall (i) assume and continue through December 31, 1998 the company-sponsored
retiree care accounts provided under the AT&T Medical Expense Plan for Retired
Employees pursuant to collective bargaining agreements for all Transferred
Individuals under the Lucent Medical Expense Plan for Retired Employees and (ii)
honor and maintain all other-covered-charges buy-up lifetime maximum elections
made by Transferred Individuals under the AT&T Medical Expense Plan for Retired
Employees.
5.12 GROUP LIFE PROGRAMS. Effective as of the Close of the Distribution
Date, AT&T shall cause the insurance carrier that provides basic active life
insurance coverage, supplemental life insurance coverage, dependent life
insurance coverage, accidental life insurance coverage and the portion of the
post-retirement life insurance benefit which exceeds $50,000 per participant
under the AT&T Group Life Program to: (a) perform an experience rating; (b)
allocate the applicable premium stabilization reserves between AT&T and Lucent
on an actuarial basis; (c) allocate pending claim reserves based on actual
claims data; and (d) allocate unreported claim reserves based on expected claims
by coverage.
5.13 COBRA AND DIRECT PAY. Through the Close of the Distribution Date,
AT&T shall be responsible for administering compliance with the health care
continuation coverage requirements of COBRA and the AT&T Health and Welfare
Plans with respect to Transferred Individuals, Lucent Individuals and other
employees and former employees of Lucent and the Lucent Entities and
beneficiaries and dependents thereof and Lucent and the Lucent Entities shall be
responsible for filing all necessary employee change notices with respect to
their respective employees in accordance with applicable AT&T policies and
procedures. Effective Immediately after the Distribution Date, Lucent shall
solely be responsible for administering compliance with the health care
continuation coverage requirements of COBRA and the Lucent Health and Welfare
plans, and, with respect to Transferred Individuals, the AT&T Health and Welfare
Plans.
5.14 LEAVE OF ABSENCE PROGRAMS AND FMLA.
(a) Through the Close of the Distribution Date, AT&T shall be
responsible for administering compliance with the AT&T Leave of Absence Programs
and FMLA with respect to Lucent Individuals and all other employees of Lucent
and the Lucent Entities. Lucent and the Lucent Entities shall be responsible for
determining whether their respective employees are eligible for leave under the
AT&T Leave of Absence Programs and FMLA in accordance with such programs and
FMLA, respectively.
(b) Effective Immediately after the Distribution Date: (i)
Lucent shall adopt, and shall cause each Lucent Entity to adopt, leave of
absence programs which are substantially identical in all Material Features to
the AT&T Leave of Absence Programs as in effect on the Distribution Date; (ii)
Lucent shall honor, and shall cause each Lucent Entity to honor, all terms and
conditions of leaves of absence which have been granted to any
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Transferred Individual under an AT&T Leave of Absence Program or FMLA before the
Close of the Distribution Date by AT&T, Lucent, or a Lucent Entity, including
such leaves that are to commence after the Distribution Date; (iii) Lucent and
each Lucent Entity shall be solely responsible for administering leaves of
absence and compliance with FMLA with respect to their employees; and (iv)
Lucent and each Lucent Entity shall recognize all periods of service of
Transferred Individuals with AT&T or an AT&T Entity, as applicable, to the
extent such service is recognized by AT&T for the purpose of eligibility for
leave entitlement under the AT&T Leave of Absence Programs and FMLA; provided,
that no duplication of benefits shall be required by the foregoing.
(c) As soon as administratively possible after the Close of
the Distribution Date, AT&T shall provide to Lucent copies of all records
pertaining to the AT&T Leave of Absence Programs and FMLA with respect to all
Transferred Individuals to the extent such records have not been provided
previously to Lucent or a Lucent Entity.
5.15 AT&T WORKERS' COMPENSATION PROGRAM.
(a) ADMINISTRATION OF CLAIMS.
(i) Through the Close of the Distribution Date or
such earlier date as may be agreed by AT&T and Lucent, (A) AT&T shall continue
to be responsible for the administration of all claims that (1) are, or have
been, incurred under the AT&T WCP before the Close of the Distribution Date by
Transferred Individuals, Lucent Individuals and other employees and former
employees of Lucent and the Lucent Entities through the Close of the
Distribution Date ("Lucent WCP Claims") and (2) have been historically
administered by AT&T or its insurance company, and (B) Lucent shall continue to
be responsible for the administration of all Lucent WCP Claims that have been
historically administered by the Lucent Business.
(ii) Effective Immediately after the Distribution
Date or such earlier date as may be agreed by AT&T and Lucent, (A) Lucent shall,
to the extent Legally Permissible (as defined below), be responsible for the
administration of all Lucent WCP Claims, whether those claims were previously
administered by AT&T or Lucent, and (B) AT&T shall be responsible for the
administration of all Lucent WCP Claims not administered by Lucent pursuant to
clause (A), whether previously administered by AT&T or Lucent and whether under
the self-insured or insured portion of the AT&T WCP. Any determination made, or
settlement entered into, by either party or its insurance company with respect
to Lucent WCP Claims for which it is administratively responsible shall be final
and binding upon the other party.
(iii) Each party shall fully cooperate with the other
with respect to the administration and reporting of Lucent WCP Claims, the
payment of Lucent WCP Claims determined to be payable, and the transfer of the
administration of any Lucent WCP Claims to the other party as determined under
Section 5.15(a)(ii). Either party shall have the right to "outsource" (i.e.,
transfer the administration of claims to a third party administrator or cause
claims to be paid through insurance) any and all Lucent WCP Claims for which it
is administratively responsible.
(iv) For purposes of this Section 5.15(a), "Legally
Permissible" shall be determined on a state-by-state basis, and shall mean that
administration of Lucent
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WCP Claims by Lucent both (A) is permissible under the applicable state's
workers' compensation laws (taking into account all relevant facts, including
that Lucent may have a self-insurance certificate in that state) and (B) would
not have a material adverse effect on AT&T's self-insurance certificate within
that state. If it is determined that, in a particular state, it is Legally
Permissible for Lucent to administer Lucent WCP Claims, then Lucent shall be
responsible for the administration of all Lucent WCP Claims incurred in that
state, whether previously administered by AT&T, Lucent, or an insurance company.
If it is determined that, in a particular state, it is not Legally Permissible
for Lucent to administer Lucent WCP Claims, then AT&T shall be responsible for
the administration of all Lucent WCP Claims incurred in that state, whether
previously administered by AT&T, Lucent, or an insurance company.
(b) SELF-INSURANCE STATUS.
(i) AT&T shall amend its certificates of
self-insurance with respect to workers' compensation and any applicable group
insurance policies to include Lucent until the Close of the Distribution Date,
and Lucent shall fully cooperate with AT&T in obtaining such amendments. All
costs incurred by AT&T in amending such certificates or group insurance
policies, including filing fees, adjustments of security and excess loss
policies and amendment of safety programs, shall be shared equally by AT&T and
Lucent. AT&T shall use its reasonable best efforts to obtain self-insurance
status for workers' compensation for Lucent effective Immediately after the
Distribution Date in each jurisdiction in which Lucent conducts business and in
which AT&T is self-insured, if AT&T determines that such status is beneficial to
Lucent. Lucent hereby authorizes AT&T to take all actions necessary and
appropriate on its behalf in order to obtain such self-insurance status.
(ii) AT&T shall also arrange a contingent insured or
other arrangement for payment of workers' compensation claims, into which Lucent
shall enter if and to the extent that AT&T fails to obtain self-insured status
for Lucent as provided in Section 5.15(b)(i), unless Lucent obtains another such
arrangement that is effective Immediately after the Distribution Date, in which
event Lucent shall reimburse AT&T for any expenses incurred by AT&T in procuring
such contingent arrangement.
(c) INSURANCE POLICY.
(i) In the event the workers' compensation insurance
policy that AT&T maintains under the AT&T WCP expires before the Distribution
Date, AT&T shall use its reasonable best efforts to renew such policy and to
cause the issuing insurance company to issue a separate policy to Lucent. If
AT&T is not able to cause such insurance company to issue such separate
insurance policy, Lucent shall use its reasonable best efforts to procure a
separate policy from another insurance company or to obtain self-insurance
status, and AT&T shall use its reasonable best efforts to continue to cover
Lucent under its renewed policy until the earlier of (A) the date on which
Lucent's application for such self-insurance status is approved or (B) the date
on which a separate insurance policy is procured. Lucent shall compensate AT&T
for all costs incurred by AT&T to continue such coverage. Any claims incurred by
Transferred Individuals after the Close of the Distribution Date that will be
covered under and during any such continuation of coverage shall be treated as
being incurred before the Close of the Distribution Date for purposes of
determining the party responsible for the administration of benefits.
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(ii) AT&T shall use its best effort to maintain the
premium rates for all workers' compensation insurance policies for both AT&T and
Lucent in effect for periods through the Close of the Distribution Date to be
based on the aggregate number of employees covered under the workers'
compensation insurance policies of both AT&T and Lucent. Any premiums due under
the separate workers' compensation insurance issued to Lucent shall be payable
by Lucent.
5.16 AMERICAN TRANSTECH INC. AND BENEFIT DIRECTIONS ENROLLMENT CENTER.
AT&T shall cause American Transtech Inc. to enter into an agreement with Lucent
for the provision of data and enrollment services and customer service for
enrollment and eligibility matters through the 1996 fall open enrollment period
using the Benefit Directions Enrollment Center (the "BDEC") and the Benefit
Direction System (the "BDS") database. Such services shall be provided by
American Transtech Inc. to Lucent on terms and conditions and at prices
comparable to those on which American Transtech Inc. provides similar services
to AT&T.
5.17 AT&T EMPLOYEE ASSISTANCE PROGRAM. Effective Immediately after the
Distribution Date, Lucent shall either (a) provide a centralized Lucent Employee
Assistance Program staff to provide case management services for chemical
dependency/substance abuse treatments to Transferred Individuals or (b) contract
with the mental health network vendor used by AT&T to provide such services. As
of the Close of the Distribution Date, the AT&T Employee Assistance Program
shall cease to have any responsibility to provide case management services for
any Transferred Individuals' chemical dependency/substance abuse treatments.
5.18 AT&T WORK AND FAMILY PROGRAM. Before the Close of the Distribution
Date, AT&T and Lucent shall use their reasonable best efforts to agree on the
manner in which the Work and Family Program, including the Family Care
Development Fund, will be jointly funded, operated and administered. Until an
agreement is reached, AT&T will have sole responsibility for determining the
1996 grant payments to be made under the occupational and management Family Care
Development Fund. After an agreement is reached, but no later than the Close of
the Distribution Date, Lucent will have sole discretion to determine whether and
at what rate to make payments for the Lucent Fund for Management Employees. In
addition, Lucent will have sole discretion for administering the Lucent Family
Development Fund Program, provided that it funds its proportionate share of the
grants required by the National AT&T/CWA/IBEW Memorandum of Understanding
executed by AT&T and the CWA and IBEW as of May 31, 1992 (the "1992 Collective
Bargaining Agreement") and the Collective Bargaining Agreement. The share will
be determined in accordance with a methodology agreed upon by AT&T and Lucent,
and if they fail to agree upon a methodology, Lucent's allocable share shall be
that portion of the total of such grants that bears the same relationship to
such total grants as the number of Lucent Individuals who are occupational
employees bears to total number of occupational employees of AT&T, the AT&T
Entities, Lucent and the Lucent Entities as of the Participation Commencement
Date. Until all of the foregoing obligations under the 1992 Collective
Bargaining Agreement and the Collective Bargaining Agreement have been
satisfied, Lucent will provide AT&T with quarterly reports of occupational
grants funded. Before the Close of the Distribution Date, AT&T shall use its
reasonable best efforts to cause its agreement with its Work and Family vendors
to permit Lucent to participate in the terms and conditions of such agreements
until the expiration of the agreements. These efforts shall substantially
conform to the guidelines set forth in Section 5.7(a) as if such agreements were
ASO Contracts.
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5.19 WORLD WIDE WEB. Before the Close of the Distribution Date, AT&T and
Lucent shall jointly continue to explore (including by participation in a
testing program) the feasibility of offering participants in their Plans on-line
computer access to the point-of-service provider directories, fee schedules,
enrollment and other benefit communication materials through the AT&T customized
Internet World Wide Web developed by AT&T Bell Laboratories and a third-party
vendor. Lucent shall have the right to offer Lucent Plan participants these
on-line computer services after the Distribution Date, provided that Lucent
exercises this right by giving written notice of its intent to do so to AT&T on
or before the Distribution Date. If the portion of AT&T Bell Laboratories
responsible for developing and maintaining the AT&T customized Internet World
Wide Web is transferred to Lucent pursuant to the Separation and Distribution
Agreement, AT&T shall have the right to use, and Lucent agrees to maintain, this
service pursuant to a contract entered into between AT&T and Lucent as soon as
practicable after the Close of the Distribution Date. If the portion of AT&T
Bell Laboratories responsible for developing and maintaining the AT&T customized
Internet World Wide Web remains with AT&T pursuant to the Separation and
Distribution Agreement, Lucent shall have the right to use, and AT&T agrees to
maintain, this service pursuant to a contract entered into between AT&T and
Lucent as soon as practicable after the Close of the Distribution Date.
5.20 UNEMPLOYMENT INSURANCE TAX MANAGEMENT PROGRAM.
(a) AT&T shall cause Lucent to be covered under the AT&T
Unemployment Insurance Tax Management Program from the Participation
Commencement Date through the Close of the Distribution Date. Lucent shall
reimburse AT&T for its allocable share of fees paid by AT&T to its unemployment
insurance tax management vendor for services rendered during such period. Lucent
shall cooperate with the unemployment insurance tax management vendor by
providing information in its possession that is necessary for administration of
the AT&T Unemployment Insurance Tax Management Program.
(b) Before the Distribution Date, AT&T shall use its
reasonable best efforts to cause its agreement with its unemployment insurance
tax management vendor and any successor thereto to permit Lucent to participate
in the terms and conditions of such agreements from Immediately after the
Distribution Date through June 30, 1997. These efforts shall substantially
conform to the guidelines set forth in Section 5.7(a) as if such agreements were
ASO Contracts. AT&T shall use its reasonable best efforts to cause such
agreements to provide that Lucent's participation shall include administration
of all unemployment compensation claims of Transferred Individuals, Lucent
Individuals and other employees and former employees of Lucent and the Lucent
Entities, regardless of whether such claims were filed before, on, or after the
Distribution Date.
5.21 POST-DISTRIBUTION TRANSITIONAL ARRANGEMENTS.
(a) CONTINUANCE OF ELECTIONS, CO-PAYMENTS AND MAXIMUM
BENEFITS.
(i) Lucent shall cause the Lucent Health and Welfare
Plans to recognize and maintain all coverage and contribution elections made by
Transferred Individuals under the AT&T Health and Welfare Plans and apply such
elections under the Lucent Health and Welfare Plans for the remainder of the
period or periods for which such elections are by their terms applicable. The
transfer or other movement of employment from AT&T to Lucent at any time before
the Close of the Distribution Date shall neither constitute nor be treated as a
"status change" under the AT&T Health and Welfare Plans or the Lucent Health and
Welfare Plans.
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(ii) Lucent shall cause the Lucent Health and
Welfare Plans to recognize and give credit for (A) all amounts applied to
deductibles, out-of-pocket maximums, and other applicable benefit coverage
limits with respect to which such expenses have been incurred by Transferred
Individuals under the AT&T Health and Welfare Plans for the remainder of the
year in which the Distribution occurs, and (B) all benefits paid to Transferred
Individuals under the AT&T Health and Welfare Plans for purposes of determining
when such persons have reached their lifetime maximum benefits under the Lucent
Health and Welfare Plans.
(iii) Lucent shall recognize and maintain through
December 31, 1998 all eligible populations covered by the AT&T Health and
Welfare Plans (as defined in the applicable AT&T Health and Welfare Plan
documents), including Class I and Class II dependents, term and temporary
employees, alternate benefit plan employees, and all categories of part-time
employees (which are fully and non-fully eligible for company contributions).
(iv) Lucent shall (A) provide coverage to
Transferred Individuals under the Lucent Group Life Program without the need to
undergo a physical examination or otherwise provide evidence of insurability,
and (B) recognize and maintain all irrevocable assignments and accelerated
benefit option elections made by Transferred Individuals under the Lucent Group
Life Program.
(b) ADMINISTRATION.
(i) COORDINATION OF BENEFITS FOR SPOUSES AND
DEPENDENTS. Effective as of the first January 1 that occurs on or after the
Distribution Date, Lucent shall cause the Lucent Health and Welfare Plans to
permit eligible Transferred Individuals to cover their lawful spouses as
dependents if such lawful spouses are active or retired AT&T employees. As of
the first January 1 that occurs on or after the Distribution Date, AT&T shall
cause the AT&T Health and Welfare Plans to permit eligible AT&T and AT&T Entity
employees to cover their lawful spouses as dependents if such lawful spouses are
active or retired Lucent employees. All benefits provided under either the
Lucent Health and Welfare Plans or the AT&T Health and Welfare Plans to a lawful
spouse dependent of the other company's plans shall be coordinated pursuant to
the terms and conditions of the applicable Health and Welfare Plans. Effective
as of January 1, 1997, eligible dependents of AT&T and Lucent lawful spouse
employees or lawful spouse retirees may be covered under both the Lucent Health
and Welfare Plans and the AT&T Health and Welfare Plans, and the benefits
provided under both plans shall be coordinated pursuant to the applicable terms
and conditions of the respective Health and Welfare Plans in effect as of such
date and thereafter as amended from time to time.
(ii) HCFA DATA MATCH. Immediately after the
Distribution Date, Lucent shall assume all Liabilities relating to, arising out
of or resulting from claims verified by AT&T or Lucent under the HCFA data match
reports that relate to Transferred Individuals. Lucent and AT&T shall share all
information necessary to verify HCFA data match reports regarding Transferred
Individuals. Lucent shall not change any employee identification numbers
assigned by AT&T without notifying AT&T of the change and the new Employee
Identification Number. To the extent that AT&T enters into any settlement
negotiations between its health plan carriers or claims administrators and HCFA
before the end of the Occupational Transition Period, Lucent shall have the
right to participate in such negotiations.
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(c) OTHER POST-DISTRIBUTION TRANSITIONAL RULES.
(i) AT&T HCRA PLAN. To the extent any Transferred
Individual contributed to an account under the AT&T HCRA Plan during the
calendar year that includes the Distribution Date, effective as of the Close of
the Distribution Date, AT&T shall transfer to the Lucent HCRA Plan the account
balances of Transferred Individuals for such calendar year under the AT&T HCRA
Plan, regardless of whether the account balance is positive or negative.
(ii) AT&T CHILD/ELDER CARE REIMBURSEMENT ACCOUNT
PLAN. To the extent any Transferred Individual contributed to the AT&T CECRA
Plan during the calendar year that includes the Distribution Date, AT&T shall
transfer the account balances of Transferred Individuals for such calendar year
in the AT&T CECRA Plan to the Lucent CECRA Plan.
(iii) POST-RETIREMENT MEDICAL PLAN. Pursuant to Code
Section 401(h) and 420, Lucent shall comply with all cost maintenance
period requirements and benefit maintenance period requirements that are
applicable to post-retirement health benefits under the Lucent Health Plans for
any pension asset transfers pursuant to Code Section 420 by or on behalf of AT&T
for qualified current retiree health liabilities (as defined under Code Section
420). With respect to any pension asset transfers pursuant to Code Section 420,
Lucent shall obtain AT&T's prior written approval before amending any Lucent
Health Plan with respect to the provision of post-retirement health benefits
during the cost maintenance or benefit maintenance periods to which the AT&T
Health Plans are subject pursuant to Code Section 420. No pension asset transfer
pursuant to Code Section 420 shall be made after the date hereof and before the
Close of the Distribution Date unless Lucent and AT&T so agree.
(iv) HEALTH AND WELFARE PLANS SUBROGATION RECOVERY.
After the Close of the Distribution Date, AT&T shall pay to Lucent or the Lucent
Health Trusts (as appropriate) any amounts AT&T recovers from time to time
through subrogation or otherwise for claims incurred by or reimbursed to any
Transferred Individual. If Lucent recovers any amounts through subrogation or
otherwise for claims incurred by or reimbursed to employees and former employees
of AT&T or an AT&T Entity and their respective beneficiaries and dependents
(other than Transferred Individuals), Lucent shall pay such amounts to AT&T or
the AT&T Health Trusts (as appropriate).
(v) EXCHANGE OF HISTORICAL DATA. Both AT&T and
Lucent shall have access to claims data configured on the Medical Information
Data Analysis System database (or archived, if applicable) and to eligibility
data configured on the eligibility database (or archived, if applicable) and to
disability, medical and demographic data configured on the Health Planning
Support System ("HPSS") database (or archived, if applicable) for all historical
periods beginning January 1, 1989, up to and including eligibility, incurred
claims and HPSS data for the calendar year that includes the Distribution Date,
for all vendors administering the AT&T Medical Plans and Lucent Medical Plans.
AT&T and Lucent shall cooperate in the collection of claims, eligibility and
HPSS data during the period from the first January 1 that occurs after the
Distribution Date through December 31, 1998, and share all such data. Both AT&T
and Lucent shall have the right to access and use eligibility, incurred claims,
and HPSS data for periods through December 31, 1998 for such purposes as each
determines.
5.22 APPLICATION OF ARTICLE V TO LUCENT ENTITIES. Any reference in this
Article V to "Lucent" shall include a reference to a Lucent Entity when and to
the extent Lucent has
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caused the Lucent Entity to (a) become a party to a vendor contract, group
insurance contract, or HMO letter agreement associated with a Lucent Health and
Welfare Plan, (b) become a self-insured entity for the purposes of one or more
Lucent Health and Welfare Plans, (c) assume all or a portion of the liabilities
or administrative responsibilities for benefits which arose before the Close of
the Distribution Date under an AT&T Health and Welfare Plan and which were
expressly assumed by Lucent pursuant to the terms of this Agreement, or (d) take
any other action, extend any coverage, assume any other liability or fulfill any
other responsibility that Lucent would otherwise be required to take under the
terms of this Article V, unless it is clear from the context that the particular
reference is not intended to include a Lucent Entity. In all such instances in
which a reference in this Article V to "Lucent" includes a reference to a Lucent
Entity, Lucent shall be responsible to AT&T for ensuring that the Lucent Entity
complies with the applicable terms of this Agreement and the Transferred
Individuals allocated to such Lucent Entity shall have the same rights and
entitlements to benefits under the applicable Lucent Health and Welfare Plans
that the Transferred Individual would have had if he or she had instead been
allocated to Lucent.
ARTICLE VI
EXECUTIVE BENEFITS AND NON-EMPLOYEE DIRECTOR BENEFITS
6.1 ASSUMPTION OF OBLIGATIONS. Effective Immediately after the
Distribution Date, Lucent and the Lucent Entities shall assume and be solely
responsible for all Liabilities to or relating to Transferred Individuals under
all AT&T Executive Benefit Plans, other than any Liabilities to or relating to
executives or former executives of NCR pursuant to separate agreements with such
executives entered into in connection with AT&T's acquisition of NCR.
6.2 CONSENTS AND NOTIFICATIONS. AT&T and Lucent shall use their
reasonable best efforts to obtain, or cause to be obtained, to the extent
necessary, the written consent of each Transferred Individual who is a party to
an Individual Agreement and/or a participant in any AT&T Executive Benefit Plan,
and of each Lucent Non-Employee Director who is a participant in any AT&T
Non-Employee Director Plan, to the treatment of such Individual Agreement,
Executive Benefit Plan and/or AT&T Non-Employee Director Plan, as applicable, in
accordance with this Article VI, including the assumption by Lucent and the
Lucent Entities, of sole responsibility for, and the release of AT&T and the
AT&T Entities from, all Liabilities thereunder; provided, that no failure to
seek or to obtain any such consent shall have any effect upon the obligations of
Lucent and the Lucent Entities with respect to such Liabilities.
6.3 AT&T SHORT TERM INCENTIVE PLAN. Lucent shall be responsible for
determining, with respect to all Awards that would otherwise be payable under
the AT&T Short Term Incentive Plan to Transferred Individuals for the 1996
performance year, (a) the extent to which established performance criteria (as
interpreted by Lucent, in its sole discretion, after taking into account the
effects of the IPO and the Distribution) have been met and (b) the payment level
for each Transferred Individual.
6.4 AT&T LONG TERM INCENTIVE PLANS. AT&T and Lucent shall use their
reasonable best efforts to take all actions necessary or appropriate so that
each outstanding Award granted under any AT&T Long Term Incentive Plan held by
any Transferred Individual shall be replaced as set forth in this Section 6.4
with an Award under the Lucent Long Term Incentive Plan.
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(a) TRANSFERRED INDIVIDUALS WHO ARE ACTIVE EMPLOYEES OF
LUCENT.
(i) STOCK OPTIONS. Lucent shall cause each Award
consisting of an AT&T Option that is outstanding as of the Close of the
Distribution Date (or, in the case of a Lucent Administrative Employee, such
later date as he or she becomes a Transferred Individual) and is held by a
Transferred Individual who, as of the Distribution Date (or, in the case of a
Lucent Administrative Employee, such later date as he or she becomes a
Transferred Individual), is an active employee of or on leave of absence from
Lucent or a Lucent Entity to be replaced, effective Immediately after the
Distribution Date, with a Lucent Option. Such Lucent Option shall provide for
the purchase of a number of shares of Lucent Common Stock equal to the number of
shares of AT&T Common Stock subject to such AT&T Option as of the Close of the
Distribution Date, multiplied by the Ratio, and then rounded down to the nearest
whole share. Lucent shall pay to the holder of such replacement Award, at the
time of such replacement, cash in lieu of any fractional share equal to the
product of (A) the fraction represented by such fractional share times (B)(1)
the excess of the Lucent Stock Value over (2) the per-share exercise price of
such AT&T Option as of the Close of the Distribution Date divided by the Ratio.
The per-share exercise price of such Lucent Option shall equal the per-share
exercise price of such AT&T Option as of the Close of the Distribution Date
divided by the Ratio. Each such Lucent Option shall otherwise have the same
terms and conditions as were applicable to the corresponding AT&T Option as of
the Close of the Distribution Date, except that references to AT&T and its
Affiliates shall be amended to refer to Lucent and its Affiliates.
(ii) PERFORMANCE SHARES AND STOCK UNITS. Lucent
shall cause each Award consisting of AT&T performance shares or AT&T stock units
that is outstanding as of the Close of the Distribution Date (or, in the case of
a Lucent Administrative Employee, such later date as he or she becomes a
Transferred Individual) and is held by a Transferred Individual who, as of the
Distribution Date (or, in the case of a Lucent Administrative Employee, such
later date as he or she becomes a Transferred Individual), is an active employee
of or on leave of absence from Lucent or a Lucent Entity to be replaced,
effective Immediately after the Distribution Date, with a new performance share
award or a new stock unit award, as the case may be, consisting of a number of
Lucent performance shares or Lucent stock units, as the case may be, equal to
the number of AT&T performance shares or AT&T stock units, as the case may be,
constituting such Award immediately before the Distribution Date, multiplied by
the Ratio, and then rounded down to the nearest whole share. Lucent shall pay to
the holder of such replacement Award, at the time of such replacement, cash in
lieu of any fractional share based on the Lucent Stock Value. Each such
replacement Award shall otherwise have the same terms and conditions as were
applicable to the corresponding AT&T Award as of the Close of the Distribution
Date, except that references to AT&T and its Affiliates shall be amended to
refer to Lucent and its Affiliates and dividend equivalent payments, if any,
shall be payable after the Close of the Distribution Date with reference to
dividends on Lucent Common Stock.
(iii) RESTRICTED STOCK AND RESTRICTED STOCK UNITS.
Lucent shall cause each Award that consists of non-vested restricted shares of
AT&T Common Stock or restricted stock units relating to shares of AT&T Common
Stock that is outstanding as of the Close of the Distribution Date (or, in the
case of a Lucent Administrative Employee, such later date as he or she becomes a
Transferred Individual) and is held by a Transferred Individual who, as of the
Close of the Distribution Date (or, in the case of a Lucent Administrative
Employee, such later date as he or she becomes a Transferred Individual), is an
active employee of or on leave of absence from Lucent or a Lucent Entity to be
replaced, effective Immediately after the Distribution Date, with a new Award
consisting of a number
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of non-vested restricted shares of Lucent Common Stock and/or restricted stock
units relating to shares of Lucent Common Stock equal to the number of
non-vested restricted shares or restricted stock units of AT&T Common Stock
constituting such Award as of the Close of the Distribution Date multiplied by
the Ratio, and then rounded down to the nearest whole share. Lucent shall pay to
the holder of such replacement Award, at the time of such replacement, cash in
lieu of any fractional share based on the Lucent Stock Value. Each such
replacement Award shall otherwise have the same terms and conditions as were
applicable to the corresponding AT&T Award as of the Close of the Distribution
Date, except that references to AT&T and its Affiliates shall be amended to
refer to Lucent and its Affiliates and dividend equivalent payments, if any,
shall be payable after the Distribution Date with reference to dividends on
Lucent Common Stock.
(iv) SPECIAL PAYMENT. On the thirtieth day following
the Distribution Date, AT&T shall pay to Lucent an amount in cash equal to the
excess, if any, of (a) the Gross Value of the Assumed Stock Awards over (b)
seven percent (7%) of the Aggregate Lucent Stock Value.
(b) TRANSFERRED INDIVIDUALS WHO ARE NOT ACTIVE EMPLOYEES OF
LUCENT. Each outstanding Award that is held by a Transferred Individual who, as
of the Close of the Distribution Date (or, in the case of a Lucent
Administrative Employee, such later date as he or she becomes a Transferred
Individual), is not an active employee of or on leave of absence from Lucent or
a Lucent Entity shall remain outstanding Immediately after the Distribution Date
in accordance with its terms as applicable as of the Close of the Distribution
Date, subject to such adjustments as may be applicable to outstanding Awards
held by individuals who remain active employees of or on leave of absence from
AT&T or an AT&T Entity after the Distribution Date.
6.5 AT&T SENIOR MANAGEMENT INCENTIVE AWARD DEFERRAL PLAN. Each
Transferred Individual who has a deferred AT&T share unit account under the AT&T
Deferral Plan shall be permitted an irrevocable election to have the share units
in such account converted to their cash value and transferred to the cash
account under the AT&T Deferral Plan, which election shall be made in accordance
with procedures established by AT&T, in its sole discretion, before and
effective as of the Close of the Distribution Date. Immediately after the
Distribution Date, the balance of any Transferred Individual in either an AT&T
share unit account or a cash account under the AT&T Deferral Plan as of the
Close of the Distribution Date shall be transferred to a Lucent share unit
account or cash account, respectively, under the Lucent Deferral Plan, with a
number of Lucent share units equal to the number of AT&T share units under the
AT&T Deferral Plan as of the Close of the Distribution Date multiplied by the
Ratio.
6.6 NON-EMPLOYEE DIRECTOR BENEFITS.
(a) NON-EMPLOYEE DIRECTOR PLANS. As of the Closing Date,
Lucent shall assume and be solely responsible for all Liabilities under the AT&T
Non-Employee Director Plans to or relating to Lucent Non-Employee Directors.
(b) DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS.
Each Lucent Non-Employee Director who has a deferred AT&T share unit account
under the AT&T Deferred Compensation Plan for Non-Employee Directors shall be
permitted an irrevocable election to have the share units in such account
converted to their cash value and
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transferred to the cash account under the AT&T Deferred Compensation Plan for
Non-Employee Directors, which election shall be made in accordance with
procedures established by AT&T, in its sole discretion, before and effective as
of the Closing Date. As of the Closing Date, the balance of any Lucent
Non-Employee Director in either an AT&T share unit account or a cash account
under the AT&T Deferred Compensation Plan for Non-Employee Directors shall be
transferred to a Lucent share unit account or cash account, respectively, under
the Lucent Deferred Compensation Plan for Non-Employee Directors, with a number
of Lucent share units equal to the number of AT&T share units under the AT&T
Deferred Compensation Plan for Non-Employee Directors as of the Closing Date
multiplied by the amount obtained by dividing (A) 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 after the Closing Date, by (B) the
average of the daily high and low per-share prices of the Lucent Common Stock as
listed on the NYSE during each of the five trading days Immediately after the
Closing Date.
6.7 NON-COMPETITION GUIDELINES.
(a) AT&T NON-COMPETITION GUIDELINE. Effective as of the Close
of the Distribution Date, AT&T shall cause the AT&T Non-Competition Guideline to
be amended to provide that until the end of the eighteenth calendar month that
ends after the Close of the Distribution Date, employment by Lucent or a Lucent
Entity shall not be a violation of the guideline.
(b) LUCENT NON-COMPETITION GUIDELINE. Effective Immediately
after the Distribution Date, Lucent shall adopt a non-competition guideline,
applicable to employees of Lucent and the Lucent Entities who are similarly
situated to those employees of AT&T and the AT&T Entities who are subject to the
AT&T Non-Competition Guideline, which guideline shall expressly provide that
until the end of the eighteenth calendar month that ends after the Close of the
Distribution Date, employment by AT&T shall not constitute a violation of the
guideline.
(c) CONFIDENTIALITY AND PROPRIETARY INFORMATION. No provision
of the Separation and Distribution Agreement shall be deemed to release any
individual for any violation of the AT&T Non-Competition Guideline or any
agreement or policy pertaining to confidential or proprietary information of
AT&T or any of its Affiliates, or otherwise relieve any individual of his or her
obligations under such Guideline or any such agreement or policy.
6.8 RABBI TRUST AND CORPORATE-OWNED LIFE INSURANCE.
(a) ESTABLISHMENT OF MIRROR RABBI TRUST. Effective no later
than Immediately after the Distribution Date, Lucent shall establish, or cause
to be established, the Lucent Rabbi Trust as a grantor trust subject to Code
Section 671 et seq., which shall be substantially identical in all
Material Features to the AT&T Rabbi Trust, other than the definitions of the
terms "potential change in control" and "change in control." Lucent shall
appoint as trustee under the Lucent Rabbi Trust the then-current trustee of the
AT&T Rabbi Trust.
(b) FUNDING OF LUCENT RABBI TRUST.
(i) As of the earlier of the Close of the
Distribution Date and the date when assets are first transferred or contributed
to the Lucent Rabbi Trust (the "Rabbi
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Trust Determination Date"), AT&T shall determine the amount of the liabilities
under the AT&T Executive Benefits Plans (other than the AT&T Senior Management
Incentive Award Deferral Plan) that are payable from the AT&T Rabbi Trust. AT&T
shall then cause the trustee of the AT&T Rabbi Trust to transfer to the trustee
of the Lucent Rabbi Trust (A) the most recently purchased trust-owned life
insurance policy held by the AT&T Rabbi Trust if more than one such policy is
then so held (regardless of which entity employs the insured individuals), and
(B) if AT&T, in its sole discretion, so determines, all cash then held in the
AT&T Rabbi Trust that is not invested in trust-owned life insurance. If AT&T
determines (or projects) that immediately after such transfer the ratio of the
value of the assets in the Lucent Rabbi Trust to the liabilities under the
Lucent Executive Benefit Plans (other than the Lucent Senior Management
Incentive Award Deferral Plan) that are payable from the Lucent Rabbi Trust will
be less than the ratio of the value of the assets in the AT&T Rabbi Trust
(before the allocation of assets to the Lucent Rabbi Trust) to the liabilities
under the AT&T Executive Benefit Plans (other than the AT&T Senior Management
Incentive Award Deferral Plan) (before the allocation of liabilities to the
Lucent Rabbi Trust), then Lucent shall make an additional contribution to the
Lucent Rabbi Trust from its general assets in cash, simultaneously with the
transfer of assets from the AT&T Rabbi Trust to the Lucent Rabbi Trust, in an
amount such that, immediately following the transfer of assets from the AT&T
Rabbi Trust to the Lucent Rabbi Trust, the ratio of the value of the assets in
the Lucent Rabbi Trust to the liabilities under the Lucent Executive Benefit
Plans (other than the Lucent Senior Management Incentive Award Deferral Plan)
will immediately thereafter be equal to the ratio of assets to liabilities under
the AT&T Rabbi Trust (other than liabilities associated with the AT&T Senior
Management Incentive Award Deferral Plan) immediately before the allocation of
assets and liabilities to the Lucent Rabbi Trust. For purposes of this Section
6.8(b)(i), liabilities shall be determined based upon the "Full Funding Amount"
as defined in Section 2.5 of the AT&T Rabbi Trust.
(ii) As of the Rabbi Trust Determination Date, Lucent
and AT&T shall identify the Transferred Individuals and other individuals
insured by trust-owned life insurance polices held by the trustee of the AT&T
Rabbi Trust and (after any transfers described in Section 6.8(b)(i)) the trustee
of the Lucent Rabbi Trust, and shall share (and shall cause the trustees of
their respective Rabbi Trusts to share) such information as may be necessary for
each to determine when and whether such individuals are deceased.
(c) CORPORATE-OWNED LIFE INSURANCE. Lucent and AT&T shall take
all actions, including creating any trust arrangements necessary to replicate
the manner in which AT&T has heretofore held such policies, and executing or
accepting delivery of any assignments reasonably requested by either party or
any insurance company insuring one or more lives under the Corporate-Owned Life
Insurance, as may be necessary or appropriate in order to assign those policies
insuring Transferred Individuals to Lucent, effective Immediately after the
Distribution Date. If a Corporate-Owned Life Insurance Policy is so assigned to
Lucent, Lucent shall assume and be solely responsible for all Liabilities, and
shall be entitled to all benefits, thereunder, effective as of the earlier of
(i) the Close of the Distribution Date and (ii) the date of such assignment.
AT&T and Lucent shall continue, liquidate and/or administer such Corporate-Owned
Life Insurance Policies on terms and conditions agreed to by AT&T and Lucent.
Lucent and AT&T shall share all information that may be necessary to identify
the individuals insured by the Corporate-Owned Life Insurance policies owned by
AT&T and Lucent and to determine when and whether such individuals are deceased.
6.9 AT&T SPLIT DOLLAR LIFE INSURANCE. AT&T and Lucent shall take all
actions necessary or appropriate to assign to Lucent, AT&T's rights and
interests in the Split Dollar
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Life Insurance policies under the Senior Management Individual Life Insurance
Program and the Senior Management Basic Life Insurance Program issued by
Metropolitan Life Insurance Company, Hartford Life Insurance Company, and
Confederation Life Insurance Company (or their successors in interest, including
Pacific Mutual Life Insurance Company), and any additional split dollar life
insurance program that may be implemented by AT&T before the Close of the
Distribution Date, with respect to Transferred Individuals, effective
Immediately after the Distribution Date, and under the AT&T Non-Employee
Director Plans with respect to AT&T Non-Employee Directors who become Lucent
Non-Employee Directors, effective as of the Closing Date (such policies, the
"Assigned Split Dollar Policies"). Such actions shall include Lucent's
acceptance of any collateral assignments, policy endorsements or such other
documentation executed by or on behalf of Transferred Individuals and Lucent
Non-Employee Directors, or any trustee of any trust to which such individual's
policy rights or incidents of ownership under the Assigned Split Dollar Policies
have been assigned, and Lucent's entering into such agreements as may be
necessary to fulfill any obligations of AT&T to any insurance company or
insurance agent or broker under the Assigned Split Dollar Policies. From and
after the date of the assignment of any Assigned Split Dollar Policy to Lucent,
Lucent shall assume and be solely responsible for all Liabilities, and shall be
entitled to all benefits, of AT&T under such policy and under the Senior
Management Life Insurance Program, the Senior Management Basic Life Insurance
Program, the AT&T Non-Employee Director Plans and any additional split dollar
life insurance program that may be implemented by AT&T before the Close of the
Distribution Date, as the case may be, with respect to such policies, and any
related agreements entered into by Transferred Individuals or Lucent
Non-Employee Directors.
ARTICLE VII
MISCELLANEOUS BENEFITS
7.1 TRANSFER OF STOCK PURCHASE PLAN RECORDKEEPING ACCOUNTS. If the AT&T
Stock Purchase Plan is in effect as of the Close of the Distribution Date, AT&T
shall cause the recordkeeping accounts under the AT&T Stock Purchase Plan of all
Transferred Individuals to be transferred, as of the Close of the Distribution
Date or as soon as practicable thereafter, to, and Lucent shall cause the
accounts to be accepted by, the recordkeeper for the Lucent Stock Purchase Plan.
Lucent shall use its reasonable best efforts to enter into agreements
satisfactory to Lucent with the recordkeeper of the AT&T Stock Purchase Plan to
ensure the transfer and maintenance of the participant records. Through the end
of the Occupational Transition Period, Lucent shall use a recordkeeper and an
enrollment vendor under the Lucent Stock Purchase Plan compatible with the
recordkeeper and enrollment vendor under the AT&T Stock Purchase Plan.
7.2 CONCESSION TELEPHONE SERVICE. Effective Immediately after the
Distribution Date through June 30, 1998, Lucent shall continue to provide a
concession telephone service program for Transferred Individuals who are then
retired or who retire on or before June 30, 1998, which shall be substantially
identical in all Material Features to the corresponding AT&T concession
telephone service program (provided, that Lucent shall only reimburse or pay for
long-distance services provided by AT&T to such Transferred Individuals).
7.3 SERVICE ANNIVERSARY AND RETIREMENT AWARD PROGRAM.
(a) Before the Close of the Distribution Date, AT&T shall use
its reasonable best efforts to amend the service anniversary merchandise vendor
contract in existence as of
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the date of this Agreement and related to the AT&T Service Anniversary and
Retirement Award Program to permit Lucent and the Lucent Entities to participate
in the terms and conditions of such contract effective Immediately after the
Distribution Date. These efforts shall substantially conform with the guidelines
set forth in Section 5.7(a) as if the service anniversary merchandise vendor
contract were an ASO Contract.
(b) Lucent and the Lucent Entities may provide to their
employees service anniversary merchandise bearing the name and/or logo of AT&T
ordered by AT&T before the date of this Agreement and delivered under the Lucent
Service Anniversary and Retirement Award Program to Transferred Individuals,
Lucent Individuals and other employees and former employees of Lucent and the
Lucent Entities whose service anniversary occurs on or before December 31, 1996,
subject to the terms and conditions of any separate agreement between AT&T and
Lucent regarding the use of the corporate names, logos, service marks and other
intellectual property of AT&T and an AT&T Entity. No service anniversary
merchandise bearing the corporate name and/or logo of AT&T shall be delivered to
any Transferred Individuals, Lucent Individuals or other employees and former
employees of Lucent and the Lucent Entities with respect to a service
anniversary on or after January 1, 1997, without the express written consent of
AT&T.
7.4 SHARES FOR GROWTH PROGRAM. Effective Immediately after the
Distribution Date, Lucent shall assume and be solely responsible for all
Liabilities relating to, arising out of or resulting from awards to Transferred
Individuals under the Shares for Growth Program provided for in the Collective
Bargaining Agreement. Awards to Transferred Individuals payable after the Close
of the Distribution Date shall be made in shares of Lucent Common Stock rather
than shares of AT&T Common Stock, and in determining the number of shares of
Lucent Common Stock Transferred Individuals will receive for such awards, the
August 1995 reference price for a share of Lucent Common Stock shall be
calculated by dividing the August 1995 reference price for a share of AT&T
Common Stock as set forth in the Collective Bargaining Agreement by the Ratio.
7.5 THEODORE N. VAIL AWARD TRUST ASSETS. Lucent shall have the option
to continue to offer the Theodore N. Vail Memorial Fund Awards program to its
employees after the Close of the Distribution Date, provided that it exercises
this option by giving written notice of its intent to AT&T before the Close of
the Distribution Date. If Lucent elects to offer the Theodore N. Vail Awards
program, and it is determined by AT&T to be legally permissible to transfer
assets from the AT&T Theodore N. Vail Awards trust to a trust established by
Lucent for purposes of the Lucent Theodore N. Vail Awards program, AT&T shall
transfer from the AT&T Theodore N. Vail Awards trust to such trust established
by Lucent assets determined by AT&T to have a fair market value that bears the
same relationship to the fair market value of the total assets in such AT&T
trust as the number of Transferred Individuals bears to the total number of
employees and former employees of AT&T, the AT&T Entities, Lucent and the Lucent
Entities as of the Close of the Distribution Date. AT&T shall have the sole
discretion to determine whether such assets will be transferred to the Lucent
trust in the form of AT&T Stock or cash or a combination thereof.
7.6 1996 MANAGEMENT INCENTIVE COMPENSATION PAYMENTS. Effective
Immediately after the Distribution Date, Lucent shall be responsible for
determining, with respect to company performance awards, unit performance
awards, and merit awards that would otherwise be payable under AT&T's management
compensation program to Transferred Individuals for the 1996 performance year,
(a) the extent to which established performance criteria (as interpreted by
Lucent, in its sole discretion, after taking into account the effects
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of the IPO and the Distribution) have been met and (b) the payment level for
each Transferred Individual.
ARTICLE VIII
GENERAL AND ADMINISTRATIVE
8.1 PAYMENT OF 1996 ADMINISTRATIVE COSTS AND EXPENSES.
(a) SHARED COSTS. The estimated budget for 1996 for AT&T's
Benefits and Compensation organization is set forth on Schedule VII. AT&T and
Lucent shall each be responsible for their allocable share of such budgeted
costs as set forth on Schedule VII. Lucent shall pay to AT&T one-twelfth of its
allocable share of such budgeted costs each month during 1996. AT&T shall
provide, as soon as practicable after the date of this Agreement, such
information as may reasonably be requested by Lucent concerning the
determination of such budgeted costs.
(b) ADDITIONAL UNANTICIPATED EXPENSES. If there are additional
expenses not anticipated in the 1996 budget for AT&T's Benefits and Compensation
organization, then Lucent shall pay to AT&T one-half of such unanticipated
expenses, but only to the extent that the additional expenses are (i) reasonable
and necessary and (ii) incurred as a direct result of, and solely for the
purpose of, the normal administration (as currently projected for 1996) of the
AT&T Plans and the Lucent Plans during 1996. If any unanticipated expenses are
incurred at the request of Lucent or a Lucent Entity, they shall be the sole
responsibility of Lucent. Any other unanticipated expenses shall be the sole
responsibility of AT&T.
(c) ADMINISTRATIVE PERSONNEL. A schedule of the individuals
employed in AT&T's Benefits and Compensation organization who have been
designated to become employees of Lucent or a Lucent Entity (the "Lucent
Administrative Employees") has been agreed to by Lucent and AT&T. The Lucent
Administrative Employees shall remain on AT&T's payroll until December 31, 1996
unless AT&T and Lucent agree to a different date. If AT&T and Lucent elect that
the Lucent Administrative Employees be placed on the Lucent payroll before
January 1, 1997, then Lucent's direct cost with respect to the Lucent
Administrative Employees (including salary and loading for benefit related
charges) for each month after they leave AT&T's payroll shall be subtracted from
the monthly amount payable by Lucent in accordance with Section 8.1(a). Such
individuals shall become Transferred Individuals when they are placed on the
payroll of Lucent or a Lucent Entity if such date is after the Close of the
Distribution Date. Regardless of whether the Lucent Administrative Employees are
on the payroll of AT&T or Lucent or a Lucent Entity, they shall be subject to
the supervision of AT&T's Senior Vice President, Benefits and Compensation, or
his delegates, through December 31, 1996.
(d) POST-DISTRIBUTION ADMINISTRATION IN 1996. From the
Distribution Date through December 31, 1996, AT&T's Senior Vice President,
Benefits and Compensation, and his staff (including the Lucent Administrative
Employees) shall have full authority and responsibility to administer the Lucent
Plans to the same extent as if AT&T's Senior Vice President, Benefits and
Compensation, and his staff were employees of Lucent or a Lucent Entity.
Notwithstanding the foregoing, Lucent shall retain all fiduciary responsibility
for the administration of the Lucent Plans and, subject to the need to conform
the administration of the AT&T Plans and the Lucent Plans during 1996, Lucent
shall have the right to
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direct AT&T's Senior Vice President, Benefits and Compensation, in the manner in
which it intends the Lucent Plans to be administered.
8.2 PAYMENT OF LIABILITIES, PLAN EXPENSES AND RELATED MATTERS.
(a) ACTUARIAL AND ACCOUNTING METHODOLOGIES AND ASSUMPTIONS.
For purposes of this Agreement, unless specifically indicated otherwise: (i) all
actuarial methodologies and assumptions used for a particular Plan shall (except
to the extent otherwise determined by AT&T and Lucent to be reasonable or
necessary) be substantially the same as those used in the actuarial valuation of
that Plan used to determine minimum funding requirements under ERISA Section 302
and Code Section 412 for 1996, or, if such Plan is not subject to such minimum
funding requirements, used to determine AT&T's deductible contributions under
Code Section 419A or, if such Plan is not subject to Code Section 419A, the
assumptions used to prepare AT&T's audited financial statements for 1996, as the
case may be; and (ii) the value of plan assets shall be the value established
for purposes of audited financial statements of the relevant plan or trust for
the period ending on the date as of which the valuation is to be made. Lucent
Liabilities relating to, arising out of or resulting from the status of Lucent
and the Lucent Entities as Participating Companies in AT&T Plans, as provided
for in Section 2.2 and all accruals relating thereto shall be determined by AT&T
using actuarial assumptions and methodologies (including with respect to
demographics, medical trends and other relevant factors) determined by AT&T in a
manner consistent with AT&T's practice as in effect on the Participation
Commencement Date and in conformance with the generally accepted actuarial
principles promulgated by the American Academy of Actuaries, the Code, ERISA,
and/or generally accepted accounting principles, as applicable, in each case as
interpreted by AT&T consistent with past practice. Except as otherwise
contemplated by this Agreement or as required by law, all determinations as to
the amount or valuation of any assets of or relating to any AT&T Plan (whether
or not such assets are being transferred to a Lucent Plan) shall be made
pursuant to procedures to be established by the parties before the Closing Date.
(b) PAYMENT OF LIABILITIES; DETERMINATION OF EMPLOYEE STATUS.
Lucent shall pay directly, or reimburse AT&T promptly for, all Liabilities
assumed by it pursuant to this Agreement, including all compensation payable to
Lucent Individuals and Transferred Individuals for services rendered while in
the employ of AT&T or an AT&T Entity before becoming a Lucent Individual or
Transferred Individual, respectively (to the extent not charged for pursuant to
Section 8.1 or another Ancillary Agreement). To the extent the amount of such
Liabilities is not yet determinable because the status of individuals as Lucent
Individuals or Transferred Individuals is not yet determined, except as
otherwise specified herein or in another Ancillary Agreement with respect to
particular Liabilities, Lucent shall make such payments or reimbursements based
upon AT&T's reasonable estimates of the amounts thereof, and when such status is
determined, Lucent shall make additional reimbursements or payments, or AT&T
shall reimburse Lucent, to the extent necessary to reflect the actual amount of
such Liabilities. In determining the number of individuals in any particular
group of employees described in this Agreement (such as "Transferred Individuals
and Lucent Individuals"), no individual shall be counted twice (even if, for
example, he or she is both a Lucent Individual and a Transferred Individual).
Determinations of what entity employs or employed a particular individual shall
be made by reference to the applicable legal entity and/or other appropriate
accounting code, to the extent possible.
(c) CONTRIBUTIONS TO TRUSTS. Lucent shall pay its share of any
contributions made to any trust maintained in connection with an AT&T Plan with
respect to any
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period while Lucent or a Lucent Entity is a Participating Company in that AT&T
Plan; provided, however, that Lucent shall not be required to contribute to the
AT&T Rabbi Trust after the date of this Agreement. Lucent's share of any
contributions to the AT&T Health Benefits Trust shall be determined based on
AT&T's reasonable estimate of the claims under the AT&T Plans funded through
such trust that are paid to or for the benefit of Lucent Individuals and other
employees and former employees of Lucent and the Lucent Entities, Transferred
Individuals and beneficiaries and dependents thereof, until a cash benefit
payment procedure for daily check presentments separately to Lucent and the
Lucent Entities for such claims is implemented, after which Lucent's share of
such contributions shall be determined based upon such procedure. Lucent's share
of any contributions to any other such trust shall be determined by AT&T by
computing separate contribution amounts for AT&T and Lucent, as if Lucent and
the Lucent Entities were not Affiliates of AT&T and the AT&T Entities, but
followed the same funding policy and used the same funding assumptions as AT&T
and the AT&T Entities with respect to such trust; provided, that if the sum of
the amounts so determined is less than or exceeds the total contribution to be
made to such trust in accordance with such funding policy as applied to AT&T,
the AT&T Entities, Lucent and the Lucent Entities as a group, then Lucent's
share of such contribution shall be determined by increasing or reducing both
such amounts, as applicable, proportionately so as to eliminate such difference.
(d) PARTICIPANT CONTRIBUTIONS; SETTLEMENTS, REFUNDS, AND
SIMILAR PAYMENTS. Until such time as a cash benefit payment procedure is
implemented pursuant to which the participant contributions made under any AT&T
Health and Welfare Plan made by Lucent Individuals, Transferred Individuals and
other employees and former employees of Lucent and the Lucent Entities and
beneficiaries and dependents thereof can be specifically identified as such, for
purposes of determining the Lucent Liabilities associated with such Plan, such
individuals shall be deemed to have made such contributions in an amount that
bears the same relationship to the total contributions by all participants to
such Plan as the number of such individuals who are participants in such Plan
bears to the total number of participants in such Plan. If AT&T or an AT&T
Entity receives any amount that represents an offset to or reduction of any
Liability relating to, arising out of or resulting from any AT&T Plan (including
any amount received in settlement of a dispute regarding the amount of benefits
payable under such Plan and any refund of premiums paid to an insurer of
benefits under such Plan) with respect to a period before the Close of the
Distribution Date, then except to the extent Section 5.21(c)(iv) is applicable,
AT&T shall pay to Lucent a portion of such amount that bears the same
relationship to the total of such amount as the number of Lucent Individuals,
Transferred Individuals and other employees and former employees of Lucent and
the Lucent Entities who were participants in such Plan during the period to
which such amount relates bears to the total number of participants in such
Plan.
(e) ADMINISTRATIVE EXPENSES NOT CHARGEABLE TO A TRUST. To the
extent not charged for pursuant to Section 8.1 or another Ancillary Agreement or
the ASA Agreement and to the extent not chargeable to a trust established in
connection with an AT&T Plan, Lucent shall be responsible, through either direct
payment from its own cash or reimbursement of AT&T from its own cash, for the
following expenses in the administration of the AT&T Plans while Lucent or a
Lucent Entity is a Participating Company in such Plans (and except as expressly
provided below, Lucent's allocable share of the following administrative
expenses shall be that portion of the total such expenses that bears the same
relationship to such total expenses as the number of Lucent Individuals,
Transferred Individuals and other employees and former employees of Lucent and
the Lucent Entities who are participants in the applicable Plan bears to total
number of participants in
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such Plan): (i) the costs incurred in the administration of the AT&T Pension
Plans and other Plans providing benefits to retired individuals, including the
cost of managing any trust assets and performing actuarial calculations (which
shall be shared equally between Lucent and AT&T); (ii) the recordkeeping costs
(including expenses in development and operation of the daily valuation
recordkeeping system for the AT&T LTSSP) and other costs incurred in the
administration of the AT&T Savings Plans (including expenses in employee
communications materials for the AT&T Savings Plans and consultant and other
out-of-pocket fees and expenses generally related to the design or
administration of the AT&T Savings Plans); (iii) the fees paid to benefit
delivery vendors under AT&T Health and Welfare Plans; (iv) COBRA administrative
costs (of which Lucent's allocable share shall be that portion of the total such
costs that bears the same relationship to such total costs as the number of
Lucent Individuals, Transferred Individuals and other employees and former
employees of Lucent and the Lucent Entities and beneficiaries and dependents
thereof who are participants in the applicable Plan bears to total number of
participants in such Plan); (v) the cost of administrative services for the
Family Care Development Fund and other Work and Family programs; (vi) the costs
incurred in the administration of the AT&T Executive Benefits Plans, including
payments made to insurance agents and brokers (such as the agents and brokers
who administer corporate-owned life insurance and trust-owned life insurance
programs), and payments made to vendors (such as the vendor(s) who administer
the AT&T Senior Management Financial Counseling Program); (vii) the expenses
incurred in establishing the AT&T Stock Purchase Plan and its recordkeeping
system; (viii) the consultant and other out-of-pocket fees and expenses
(including accounting, actuarial, consulting, and legal fees, and photocopying,
printing, and similar expenses) generally related to the design or
administration of the AT&T Plans (which shall be shared equally between Lucent
and AT&T); (ix) the payments for administration of the AT&T Rabbi Trust and for
actuarial and legal work in connection with the AT&T Rabbi Trust (which shall be
shared equally between Lucent and AT&T); and (x) the payments for the management
of the assets of the AT&T Rabbi Trust (which shall be prorated between Lucent
and AT&T based on relative value of Lucent's and AT&T's share of the liabilities
funded by AT&T Rabbi Trust assets with respect to AT&T and Lucent Executives as
reflected in the IPO Registration Statement).
(f) STOCK AWARD CHARGEBACKS. Lucent shall pay AT&T the
following amounts: (i) with respect to each AT&T Option that is exercised by a
Lucent Individual or another employee of Lucent or a Lucent Entity at any time
after the Closing Date, the Spread on such Option; (ii) with respect to each
purchase of AT&T Common Stock pursuant to the AT&T Stock Purchase Plan by a
Lucent Individual or another employee of Lucent or a Lucent Entity at any time
after the Closing Date, the Spread with respect to such purchase; (iii) with
respect to the vesting or delivery at any time after the Closing Date of shares
of AT&T Common Stock pursuant to an Award (other than an AT&T Option) held by a
Lucent Individual or another employee of Lucent or a Lucent Entity, the Value of
such AT&T Common Stock on the date of such vesting or delivery. AT&T shall bill
Lucent for such amounts from time to time (but only after the exercise,
purchase, vesting or delivery that gives rise to the obligation to make any such
payment), and Lucent shall pay such amounts promptly after receipt of such
bills. The "Spread" on an Option or with respect to a purchase pursuant to the
AT&T Stock Purchase Plan means the excess, if any, of the Value 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. The "Value" of a share of AT&T
Common Stock on a given date means the average of the high and the low per-share
prices 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.
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8.3 1984 AT&T UNFUNDED DIVESTITURE REIMBURSEMENT AGREEMENTS. In order
to permit AT&T to continue to honor any obligations it may have for on-going
reimbursement costs payable periodically to the seven Regional Bell Holding
Companies and Bell Communications Research, Inc. in accordance with the
provisions of the Unfunded Cost Sharing Agreements, Lucent shall provide, on an
annual basis and in accordance with the schedule provided to Lucent by AT&T, at
no cost to AT&T, any information in its possession required to enable AT&T to
determine, validate, and reconcile the AT&T offset amounts specified in the
Unfunded Cost Sharing Agreements. Lucent shall also provide AT&T with
information in its possession to the extent requested by a party to an Unfunded
Cost Sharing Agreement pursuant to its rights thereunder to audit information
provided by Lucent to AT&T. The foregoing shall not be deemed to give rise to
any liability of Lucent under the Unfunded Cost Sharing Agreements.
8.4 SHARING OF PARTICIPANT INFORMATION. AT&T and Lucent shall share,
AT&T shall cause each applicable AT&T Entity to share, and Lucent shall cause
each applicable Lucent Entity to share, with each other and their respective
agents and vendors (without obtaining releases) all participant information
necessary for the efficient and accurate administration of each of the AT&T
Plans and the Lucent Plans during the respective Transition Periods applicable
to such Plans, and with respect to each of the AT&T Health and Welfare Plans and
Lucent Health and Welfare Plans, any additional periods during which such Plan
is subject to the restrictions of Section 5.8. AT&T and Lucent and their
respective authorized agents shall, subject to applicable laws on
confidentiality, be given reasonable and timely access to, and may make copies
of, all information relating to the subjects of this Agreement in the custody of
the other party, to the extent necessary for such administration. Until the
Close of the Distribution Date, all participant information shall be provided in
the manner and medium applicable to Participating Companies in the AT&T Plans
generally, and thereafter until December 31, 1998, all participant information
shall be provided in a manner and medium that is compatible with the data
processing systems of AT&T as in effect of the Close of the Distribution Date,
unless otherwise agreed to by AT&T and Lucent.
8.5 REPORTING AND DISCLOSURE AND COMMUNICATIONS TO PARTICIPANTS. While
Lucent is a Participating Company in the AT&T Plans, Lucent shall take, and
shall cause each other applicable Lucent Entity to take, all actions necessary
or appropriate to facilitate the distribution of all AT&T Plan-related
communications and materials to employees, participants and beneficiaries,
including summary plan descriptions and related summaries of material
modification, summary annual reports, investment information, prospectuses,
notices and enrollment material for the Lucent Plans. Lucent shall pay AT&T the
cost relating to the copies of all such documents provided to Lucent, except to
the extent such costs are charged pursuant to Section 8.1 or pursuant to an
Ancillary Agreement or the ASA Agreement. Lucent shall assist, and Lucent shall
cause each other applicable Lucent Entity to assist, AT&T in complying with all
reporting and disclosure requirements of ERISA, including the preparation of
Form 5500 annual reports for the AT&T Plans, where applicable.
8.6 NON-TERMINATION OF EMPLOYMENT; NO THIRD-PARTY BENEFICIARIES. No
provision of this Agreement or the Separation and Distribution Agreement shall
be construed to create any right, or accelerate entitlement, to any compensation
or benefit whatsoever on the part of any Lucent Individual, Transferred
Individual or other future, present or former employee of AT&T, an AT&T Entity,
Lucent, or a Lucent Entity under any AT&T Plan or Lucent Plan or otherwise.
Without limiting the generality of the foregoing: (i) neither the Distribution
nor the termination of the Participating Company status
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of Lucent or a Lucent Entity shall cause any employee to be deemed to have
incurred a termination of employment which entitles such individual to the
commencement of benefits under any of the AT&T Plans, any of the Lucent Plans,
or any of the Individual Agreements; and (ii) except as expressly provided in
this Agreement, nothing in this Agreement shall preclude Lucent, at any time
after the Close of the Distribution Date, from amending, merging, modifying,
terminating, eliminating, reducing, or otherwise altering in any respect any
Lucent Plan, any benefit under any Plan or any trust, insurance policy or
funding vehicle related to any Lucent Plan.
8.7 PLAN AUDITS.
(a) AUDIT RIGHTS WITH RESPECT TO THE ALLOCATION OR TRANSFER OF
PLAN ASSETS. The allocation of Pension Plan assets and liabilities pursuant to
Section 3.2, the transfer of assets from AT&T VEBAs pursuant to Sections 5.3 and
5.5, the transfer of RFA assets pursuant to Section 5.4 and the transfer of
assets from the AT&T Rabbi Trust pursuant to Section 6.8 shall be audited on
behalf of both AT&T and Lucent by the consulting firm of Milliman & Robertson.
The scope of such audit shall be limited to the accuracy of the data and the
accuracy of the computation and adherence to the methodology specified in this
Agreement and except as set forth in the last sentence of this Section 8.7(a),
such audit shall not be binding on the parties. Milliman & Robertson shall
provide its report to both AT&T and Lucent. No other audit shall be conducted
with respect to the transfer or allocation of Plan assets. The costs of such
audit shall be shared equally by AT&T and Lucent, or, at each company's
discretion and to the extent allocable thereto, by their respective Pension
Plans. To the extent such audit recommends a change to the value of assets
allocated to a Lucent Plan of less than 0.25%, the original determination shall
be binding on the parties and shall not be subject to the dispute resolution
process provided under the Separation and Distribution Agreement. To the extent
such audit recommends such a change of 0.25% or more, any unresolved dispute
between the parties as to whether and how to make any change in response to such
recommendation shall be subject to the dispute resolution process provided under
the Separation and Distribution Agreement.
(b) AUDIT RIGHTS WITH RESPECT TO INFORMATION PROVIDED.
(i) Each of AT&T and Lucent, and their duly
authorized representatives, shall have the right to conduct audits with respect
to all information provided to it by the other party. The party conducting the
audit (the "Auditing Party") shall have the sole discretion to determine the
procedures and guidelines for conducting audits and the selection of audit
representatives under this Section 8.7(b); provided, that audits with respect to
the allocation or transfer of Plan assets and liabilities shall be subject only
to Section 8.7(a). The Auditing Party shall have the right to make copies of any
records at its expense, subject to the confidentiality provisions set forth in
the Separation and Distribution Agreement, which are incorporated by reference
herein. The party being audited shall provide the Auditing Party's
representatives with reasonable access during normal business hours to its
operations, computer systems and paper and electronic files, and provide
workspace to its representatives. After any audit is completed, the party being
audited shall have the right to review a draft of the audit findings and to
comment on those findings in writing within five business days after receiving
such draft.
(ii) The Auditing Party's audit rights under this
Section 8.7(b) shall include the right to audit, or participate in an audit
facilitated by the party being audited, of any Subsidiaries and Affiliates of
the party being audited and of any benefit providers
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and third parties with whom the party being audited has a relationship, or
agents of such party, to the extent any such persons are affected by or
addressed in this Agreement (collectively, the "Non-parties"). The party being
audited shall, upon written request from the Auditing Party, provide an
individual (at the Auditing Party's expense) to supervise any audit of a
Non-party. The Auditing Party shall be responsible for supplying, at the
Auditing Party's expense, additional personnel sufficient to complete the audit
in a reasonably timely manner. The responsibility of the party being audited
shall be limited to providing, at the Auditing Party's expense, a single
individual at each audited site for purposes of facilitating the audit.
(c) AUDITS REGARDING VENDOR CONTRACTS. From Immediately after
the Distribution Date through December 31, 1998, AT&T and Lucent and their duly
authorized representatives shall have the right to conduct joint audits with
respect to any vendor contracts that relate to both the AT&T Health and Welfare
Plans and the Lucent Health and Welfare Plans. The scope of such audits shall
encompass the review of all correspondence, account records, claim forms,
canceled drafts (unless retained by the bank), provider bills, medical records
submitted with claims, billing corrections, vendor's internal corrections of
previous errors and any other documents or instruments relating to the services
performed by the vendor under the applicable vendor contracts. AT&T and Lucent
shall agree on the performance standards, audit methodology, auditing policy and
quality measures and reporting requirements relating to the audits described in
this Section 8.7 and the manner in which costs incurred in connection with such
audits will be shared.
8.8 BENEFICIARY DESIGNATIONS. All beneficiary designations made by
Transferred Individuals for AT&T Plans shall be transferred to and be in full
force and effect under the corresponding Lucent Plans until such beneficiary
designations are replaced or revoked by the Transferred Individual who made the
beneficiary designation.
8.9 REQUESTS FOR IRS RULINGS AND DOL OPINIONS.
(a) COOPERATION. Lucent shall cooperate fully with AT&T on any
issue relating to the transactions contemplated by this Agreement for which AT&T
elects to seek a determination letter or private letter ruling from the IRS or
an advisory opinion from the DOL. AT&T shall cooperate fully with Lucent with
respect to any request for a determination letter or private letter ruling from
the IRS or advisory opinion from the DOL with respect to any of the Lucent Plans
relating to the transactions contemplated by this Agreement.
(b) APPLICATIONS. AT&T and Lucent shall make such applications
to regulatory agencies, including the IRS and DOL, as may be necessary to ensure
that any transfers of assets from the AT&T Health Trusts to the Lucent Health
Trusts and from the AT&T LTD VEBA to the Lucent LTD VEBA will neither (i) result
in any adverse tax, legal or fiduciary consequences to AT&T and Lucent, the AT&T
Health Trusts and the AT&T LTD VEBA, the Lucent Health Trusts and the Lucent LTD
VEBA, any participant therein or beneficiaries thereof, or any of AT&T Health
Trusts and the AT&T LTD VEBA, any successor welfare benefit funds established by
or on behalf of Lucent, or the trustees of such trusts, nor (ii) contravene any
statute, regulation or technical pronouncement issued by any regulatory agency.
Before the Close of the Distribution Date, Lucent shall prepare all forms
required to obtain favorable tax-exempt determination letters from the IRS for
the Lucent Health Trusts and the Lucent LTD VEBA, and, if applicable, the Lucent
Union VEBA. Lucent and AT&T agree to cooperate with each other to fulfill any
filing and/or regulatory reporting obligations with respect to such transfers.
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(c) LIFE INSURANCE. To the extent the transfer or allocation
of all or a portion of any life insurance policies results in any adverse tax or
legal consequences, including (i) any finding that such transfer results in the
creation of a modified endowment contract within the meaning of Code Section
7702A, a transfer for value within the meaning of Code Section 101(a), or a lack
of insurable interest for either AT&T or Lucent (or their respective trusts, if
any), or (ii) multiple claims for insurance proceeds, AT&T and Lucent shall take
such steps as may be necessary to contest any such finding and, to the extent of
any final determination that such adverse tax or legal consequences will result,
AT&T and Lucent shall make such further adjustments so as to place both parties
in the proportionate financial position that they each would have been in
relative to the other but for such adverse tax or legal consequences.
8.10 FIDUCIARY MATTERS.
(a) FIDUCIARY STATUS. AT&T and Lucent each acknowledges that
actions required to be taken pursuant to this Agreement may be subject to
fiduciary duties or standards of conduct under ERISA or other applicable law,
and no party shall be deemed to be in violation of this Agreement if it fails to
comply with any provisions hereof based upon its good faith determination that
to do so would violate such a fiduciary duty or standard.
(b) INDEPENDENT FIDUCIARY. Lucent shall retain a fiduciary
independent of AT&T to review and approve the types and value of the assets to
be transferred to the Lucent Plans from the AT&T Plans as described in Articles
III and IV of this Agreement to the extent that such Plans are subject to Part 4
of Title I of ERISA. The foregoing shall not prevent Lucent from engaging any
fiduciaries for any other purposes.
8.11 AGREEMENT WITH ACTUARIAL SCIENCES ASSOCIATES, INC. Lucent shall
enter into an agreement with Actuarial Sciences Associates, Inc. ("ASA"), in a
form substantially similar to Exhibit A. Within 60 days after the Distribution
Date, such agreement shall be presented for ratification by Lucent's Board of
Directors or its authorized delegate.
8.12 COLLECTIVE BARGAINING. To the extent any provision of this
Agreement is contrary to the provisions of the Collective Bargaining Agreement
or any other collective bargaining agreement to which AT&T or any Affiliate of
AT&T is a party, the terms of such collective bargaining agreement shall
prevail. Should any provisions of this Agreement be deemed to relate to a topic
determined by an appropriate authority to be a mandatory subject of collective
bargaining, AT&T or Lucent may be obligated to bargain with the union
representing affected employees concerning those subjects. Neither party will
agree to a modification of the Collective Bargaining Agreement without the
consent of the other. In the event a force surplus affecting members of a
bargaining unit in both AT&T or any AT&T Entity (on the one hand) and Lucent or
any Lucent Entity (on the other hand) directly results, due to the provisions of
the Collective Bargaining Agreement, in an employee involuntarily leaving the
payroll of the party not declaring the surplus, then the party declaring the
surplus shall bear the cost of any severance payable to such employee.
8.13 CONSENT OF THIRD PARTIES. If any provision of this Agreement is
dependent on the consent of any third party (such as a vendor or a union) and
such consent is withheld, AT&T and Lucent shall use their reasonable best
efforts to implement the applicable provisions of this Agreement to the full
extent practicable. If any provision of this Agreement cannot be implemented due
to the failure of such third party to consent, AT&T and Lucent shall negotiate
in good faith to implement the provision in a mutually satisfactory
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manner. The phrase "reasonable best efforts" as used herein shall not be
construed to require the incurrence of any non-routine or unreasonable expense
or liability or the waiver of any right.
8.14 POST-DISTRIBUTION BENEFIT DELIVERY/ADMINISTRATION. Lucent shall
continue to use the P2000 benefit administration system and a compatible pension
payment system, to administer the Lucent Pension Plans through the end of the
Management Transition Period.
8.15 QUIET PERIODS. Lucent shall take such action as is necessary to
ensure that participants in the Lucent LTSSP, the Lucent LTSPME, and the Lucent
RSPSP are notified that a quiet period will occur beginning on or about October
1, 1996, during which changes in investment direction with respect to
participants' accounts generally will not be permitted.
ARTICLE IX
MISCELLANEOUS
9.1 FOREIGN PLANS. As soon as practicable after the date of this
Agreement, AT&T and Lucent shall enter into an agreement regarding the treatment
of Foreign Plans consistent with the principles set forth in Exhibit B hereto.
9.2 RESOURCE LINK EMPLOYEES. The following individuals who are
employees of AT&T or an AT&T Entity as of the Close of the Distribution Date
shall become employees of Lucent or a Lucent Entity Immediately after the
Distribution Date, and shall be Transferred Individuals: (a) a maximum of 208
such individuals who, as of the Close of the Distribution Date, are on Resource
Link assignments to Lucent or a Lucent Entity as of that time, or whose most
recent Resource Link assignment before the Close of the Distribution Date was
with Lucent or a Lucent Entity; (b) a maximum of 48 additional individuals who
are, as of the Close of the Distribution Date, on Resource Link assignment to
common support functions or whose most recent Resource Link assignment before
the Close of the Distribution Date was to common support functions; and (c) term
employees who are, as of the Close of the Distribution Date, on Resource Link
assignments with Lucent or a Lucent Entity.
9.3 EFFECT IF DISTRIBUTION DOES NOT OCCUR. If the Distribution does
not occur, then all actions and events that are, under this Agreement, to be
taken or occur effective as of the Close of the Distribution Date, Immediately
after the Distribution Date, or otherwise in connection with the Distribution,
shall not be taken or occur except to the extent specifically agreed by Lucent
and AT&T.
9.4 RELATIONSHIP OF PARTIES. Nothing in this Agreement shall be deemed
or construed by the parties or any third party as creating the relationship of
principal and agent, partnership or joint venture between the parties, it being
understood and agreed that no provision contained herein, and no act of the
parties, shall be deemed to create any relationship between the parties other
than the relationship set forth herein.
9.5 AFFILIATES. Each of AT&T and Lucent shall cause to be performed,
and hereby guarantees the performance of, all actions, agreements and
obligations set forth in this Agreement to be performed by an AT&T Entity or a
Lucent Entity, respectively.
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9.6 INCORPORATION OF SEPARATION AND DISTRIBUTION AGREEMENT PROVISIONS.
The following provisions of the Separation and Distribution Agreement are hereby
incorporated herein by reference, and unless otherwise expressly specified
herein, such provisions shall apply as if fully set forth herein (references in
this Section 9.6 to an "Article" or "Section" shall mean Articles or Sections of
the Separation and Distribution Agreement, and, except as expressly set forth
below, references in the material incorporated herein by reference shall be
references to the Separation and Distribution Agreement): Article V (relating to
Mutual Releases and Indemnification); Article VIII (relating to Exchange of
Information and Confidentiality); Article IX (relating to Arbitration and
Dispute Resolution); Article X (relating to Further Assurances and Additional
Covenants); Article XI (relating to Termination); and Article XII (relating to
Miscellaneous) other than Section 12.2 (relating to Governing Law).
9.7 GOVERNING LAW. To the extent not preempted by applicable federal
law, this Agreement shall be governed by, construed and interpreted in
accordance with the laws of the State of New York, irrespective of the choice of
laws principles of the State of New York, as to all matters, including matters
of validity, construction, effect, performance and remedies.
IN WITNESS WHEREOF, the parties have caused this Employee
Benefits Agreement to be duly executed as of the day and year first above
written.
AT&T CORP.
By:________________________
Name:
Title:
LUCENT TECHNOLOGIES INC.
By:________________________
Name:
Title:
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<PAGE> 1
Exhibit 10.7
PATENT LICENSE AGREEMENT
AMONG
AT&T CORP.
NCR CORPORATION
AND
LUCENT TECHNOLOGIES INC.
EFFECTIVE AS OF , 1996
<PAGE> 2
PATENT LICENSE AGREEMENT
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS ............................................................ 2
1.1 AT&T's Limited Patents. .................................................. 2
1.2 AT&T's Patents .......................................................... 2
1.3 AT&T's Specified Patents.. ............................................... 3
1.4 Foreign Affiliate.. ...................................................... 3
1.5 Limited Period. .......................................................... 3
1.6 NCR's Limited Patents. ................................................... 3
1.7 NCR's Patents.. .......................................................... 3
1.8 Lucent's Limited Patents ................................................. 4
1.9 Lucent's Patents.. ....................................................... 4
1.10 Lucent's Specified Patents ............................................... 4
1.11 Related Companies of AT&T.. .............................................. 4
1.12 Related Companies of NCR.. ............................................... 5
1.13 Related Companies of Lucent. ............................................. 5
ARTICLE II GRANTS OF LICENSES.. .................................................. 5
2.1 Grants to AT&T.. ........................................................ 5
2.2 Grants to NCR.. ......................................................... 6
2.3 Grants to Lucent. ....................................................... 7
2.4 Duration and Extent.. ................................................... 8
2.5 Scope. .................................................................. 8
2.6 Exclusions of Patents ................................................... 11
2.7 Filings of Patent Applications.. ........................................ 11
2.8 Joint Inventions ........................................................ 11
2.9 Sales to the United States Government ................................... 12
2.10 Licensing of certain identified patents of AT&T necessary to implement
an adopted standard. .................................................... 12
2.11 Lucent licensing of designated parties at AT&T's request................. 12
ARTICLE III TERMINATION .......................................................... 16
3.1 Voluntary Termination. .................................................. 16
3.2 Survival ................................................................ 16
3.3 Change of Control of or Certain Acquisitions by NCR...................... 16
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE IV MISCELLANEOUS PROVISIONS ...................................... 16
4.1 Disclaimer ....................................................... 16
4.2 Nonassignability ................................................. 16
4.3 Addresses ........................................................ 17
4.4 Choice of Law .................................................... 17
4.5 Integration ...................................................... 17
4.6 Outside the United States ........................................ 17
4.7 Arbitration and Dispute Resolution ............................... 18
4.8 Amendments and Changes ........................................... 18
Exhibit A List of Retained AT&T Patents and Patent Applications........ 21
Exhibit B List of Patents Assigned to NCR by AT&T...................... 26
Exhibit C List of AT&T's Specified Patents ............................ 28
Exhibit D List of Lucent's Specified Patents .......................... 34
.
Exhibit E List of Patents Referenced in Section 2.11(d)................ 38
</TABLE>
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<PAGE> 4
PATENT LICENSE AGREEMENT
This Agreement is effective as of __________, 1996, among AT&T CORP., a
New York corporation ("AT&T"), having an office at 32 Avenue of the Americas,
New York, New York 10013, NCR CORPORATION, a Maryland corporation ("NCR"),
having an office at 101 West Schantz Avenue, Dayton, Ohio 45479, and LUCENT
TECHNOLOGIES INC., a Delaware corporation ("Lucent"), having an office at 600
Mountain Avenue, Murray Hill, New Jersey 07974 (each hereinafter referred to as
a "Party"). Capitalized terms used herein and not otherwise defined shall have
the respective meanings assigned to them in Article I hereof or as assigned to
them in the Separation and Distribution Agreement (as defined below).
WHEREAS, the Board of Directors of AT&T has determined that it is in the
best interests of AT&T and its shareholders to separate AT&T's existing
businesses into three independent businesses; and
WHEREAS, as part of the foregoing AT&T, NCR and Lucent have entered into
a Separation and Distribution Agreement, dated as of February 1, 1996 (the
"Separation and Distribution Agreement") which provides, among other things, for
the Separation of the Lucent Assets and Lucent Liabilities, the IPO, the
Distribution and the execution and delivery of certain other agreements in order
to facilitate and provide for the foregoing; and
WHEREAS, as part of the foregoing, the Parties have assigned the patents
and patent applications owned or controlled by AT&T prior to the date hereof
among the three Parties; and
WHEREAS, the Parties desire to facilitate such transaction by exchanging
licenses among them under certain of the patents and patent applications owned
or controlled by them on or after the date hereof; and
WHEREAS, the Parties have entertained arm's-length patent cross-licensing
dialogues and negotiations between them assuming that the Parties were not
affiliated and that each Party was not previously licensed under inventions of
the other two Parties and their respective Related Companies; and
WHEREAS, AT&T desires to receive and NCR and Lucent, respectively, are
each willing to grant to AT&T certain patent licenses and rights under patents
owned by NCR and Lucent on or after the date hereof; and
<PAGE> 5
WHEREAS, NCR desires to receive and AT&T and Lucent, respectively, are
each willing to grant to NCR certain patent licenses and rights under patents
owned by AT&T and Lucent on or after the date hereof; and
WHEREAS, Lucent desires to receive and AT&T and NCR, respectively, are
each willing to grant to Lucent certain patent licenses and rights under patents
owned by AT&T and those patents owned by NCR on or after the date hereof.
NOW, THEREFORE, in consideration of the mutual promises of the Parties,
and of good and valuable consideration, it is agreed by and between the Parties
as follows:
ARTICLE I
DEFINITIONS
For the purpose of this Agreement the following terms in capital letters are
defined in this Article I and shall have the meaning specified herein:
1.1 AT&T'S LIMITED PATENTS means only those AT&T's Patents issued
on patent applications having an effective filing date on or before December 31,
1996.
1.2 AT&T'S PATENTS means:
(1) the patents listed in Exhibit "A" and all patents issuing on the
patent applications listed in Exhibit "A", as well as all their corresponding
foreign patents and patent applications, and all other patents and patent
applications jointly owned by AT&T under the respective Patent Assignments
executed as of this date; and
(2) every patent (including utility models but excluding design patents
and design registrations) issued in any country of the world which claims or is
otherwise directed to an invention disclosed in any patent application in that
country, or in any other country, having an effective filing date in the period
beginning on the date hereof and ending on the last day of the Limited Period,
but only if, at any time after the earliest filing of any such application
disclosing such invention and prior to the expiration of the Limited Period,
AT&T (or any company while a Related Company of AT&T)
(i) has ownership or control of any such patent or
application, or
(ii) otherwise has the right under such patent to grant
any licenses of the type and on terms herein granted
by AT&T.
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Notwithstanding the foregoing, the term AT&T's Patents does not include NCR's
Patents or Lucent's Patents, other than those Lucent's Patents that are jointly
owned with AT&T under the Patent Assignments executed as of this date.
1.3 AT&T'S SPECIFIED PATENTS means those AT&T's Patents listed in
Exhibit "C" and all patents issuing on the patent applications listed in Exhibit
"C", as well as all their corresponding foreign patents and patent applications.
1.4 FOREIGN AFFILIATE of a company means a corporation or other
legal entity formed and doing business in any country other than the United
States, and in which the company, either directly or indirectly, holds, owns or
controls (i) at least forty percent (40%) of the equity or ownership interest in
such corporation or other legal entity or the maximum ownership interest allowed
by the foreign jurisdiction in which such corporation or other legal entity is
formed, whichever is lower; and (ii) sufficient voting rights required under
such foreign laws to enable the company to actively participate in the election
of directors or other managing authority and in the direction of the business
operations and strategies of such corporation or other legal entity; and (iii)
an active operational interest, not merely a passive investment interest, in
such corporation or other legal entity; but any such corporation or other legal
entity shall be deemed to be a Foreign Affiliate of such company only as long as
such ownership or ownership and control exists.
1.5 LIMITED PERIOD means the period commencing on the date
hereof and ending on December 31, 1999.
1.6 NCR'S LIMITED PATENTS means only those NCR's Patents issued on
patent applications having an effective filing date on or before December 31,
1996.
1.7 NCR'S PATENTS means:
(1) the patents listed in Exhibit "B" and all their corresponding foreign
patents and patent applications, and the patents and patent applications jointly
owned by NCR and Lucent under the Patent Assignment from Lucent to NCR executed
as of this date; and
(2) every patent (including utility models but excluding design patents
and design registrations) issued in any country of the world which claims or is
otherwise directed to an invention disclosed in any patent application in that
country or in any other country having an effective filing date on or before the
last day of the Limited Period, but only if, at any time after the earliest
filing of any such application disclosing such invention and prior to the
expiration of the Limited Period, NCR (or any company while a Related Company of
NCR)
(i) has ownership or control of any such patent or
application, or
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<PAGE> 7
(ii) otherwise has the right under such patent to grant
any licenses of the type and on the terms herein
granted by NCR.
1.8 LUCENT'S LIMITED PATENTS means only those Lucent's Patents
issued on patent applications having an effective filing date on or before
December 31, 1996.
1.9 LUCENT'S PATENTS means:
(1) all patents and patent applications previously owned respectively by
AT&T or NCR and owned by Lucent, either solely or jointly, under the respective
Patent Assignments executed as of this date, other than the patents and patent
applications listed in Exhibits "A" and "B", and all their corresponding foreign
patents and patent applications; and
(2) every patent (including utility models but excluding design patents
and design registrations) issued in any country of the world which claims or is
otherwise directed to an invention disclosed in any patent application in that
country or in any other country having an effective filing date in the period
beginning on the date hereof and ending on the last day of the Limited Period,
provided that, at any time after the earliest filing of any such application
disclosing such invention and prior to the expiration of the Limited Period,
Lucent (or any company while a Related Company of Lucent)
(i) has ownership or control of any such patent or
application, or
(ii) otherwise has the right under such patent to grant
any licenses of the type and on the terms herein
granted by Lucent.
1.10 LUCENT'S SPECIFIED PATENTS means only those Lucent's Patents
listed in Exhibit "D", as well as all their corresponding foreign patents.
1.11 RELATED COMPANIES OF AT&T means Subsidiaries of AT&T, for so
long as they remain Subsidiaries, and any other company so designated and agreed
to in a writing signed by AT&T and by NCR or Lucent, as applicable. Solely for
purposes of this definition, Lucent, its Subsidiaries, NCR and its Subsidiaries
shall be deemed not to be Related Companies of AT&T.
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<PAGE> 8
1.12 RELATED COMPANIES OF NCR means NCR's Subsidiaries as of the
Distribution Date, for so long as they remain NCR's Subsidiaries, and any other
company so designated and agreed to in a writing signed by NCR and by AT&T or
Lucent, as applicable. Solely for purposes of the definition of NCR's Patents,
Related Companies of NCR also shall include any and all Subsidiaries of NCR
acquired or formed after the Distribution Date.
1.13 RELATED COMPANIES OF LUCENT means Subsidiaries of Lucent, for
so long as they remain Subsidiaries, and any other company so designated and
agreed to in a writing signed by Lucent and by NCR or AT&T, as applicable.
ARTICLE II
GRANTS OF LICENSES
2.1 GRANTS TO AT&T. (a)(1) NCR grants to AT&T, under NCR's
Patents, personal, nonexclusive, royalty-free and non-transferable licenses to
make (but not have made other than as specified in Section 2.1(a)(2)), use,
lease, sell and import any and all products and services of the businesses in
which AT&T or any of its Related Companies or Foreign Affiliates is now or
hereafter engaged.
(a)(2)(A) NCR grants to AT&T, under NCR's Limited Patents,
personal, nonexclusive, royalty-free and non-transferable (except as specified
herein) licenses to have made any and all items (i) to be used by AT&T for
internal business purposes (as such business may be conducted from time to
time); or (ii) to be used in the provisioning of services to AT&T's customers;
or (iii) to be sold or furnished to end user customers by AT&T either directly
or indirectly; or (iv) to be sold or furnished to a Related Company of AT&T, any
Foreign Affiliate of AT&T, or any other legal entity in which AT&T continually
holds at least a ten percent (10%) equity interest. As an attribute to the
foregoing have made rights under NCR's Limited Patents, NCR grants to AT&T the
right to grant to AT&T's suppliers or vendors of any item to be furnished to
AT&T, the right to use processes and equipment under NCR's Limited Patents in
the design, manufacturing and testing of such items.
(a) (2)(B) The have made rights hereunder granted to AT&T to
resell, either directly or indirectly, any items made by others under the
provisions of Section 2.1(a)(2)(A)(iii) or (iv) above shall not be exercised in
a manner such that the exercise of the have made rights is a sham to sublicense
NCR's Limited Patents to a third party and not for bona fide AT&T business
purposes.
(b) (1) Lucent grants to AT&T, under Lucent's Limited Patents,
personal, nonexclusive, royalty-free and non-transferable licenses to make (but
not have made other than as specified in Section 2.1(b)(2)), use, lease, sell
and import any and all products and services of
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the businesses in which AT&T or any of its Related Companies or Foreign
Affiliates is now or hereafter engaged.
(b)(2)(A) Lucent grants to AT&T, under Lucent's Limited Patents,
personal, nonexclusive, royalty-free and non-transferable (except as specified
herein) licenses to have made any and all items (i) to be used by AT&T for
internal business purposes (as such business may be conducted from time to
time); or (ii) to be used in the provisioning of services to AT&T's customers;
or (iii) to be sold or furnished to end user customers by AT&T, either directly
or indirectly; or (iv) to be sold or furnished to a Related Company of AT&T, any
Foreign Affiliate of AT&T or any other legal entity in which AT&T continually
holds at least a ten percent (10%) equity interest. As an attribute to the
foregoing have made rights under Lucent's Limited Patents, Lucent grants to AT&T
the right to grant to AT&T's suppliers or vendors of any item to be furnished to
AT&T the right to use processes and equipment under Lucent's Limited Patents in
the design, manufacturing and testing of such items.
(b)(2)(B) The have made rights hereunder granted to AT&T to
resell, either directly or indirectly, any items made by others under the
provisions of Section 2.1(b)(2)(A)(iii) or (iv) above shall not be exercised in
a manner such that the exercise of the have made rights is a sham to sublicense
Lucent's Limited Patents to a third party and not for bona fide AT&T business
purposes.
2.2 GRANTS TO NCR. (a)(1) AT&T grants to NCR, under AT&T's
Patents, personal, nonexclusive, royalty-free and non-transferable licenses to
make (but not have made other than as specified in Section 2.2(a)(2)), use,
lease, sell and import any and all products and services of the businesses in
which NCR or any of its Related Companies is now or hereafter engaged.
(a)(2) AT&T grants to NCR, under AT&T's Patents, personal,
nonexclusive, royalty-free and non-transferable (except as specified herein)
licenses to have made any and all items (i) to be used by NCR for internal
business purposes (as such business may be conducted from time to time); or (ii)
to be sold by NCR or incorporated into products of NCR; or (iii) to be used by
NCR in the engineering, installation and systems integration of NCR's products
for NCR's customers. As an attribute to the foregoing have made rights under
AT&T's Patents, AT&T grants to NCR the right to grant to NCR's suppliers or
vendors of any item to be furnished to NCR, the right to use processes and
equipment under AT&T's Patents in the design, manufacturing and testing of such
items. NCR's have made rights under AT&T's Patents to resell any item made by
others under this Section 2.2(a)(2) shall not be exercised in a manner such that
the exercise of the have made rights is a sham to sublicense AT&T's Patents to a
third party and not for bona fide NCR business purposes.
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(b) (1) Lucent grants to NCR, under Lucent's Patents, personal,
nonexclusive and non-transferable licenses to make (but not have made other than
as specified in Section 2.2(b)(2)), use, lease, sell and import any or all
products and services of the businesses in which NCR or any of its Related
Companies is now or hereafter engaged.
(b)(2) Lucent grants to NCR, under Lucent's Patents, personal,
nonexclusive and non-transferable (except as specified herein) licenses to have
made any and all items (i) to be used by NCR for internal business purposes (as
such business may be conducted from time to time); or (ii) to be sold by NCR or
incorporated into products of NCR; or (iii) to be used by NCR in the
engineering, installation and systems integration of NCR's products for NCR's
customers. As an attribute to the foregoing have made rights under Lucent's
Patents, Lucent grants to NCR the right to grant to NCR's suppliers or vendors
of any item to be furnished to NCR the right to use processes and equipment
under Lucent's Patents in the design, manufacturing and testing of such items.
NCR's have made rights under Lucent's Patents to resell any item made by others
under this Section 2.2(b)(2) shall not be exercised in a manner such that the
exercise of the have made rights is a sham to sublicense Lucent's Patents to a
third party and not for bona fide NCR business purposes.
(b)(3) In consideration for the balance of Lucent's and NCR's
licenses and rights exchanged hereunder by Lucent and NCR, NCR shall pay to
Lucent a lump sum amount of six million one hundred twenty thousand U.S. dollars
($6,120,000) within sixty (60) days of execution of this Agreement by all
Parties. Neither such sum nor any portion thereof shall be refundable or
creditable to NCR.
2.3 GRANTS TO LUCENT. (a)(1) AT&T grants to Lucent, under AT&T's
Limited Patents, personal, nonexclusive, royalty-free and non-transferable
licenses to make (but not have made other than as specified in Section
2.3(a)(2)), use, lease, sell and import any and all products and services of the
businesses in which Lucent or any of its Related Companies or Foreign Affiliates
is now or hereafter engaged.
(a)(2) AT&T grants to Lucent, under AT&T's Limited Patents,
personal, nonexclusive, royalty-free and non-transferable (except as specified
herein) licenses to have made any and all items (i) to be used by Lucent for
internal business purposes (as such business may be conducted from time to
time); or (ii) to be sold by Lucent or incorporated into products of Lucent; or
(iii) to be used by Lucent in the engineering, installation and systems
integration of Lucent's products for Lucent's customers. As an attribute to the
foregoing have made rights under AT&T's Limited Patents, AT&T grants to Lucent
the right to grant to Lucent's suppliers or vendors of any item to be furnished
to Lucent the right to use processes and equipment under AT&T's Limited Patents
in the design, manufacturing and testing of such items. Lucent's have made
rights under AT&T's Limited Patents to resell any item made by others under this
Section 2.3(a)(2) shall not be exercised in a manner such that the exercise of
the have made rights is a
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sham to sublicense AT&T's Limited Patents to a third party and not for bona fide
Lucent business purposes.
(b) (1) NCR grants to Lucent, under NCR's Patents, personal,
nonexclusive, royalty-free and non-transferable licenses to make (but not have
made other than as specified in Section 2.3(b)(2)), use, lease, sell and import
any and all products and services of the businesses in which Lucent or any of
its Related Companies or Foreign Affiliates is now or hereafter engaged.
(2) NCR grants to Lucent, under NCR's Patents, personal,
nonexclusive, royalty-free and non-transferable (except as specified herein)
licenses to have made any and all items (i) to be used by Lucent for internal
business purposes (as such business may be conducted from time to time); or (ii)
to be sold by Lucent or incorporated into products of Lucent; or (iii) to be
used by Lucent in the engineering, installation and systems integration of
Lucent's products for Lucent's customers. As an attribute to the foregoing have
made rights under NCR's Patents, NCR grants to Lucent the right to grant to
Lucent's suppliers or vendors of any item to be furnished to Lucent the right to
use processes and equipment under NCR's Patents in the design, manufacturing and
testing of such items. Lucent's have made rights under NCR's Patents to resell
any item made by others under this Section 2.3(b)(2) shall not be exercised in a
manner such that the exercise of the have made rights is a sham to sublicense
NCR's Patents to a third party and not for bona fide Lucent business purposes.
2.4 DURATION AND EXTENT. All licenses granted herein as to any
Party's patent or patents shall continue for the entire unexpired term of such
patent, but for patents falling within subsection (2) (ii) of the definition of
AT&T's Patents, NCR's Patents or Lucent's Patents, as the case may be, for as
much of such term as the grantor has the right to grant such licenses.
2.5 SCOPE. (a)(1)(A) The licenses granted herein to AT&T include
licenses to convey to any customer of AT&T, with respect to any product/service
furnished by AT&T, including any combination of products/services furnished by
AT&T, whether or not furnished at the same time to such customer, rights to use
such product/service as furnished by AT&T (whether or not as part of a larger
combination); provided, however, that no rights may be conveyed to customers
with respect to any invention which is directed to (i) a combination of such
product/service (as furnished) with any other item which is not a
product/service furnished by AT&T, or (ii) a method or process which is other
than the inherent use of such product/service itself (as furnished). As used in
this Section 2.5(a)(1)(A), the term "inherent use" means a use that would be
completely performed by a product/service as furnished by AT&T, or combination
of products/services as furnished by AT&T, without the need for any additional
product, service, development, modification or programming by AT&T's customer or
a third party.
(a)(1)(B) The licenses granted herein to NCR under AT&T's Patents include
licenses to convey to any customer of NCR, with respect to any product/service
furnished by NCR to such customer, rights to use such product/service as
furnished by NCR; provided, however, that no
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rights may be conveyed to customers with respect to any invention which is
directed to (i) a combination of such product/service (as furnished) with any
other item, including another item previously or subsequently furnished by NCR,
or (ii) a method or process which is other than the inherent use of such
product/service itself (as furnished). As used in this Section 2.5(a)(1)(B), the
term "inherent use" means a use that would be completely performed by a
product/service as furnished by NCR without the need for any additional product,
service, development, modification or programming by NCR's customer or a third
party.
(a)(1)(C) The licenses granted herein to NCR under Lucent's Patents
include licenses to convey to any customer of NCR, with respect to any
product/service furnished by NCR (including any combination of products/services
furnished by NCR, whether or not furnished at the same time) to such customer,
rights to use such product/service as furnished by NCR (whether or not as part
of a larger combination); provided, however, that no rights may be conveyed to
customers with respect to any invention which is directed to (i) a combination
of such product/service (as furnished) with any other item which is not a
product/service furnished by NCR, or (ii) a method or process which is other
than the inherent use of such product/service itself (as furnished). As used in
this Section 2.5(a)(1)(C), the term "inherent use" means a use that would be
completely performed by a product/service as furnished by NCR (or combination of
products/services as furnished by NCR) without the need for any additional
product, service, development, modification or programming by NCR's customer or
a third party.
(a)(1)(D) The licenses granted herein to Lucent under AT&T's Limited
Patents include licenses to convey to any customer of Lucent, with respect to
any product/service furnished by Lucent to such customer, rights to use such
product/service as furnished by Lucent; provided, however, that no rights may be
conveyed to customers with respect to any invention which is directed to (i) a
combination of such product/service (as furnished) with any other item,
including another item previously or subsequently furnished by Lucent, or (ii) a
method or process which is other than the inherent use of such product/service
itself (as furnished). As used in this Section 2.5(a)(1)(D), the term "inherent
use" means a use that would be completely performed by a product/service as
furnished by Lucent without the need for any additional product, service,
development, modification or programming by Lucent's customer or a third party;
and the term "furnish" or "furnished" shall include the provision of an entire
system of products and services, including components obtained from third-party
vendors, so long as the entire system was or is sold or contracted for under a
stand alone agreement or single purchase order for such entire system, and
further provided that Lucent when furnishing the entire system is in direct
privity with the customer under the terms of such stand alone agreement or such
purchase order as to all components so furnished such that all representations
and warranties to the customer concerning the system and each of its relevant
components are provided by Lucent and not by the third-party vendor.
(a)(1)(E) In addition to those rights provided by Section 2.5(a)(1)(D),
the licenses granted herein to Lucent under AT&T's Specified Patents include
licenses to convey to any customer of Lucent, with respect to any
product/service furnished by Lucent (including any combination of
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products/services furnished by Lucent, whether or not furnished at the same
time) to such customer, rights to use such product/service as furnished by
Lucent (whether or not as part of a larger combination); provided, however, that
no rights may be conveyed to customers with respect to any invention which is
directed to (i) a combination of such product/service (as furnished) with any
other item which is not a product/service furnished by Lucent, or (ii) a method
or process which is other than the inherent use of such product/service itself
(as furnished). As used in this Section 2.5(a)(1)(E), the term "inherent use"
means a use that would be completely performed by a product/service as furnished
by Lucent (or combination of products/services as furnished by Lucent) without
the need for any additional product, service, development, modification or
programming by Lucent's customer or a third party.
(a)(1)(F) The licenses granted herein to Lucent under NCR's Patents
include licenses to convey to any customer of Lucent, with respect to any
product/service furnished by Lucent (including any combination of
products/services furnished by Lucent, whether or not furnished at the same
time) to such customer, rights to use such product/service as furnished by
Lucent (whether or not as part of a larger combination); provided, however, that
no rights may be conveyed to customers with respect to any invention which is
directed to (i) a combination of such product/service (as furnished) with any
other item which is not a product/service furnished by Lucent, or (ii) a method
or process which is other than the inherent use of such product/service itself
(as furnished). As used in this Section 2.5(a)(1)(F), the term "inherent use"
means a use that would be completely performed by a product/service as furnished
by Lucent (or combination of products/services as furnished by Lucent) without
the need for any additional product, service, development, modification or
programming by Lucent's customer or a third party.
(a)(2)(A) The provision by one Party of certain pass-through rights under
any of the other Parties' Patents, as contemplated under Sections 2.5(a)(1)(A)
through (F), shall not be a sham to effect the sublicensing of a competitor of
the Party owning the respective patent subject to the pass through as opposed to
a pass through of necessary rights to permit the bona fide selling or
provisioning of products or services to customers of the Party that is directly
conveying the pass-through rights under the other Party's Patents.
(a)(2)(B) The exclusions numbered "(i)" and "(ii)" in each of Sections
2.5(a)(1)(B) through (F), as relevant, shall not apply to a replacing or
additional software or hardware product furnished by NCR or Lucent to a customer
for use in a hardware product previously furnished by NCR or Lucent,
respectively, but solely to the extent that such product is used in combination
only with such previously furnished hardware product.
(a)(3) The licenses granted herein to AT&T and to Lucent include an
additional limited right to extend patent sublicenses to any Person, solely to
the extent necessary for AT&T and Lucent, respectively, to fulfill any existing
patent licensing commitments or obligations to unaffiliated existing third party
licensees. Each Party to this Agreement hereby agrees and
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confirms that the scope of such sublicenses shall not exceed these existing
commitments or obligations.
(b) Licenses granted herein are not to be construed either (i)
as consent by the grantor to any act which may be performed by the grantee,
except to the extent impacted by a patent licensed herein to the grantee, or
(ii) except as otherwise specifically provided under Sections 2.1(a)(2)(A),
2.1(b)(2)(A), 2.2(a)(2), 2.2(b)(2), 2.3(a)(2), 2.3(b)(2) and 2.5(a), a waiver of
a Party's (or any of its Related Companies') rights against any third party with
respect to any infringement.
(c) In addition to the limited sublicensing rights of AT&T and
Lucent specified in Section 2.5(a)(3), AT&T and Lucent may each grant
sublicenses to their respective Foreign Affiliates within the scope of their
respective licenses hereunder. The grant of each license hereunder to each Party
to this Agreement includes the right to grant sublicenses within the scope of
such license to a Party's Related Companies for so long as they remain its
Related Companies. Any such sublicense may be made effective retroactively, but
not prior to the effective date hereof, nor prior to the sublicensee's becoming
a Related Company of such Party.
2.6 EXCLUSIONS OF PATENTS. The licenses and rights granted
hereunder by AT&T to NCR or Lucent under AT&T's Patents do not include any
license or right under (a) any patents or patent applications first filed prior
to February 1, 1996 which patents or applications are (i) owned or controlled by
AT&T Wireless Services, Inc, ("AWS") or any of its Subsidiaries, and (ii)
related to the business of wireless telecommunications services; or (b) any
patents or patent applications first filed on or after February 1, 1996 and
covering inventions made by employees of AWS or by third parties other than AT&T
or any of its Subsidiaries, which patents and applications (i) are owned or
controlled by AWS or any of its Subsidiaries, and (ii) relate to the business of
wireless telecommunications services. With respect to all patents issued as of
February 1, 1996 to AWS and to any of its Subsidiaries, the foregoing shall not
limit NCR's or Lucent's ability to continue providing products and services
embodying inventions covered by such patents and provided by each as of the date
of this Agreement.
2.7 FILINGS OF PATENT APPLICATIONS. Each Party agrees to file
patent applications during 1996 and 1999 in a timely manner as determined by
generally accepted good patent filing practices and as though this Agreement
were not in existence between the Parties. The dispute resolution provisions of
Section 4.7 shall apply to any allegation by one Party that another Party hereto
has purposely delayed its patent filings primarily to avoid providing the
licenses and rights granted hereunder.
[/R]
2.8 JOINT INVENTIONS. (a) There are countries (not including the
United States) which require the express consent of all inventors or their
assignees to the grant of licenses or rights under patents issued in such
countries for joint inventions.
[/R]
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(b) Each Party shall give such consent, or shall obtain such
consent from its Related Companies, its employees or employees of any of its
Related Companies, as required to make full and effective any such licenses and
rights respecting any joint invention granted to a grantee hereunder by such
Party and by another licensor of such grantee.
(c) Each Party shall take steps which are reasonable under the
circumstances to obtain from third parties whatever other consents are necessary
to make full and effective such licenses and rights respecting any joint
invention purported to be granted by it hereunder. If, in spite of such
reasonable steps, such Party is unable to obtain the requisite consents from
such third parties, the resulting inability of such Party to make full and
effective its purported grant of such licenses and rights shall not be
considered to be a breach of this Agreement.
2.9 SALES TO THE UNITED STATES GOVERNMENT. With respect to one
Party's bid or contract with the United States government, or any of its
component agencies, each of the other two Parties agrees to provide to such
first Party, on reasonable terms and conditions, including royalties, patent
licenses and rights under any and all of each of the other Parties' patents or
patent applications that are licensed hereunder. The scope of such patent
licenses and rights will be for the use of any and all products, services, or
combinations thereof sold to the United States government by such Party,
provided that use of the products or services is by the government, its
agencies, or employees, and not for use by or resell to other Persons or
governments.
2.10 LICENSING OF CERTAIN IDENTIFIED PATENTS OF AT&T NECESSARY TO
IMPLEMENT AN ADOPTED STANDARD. With respect to the following six (6) AT&T's
Limited Patents (U.S.4,383,332; 5,410,538; 5,420,851 and 5,442,625; and patents
issued on U.S. Patent Applications Serial Nos. 08/504,481 and 08/234,197), if,
at any time more than five (5) years after the Closing Date, an official
standards body or organization adopts a standard that requires the use of all or
a portion of the claims of any of these six (6) patents, and the standards body
or organization so directs, then AT&T will license those patents (on reasonable
terms, conditions and for a reasonable royalty, if any is permitted pursuant to
the standard) to third parties at the request and direction of Lucent, but only
to the extent of the claims and fields of use covered by the standard.
2.11 LUCENT LICENSING OF DESIGNATED PARTIES AT AT&T'S REQUEST.
(a) Whenever AT&T desires that a third party be licensed under one or more of
Lucent's Specified Patents, AT&T will notify Lucent in a writing which shall
contain the following:
(i) The name and address of the third party and whether any affiliated
companies of the third party are to be included in the license;
(ii) The specific Lucent's Specified Patents to be included in the
license;
(iii)The date by which a license is to be granted;
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(iv) The scope of the license to be granted; and
(v) A rationale for the request to license such third party.
(b) Lucent, upon receipt of notification specified in
Section 2.11(a) will proceed as follows:
(i) If Lucent has any objection to the AT&T request, it will notify
AT&T in writing within ten (10) business days of its objection(s) and the
reasons therefor. Lucent and AT&T will then attempt to resolve the objection
and, if a resolution satisfactory to both parties is not achieved within ten
(10) additional business days, either AT&T or Lucent may submit the matter to
arbitration pursuant to Article IX of the Separation and Distribution Agreement
between the parties for resolution (without compliance with the escalation
provisions contemplated by Section 9.2 thereof or any waiting period related to
such escalation provisions); provided that the procedural provisions set forth
below shall apply in lieu of any conflicting provisions contained in Article IX
of the Separation and Distribution Agreement.
In submitting the matter to arbitration, a Party shall include all
documents which that Party needs to support its position in arbitration. The
other Party shall then have five (5) business days from the date it receives the
first Party's document to submit any and all documents which that Party needs to
support its position. Either Party may request a hearing to be conducted within
ten (10) business days from the conclusion of document submission. The
arbitrator shall render a ruling within a time period not to exceed two (2)
months from the date the matter is submitted to arbitration. In considering
whether an objection to a license is proper, the arbitrator shall consider all
relevant facts and positions offered by the Parties, including whether Lucent
has granted licenses to other companies with products comparable to those sold
or planned for sale by the third party and upon what terms such licenses were
granted, Lucent's competitive position in the relevant markets, any expressed
rationale for the request by AT&T, the impact of an adverse ruling against each
Party, and the reasonableness of the requested completion date. Should the
arbitrator rule in favor of AT&T, Lucent will have five (5) business days to
submit to the arbitrator a set of terms and conditions which Lucent would
propose be offered to the third party. AT&T shall have five (5) business days to
submit to the arbitrator its comments on Lucent's proposed terms and conditions
and may bring to the attention of the arbitrator any and all facts relevant to
the issue of appropriate terms and conditions of licensing the Lucent's
Specified Patents. The arbitrator, within five (5) business days, shall then
make a determination of an initial set of terms and conditions to be presented
to the third party by Lucent. Lucent shall present such terms and conditions to
the third party within three (3) business days of the arbitrator's
determination. If the arbitrator rules in favor of Lucent, or if the third party
is unwilling to accept the terms and conditions set by the arbitrator, Lucent
will have no obligation to license that third party and AT&T may not make a
similar request to license that third party for a period of one (1) year.
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(ii) If Lucent has no objection to the request, it will attempt to
license the Lucent's Specified Patents selected by AT&T, within the period
referenced in Section 2.11(a)(iii), to the third party on reasonable terms and
conditions which may include a grantback license to Lucent. Such terms and
conditions will be established in accordance with ordinary practices in the
industry to which the patents pertain. Lucent's then normal licensing practices,
as measured by licenses granted to others of a scope similar to that referenced
in Section 2.11(b)(i) under such Lucent's Specified Patents, will be considered
as examples of such industry practices. If the third party is unwilling to
accept the terms and conditions of the license offered by Lucent (which terms
and conditions are other than those determined by the arbitrator) within the
time period referenced in Section 2.11(a)(iii), Lucent shall provide to AT&T
within five (5) business days a statement in writing as to why Lucent believes
that a license on the terms and conditions requested by the third party is not
advisable in its view. AT&T may then submit the matter to arbitration pursuant
to Article IX of the Separation and Distribution Agreement between the Parties
(modified as contemplated below) to determine whether different terms and
conditions should be offered to the third party.
In submitting the matter to arbitration, AT&T shall include all
documents which it needs to support its position. Lucent shall then have five
(5) business days to submit any and all documents which it needs to support its
position. In determining whether different terms and conditions should be
offered to the third party, the arbitrator shall consider all relevant facts and
positions offered by the Parties such as proposed terms and conditions,
including whether Lucent has granted licenses to other Persons with products
comparable to those sold or planned for sale by the third party and upon what
terms and conditions such licenses were granted, Lucent's competitive position
in the relevant markets, and any expressed rationale for such license by AT&T.
The arbitrator shall render a ruling within a time period not to exceed two (2)
months from the date AT&T submits the matter to arbitration. Should the
arbitrator rule that different terms and conditions should be offered to the
third party, Lucent shall, within three (3) business days, offer a license to
the third party on terms and conditions specified by the arbitrator. If the
arbitrator rules in favor of Lucent, or if the third party is unwilling to
accept the terms and conditions set by the arbitrator, Lucent will have no
obligation to license that third party and AT&T may not make a similar request
to license that third party for a period of one (1) year.
(c) With respect to requests by AT&T to grant licenses to
third parties under Lucent's Specified Patents, the number of such requests
shall be limited as follows:
(i) if the request is to grant a license to a third party for a product
and/or service developed by, with, or for AT&T, which product and/or service
results from either a specific custom development project or a specific joint
development project, then AT&T may request that up to eight (8) such licenses to
make, use and sell the developed products and/or services be granted in each
calendar year. In addition, for each of the eight (8) requested licenses in each
calendar year, AT&T may request that up to two (2) additional vendors be
licensed to make and sell such product and/or service (a total of three (3) such
vendors (an original and two (2) additional vendors) in the event AT&T develops
the product/service itself), provided that the
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additional vendors must accept the identical terms and conditions entered into
with the original third party and provided further that no arbitration is
permitted with respect to such additional vendor requests.
(ii) if the request is to grant a license to a third party for products
and/or services other than specific products or services, developed by, with, or
for AT&T in a specific custom development project or a specific joint
development project, then AT&T may request up to five (5) licenses of this kind
be granted in each calendar year; and
(iii) if the request is to grant a license to a third party for
inventions implemented in software developed and created in whole or in part by
AT&T and furnished by AT&T to that third party for further distribution to end
user customers, then AT&T may request up to seven (7) licenses of this kind be
granted in each calendar year to such third parties:
The Parties agree, on an annual basis, to review the success and viability of
the licensing arrangement contemplated herein, with a view toward modifying the
current limits on license requests so as to meet the needs of both Parties.
Unless the Parties agree to modify the current limits, the current limits shall
remain in force.
(d) Lucent further agrees to license, from time to time, on
reasonable and non-discriminatory terms and conditions the eight (8) patents
listed in Exhibit E to members of an undersea telecommunication system
consortium, when necessary pursuant to terms established by the consortium for
participation by AT&T in the consortium and for use in the consortium project.
(e) Lucent shall be the sole recipient and beneficiary of any
and all royalties and grantback rights, if any, paid or provided under any
license agreement made pursuant to this Agreement.
(f) As soon as practical in advance of any dispute, the
Parties shall name an arbitrator who shall serve as a sitting sole arbitrator
for any and all arbitrations held pursuant to this Section 2.11. The Parties
shall use the arbitrator selection provisions of Article IX of the Separation
and Distribution Agreement to select the sitting sole arbitrator.
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ARTICLE III
TERMINATION
3.1 VOLUNTARY TERMINATION. By written notice to another Party,
each Party may voluntarily terminate all or a specified portion of the licenses
and rights granted to it hereunder by such other Party. Such notice shall
specify the effective date of such termination and shall clearly specify any
affected patent, invention, product or service.
3.2 SURVIVAL. (a) If a company ceases to be a Related Company of a
Party, licenses and rights granted to the other Parties hereunder with respect
to patents of such company on applications filed prior to the date of such
cessation shall not be affected by such cessation.
(b) Any voluntary termination of licenses and rights of a
Party under Section 3.1 shall not affect such Party's licenses, and rights with
respect to any licensed product made or service furnished prior to such
termination, and shall not affect the licenses and rights granted to the other
Parties hereunder.
3.3 CHANGE OF CONTROL OF OR CERTAIN ACQUISITIONS BY NCR. In the
event of a Change of Control of NCR, or in the event that NCR acquires any
Person that (i) competes with AT&T in the provision of telecommunications
services, or (ii) competes with Lucent in the provision of telecommunications
systems and equipment, or (iii) has a market value greater than fifty percent
(50%) of NCR's market value at the time of acquisition, then, all patent
licenses and rights granted to NCR hereunder shall extend only to a specific
annual volume of products and services which are of a kind comparable to those
offered by NCR prior to such Change of Control or acquisition. Such specific
volume of products and services shall not exceed the volume of corresponding
licensed products and services of NCR prior to such Change of Control or
acquisition.
ARTICLE IV
MISCELLANEOUS PROVISIONS
4.1 DISCLAIMER. NO PARTY OR ANY OF ITS SUBSIDIARIES MAKES ANY
REPRESENTATIONS, EXTENDS ANY WARRANTIES OF ANY KIND, ASSUMES ANY RESPONSIBILITY
OR OBLIGATIONS WHATEVER, OR CONFERS ANY RIGHT BY IMPLICATION, ESTOPPEL OR
OTHERWISE, OTHER THAN THE LICENSES, RIGHTS AND WARRANTIES HEREIN EXPRESSLY
GRANTED.
4.2 NONASSIGNABILITY. The Parties hereto have entered into this
Agreement in contemplation of personal performance, each by the other, and
intend that the licenses and rights granted hereunder to a Party not be extended
to entities other than such Party's Related Companies (and only for so long as
any such Related Company remains a Related Company)
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<PAGE> 20
without the other Party's or Parties', as applicable, express written consent.
Neither this Agreement nor any licenses or rights hereunder shall be assignable
or transferable by any Party to any other Person, except as expressly permitted
hereunder, without the express written consent of the other Parties, provided
that such consent shall not be unreasonably withheld in the event of a proposed
assignment or transfer of those licenses and rights relevant to any portion of
any Party's business that is or is to be spun off or otherwise distributed to
such Party's shareholders.
4.3 ADDRESSES. The Parties agree that any notice or other
communication hereunder shall be given as set forth in Section 12.5 of the
Separation and Distribution Agreement.
4.4 CHOICE OF LAW. Except as otherwise provided in Section 9.9 of
the Separation and Distribution Agreement, this Agreement shall be governed by
and construed and interpreted in accordance with the laws of the State of New
York, irrespective of the choice of laws principles of the State of New York, as
to all matters, including matters of validity, construction, effect, performance
and remedies.
4.5 INTEGRATION. This Agreement sets forth the entire agreement
and understanding between the Parties as to the subject matter hereof and merges
all prior discussions between them. A Party shall not be bound by any
warranties, understandings or representations with respect to such subject
matter other than as expressly provided herein or in a writing signed with or
subsequent to execution hereof by an authorized representative of the Party to
be bound thereby.
4.6 OUTSIDE THE UNITED STATES. (a) There are countries in which
the owner of an invention is entitled to compensation, damages or other monetary
award for another's unlicensed manufacture, sale, lease, use or importation
involving such invention prior to the date of issuance of a patent for such
invention but on or after a certain earlier date, hereinafter referred to as the
invention's "protection commencement date" (e.g., the date of publication of
allowed claims or the date of publication or "laying open" of the filed patent
application). In some instances, other conditions precedent must also be
fulfilled (e.g., knowledge or actual notification of the filed patent
application). The Parties agree that (i) an invention which has a protection
commencement date in any such country may be used in such country pursuant to
the terms of this Agreement on and after any such date, and (ii) all such
conditions precedent are deemed satisfied by this Agreement.
(b) There may be countries in which a Party hereto may have, as a
consequence of this Agreement, rights against infringers of another Party's
patents licensed hereunder. Each Party hereby waives any such right it may have
by reason of such third party's infringement or alleged infringement of another
Party's patents.
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(c) Each Party hereby agrees to register or cause to be
registered, to the extent that such Party reasonably determines that
registration or recordation is necessary under applicable law, and without
expense to the other Parties or any of their Related Companies, any agreements
wherein sublicenses are granted by it under the other Parties' patents licensed
hereunder. Each Party hereby waives any and all claims or defenses, arising by
virtue of the absence of such registration, that might otherwise limit or affect
its obligations to the other Parties.
4.7 ARBITRATION AND DISPUTE RESOLUTION. The Parties agree that the
procedures for discussion, negotiation and arbitration set forth in Article IX
of the Separation and Distribution Agreement, which Article IX is incorporated
herein by reference, shall apply to all disputes, controversies or claims that
may arise under or in connection with this Agreement, except as otherwise
provided in Section 2.11.
4.8 AMENDMENTS AND CHANGES. Subsequent to the execution of this
Agreement by all Parties, and solely to the extent that a change is desired by
and restricted to any two Parties without affecting the licenses and rights of
the third Party hereto, such two Parties may separately amend any provision of
this Agreement which governs the licenses and rights exchanged between them
without notifying, advising, consulting or requesting the concurrence of the
third Party hereto. Except as specifically provided herein, any other
modification affecting all three Parties shall require the written agreement and
signature of all the Parties.
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IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be executed
in triplicate originals by its duly authorized representatives on the respective
dates entered below.
AT&T CORP.
By:
-------------------------------
Title:
-------------------------------
Date:
-------------------------------
NCR CORPORATION
By:
-------------------------------
Title:
-------------------------------
Date:
-------------------------------
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LUCENT TECHNOLOGIES INC.
By:
-------------------------------
Title:
-------------------------------
Date:
-------------------------------
THIS AGREEMENT DOES NOT BIND OR OBLIGATE ANY PARTY
IN ANY MANNER UNLESS DULY EXECUTED BY AUTHORIZED
REPRESENTATIVES OF ALL PARTIES.
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<PAGE> 1
Exhibit 10.8
TECHNOLOGY LICENSE AGREEMENT
among
AT&T CORP.
NCR CORPORATION
and
LUCENT TECHNOLOGIES INC.
Effective as of , 1996
<PAGE> 2
TECHNOLOGY LICENSE AGREEMENT
Table of Contents
ARTICLE I DEFINITIONS....................................................... 2
1.1 Applied Corporate Technology........................................ 2
1.2 AT&T's Network Technology........................................... 2
1.3 AT&T's Proprietary Feature.......................................... 2
1.4 AT&T's Restricted Technology....................................... 2
1.5 AT&T Services Business.............................................. 2
1.6 AT&T's Technology................................................... 2
1.7 AT&T's Wireless Services Technology................................. 2
1.8 Common Support Function Software.................................... 2
1.9 Copyrights.......................................................... 3
1.10 Corporate Technology................................................ 3
1.11 Enterprise Technology............................................... 3
1.12 Mask Works.......................................................... 3
1.13 NCR's Product Realization Technology................................ 3
1.14 NCR's Restricted Technology......................................... 3
1.15 NCR's Specified Technology.......................................... 3
1.16 NCR's Technology.................................................... 3
1.17 Lucent Business..................................................... 3
1.18 Lucent's Product Realization Technology............................. 4
1.19 Lucent's Restricted Technology...................................... 4
1.20 Lucent's Specified Technology....................................... 4
1.21 Lucent's Technology................................................. 4
1.22 Related Companies of AT&T........................................... 4
1.23 Related Companies of NCR............................................ 4
1.24 Related Companies of Lucent......................................... 4
1.25 Technology.......................................................... 4
ARTICLE II ACCESS AND USE OF ENTERPRISE TECHNOLOGY.......................... 5
2.1 Access to Enterprise Technology.................................... 5
2.2 Export Control..................................................... 5
2.3 AT&T's Rights to Use Enterprise Technology......................... 5
2.4 NCR's Rights to Use Enterprise Technology......................... 6
2.5 Lucent's Rights to Use Enterprise Technology...................... 7
2.6 Procurement........................................................ 8
2.7 Exclusion of AT&T's Wireless Services Technology................... 8
ARTICLE III TERMINATION..................................................... 8
3.1 Voluntary Termination.............................................. 8
3.2 Survival........................................................... 9
3.3 Change of Control of or Certain Acquisitions by NCR................ 9
<PAGE> 3
ARTICLE IV MISCELLANEOUS PROVISIONS......................................... 9
4.1 Agreement Prevails.................................................. 9
4.2 Nothing Construed................................................... 9
4.3 Disclaimer.......................................................... 9
4.4 No Patent Licenses.................................................. 9
4.5 Confidentiality..................................................... 9
4.6 Nonassignability................................................... 10
4.7 Addresses.......................................................... 10
4.8 Choice of Law...................................................... 10
4.9 Integration........................................................ 10
4.10 Arbitration and Dispute Resolution................................. 11
4.11 Amendments and Changes............................................. 11
Exhibit A List of AT&T's Network Technology................................ 14
Exhibit B List of AT&T's Proprietary Features.............................. 15
Exhibit C List of AT&T's Restricted Technology............................. 48
Exhibit D List of NCR's Product Realization Technology..................... 49
Exhibit E List of NCR's Restricted Technology.............................. 50
Exhibit F List of NCR's Specified Technology............................... 51
Exhibit G List of Lucent's Product Realization Technology.................. 52
Exhibit H List of Lucent's Restricted Technology........................... 53
Exhibit I List of Applied Corporate Technology............................. 54
<PAGE> 4
TECHNOLOGY LICENSE AGREEMENT
This Agreement is effective as of __________, 1996, among AT&T CORP., a
New York corporation ("AT&T"), having an office at 32 Avenue of the Americas,
New York, New York 10013, NCR CORPORATION, a Maryland corporation ("NCR"),
having an office at 101 West Schantz Avenue, Dayton, Ohio 45479, and LUCENT
TECHNOLOGIES INC., a Delaware corporation ("Lucent"), having an office at 600
Mountain Avenue, Murray Hill, New Jersey 07974 (each hereinafter referred to as
a "Party"). Capitalized terms used herein and not otherwise defined shall have
the respective meanings assigned to them in Article I hereof or as assigned to
them in the Separation and Distribution Agreement (as defined below).
WHEREAS, the Board of Directors of AT&T has determined that it is in the
best interests of AT&T and its shareholders to separate AT&T's existing
businesses into three independent businesses; and
WHEREAS, as part of the foregoing AT&T, NCR and Lucent have entered into
a Separation and Distribution Agreement, dated as of February 1, 1996 (the
"Separation and Distribution Agreement"), which provides, among other things,
for the Separation of the Lucent Assets and Lucent Liabilities, the IPO, the
Distribution and the execution and delivery of certain other agreements in order
to facilitate and provide for the foregoing; and
WHEREAS, AT&T desires to receive and NCR and Lucent, respectively, are
each willing to grant to AT&T certain rights to use technology which is owned by
NCR and Lucent, respectively, on or after the date hereof; and
WHEREAS, NCR desires to receive and AT&T and Lucent, respectively, are
each willing to grant to NCR certain rights to use technology retained and owned
by AT&T and technology owned by Lucent on or after the date hereof; and
WHEREAS, Lucent desires to receive and AT&T and NCR, respectively, are
each willing to grant to Lucent certain rights to use technology retained and
owned by AT&T and technology owned by NCR on or after the date hereof.
NOW, THEREFORE, in consideration of the mutual promises of the Parties,
and of good and valuable consideration, it is agreed by and between the Parties
as follows:
<PAGE> 5
ARTICLE I
DEFINITIONS
For the purpose of this Agreement the following terms in capital letters are
defined in this Article I and shall have the meaning specified herein:
1.1 APPLIED CORPORATE TECHNOLOGY means the Technology listed in
Exhibit "I". By separate Technology Assignment and Joint Ownership Agreement of
even date herewith, AT&T has assigned to Lucent and NCR equal undivided
one-third (1/3) interest in the Technology listed in Exhibit "I".
1.2 AT&T'S NETWORK TECHNOLOGY means Technology related to the
infrastructure of the AT&T Global Network as listed in Exhibit "A".
1.3 AT&T'S PROPRIETARY FEATURE means any AT&T network feature
currently committed and/or deployed as listed in Exhibit "B" which Lucent
exclusively provides to AT&T pursuant to a separate existing development or
procurement agreement between AT&T and Lucent.
1.4 AT&T'S RESTRICTED TECHNOLOGY means only those items of AT&T's
Technology listed in the attached Exhibit "C".
1.5 AT&T SERVICES BUSINESS shall have the meaning set forth in the
Separation and Distribution Agreement.
1.6 AT&T'S TECHNOLOGY means any and all portions of Enterprise
Technology existing as of the Closing Date, which were developed by or for, or
purchased by the AT&T Services Business. The term includes AT&T's Restricted
Technology, AT&T's Network Technology and AT&T's Wireless Services Technology
but shall not include Applied Corporate Technology, NCR's Technology, Lucent's
Technology, Common Support Function Software or Corporate Technology.
1.7 AT&T'S WIRELESS SERVICES TECHNOLOGY means all Technology
developed solely by or for the AT&T Wireless Services business, or by AT&T or a
third party for the AT&T Wireless Services business, without any substantial
involvement by Lucent or NCR and related to the business of AT&T Wireless
Services Inc., an AT&T Subsidiary, including both cellular and PCS technology,
both mobile and fixed.
1.8 COMMON SUPPORT FUNCTION SOFTWARE means those computer programs
in source and object code forms, including their respective associated
documentation, listed on Schedule "A" of the Technology Assignment and Joint
Ownership Agreement of even date herewith.
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1.9 COPYRIGHTS mean any original works of authorship fixed in any
tangible medium of expression as set forth in 17 U.S.C. Section 101 et. seq.
1.10 CORPORATE TECHNOLOGY means any and all portions of Enterprise
Technology other than Applied Corporate Technology, AT&T's Technology, NCR's
Technology, Lucent's Technology, and Common Support Function Software. The term
includes, but is not limited to, basic research. By separate Technology
Assignment and Joint Ownership Agreement of even date herewith, AT&T has
assigned to Lucent an equal undivided one-half (1/2) interest in Corporate
Technology.
1.11 ENTERPRISE TECHNOLOGY means any and all Technology existing
as of the Closing Date which is owned by, and was developed by or for, or
purchased by AT&T and its Subsidiaries, including any of its business units and
divisions. The term includes any and all Technology owned or controlled by any
of AT&T's Subsidiaries under which AT&T has the right to grant any of the
right-to-use licenses of the type and on the terms herein granted.
1.12 MASK WORKS means any mask work, registered or unregistered,
as defined in 17 U.S.C. Section 901.
1.13 NCR'S PRODUCT REALIZATION TECHNOLOGY means any and all
portions of NCR's Technology specifically related to the planning, design,
development and manufacture of NCR's products as listed in Exhibit "D".
1.14 NCR'S RESTRICTED TECHNOLOGY means only those items of NCR's
Technology listed in the attached Exhibit "E".
1.15 NCR'S SPECIFIED TECHNOLOGY means only those items of NCR's
Product Realization Technology newly developed by NCR for AT&T as listed in
Exhibit "F".
1.16 NCR'S TECHNOLOGY means any and all portions of Enterprise
Technology existing as of the Closing Date which is owned by NCR or any of its
Subsidiaries, or was developed by or for, or purchased by NCR or any of its
Subsidiaries, or any portion of Enterprise Technology assigned by AT&T to NCR
under a separate Technology Assignment. The term includes NCR's Restricted
Technology, NCR's Product Realization Technology and NCR's Specified Technology
but shall not include Applied Corporate Technology, AT&T's Technology, Lucent's
Technology, Corporate Technology or Common Support Function Software.
1.17 LUCENT BUSINESS shall have the meaning set forth in the
Separation and Distribution Agreement.
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1.18 LUCENT'S PRODUCT REALIZATION TECHNOLOGY means any and all
portions of Lucent's Technology specifically related to the planning, design,
development and manufacture of Lucent's products as listed in Exhibit "G".
1.19 LUCENT'S RESTRICTED TECHNOLOGY means only those items of
Lucent's Technology listed in the attached Exhibit "H".
1.20 LUCENT'S SPECIFIED TECHNOLOGY means only those items of
Lucent's Product Realization Technology which are specifically directed to any
AT&T's Proprietary Feature.
1.21 LUCENT'S TECHNOLOGY means any and all portions of Enterprise
Technology existing as of the Closing Date which were developed by or for, or
purchased by the Lucent Business. The term includes Lucent's Restricted
Technology, Lucent's Product Realization Technology and Lucent's Specified
Technology but shall not include Applied Corporate Technology, AT&T's
Technology, NCR's Technology, Common Support Function Software or Corporate
Technology.
1.22 RELATED COMPANIES OF AT&T means Subsidiaries of AT&T, only
for so long as they remain Subsidiaries, and any other company so designated and
agreed to in a writing signed by AT&T and by NCR or Lucent, as applicable.
Solely for purposes of this definition, Lucent, its Subsidiaries, NCR and its
Subsidiaries shall be deemed not to be Related Companies of AT&T.
1.23 RELATED COMPANIES OF NCR means NCR's Subsidiaries as of the
Distribution Date, only for so long as they remain NCR's Subsidiaries, and any
other company so designated and agreed to in a writing signed by NCR and by AT&T
or Lucent, as applicable.
1.24 RELATED COMPANIES OF LUCENT means Subsidiaries of Lucent,
only for so long as they remain Subsidiaries, and any other company so
designated and agreed to in a writing signed by Lucent and by NCR or AT&T, as
applicable.
1.25 TECHNOLOGY means any and all technical information, computer
or other apparatus programs, specifications, drawings, records, documentation,
works of authorship or other creative works, ideas, knowledge or data. The term
Technology includes Copyrights, Mask Works and any other intellectual property
right, but does not include any trademark, trade name, trade dress or service
mark, or any patent applications on inventions, discoveries or improvements, or
any patents that may be granted or have been granted thereon.
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<PAGE> 8
ARTICLE II
ACCESS AND USE OF ENTERPRISE TECHNOLOGY
2.1 ACCESS TO ENTERPRISE TECHNOLOGY. During a period beginning on
the effective date hereof and ending on the Distribution Date, each Party shall
have the right to access and to copy any and all portions of the Enterprise
Technology in possession of any of the other two Parties. Such access and
copying shall be in accordance with a reasonable request and schedule to be
mutually agreed upon between the Party in possession of the Technology which is
requested and the requesting Party. All costs associated with the assembling,
copying and delivering of such Technology shall be borne by the requesting
Party. No later than March 1, 1996 AT&T and Lucent shall jointly establish a
mutually acceptable process for providing copies of AT&T's Network Technology in
Lucent's possession.
2.2 EXPORT CONTROL. Each Party agrees fully to comply with all
applicable Export Control laws, rules and regulations with respect to any and
all portions of Enterprise Technology owned by the other Party or Parties.
2.3 AT&T'S RIGHTS TO USE ENTERPRISE TECHNOLOGY. (a) Subject to the
restrictions specified in this Section 2.3, AT&T and its Related Companies shall
each have a personal, worldwide, nonexclusive, royalty-free, and
non-transferable right to use the Enterprise Technology for the businesses in
which AT&T or any of its Related Companies are now or hereafter engaged.
(b) Until January 1, 2002, neither AT&T nor any of its Related
Companies shall use without NCR's prior written consent any of NCR's Restricted
Technology for making or having others make for it any product of the kind made,
sold or developed by NCR or any of its Related Companies as of the Closing Date.
(c) Until January 1, 2002, neither AT&T nor any of its Related
Companies shall use without Lucent's written consent any of Lucent's Restricted
Technology for making or having others make for it any telecommunications
equipment of the kind made, sold or developed by Lucent or any of its Related
Companies as of the Closing Date.
(d) AT&T's right to use includes the right of AT&T and its Related
Companies to copy, modify and improve any portion of Enterprise Technology. No
right is granted hereunder to AT&T or its Related Companies to sublicense any of
NCR's Technology or Lucent's Technology to any third party.
(e) Notwithstanding any other provision, neither AT&T nor any of
its Related Companies shall have the right to access, copy or use, in whole or
in part, for any
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<PAGE> 9
purpose, any of NCR's Product Realization Technology or Lucent's Product
Realization Technology without the prior written consent of NCR or Lucent,
respectively.
2.4 NCR'S RIGHTS TO USE ENTERPRISE TECHNOLOGY. (a) Subject to the
restrictions specified in this Section 2.4 and in Section 2.7, NCR and its
Related Companies shall each have a personal, worldwide, nonexclusive,
royalty-free and non-transferable right to use the Enterprise Technology for the
businesses in which NCR or any of its Related Companies are now or hereafter
engaged.
(b) Until January 1, 2002, neither NCR nor any of its Related
Companies shall use without AT&T's prior written consent any of AT&T's
Restricted Technology to provide or to enable the provision by anyone of
services of the kind sold, offered or developed by AT&T or any of its Related
Companies as of the Closing Date.
(c) Until January 1, 2002, neither NCR nor any of its Related
Companies shall use without Lucent's written consent any of Lucent's Restricted
Technology for making or having others make for it any telecommunications
equipment of the kind made, sold or developed by Lucent or any of its Related
Companies as of the Closing Date.
(d) NCR's right to use includes the right of NCR and its Related
Companies to copy, modify and improve any portion of Enterprise Technology. No
right is granted hereunder to NCR or its Related Companies to sublicense any of
AT&T's Technology or Lucent's Technology or Common Support Function Software or
Corporate Technology to any third party.
(e) Until January 1, 2002, neither NCR nor any of its Related
Companies (i) shall use, in whole or in part, any NCR's Specified Technology in
connection with the development of substantially the same feature as any AT&T's
Proprietary Feature for customers other than AT&T, or (ii) shall provide copies
of or disclose any portion of NCR's Specified Technology to any such other
customers. Notwithstanding the above, the use prohibition associated with NCR's
Specified Technology will extend for a period of nine (9) years from first
deployment for that NCR's Specified Technology associated with any AT&T's
Proprietary Features which is committed but not yet deployed on the effective
date hereof.
(f) Notwithstanding any other provision, neither NCR nor any of
its Related Companies shall have the right to access, copy or use, in whole or
in part, for any purpose, any of AT&T's Network Technology or AT&T's Wireless
Services Technology, or any of Lucent's Product Realization Technology or
Lucent's Specified Technology, without the prior written consent of AT&T or
Lucent, respectively, and only to support work for or on behalf of AT&T or
Lucent, respectively.
2.5 LUCENT'S RIGHTS TO USE ENTERPRISE TECHNOLOGY. (a) Subject to
the restrictions specified in this Section 2.5 and in Section 2.7, Lucent and
its Related
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<PAGE> 10
Companies shall each have a personal, worldwide, nonexclusive, royalty-free and
non-transferable right to use the Enterprise Technology for the businesses in
which Lucent or any of its Related Companies are now or hereafter engaged.
(b) Until January 1, 2002, neither Lucent nor any of its Related
Companies shall use without AT&T's prior written consent any of AT&T's
Restricted Technology to provide or to enable the provision by anyone of
services of the kind sold, offered or developed by AT&T or any of its Related
Companies as of the Closing Date.
(c) Until January 1, 2002, neither Lucent nor any of its Related
Companies shall use without NCR's prior written consent any of NCR's Restricted
Technology for making or having others make for it products of the kind made,
sold or developed by NCR or any of its Related Companies as of the Closing Date.
(d) Lucent's right to use includes the right of Lucent and its
Related Companies to copy, modify and improve any portion of Enterprise
Technology. No right is granted hereunder to Lucent or its Related Companies to
sublicense any of AT&T's Technology or NCR's Technology to any third party.
(e) Notwithstanding any other provision, neither Lucent nor any of
its Related Companies shall have the right to access, copy or use, in whole or
in part, for any purpose, any of AT&T's Network Technology or AT&T's Wireless
Services Technology or NCR's Product Realization Technology, without the prior
written consent of AT&T or NCR, respectively, and only to support work for or on
behalf of AT&T or NCR, respectively.
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<PAGE> 11
2.6 PROCUREMENT. (a) As an attribute to each Party's rights to use
Enterprise Technology and subject to the restrictions specified in Sections 2.3,
2.4 and 2.5, each Party may disclose to any of its suppliers or prospective
suppliers only those portions of Enterprise Technology that are necessary for
the procurement by such Party of components, subsystems, subassemblies, products
and/or services of the businesses of such Party.
(b) Each Party agrees that it will not make any portion of
Enterprise Technology available to any such supplier or prospective supplier
except under procurement terms and conditions (including confidentiality, use
and disclosure restrictions) normally used by such Party to protect its own
proprietary information of a similar nature.
(c) The procurement rights granted hereunder to each one of the
Parties under this Section 2.6 shall not be exercised by one Party in a manner
such that the exercise of such one Party's procurement rights is a sham to
effect the licensing of another Party's Technology or any portion thereof, or of
the Enterprise Technology or any thereof, to a third party and not for bona fide
business purposes of such one Party.
(d) Each Party agrees that prior to the disclosure of any portion
of Enterprise Technology under this Section 2.6, all proprietary information of
the other two Parties shall be expunged. No later than March 1, 1996, the
Parties will agree on acceptable procedures to achieve such expungement.
2.7 EXCLUSION OF AT&T'S WIRELESS SERVICES TECHNOLOGY. The licenses
and rights to use Enterprise Technology granted hereunder to NCR or Lucent do
not include any license or right under any AT&T's Wireless Services Technology
existing as of the Closing Date. With respect to any such AT&T's Wireless
Services Technology in commercial use as of the Closing Date by AT&T Wireless
Services, Inc., the foregoing exclusion shall not limit NCR's or Lucent's
ability to continue providing products and services of the kind they each
provide as of the date of this Agreement.
ARTICLE III
TERMINATION
3.1 VOLUNTARY TERMINATION. By written notice to another Party,
each Party may voluntarily terminate all or a specified portion of the rights
granted to it hereunder. Such notice shall specify the effective date of such
termination and shall clearly specify the portion of the other Party's
Technology for which rights to use are being terminated.
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<PAGE> 12
3.2 SURVIVAL. Any voluntary termination of rights of a Party under
Section 3.1 shall not affect such Party's rights with respect to any use prior
to such termination, and shall not affect the rights of the other two Parties
hereunder.
3.3 CHANGE OF CONTROL OF OR CERTAIN ACQUISITIONS BY NCR. In the
event of a Change of Control of NCR or in the event that NCR acquires any Person
that (i) competes with AT&T in the provision of telecommunications services, or
(ii) competes with Lucent in the provision of telecommunications systems and
equipment, or (iii) has a market value greater than fifty percent (50%) of NCR's
market value at the time of such acquisition, then all rights granted to NCR
hereunder shall extend only to a specific annual volume of products which are of
a kind comparable to those offered by NCR prior to such Change of Control or
acquisition. Such specific volume of products shall not exceed the volume of
corresponding products of NCR prior to such Change of Control or acquisition.
ARTICLE IV
MISCELLANEOUS PROVISIONS
4.1 AGREEMENT PREVAILS. This Agreement shall prevail in the event
of any conflicting terms or legends which may appear on any portion of the
Enterprise Technology.
4.2 NOTHING CONSTRUED. Neither the execution of this Agreement nor
anything in it or in the Enterprise Technology shall be construed as an
obligation upon any Party or its Related Companies to furnish to any other Party
or its Related Companies, any assistance of any kind whatsoever, or any
information other than the portion of Enterprise Technology requested pursuant
to Section 2.1, or to revise, supplement or elaborate upon the Enterprise
Technology.
4.3 DISCLAIMER. NO PARTY OR ANY OF ITS RELATED COMPANIES MAKES ANY
REPRESENTATIONS, EXTENDS ANY WARRANTIES OF ANY KIND, ASSUMES ANY RESPONSIBILITY
OR OBLIGATIONS WHATEVER, OR CONFERS ANY RIGHT BY IMPLICATION, ESTOPPEL OR
OTHERWISE, OTHER THAN THE RIGHTS AND WARRANTIES HEREIN EXPRESSLY GRANTED.
4.4 NO PATENT LICENSES. Nothing contained in this Agreement shall
be construed as conferring to any Party by implication, estoppel or otherwise
any license or right under any patent, whether or not the exercise of any right
herein granted necessarily employs an invention of any existing or later issued
patent.
4.5 CONFIDENTIALITY. The confidentiality obligations of each Party
under Article VIII of the Separation and Distribution Agreement shall apply to
such Party's handling and treatment of those portions of Enterprise Technology
in such Party's possession which are owned by any of the other Parties.
-9-
<PAGE> 13
4.6 NONASSIGNABILITY. The Parties hereto have entered into this
Agreement in contemplation of personal performance, each by the other, and
intend that the rights granted hereunder to a Party not be extended to entities
other than such party's Related Companies (and only for so long as they remain
Related Companies) without the other Party's or Parties', as applicable, express
written consent. Neither this Agreement nor any rights hereunder shall be
assignable or transferable by any Party to any other Person, except as expressly
permitted hereunder, without the express written consent of the other Parties,
provided that such consent shall not be unreasonably withheld in the event of a
proposed assignment or transfer of those licenses and rights relevant to any
portion of any Party's business that is or is to be spun off or otherwise
distributed to such Party's shareholders.
4.7 ADDRESSES. The Parties agree that any notice or other
communication hereunder shall be given as set forth in Section 12.5 of the
Separation and Distribution Agreement.
4.8 CHOICE OF LAW. Except as otherwise provided in Section 9.9 of
the Separation and Distribution Agreement, this Agreement shall be governed by
and construed and interpreted in accordance with the laws of the State of New
York, irrespective of the choice of laws principles of the State of New York, as
to all matters, including matters of validity, construction, effect, performance
and remedies.
4.9 INTEGRATION. (a) Except as expressly provided hereunder, this
Agreement does not amend, cancel, terminate or replace any preexisting
agreements or arrangements between all three Parties, or any two Parties, or any
of their respective units, divisions or organizations of their respective
businesses before the AT&T's restructuring. Except as otherwise provided in the
Separation and Distribution Agreement, all terms and conditions under such
preexisting agreements or arrangements shall continue to apply as between the
Parties thereto in accordance with their respective terms and conditions.
(b) Except as otherwise provided in the Supplemental General
Purchase Agreement between AT&T and Lucent dated as of February 1, 1996 (which
supplemental agreement specifically relates to development and support for the
4ESS switch, Next Network Switch, and related products and development), this
Agreement sets forth the entire agreement and understanding between the Parties
as to the subject matter hereof and merges all prior discussions between them
other than preexisting agreements or arrangements as specified in Section
4.9(a). A Party shall not be bound by any warranties, understandings or
representations with respect to such subject matter other than as expressly
provided herein or in a writing signed with or subsequent to execution hereof by
an authorized representative of the Party to be bound thereby.
-10-
<PAGE> 14
4.10 ARBITRATION AND DISPUTE RESOLUTION. The Parties agree that
the procedures for discussion, negotiation and arbitration set forth in Article
IX of the Separation and Distribution Agreement, which Article IX is
incorporated herein by reference, shall apply to all disputes, controversies or
claims that may arise under or in connection with this Agreement.
4.11 AMENDMENTS AND CHANGES. Subsequent to the execution of this
Agreement by all Parties, and solely to the extent that a change is desired by
and restricted to any two Parties without affecting the rights of the third
Party hereto, such two Parties may separately amend any provision of this
Agreement which governs the rights exchanged between them without notifying,
advising, consulting or requesting the concurrence of the third Party hereto.
Except as specifically provided herein, any other modification affecting all
three Parties shall require the written agreement and signature of all the
Parties.
-11-
<PAGE> 15
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be executed
in triplicate originals by its duly authorized representatives on the respective
dates entered below.
AT&T CORP.
By:
-------------------------------------
Title:
-------------------------------------
Date:
-------------------------------------
NCR CORPORATION
By:
-------------------------------------
Title:
-------------------------------------
Date:
-------------------------------------
-12-
<PAGE> 16
LUCENT TECHNOLOGIES INC.
By:
-------------------------------------
Title:
-------------------------------------
Date:
-------------------------------------
THIS AGREEMENT DOES NOT BIND OR OBLIGATE ANY PARTY
IN ANY MANNER UNLESS DULY EXECUTED BY AUTHORIZED
REPRESENTATIVES OF ALL PARTIES.
-13-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this registration statement on Form S-1 (File No.
333-00703) of our report dated January 25, 1996 (Note 14 is dated February 1,
1996), on our audits of the consolidated financial statements and financial
statement schedule of Lucent Technologies Inc. and subsidiaries. We also consent
to the reference to our firm under the caption "Experts."
Coopers & Lybrand L.L.P.
New York, New York
March 12, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet of Lucent Technologies Inc. at December 31, 1995 and
the Consolidated Statement of Operations for the year ended December 31, 1995
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 448
<SECURITIES> 0
<RECEIVABLES> 5,602
<ALLOWANCES> 248
<INVENTORY> 3,222
<CURRENT-ASSETS> 10,679
<PP&E> 11,037
<DEPRECIATION> 6,699
<TOTAL-ASSETS> 19,722
<CURRENT-LIABILITIES> 11,063
<BONDS> 172
0
0
<COMMON> 0
<OTHER-SE> 1,434
<TOTAL-LIABILITY-AND-EQUITY> 19,722
<SALES> 21,413
<TOTAL-REVENUES> 21,413
<CGS> 12,945
<TOTAL-COSTS> 22,413
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 302
<INCOME-PRETAX> (1,138)
<INCOME-TAX> (271)
<INCOME-CONTINUING> (867)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (867)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
CONSENT OF DIRECTOR NOMINEE
I hereby consent to being named as a nominee to the Board of Directors of
Lucent Technologies Inc., a Delaware corporation, in its Registration Statement
on Form S-1 (Registration No. 333-00703) and any amendments thereto, with the
Securities and Exchange Commission.
March 12, 1996 Signed: /s/ JIM G. KILPATRIC
Jim G. Kilpatric
<PAGE> 1
EXHIBIT 99.1
CONSENT OF DIRECTOR NOMINEE
I hereby consent to being named as a nominee to the Board of Directors of
Lucent Technologies Inc., a Delaware corporation, in its Registration Statement
on Form S-1 (Registration No. 333-00703) and any amendments thereto, with the
Securities and Exchange Commission.
March 12, 1996 Signed: /s/ MARC E. MANLY
Marc E. Manly
<PAGE> 1
EXHIBIT 99.1
CONSENT OF DIRECTOR NOMINEE
I hereby consent to being named as a nominee to the Board of Directors of
Lucent Technologies Inc., a Delaware corporation, in its Registration Statement
on Form S-1 (Registration No. 333-00703) and any amendments thereto, with the
Securities and Exchange Commission.
March 12, 1996 Signed: /s/ S. LAWRENCE PRENDERGAST
S. Lawrence Prendergast
<PAGE> 1
EXHIBIT 99.1
CONSENT OF DIRECTOR NOMINEE
I hereby consent to being named as a nominee to the Board of Directors of
Lucent Technologies Inc., a Delaware corporation, in its Registration Statement
on Form S-1 (Registration No. 333-00703) and any amendments thereto, with the
Securities and Exchange Commission.
March 12, 1996 Signed: /s/ FLORENCE L. WALSH
Florence L. Walsh
<PAGE> 1
EXHIBIT 99.1
CONSENT OF DIRECTOR NOMINEE
I hereby consent to being named as a nominee to the Board of Directors of
Lucent Technologies Inc., a Delaware corporation, in its Registration Statement
on Form S-1 (Registration No. 333-00703) and any amendments thereto, with the
Securities and Exchange Commission.
March 12, 1996 Signed: /s/ PAUL J. WONDRASCH
Paul J. Wondrasch
