<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
..X.. QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
..... TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to _____________
Commission file number 1-1105
AT&T CORP.
A New York I.R.S. Employer
Corporation No. 13-4924710
32 Avenue of the Americas, New York, New York 10013-2412
Telephone - Area Code 212-387-5400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes ..X No .....
At July 31, 1996, 1,612,392,555 common shares were outstanding.
<PAGE> 2 AT&T Form 10-Q - Part I
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1996 1995 1996 1995
Revenues
Communications services.................. $12,613 $12,196 $25,089 $24,017
Financial services ...................... 419 565 899 1,125
Total revenues........................... 13,032 12,761 25,988 25,142
Operating Expenses
Access and other interconnection......... 3,852 4,482 8,020 8,935
Network and other
communications services................ 2,046 1,711 3,969 3,463
Depreciation and amortization ........... 655 635 1,320 1,255
Selling, general and administrative ..... 3,817 3,188 7,213 6,178
Total communications services expenses.. 10,370 10,016 20,522 19,831
Financial services expenses.............. 366 492 796 981
Total operating expenses ................ 10,736 10,508 21,318 20,812
Operating income ........................ 2,296 2,253 4,670 4,330
Other income - net ...................... 100 59 202 102
Interest expense ........................ 97 111 220 215
Income from continuing operations
before income taxes ................... 2,299 2,201 4,652 4,217
Provision for income taxes .............. 776 828 1,686 1,579
Income from continuing operations ....... 1,523 1,373 2,966 2,638
Discontinued Operations:
Loss from discontinued operations
net of taxes of ($46), $22,
($346) and ($2), respectively........... (32) (18) (113) (85)
Net income .............................. $ 1,491 $ 1,355 $ 2,853 $ 2,553
Weighted average common shares
outstanding (millions)................ 1,614 1,589 1,611 1,585
Earnings per common share:
Income from continuing operations ...... $ 0.94 $ 0.86 $ 1.84 $ 1.66
Loss from discontinued operations ...... (0.02) (0.01) (0.07) (0.05)
Net income ............................. $ 0.92 $ 0.85 $ 1.77 $ 1.61
Dividends declared per
common share.......................... $ 0.33 $ 0.33 $ 0.66 $ 0.66
See Notes to Consolidated Financial Statements.
<PAGE> 3 AT&T Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
June 30, December 31,
1996 1995
ASSETS
Cash and cash equivalents .............. $ 21 $ 129
Receivables less allowances
of $1,244 and $1,267, respectively
Accounts receivable................... 8,776 8,457
Finance receivables................... 7,746 10,665
Deferred income taxes................... 1,600 2,437
Other current assets.................... 1,123 753
Total current assets.................... 19,266 22,441
Property, plant and equipment, net
of accumulated depreciation of
$18,432 and $17,729, respectively...... 16,979 16,375
Licensing costs, net of accumulated
amortization of $823
and $743, respectively................ 8,078 8,056
Investments............................. 3,689 3,646
Long-term finance receivables........... 761 768
Prepaid pension costs................... 1,940 1,793
Other assets............................ 2,750 2,524
Net assets of discontinued operations... 4,710 7,047
TOTAL ASSETS............................ $58,173 $62,650
(CONT'D)
<PAGE> 4 AT&T Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
June 30, December 31,
1996 1995
LIABILITIES
Accounts payable....................... $ 4,897 $ 5,174
Payroll and benefit-related
liabilities.......................... 2,403 2,914
Debt maturing within one year.......... 4,662 12,176
Dividends payable...................... 531 527
Other current liabilities.............. 3,839 3,923
Total current liabilities.............. 16,332 24,714
Long-term debt......................... 8,033 8,545
Long-term benefit-related liabilities.. 2,863 2,871
Deferred income taxes.................. 4,649 5,458
Other long-term liabilities and
deferred credits..................... 3,864 3,788
Total liabilities ..................... 35,741 45,376
SHAREOWNERS' EQUITY
Common stock - par value $1 per share.. 1,610 1,596
Authorized shares: 2,000,000,000
Outstanding shares:
1,610,360,862 at June 30, 1996
1,596,005,351 at December 31, 1995
Additional paid-in capital............. 20,014 16,614
Guaranteed ESOP obligation............. (228) (254)
Foreign currency translation
adjustments.......................... (35) 5
Retained earnings (deficit)............ 1,071 (687)
Total shareowners' equity.............. 22,432 17,274
TOTAL LIABILITIES & SHAREOWNERS' EQUITY $58,173 $62,650
See Notes to Consolidated Financial Statements.
<PAGE> 5 AT&T Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
For the Six
Months Ended
June 30,
1996 1995
Operating Activities
Net income .............................. $ 2,853 $ 2,553
Add: loss from discontinued operations .. 113 85
Income from continuing operations ....... 2,966 2,638
Adjustments to reconcile net income to
net cash provided by operating
activities of continuing operations:
Depreciation and amortization for
communications services............. 1,320 1,255
Provision for uncollectibles.......... 1,044 1,004
Increase in accounts receivable....... (1,003) (977)
Decrease in accounts payable.......... (275) (13)
Net increase in other operating
assets and liabilities.............. (1,264) (383)
Other adjustments for non-cash
items - net......................... 170 150
Net cash provided by operating
activities of continuing operations.... 2,958 3,674
Investing Activities
Capital expenditures................... (2,068) (1,519)
Proceeds from sale or disposal of
property, plant and equipment........ 39 122
Decrease (increase) in
finance receivables.................. 675 (281)
Proceeds from securitization of
finance receivables.................. 2,000 -
Acquisitions of licenses............... (107) (1,837)
Net increase in investments............ (135) (56)
Disposition of joint venture........... 160 -
Other investing activities - net....... (14) 3
Net cash provided by (used in)investing
activities of continuing operations.... 550 (3,568)
(CONT'D)
<PAGE> 6 AT&T Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(Dollars in Millions)
(Unaudited)
For the Six
Months Ended
June 30,
1996 1995
Financing Activities
Proceeds from long-term debt issuances. 2 2,364
Retirements of long-term debt.......... (927) (572)
Issuance of common shares.............. 755 763
Dividends paid......................... (1,057) (1,040)
Decrease in short-term
borrowings - net..................... (3,378) (1,366)
Other financing activities - net....... 1,896 (36)
Net cash (used in) provided by financing
activities of continuing operations.... (2,709) 113
Effect of exchange rate
changes on cash........................ (28) (27)
Net cash used in
discontinued operations................ (879) (412)
Net decrease in cash and
cash equivalents....................... (108) (220)
Cash and cash equivalents
at beginning of year................... 129 220
Cash and cash equivalents
at end of period....................... $ 21 $ -
See Notes to Consolidated Financial Statements.
<PAGE> 7 AT&T Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
(a) BASIS OF PRESENTATION
The consolidated financial statements have been prepared by AT&T Corp.
("AT&T" or the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of man-
agement, include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair statement of the consolidated re-
sults of operations, financial position and cash flows for each period
presented. The consolidated results for interim periods are not
necessarily indicative of results for the full year. These financial
statements should be read in conjunction with AT&T's 1995 Annual
Report to Shareowners, Form 10-K for the year ended December 31, 1995,
Form 8-K dated March 21, 1996 and the current year's previously issued
Form 10-Q.
(b) DISCONTINUED OPERATIONS
On September 20, 1995, AT&T Corp. announced a plan, subject to certain
conditions, to separate into three independent, publicly held, global
companies: communications services (which will retain the AT&T name),
communications systems and technologies (which has been named Lucent
Technologies Inc., "Lucent") and transaction-intensive computing (NCR
Corporation, "NCR"). On April 10, 1996, Lucent sold 112 million
shares of common stock in an initial public offering ("IPO"),
representing 17.6% of the Lucent common stock outstanding. AT&T owns
the remaining 82.4%. Because AT&T plans to spin-off the remaining
shares of Lucent, the sale of the Lucent stock was recorded as an
equity transaction, resulting in an increase in AT&T's Additional
Paid-In Capital. In addition, in connection with the restructuring,
Lucent assumed $3.7 billion of AT&T debt. Upon the distribution of
the remaining shares of Lucent to AT&T's shareowners, the total assets
and shareowners' equity of AT&T will be reduced by an amount equal to
the Net Assets of Discontinued Operations applicable to Lucent at the
date of disposition. AT&T intends to distribute its remaining
interest in Lucent on September 30, 1996 and its 100% interest in
NCR by the end of 1996 to AT&T shareowners.
<PAGE> 8 AT&T Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Also announced as part of the plan was the Company's intent to pursue
the sale of its remaining approximate 86% interest in AT&T Capital
Corporation ("AT&T Capital"). On June 5, 1996, AT&T Capital
entered into a definitive merger agreement with a consortium. The
total purchase price for the outstanding shares and stock options is
expected to be approximately $2.2 billion. It is expected that the
merger, which is subject to certain closing conditions, including
regulatory approvals, will be consummated in September 1996 or shortly
thereafter.
Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB 30"), the consolidated financial
statements of AT&T have been restated to reflect the probable
dispositions of Lucent, NCR and AT&T Capital. Accordingly, the
revenues, costs and expenses, assets and liabilities, and cash
flows of Lucent, NCR and AT&T Capital have been excluded from the
respective captions in the Consolidated Statements of Income,
Consolidated Balance Sheets and Consolidated Statements of Cash Flows.
The net operating results of these entities have been reported, net of
applicable income taxes, as "Loss from discontinued operations"; the
net assets of these entities have been reported as "Net assets of
discontinued operations"; and the cash flows of these entities have
been reported as "Net cash used by discontinued operations". In
addition, the consolidated results for continuing operations have been
reclassified to reflect the results of the ongoing AT&T businesses and
to improve comparability within the communications services industry.
<PAGE> 9 AT&T Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Summarized financial information for the discontinued operations is as
follows:
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1996 1995 1996 1995
Revenues $6,799 $6,751 $12,618 $12,632
Income (loss) before
income taxes (78) 4 (459) (87)
Net loss (32) (18) (113) (85)
At June At Dec.
30, 1996 31, 1995
Current Assets $18,300 $17,068
Total Assets 35,535 34,090
Current Liabilities 17,869 14,658
Total Liabilities 30,825 27,043
Net assets of discontinued
operations $ 4,710 $ 7,047
The income (loss) before income taxes includes allocated interest
expense of $5 million and $27 million for the quarters ended June 30,
1996 and June 30, 1995, respectively, and $33 million and $54 million
for the year to date periods ended June 30, 1996 and June 30, 1995,
respectively. Interest expense is allocated to discontinued
operations based on the ratio of net assets of discontinued operations
to total AT&T consolidated assets.
(c) CREDIT HOLDINGS
In connection with a March 31, 1993 legal restructuring of AT&T
Capital Holdings, Inc. (formerly AT&T Capital Corporation), AT&T
issued a direct, full and unconditional guarantee of all the public
debt of AT&T Credit Holdings, Inc. (formerly AT&T Credit Corporation)
and certain public debt of its majority owned subsidiary, AT&T Capital
Corporation, outstanding at March 31, 1993. At June 30, 1996 $358.6
million of the guaranteed debt remained outstanding.
<PAGE> 10 AT&T Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
AT&T Credit Holdings, Inc. holds the majority of AT&T's investment in
AT&T Capital Corporation and the lease finance assets of the former
AT&T Credit Corporation. The following table shows summarized
consolidated financial information for AT&T Credit Holdings, Inc.,
which consolidates the accounts of AT&T Capital Corporation.
Consistent with AT&T's presentation, the net operating results and net
assets of AT&T Capital have been reported as "Discontinued
Operations". The summarized financial information includes
transactions with AT&T that are eliminated in consolidation.
For the Six
Months Ended
June 30,
1996 1995
Total revenue from
continuing operations $ 64 $ 77
Interest expense 5 6
Selling, general and
administrative expense 5 4
Income (loss) from
continuing operations (13) 4
Income from discontinued operations 54 39
Net income 41 43
At At
June 30, December 31,
1996 1995
Finance receivables $1,143 $1,149
Net assets of discontinued
operations 882 835
Total assets 2,399 2,355
Total debt 90 100
Total liabilities 1,353 1,343
Total shareowner's equity 1,046 $1,012
<PAGE> 11 AT&T Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
(d) OPERATING EXPENSES OF FINANCIAL SERVICES
Operating expenses of the financial services segment, which now
excludes AT&T Capital, are comprised of the following:
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1996 1995 1996 1995
Interest Expense $ 106 $ 165 $ 229 $ 324
Provision for losses and
other costs 190 281 452 569
Selling, general and
administrative 70 46 115 88
Total $ 366 $ 492 $ 796 $ 981
(e) RECLASSIFICATIONS
Prior period amounts have been reclassified to conform to the current
presentation.
<PAGE> 12 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
On September 20, 1995, AT&T Corp. ("AT&T" or the "Company") announced a
plan, subject to certain conditions, to separate into three independent,
publicly held, global companies: communication services (which will retain
the AT&T name), communications systems and technology (which has been named
Lucent Technologies Inc., "Lucent") and transaction-intensive computing
(formerly Global Information Solutions, now NCR Corporation, "NCR"). On
April 10, 1996, Lucent sold 112 million shares of common stock in an
initial public offering ("IPO"), representing 17.6% of the Lucent common
stock outstanding. AT&T owns the remaining 82.4%. Because AT&T plans to
spin off the remaining shares of Lucent, the sale of Lucent stock was
recorded as an equity transaction, resulting in an increase in AT&T's
Additional Paid-In Capital. In addition, in connection with the
restructuring, Lucent assumed $3.7 billion of AT&T debt. Upon the
distribution of the remaining shares of Lucent to AT&T's shareowners, the
total assets and shareowners' equity of AT&T will be reduced by an amount
equal to the Net Assets of Discontinued Operations applicable to Lucent at
the date of disposition. AT&T intends to distribute its remaining interest
in Lucent on September 30, 1996 and its 100% interest in NCR by the end of
1996 to AT&T shareowners.
Also announced as part of the plan was the Company's intent to pursue the
sale of its remaining approximate 86% interest in AT&T Capital Corporation
("AT&T Capital"). On June 5, 1996, AT&T Capital entered into a definitive
merger agreement with a consortium. The total purchase price for the
outstanding shares and stock options is expected to be approximately $2.2
billion. It is expected that the merger, which is subject to certain
closing conditions, including regulatory approvals, will be consummated in
September 1996 or shortly thereafter.
On July 18, 1996, AT&T's board of directors approved the distribution of
the 524,624,894 shares of Lucent common stock which represents AT&T's 82.4%
interest. AT&T shareowners of record on September 17, 1996 will receive
this distribution on September 30, 1996, provided that all conditions
thereto have been satisfied. This will effectively finalize the spin-off
of Lucent. The Lucent shares will be distributed on the basis of
approximately .326 of a share of Lucent for each AT&T share outstanding.
At June 30, 1996 there were 1,610,360,862 shares of AT&T outstanding. The
final ratio will be determined based on the actual number of AT&T shares
outstanding on the record date.
<PAGE> 13 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The board of directors also reviewed the AT&T dividend policy and indicated
that AT&T currently intends to maintain its regular quarterly dividend of
$.33 per share following the spin-off. The declaration and payment of
future dividends, however, is subject to the discretion of the Board of
Directors and will depend on the results of operations, financial
condition, cash requirements and future prospects of AT&T, general economic
conditions and other factors deemed relevant by the Board of Directors.
AT&T shareowners will receive stock certificates for whole shares of Lucent
and cash payments for fractional shares. AT&T received a favorable Private
Letter Ruling from the Internal Revenue Service on March 21, 1996 that
approved the tax-free status of the planned distribution. Therefore the
dividend will qualify as a tax-free distribution for federal tax purposes,
except for any cash that is received for fractional shares. The
distribution remains subject to the conditions set forth in the separation
and distribution agreement previously entered into between AT&T and Lucent.
Separately, AT&T and Lucent previously declared second-quarter dividends of
$.33 and $.075 per common share respectively, payable August 1, 1996, to
shareowners of record on June 28, 1996.
The Company believes that spinning off Lucent and NCR and selling AT&T
Capital will enhance its ability to focus on strategic businesses that add
value to customers, to take advantage of new opportunities and to improve
operating efficiencies. However, upon separation, the ongoing AT&T will no
longer have the benefits of vertical integration of its manufacturing and
services businesses (i.e., the ability to purchase equipment at cost to
manufacture). Accordingly, depreciation associated with equipment
purchases and other costs associated with the AT&T network may increase
over time.
As a result of the above activities, AT&T has restated its Consolidated
Financial Statements pursuant to Accounting Principles Board Opinion No. 30
"Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" ("APB 30") to reflect the probable
<PAGE> 14 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
dispositions of Lucent, NCR and AT&T Capital. Accordingly, the revenues,
costs and expenses, assets and liabilities, and cash flows of Lucent, NCR
and AT&T Capital have been excluded from the respective captions in the
Consolidated Statements of Income, Consolidated Balance Sheets and
Consolidated Statements of Cash Flows. The net operating results of these
entities have been reported, net of applicable income taxes, as "Loss from
discontinued operations"; the net assets of these entities have been
reported as "Net assets of discontinued operations"; and the cash flows of
these entities have been reported as "Net cash used by discontinued
operations". In addition, the consolidated results for continuing
operations have been reclassified to reflect the results of the ongoing
AT&T businesses, to improve comparability within the communications
services industry and to conform to the current presentation.
For a detailed discussion of the results for Lucent and AT&T Capital, refer
to their separate Form 10-Qs and other reports filed with the Securities
and Exchange Commission.
Revenues from continuing operations grew 2.1% to $13,032 million for the
quarter ended June 30, 1996 compared to $12,761 million in the second
quarter of 1995. For the first half of 1996, revenues from continuing
operations increased 3.4% to $25,988 million from $25,142 million in the
comparable 1995 period. This growth was achieved amidst heightened
competition, especially in our consumer communications services business.
It is likely that competitive pressures will continue and may increase.
Operating income increased 1.9% to $2,296 million for the second quarter,
up $43 million from $2,253 million in the prior year's second quarter.
Operating income for the first half of 1996 was $4,670 million, an increase
of 7.8% from $4,330 million in the year ago period. Operating margin for
the second quarter when compared to the same period in 1995 decreased
slightly to 17.6% from 17.7% primarily due to higher selling, general and
administrative expenses and higher network and other communications
services expenses, partially offset by lower access and other
interconnection expenses. For the six months ended June 30, 1996,
operating margin improved to 18.0% from 17.2% in 1995 primarily due to
lower access and other interconnection expenses partially offset by higher
selling, general and administrative expenses as well as higher network and
other communications services expenses.
<PAGE> 15 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Quarterly income from continuing operations was $1,523 million, or $.94 per
share. This represents a 10.9% increase in income from continuing
operations and a 9.2% increase in earnings per share compared with the
prior period income from continuing operations of $1,373 million, or $.86
per share. For the first half of 1996, income from continuing operations
increased 12.5% to $2,966 million from $2,638 million for the six months
ended June 30, 1995.
RESULTS OF OPERATIONS
COMMUNICATIONS SERVICES
Communications services revenues increased $417 million or 3.4% for the
quarter compared with the second quarter of 1995, and $1,072 or 4.5% for
the first six months of 1996 compared with the prior year period.
Three months Six months
ended ended
June 30, June 30,
In millions 1996 1995 1996 1995
Wireline services revenue $11,223 $11,035 $22,536 $21,771
Wireless services revenue 854 724 1,648 1,376
Products and other services
revenue 536 437 905 870
Total communications
services revenues $12,613 $12,196 $25,089 $24,017
Operating income $ 2,243 $ 2,180 4,567 4,186
Operating margin 17.8% 17.9% 18.2% 17.4%
Wireline services revenue, which includes toll calling, network management,
satellite services, messaging and other network enabled services, increased
$188 million or 1.7% compared with the second quarter of 1995. The revenue
increase quarter over quarter was driven by volume growth of 5.1% and was
led by strong growth in business inbound services. For the first half of
1996, revenues increased by $765 million or 3.5% compared to the same
period in 1995, led again by volume and revenue growth in business
services. This growth was limited by slowed overall revenue and volume
growth for the company in the consumer markets in 1996.
<PAGE> 16 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Volume growth for the quarter slowed from the 9.5% growth in the second
quarter of 1995, reflecting expanding competition from non-traditional
sources as well as continued competition from traditional sources in the
consumer markets. Non-traditional competitors include third-tier and niche
players such as dial-around resellers. The increased competition in the
consumer markets impacted the volume growth rate for the second quarter of
1996 and could continue to impact volume growth for the remainder of the
year. Total volume growth exceeded revenue growth for the quarter by 3.4%
reflecting the use of promotional discounts, the increased movement of
customers to optimal calling plans, the impact of targeted pricing actions
and increased competition. The gap between volume growth and revenue
growth for the second quarter of 1996 is lower than the second quarter 1995
gap of 4.3% and higher than the first quarter 1996 gap of 2.3%. The gap
for the second quarter of 1996 reflects the impact of the increased
competition in the marketplace.
Wireless services revenues, which include cellular, messaging services and
air-to-ground services, grew 17.9% to $854 million in the second quarter of
1996 compared to the second quarter of 1995. On a consolidated basis,
cellular revenue rose 15.9% to $802 million, while related cellular
subscribers increased 32.9% to 4.5 million at the end of the quarter from
3.4 million at the end of the second quarter 1995. During the quarter,
subscriber additions totaled 307 thousand, representing an 11.6% increase
over second quarter 1995. Wireless services revenues grew 19.7% to $1,648
million for the first half of 1996 compared with the same period in 1995.
The revenue growth in both the quarterly and year to date period was fueled
by additional cellular service subscribers. Total cellular customers
served by companies in which AT&T has or shares a controlling interest
increased 30.4% to 6.3 million at June 30, 1996 from 4.8 million at June
30, 1995.
Average cellular revenue per subscriber continued to decline in the second
quarter of 1996 reflecting industry wide pricing pressures, as well as
lower average usage per subscriber. The lower average usage per subscriber
is attributed to growth in subscribers for emergency and other personal
use. Consistent with the industry, average revenue per subscriber is
expected to decline throughout 1996.
<PAGE> 17 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Products and other services revenues increased 23.0% to $536 million second
quarter 1996 over second quarter 1995 led by higher consulting and
outsourcing services revenues from AT&T Solutions, increased revenues from
sales of submarine systems products and on-line services. For the first
half of 1996, products and other services revenues grew 4.1% to $905
million compared with the same period last year. The rise was led by
higher consulting and outsourcing revenues, partially offset by a decrease
in the sales of cellular phones.
Operating expenses for communications services increased 3.5% to $10,370
million from $10,016 million in the second quarter of 1995 and also
increased 3.5% to $20,522 million for the first half of 1996. The expense
increases for both periods were driven by higher levels of selling, general
and administrative expenses and network and other communications services
expenses, partially offset by lower access and other interconnection
expenses. The operating margin for communications services was 17.8% for
the second quarter of 1996 and 17.9% for the second quarter of 1995 and
increased .8% to 18.2% for the first half of 1996 compared with the same
period in 1995.
Access and other interconnection expenses decreased $630 million or 14.1%
from the second quarter of 1995 and $915 million or 10.3% from the six
months ended June 30, 1995. The reduction reflects improved access
efficiencies, lower unit costs in access, a significant reduction in
international settlements and a second quarter 1996 accounting adjustment
to previously estimated accruals to reflect actual billing. Access and
other interconnection expenses as a percentage of wireline services revenue
declined quarter over quarter to 34.3% from 40.6%, and to 35.6% from 41.0%
for the year to date period. As a percentage of communications services
revenues, these expenses declined to 30.5% for the quarter from 36.8% a
year ago, and to 32.0% for the first half of 1996 from 37.2% for the same
period in 1995.
Network and other communications services expenses increased $335 million
or 19.5% quarter over quarter and $506 million or 14.6% for the first six
months compared with the same period in 1995. These increases reflect
higher network operating expenses; higher provisions for uncollectibles due
to initial expansion of international service offerings; initiatives for
AT&T Solutions offers, local services, and WorldNet* services; higher gross
receipt taxes; and higher operator services expenses.
<PAGE> 18 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Depreciation and amortization increased $20 million, or 3.3%, from the
second quarter of 1995 and $65 million, or 5.3%, for the first half of 1996
reflecting increased capital expenditures for the AT&T network, as well as
the amortization of intangibles from the purchase of the remaining 48% of
LIN Broadcasting. These increases were partially offset by decreased
depreciation from assets written off as part of the fourth quarter 1995
charge.
Selling, general and administrative expenses ("SG&A")increased $629
million, or 19.8%, from the second quarter of 1995 and $1,035 million, or
$16.8% from the first six months of 1995. SG&A as a percentage of
communications services revenue was 30.3%, up 4.1% from the second quarter
1995 and 28.8%, up 3.0% from the first half of 1995. The higher SG&A
expenses for both periods are due to higher marketing and sales expenses
primarily in consumer long distance services, as well as initiatives for
our AT&T Solutions and WorldNet businesses; initiatives for bundled offers
including local services, direct billing, and customer care; and additions
to the cellular subscriber base.
FINANCIAL SERVICES
Financial services revenues decreased $146 million, or 26.0%, on a
quarterly basis and $226 million, or 20.1% on a year to date basis. The
declines were primarily a result of the Universal Card Services Corp.
("Universal Card") securitization program but also reflect heightened
competition and greater use of promotional pricing. The marketplace
continues to extend lower rate offers, decreasing margins throughout the
industry.
Universal Card securitized $2.0 billion of cardholder receivables in the
second quarter of 1996 in order to further diversify its sources for
funding receivables growth. This brings the total receivables securitized
to $5.5 billion since August of 1995.
We expect promotional pricing competition to continue, which may impact
operating income throughout 1996.
<PAGE> 19 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Three months Six months
FINANCIAL SERVICES ended ended
June 30, June 30,
In millions 1996 1995 1996 1995
Financial services revenue $419 $565 $899 $1,125
Operating income $ 53 $ 73 $103 $ 144
Operating margin 12.7% 13.2% 11.5% 12.9%
Universal Card Information:
At June 30,
In millions 1996 1995
Total book finance receivables $ 7,666 $12,314
Total managed finance receivables $13,166 $12,314
Cardholder accounts 18.3 16.3
Universal Card book receivables, which exclude the $3.5 billion and the
$2.0 billion of receivables securitized in 1995 and 1996, respectively,
were $7.7 billion at the end of the second quarter. Universal Card
retained the servicing and customer relationships of the securitized credit
card accounts.
Financial services expenses decreased $126 million, or 25.5%, for the
quarter ended June 30, 1996 and $185 million, or 18.8% for the six months
ended June 30, 1996. This reflects a decrease in direct portfolio expenses
(interest, provisions for losses, and other related costs) of $150 million
for the quarter, and $212 million year to date, due to reductions
associated with the securitization program. The reductions due to the
securitization program are partially offset by increases in the provision
for losses associated with the continued decline in portfolio credit
performance. Selling, general and administrative expenses increased $24
million quarter over quarter and $27 million for the six months ended June
30, 1996 compared with the prior year primarily due to the introduction of
the new Universal Rewards loyalty program and higher than expected
redemptions from the discontinuation of the previous program.
<PAGE> 20 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Financial services operating income decreased $20 million compared to the
second quarter of 1995 and $41 million for the six months ended June 30,
1996 compared with the prior year. The operating margin percentage
decreased to 12.7% compared with 13.2% for the second quarter of 1995 and
to 11.5% compared with 12.9% for the first half of 1996. The lower
operating margins were due to the continued decline in portfolio credit
performance, as well as increased selling, general and administrative
expenses.
OTHER INCOME STATEMENT ITEMS
Other income increased $41 million quarter over quarter and $100 million
for the six months ended June 30, 1996 compared to the same period of 1995.
The year to date increase was primarily due to gains on the sale of
cellular interests in Mexico and the sale of a real estate joint venture in
the first quarter as well as various items in the second quarter, none of
which were significant individually.
Interest expense decreased $14 million, or 12.2% from the second quarter of
1995, primarily reflecting a lower level of average debt outstanding.
Interest expense for the first six months of 1996 increased $5 million
reflecting a higher level of average debt outstanding for the six months of
1996 as compared to the six months of 1995.
The provision for income taxes decreased $52 million for the quarter,
reflecting a lower effective tax rate. The declines in the effective tax
rates to 33.8% from 37.6% quarter over quarter, and to 36.2% from 37.5% for
the first six months of 1996 compared with the same period of 1995 were
primarily associated with tax benefits to AT&T from various legal entity
restructurings.
Loss from discontinued operations increased $14 million to $32 million for
the second quarter of 1996 compared with the same period last year, and
increased $28 million to $113 million for the first half of 1996 compared
with the first half of 1995. The loss from discontinued operations
includes the results of Lucent, NCR and AT&T Capital. Discontinued
operations also includes the elimination of intercompany transactions, an
allocation of AT&T's interest expense (based on the ratio of net assets of
discontinued operations to total AT&T consolidated assets), and a portion
of AT&T's consolidated taxes attributable to discontinued businesses.
<PAGE> 21 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Included in the year to date loss from discontinued operations is a
non-recurring tax benefit of $155 million recorded in the first quarter of
1996. This benefit is the result of reversing deferred tax liabilities on
the undistributed earnings of Lucent's non-United States consolidated
subsidiaries. The subsidiaries have the ability and specific intention to
permanently reinvest such undistributed earnings. These deferred tax
liabilities previously reduced income from discontinued operations in
earlier years.
FINANCIAL CONDITION
JUNE 30, 1996 VERSUS DECEMBER 31, 1995
Assets attributable to continuing operations decreased $2.1 billion, or
3.8%. This decrease is primarily due to a decline in current assets of
$3.2 billion partially offset by an increase in net property plant and
equipment. The current asset decline was driven by decreases in both
finance receivables and current deferred income tax assets, partially
offset by increases in other current assets and accounts receivable. Total
assets, including net assets of discontinued operations, decreased $4.5
billion, or 7.1% in the first six months of 1996.
Finance receivables decreased from December 31, 1995 mainly due to the
Universal Card securitization of $2.0 billion in the first half of 1996 and
the normal seasonal decline as a result of higher levels of consumer
purchases in the fourth quarter of 1995 with increased payments resulting
in the first quarter of 1996.
The decrease in current deferred income tax assets is due to long-term
deferred income tax liabilities at December 31, 1995 becoming current
deferred income tax liabilities mainly in the first quarter of 1996. Since
current deferred income taxes are in an asset position, this results in a
decrease in current deferred income tax assets and a decrease in long-term
deferred income tax liabilities.
The increase in other current assets is primarily due to prepaid equipment
purchases of $500 million from Lucent pursuant to a purchase agreement.
<PAGE> 22 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The increase in accounts receivable was primarily due to the remaining
balance of accounts receivable retained by AT&T as part of the
restructuring plan and normal business activity.
Net property, plant and equipment increased $604 million from December 31,
1995 reflecting increased expenditures for the AT&T network.
Working capital, defined as current assets less current liabilities,
increased $5.2 billion from year-end due to a $7.5 billion decrease in debt
maturing within one year and a decrease in benefit-related liabilities,
partially offset by the decline in current assets discussed above. Debt
maturing within one year decreased primarily due to the assignment of debt
to Lucent, Lucent directly obtaining external financing, and lower levels
of debt for Universal Card due to the securitization program. Benefit-related
liabilities decreased $511 million primarily due to the annual
payment of year-end employee bonuses in the first quarter of 1996.
Long-term deferred income tax liabilities declined $809 million due to the
reclassification of deferred income taxes to current as discussed
previously. Long term debt decreased $512 million reflecting amounts
becoming current and therefore, reclassified to short term debt.
Shareowner's equity increased primarily due to the year to date net income
of $2.9 billion, the sale of Lucent stock recorded as an equity transaction
(see Note (b)) and shares issued under employee plans, partially offset by
dividends paid.
Net assets of discontinued operations decreased $2.3 billion primarily due
to the assignment of debt to Lucent as noted above partially offset by an
increase in Lucent's current assets.
The ratio of total debt to total capital (total debt and equity) decreased
to 36.1% at June 30, 1996, compared with 54.5% at December 31, 1995.
Excluding financial services operations, the debt ratio was 22.1% at June
30, 1996 compared with 41.3% at December 31, 1995. The decrease is
primarily due to Lucent borrowing on its own behalf.
In the normal course of business, AT&T uses certain derivative financial
instruments, mainly interest rate swaps and foreign currency exchange rate
contracts. The interest rate swaps and foreign currency contracts and
options allow the Company to manage its exposures to changing interest
<PAGE> 23 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
rates and currency exchange rates. AT&T does not use derivative financial
instruments for speculative purposes. Credit policies are designed to
limit the risks of dealing with other parties to these instruments. In
management's view, the risks to AT&T from using these derivative financial
instruments are small and the benefits include more stable earnings in
periods when interest rates and currency exchange rates are changing.
CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 VERSUS SIX MONTHS ENDED JUNE 30, 1995
Cash flows provided by operating activities from continuing operations
decreased $716 million compared with the same six-month period of 1995
primarily due to prepaid equipment purchases from Lucent in 1996 and
payments of $228 million related to the 1995 restructuring and other
charges. Of the 17,000 positions related to continuing operations included
in the fourth quarter of 1995 restructuring charges, approximately 4,000
people have left the payroll as of June 30, 1996. The increased use of
cash was partially offset by an increase in income from continuing
operations of $328 million.
For the six months ended June 30, 1996, net cash provided by investing
activities of continuing operations of $550 million increased $4,118
million compared with the $3,568 million net cash used in the second half
of 1995. This year over year increase is due to the proceeds from the
Universal Card securitizations, a lower level of license acquisitions, and
a decrease in finance receivables. These changes were partially offset by
increases in cash outflows for capital expenditures related to the AT&T
network.
Net cash used in financing activities of $2,709 million increased $2,822
million compared to net cash provided of $113 million for the comparable
period of 1995. The increase was due to decreases in both long term debt
issuances and short term debt borrowings as well as increases in
retirements of long term debt. These changes in debt activity reflect the
use of alternative sources of funding, such as securitizations and cash
collections of the $2.0 billion in accounts receivable retained by AT&T
continuing operations as part of the restructuring plan, as well as the
impact of Lucent obtaining its own external financing in 1996.
<PAGE> 24 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Future financing is contemplated to be arranged as necessary to meet AT&T's
capital and other requirements with the timing of issue, principal amount
and form depending on the Company's needs, prevailing market and general
economic conditions.
AT&T anticipates obtaining all necessary external financing through
issuances of commercial paper, long-term debt and equity, asset-backed
financings (i.e. securitizations) and available lines of credit.
RECENT PRONOUNCEMENTS
In June, 1996 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities". This
statement requires that liabilities incurred or obtained by transferors as
part of a transfer of financial assets be initially measured at fair value,
if practical. It also requires that servicing assets and other retained
interests in the transferred assets be recognized and measured by
allocating the previous carrying amount between the assets sold and
retained interests based upon their relative fair values at the date of
transfer. The statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
December 31, 1996, and early adoption is prohibited. Management does not
expect the adoption of this standard to have a material impact on AT&T's
consolidated financial statements.
LEGISLATIVE AND REGULATORY DEVELOPMENTS
In February 1996, the Telecommunications Act of 1996 (the
"Telecommunications Act") became law. The Telecommunications Act, among
other things, preempted state and local requirements which prohibit or have
the effect of prohibiting an entity from providing local telecommunications
services. In addition, the Telecommunications Act requires incumbent local
exchange carriers ("LECs"), including the Regional Bell Operating Companies
("RBOCs"), to implement a checklist of conditions that are designed to
foster local exchange competition.
The Telecommunications Act also permits an RBOC to petition the Federal
Communications Commission ("FCC") at any time for permission to provide
interexchange services originating in any state in its region. The FCC
cannot approve such a request unless, among other things, (i) approval is
consistent with the public interest, (ii) the RBOC has implemented the
Telecommunications Act checklist of conditions, including those imposed by
<PAGE> 25 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
the Telecommunications Act rules and regulations, throughout such state and
(iii) generally, the RBOC faces facilities-based competition for business
and residential customers within such state. Once authorized to provide
interexchange services in a single in-region state, an RBOC is also
permitted to begin manufacturing telecommunications equipment.
Furthermore, the Telecommunications Act permits immediate RBOC provision of
interexchange services outside of its home service areas and certain
incidental interexchange services, such as those provided in conjunction
with commercial mobile and cellular services, information services, alarm
monitoring and video and audio programming services within their home
service area.
In August 1996, the FCC adopted rules and regulations (the "Implementing
Rules") to implement the local competition provisions of the
Telecommunications Act, including with respect to the terms and conditions
of interconnection with LEC networks and the standards governing the
purchase of unbundled elements and wholesale services. The Implementing
Rules rely on each state to develop the specific rates and procedures in
such state within the framework prescribed by the FCC for developing such
rates and procedures.
For example, the Implementing Rules identify a minimum set of technically
feasible points of interconnection that an incumbent LEC must provide;
identify a minimum set of network elements that must be made available by
an incumbent LEC on an unbundled basis, without restriction; and require
incumbent LECs to provide nondiscriminatory access to operations support
systems for ordering, provisioning, maintenance and repair.
In addition, the Implementing Rules require states to set prices for
interconnection and unbundled elements pursuant to a forward looking
economic cost pricing methodology which is based on the Total Element Long-Run
Incremental Cost ("TELRIC") of providing a particular network element
plus a reasonable share of forward-looking joint and common costs. If
states are unable to conduct a cost study to determine such rates within
the statutory time frame for arbitrating interconnection disputes, the
Implementing Rules establish default ranges or ceilings for unbundled
network elements. Although the FCC deferred interstate access charge
reform to another proceeding, the Implementing Rules only permit incumbent
LECs to recover from interexchange carriers using unbundled network
elements for local service certain portions of the current interstate
access charges. Such interexchange carriers will not be required to pay
these charges as of the earliest of (i) July 1, 1997, (ii) the effective
date of final decisions by the FCC in its universal service and access
<PAGE> 26 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
charge reform proceedings, which are expected to result in new cost-based
access charges and a new service fund to subsidize universal service, or
(iii) in the case of an RBOC, the date upon which such RBOC receives
authority to provide in-region long-distance service. Finally, the
Implementing Rules establish a methodology that states must use for
determining the wholesale rates that LECs must provide to resellers of
their services and which is based on retail rates less marketing, billing,
collection and other avoided or avoidable costs. In addition, the
Implementing Rules establish a default discount in the range of 17-25% that
states may use pending implementation of this methodology.
AT&T believes that the establishment of uniform national interconnection
standards, the pricing principles adopted, and the flexibility inherent in
the unbundling of network elements should promote service competition in
the LEC's monopoly markets and provide AT&T with new market opportunities.
However, there can be no assurance the Implementing Rules will achieve
their intended purpose or provide for effective local service entry and
competition. A significant factor for successful entry by AT&T and others
will be the adoption, at the state level, of acceptable rates and
procedures for entrants, including certification by state regulatory
agencies and LEC interconnection agreements arbitrated and approved by
state regulatory agencies.
By March of 1996, AT&T had applied for permission to provide local service
in all 50 states. At July 31, 1996, AT&T had received authority to provide
service in 29 states and anticipates that it will receive the remaining
approvals as the other states take the actions contemplated by the
Telecommunications Act and the Implementing Rules. While the
Telecommunications Act makes clear that no state can prohibit AT&T or any
other entity from providing local services, AT&T cannot be certain as to
when it will receive certification in each state and the conditions that
might attach to each such certification.
In addition to the matters referred to above, various other factors,
including market acceptance, start-up and ongoing costs associated with the
provision of new services and local conditions and obstacles, could
adversely affect the timing and success of AT&T's entrance into the local
exchange services market and AT&T's ability to offer combined service
packages that include local service. Because it is widely anticipated that
substantial numbers of customers will seek to purchase local, interexchange
and other services from a single carrier as part of a combined or full
service package, any competitive disadvantage, inability to profitably
<PAGE> 27 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
provide local service at competitive rates or delays in providing local
service or combined service packages could adversely affect AT&T's future
revenues and earnings. In addition, the simultaneous entrance of numerous
new competitors for interexchange and combined service packages is likely
to adversely affect AT&T's long-distance revenues and could adversely
affect earnings.
COMPETITION
AT&T currently faces significant competition and expects that the level of
competition will continue to increase. The competitive environment has
intensified in recent months as current and potential competitors have
taken actions to position themselves for the implementation of the
Telecommunications Act, such as entering into long-term contracts with
business customers in currently monopoly markets. As public policy and
technological changes occur, including those occasioned by enactment of the
Telecommunications Act, AT&T anticipates that new and different competitors
will enter and expand their position in the communications services market.
These may include entrants from other segments of the telecommunications
and information services industry and/or global competitors seeking to
expand their market opportunities. Many such new competitors are likely to
enter with a strong market presence, well recognized names and pre-existing
direct customer relationships. Furthermore, consolidation of monopoly
local exchange carriers through the recently announced mergers of Bell
Atlantic Corp./Nynex Corp. and SBC Communications Inc./Pacific Telesis
Group will, if allowed to proceed, eliminate competition in the
construction of local facilities in the states of the combining RBOCs, and
potentially aggravate the RBOCs' advantage in providing interexchange
services due to the high level of telecommunications traffic conducted
between formerly distinct in-region areas. Finally, to the extent that the
RBOCs obtain in-region interLATA authority before the Telecommunications
Act's checklist of conditions have been fully implemented and adequate
facilities-based local exchange competition exists, there is a substantial
risk that AT&T and other interexchange service providers would be at a
disadvantage to the RBOCs in providing both local service and combined
service packages.
FORWARD LOOKING STATEMENTS
Except for the historical statements and discussions contained herein,
statements contained in this Report on Form 10-Q constitute "forward
looking statements" within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. Any Form
<PAGE> 28 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
10-K, Annual Report to Shareowners, Form 10-Q or Form 8-K of AT&T may
include forward looking statements. In addition, other written or oral
statements which constitute forward looking statements have been made and
may in the future be made by or on behalf of AT&T, including statements
concerning future operating performance, AT&T's share of new and existing
markets, AT&T's short- and long-term revenue and earnings growth rates, and
general industry growth rates and AT&T's performance relative thereto.
These forward-looking statements rely on a number of assumptions concerning
future events, including the adoption of balanced and effective rules and
regulations by the FCC and the state public regulatory agencies and AT&T's
ability to achieve a significant market penetration in new markets. These
forward looking statements are subject to a number of uncertainties and
other factors, many of which are outside AT&T's control, that could cause
actual results to differ materially from such statements. These include,
but are not limited to:
- - the efficacy of the Implementing Rules and other rules and regulations to
be adopted by the FCC to implement the provisions of the Telecommunications
Act;
- - the outcome of negotiations with LECs and state regulatory arbitrations and
approvals with respect to interconnection agreements;
- - the timing of receipt of, and the conditions that attach to,
certification to provide local service in each state;
- - success and market acceptance for new offerings, including local service;
start-up costs associated with entering new markets, including advertising
and promotional efforts; successful deployment of new systems and applications
to support new offerings; and local conditions and obstacles;
- - competitive pressures, including pricing pressures, technological
developments and the ability to offer combined service packages that include
local service; the extent and pace at which different competitive
environments develop for each segment of the telecommunications industry; and
the degree to which AT&T experiences material competitive impacts to its
traditional service offerings prior to achieving adequate local service
entry;
- - the availability, terms and deployment of capital;
- - general economic conditions, government and regulatory policies, and
business conditions in the communications industry.
Readers are cautioned not to put undue reliance on such forward looking
statements. For a more detailed description of these and additional
uncertainties and other factors that could cause actual results to differ
materially from such forward-looking statements, see "Results of
Operations", "Financial Condition", "Regulatory and Legislative
Developments", and "Competition". As described elsewhere in this Form 10-Q,
these uncertainties and factors could adversely affect the timing and
success of AT&T's entrance into the local exchange services market and
<PAGE> 29 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
AT&T's ability to offer combined service packages that include local
service, thereby adversely affecting AT&T's future revenues and earnings.
AT&T disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
<PAGE> 30 AT&T Form 10-Q - Part II
Part II - Other Information
Item 1. Legal Proceedings.
On February 14, 1996, Bell Atlantic Corporation and DSC
Communications Corporation filed a complaint against AT&T and
Lucent in the United States District Court for the Eastern
District of Texas. The complaint alleges, among other things,
that AT&T 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, of
approximately $3.5 billion. In June 1996, AT&T's motions to
dismiss the complaint on procedural grounds and to transfer
venue were denied. AT&T does not believe that the complaint
has merit and intends to defend the lawsuit vigorously.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit:
Exhibit Number
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
99 Information Statement dated as of July 24, 1996
concerning the distribution of 524,624,894 shares of
Lucent Technologies Inc.
(b) Reports on Form 8-K:
Form 8-K dated June 6, 1996 was filed pursuant to Item
5 (Other Events) and Item 7 (Financial Statements and
Exhibits)
<PAGE> 31 AT&T Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AT&T Corp.
Date August 13, 1996
M. B. Tart
Vice President and Controller
(Principal Accounting Officer)
<PAGE> 32 AT&T Form 10-Q
EXHIBIT INDEX
EXHIBIT
NUMBER
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
99 Information Statement dated as of July 24, 1996
concerning the distribution of 524,624,894 shares of
Lucent Technologies Inc.
<PAGE> 1
Exhibit 12
Form 10-Q
For the Six
Months Ended
June 30, 1996
AT&T Corp.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
For the Six
Months Ended
June 30, 1996
Earnings Before Income Taxes .......................... $4,652
Less Interest Capitalized during
the Period........................................... 87
Less Undistributed Earnings of Less than 50%
Owned Affiliates..................................... 99
Add Fixed Charges...................................... 647
Total Earnings......................................... $5,113
Fixed Charges
Total Interest Expense Including Capitalized Interest.. $ 547
Interest Portion of Rental Expense..................... 100
Total Fixed Charges................................ $ 647
Ratio of Earnings to Fixed Charges..................... 7.9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited balance sheet of AT&T at June 30, 1996 and the unaudited
consolidated statement of income for the six-month period ended June 30,
1996 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 21
<SECURITIES> 0
<RECEIVABLES> 10,020
<ALLOWANCES> 1,244
<INVENTORY> 0
<CURRENT-ASSETS> 19,266
<PP&E> 35,411
<DEPRECIATION> 18,432
<TOTAL-ASSETS> 58,173
<CURRENT-LIABILITIES> 16,332
<BONDS> 8,033
0
0
<COMMON> 1,610
<OTHER-SE> 20,822
<TOTAL-LIABILITY-AND-EQUITY> 58,173
<SALES> 0
<TOTAL-REVENUES> 25,988
<CGS> 0
<TOTAL-COSTS> 21,318
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,044
<INTEREST-EXPENSE> 220
<INCOME-PRETAX> 4,652
<INCOME-TAX> 1,686
<INCOME-CONTINUING> 2,966
<DISCONTINUED> (113)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,853
<EPS-PRIMARY> $1.77
<EPS-DILUTED> 0
</TABLE>
<PAGE> Exhibit 99
INFORMATION STATEMENT
Concerning the Distribution of
524,624,894 Shares
of
Lucent Technologies Inc.
Common Stock
(Par Value $.01 per Share)
By
AT&T Corp.
This Information Statement is being furnished by AT&T Corp., a New
York corporation ("AT&T"), in connection with the distribution (the
"Distribution") to holders of shares of common stock, $1.00 par value, of
AT&T (the "AT&T Common Stock") of approximately .326 of a share of the
common stock, $.01 par value (the "Lucent Common Stock"), of Lucent
Technologies Inc., a Delaware corporation ("Lucent Technologies"), for
each share of AT&T Common Stock owned on September 17, 1996 (the "Record
Date"). The Distribution will result in approximately 82.4% of the
outstanding shares of Lucent Common Stock being distributed to holders of
AT&T Common Stock. The remaining outstanding shares of Lucent Common
Stock were sold to the public by Lucent Technologies on April 10, 1996 at
a price of $27 per share.
Certificates for Lucent Common Stock will be mailed on or about
September 30, 1996 to holders of record of AT&T Common Stock on the Record
Date. No holder of shares of AT&T Common Stock will be required to pay
any cash or other consideration for the shares of Lucent Common Stock
received in the Distribution or to surrender or exchange shares of AT&T
Common Stock in order to receive Lucent Common Stock. As a result of the
Distribution, Lucent Technologies will cease to be a subsidiary of AT&T
and AT&T will not own any shares of Lucent Common Stock.
All such shares of Lucent Common Stock will be fully paid and
nonassessable and the holders thereof will not be entitled to preemptive
rights. Each share of Lucent Common Stock will initially have one
Preferred Share Purchase Right attached thereto. See "Additional
Information."
Lucent Common Stock is listed on the New York Stock Exchange under
the symbol "LU." The Lucent Common Stock received in the Distribution will
be freely tradeable by nonaffiliates of Lucent Technologies. See "Market
for Lucent Common Stock."
AT&T has received a ruling from the Internal Revenue Service to the
effect that the Distribution is not taxable for federal income tax
purposes to AT&T and its shareowners. See "Federal Income Tax
Consequences."
NO VOTE OF AT&T SHAREOWNERS IS REQUIRED IN CONNECTION WITH THE
DISTRIBUTION. THEREFORE, WE ARE NOT ASKING YOU FOR A PROXY, AND YOU ARE
REQUESTED NOT TO SEND US A PROXY.
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 INFORMATION STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Information Statement is July 24, 1996.
<PAGE>
The Distribution
The Board of Directors of AT&T has declared a dividend to the
holders of AT&T Common Stock of the 524,624,894 shares of the Lucent
Common Stock owned by AT&T on the basis of approximately .326 of a share
of Lucent Common Stock for each share of AT&T Common Stock outstanding on
September 17, 1996, which is the Record Date for the Distribution. The
actual fraction of a share of Lucent Common Stock that will be distributed
for each share of AT&T Common Stock will equal 524,624,894 (the number of
shares of Lucent Common Stock owned by AT&T) divided by the number of
shares of AT&T Common Stock outstanding on the Record Date. As of
July 19, there were 1,611,390,651 shares of AT&T Common Stock outstanding.
No holder of shares of AT&T Common Stock will be required to pay any cash
or other consideration for the shares of Lucent Common Stock received in
the Distribution or to surrender or exchange shares of AT&T Common Stock
in order to receive Lucent Common Stock.
As required by New York Business Corporation law, AT&T advises that
this dividend will be paid entirely from capital surplus.
Shareowners of AT&T with questions relating to the Distribution
should call our toll-free 800 number: 1-800-756-8500, anytime, 24 hours a
day, 7 days a week.
Manner of Effecting the Distribution
AT&T will effect the Distribution on September 30, 1996 (the
"Distribution Date") by delivering shares of Lucent Common Stock to The
Bank of New York, as the distribution agent (the "Distribution Agent"),
for distribution to the AT&T shareowners of record on the Record Date.
Certificates for Lucent Common Stock will be mailed to AT&T shareowners on
or about September 30, 1996.
No certificates representing fractional shares of Lucent Common
Stock will be issued as part of the Distribution. The Distribution Agent
will aggregate fractional shares into whole shares, and will sell them on
behalf of holders who otherwise would be entitled to receive a fractional
share. Such holders will receive a cash payment in the amount of their
pro rata share of the total net sale proceeds. See "Federal Income Tax
Consequences."
Federal Income Tax Consequences
General. The Internal Revenue Service has ruled that, for United
States federal income tax purposes, the Distribution will qualify as
tax-free under Section 355 of the Internal Revenue Code of 1986, as
amended (the "Code"), and that, accordingly, (i) AT&T shareowners will not
recognize gain or loss by reason of the receipt of whole shares of Lucent
Common Stock in the Distribution and (ii) AT&T will not recognize gain or
loss by reason of the Distribution. A shareholder who receives cash in
lieu of a fractional share will recognize gain or loss equal to the
difference between the cash received and the amount of tax basis allocable
to such fractional share.
Treatment of Fractional Shares. Cash which an AT&T shareowner
receives in lieu of a fractional share of Lucent Common Stock as part of
the Distribution will be treated for federal income tax purposes as paid
in exchange for such fractional share of stock. Such AT&T shareowner will
realize a capital gain or loss, provided that the fractional share is
considered to be held as a capital asset, measured by the difference
between the cash which such shareholder received for such fractional share
and the shareholder's tax basis in that fractional share.
Allocation of Tax Basis. The aggregate tax basis of shares of AT&T
Common Stock and Lucent Common Stock, including fractional shares treated
<PAGE>
as exchanged for cash, in the hands of AT&T shareowners after the
Distribution will be the same as the aggregate tax basis, immediately
prior to the Distribution, of the shares of AT&T Common Stock with respect
to which the Distribution was made. The aggregate tax basis of the shares
of AT&T Common Stock will be allocated in proportion to the fair market
value (determined based upon the average high and low prices on the New
York Stock Exchange) of shares of AT&T Common Stock and Lucent Common
Stock at the time of Distribution. Additional information concerning
calculation of the new tax basis of shares of AT&T Common Stock and Lucent
Common Stock will be sent to shareholders shortly after the Distribution
Date.
Holding Period. The holding period of shares of Lucent Common Stock
received by an AT&T shareowner will include the holding period of the
shares of AT&T Common Stock with respect to which the Distribution will be
made, provided that such shares of AT&T Common Stock are held as a capital
asset on the Distribution Date.
State, Local and Foreign Tax Consequences. AT&T shareowners should
consult their own tax advisors regarding the state, local and foreign tax
consequences of the receipt of shares of Lucent Common Stock and any
payment for fractional shares.
Additional Information. Additional information will be sent to
shareholders shortly after the Distribution Date concerning (1) the
calculation of the new tax basis of their shares of AT&T Common Stock and
Lucent Common Stock, and (2) the tax treatment of cash received in lieu of
fractional shares.
Summary Only. The summary of federal income tax consequences set
forth above is for general information only and may not be applicable to
shareholders who are not citizens or residents of the United States or who
are otherwise subject to special treatment under the Code. All
shareholders should consult their own tax advisors as to the particular
tax consequences of the Distribution to them, including the state, local,
and (if applicable) foreign tax consequences.
Market for Lucent Common Stock
Lucent Common Stock is listed on the New York Stock Exchange under
the symbol "LU". Shares of Lucent Common Stock distributed to AT&T
shareowners will be freely transferable, except for shares received by
persons who may be deemed to be "affiliates" of Lucent Technologies under
the Securities Act of 1933. The following table sets forth for the
periods indicated the high and low sale prices of Lucent Common Stock as
reported on the New York Stock Exchange Composite Tape. Shareowners are
urged to obtain current quotations for the Lucent Common Stock.
High Low
Second Quarter, 1996 39 1/4 29 3/4
Third Quarter, 1996 (through July 23) 38 1/4 30 5/8
Information About A&T
AT&T was incorporated in 1885 under the laws of the State of New
York and has its principal executive offices at 32 Avenue of the Americas,
New York, New York 10013-2412. AT&T is among the world's communications
leaders, providing voice, data and video telecommunication services to
large and small businesses, government entities and consumers, as well as
offering a general-purpose credit card and other services.
Following the Distribution, AT&T will not hold any shares of Lucent
Common Stock. AT&T will continue to be a publicly held corporation whose
common shares are traded on the New York and other domestic and
international exchanges.
<PAGE>
Information About Lucent Technologies
Lucent Technologies is one of the world's leading designers,
developers and manufacturers of telecommunications systems, software and
products. Lucent Technologies is a global market leader in the sale of
public telecommunications network systems, business communications systems
and microelectronic components for communications applications. Further,
Lucent Technologies is the largest supplier in the United States of
telecommunications products for consumers. In addition, Lucent
Technologies supports network operators and businesses with engineering,
installation, maintenance and operations support services. Lucent
Technologies' research and development activities are conducted through
Bell Laboratories.
It is anticipated that the first annual meeting of shareholders of
Lucent Technologies will be held on February 19, 1997 at a location to be
announced. Shareholder proposals for inclusion in Lucent Technologies'
1997 Proxy Statement must be received by Lucent Technologies no later than
August 30, 1996.
Lucent Technologies was incorporated on November 29, 1995 under the
laws of the State of Delaware and has its principal executive offices at
600 Mountain Avenue, Murray Hill, New Jersey 07974.
PAGE>
Dividends
As with any company, the declaration and payment of future dividends
are subject to the discretion of the respective Boards of Directors of
AT&T and Lucent Technologies and will depend on the results of operations,
financial condition, cash requirements and future prospects of the
respective companies, general economic and financial market conditions and
other factors deemed relevant by each Board of Directors.
AT&T has announced that it currently intends to continue its $.33
per share quarterly cash dividend rate. Lucent Technologies currently
pays cash dividends at the rate of $.075 per quarter.
Beginning with the fourth quarter dividend, if you own 100 shares of
AT&T Common Stock on the Record Date (and continue to hold those shares
through the Distribution), immediately after the Distribution you will own
both 100 shares of AT&T Common Stock and, assuming a .326 spin-off ratio,
32 shares of Lucent Common Stock. Based on these amounts and the expected
dividend rates set forth above, if you continue to hold the shares through
the dividend record dates, you would receive an aggregate quarterly
dividend on these shares of $33 from AT&T and $2.40 from Lucent
Technologies, for a total of $35.40 from the two companies. This compares
to the AT&T quarterly dividend rate prior to the Distribution of $.33 per
share (or $33 on 100 shares of AT&T Common Stock)--an increase of
approximately 7.3%.
AT&T shareowners will not receive the quarterly cash dividend on
shares of Lucent Technologies received in the spin-off until the fourth
quarter 1996 dividend which is expected to be payable in the first quarter
of 1997.
Conditions
Although AT&T has declared the Lucent dividend distribution, such
dividend remains subject to the conditions set forth in the Separation and
Distribution Agreement, dated as of February 1, 1996, as amended and
restated as of March 29, 1996, by and among AT&T, Lucent Technologies and
NCR Corporation. A copy of such agreement has been filed as an exhibit to
the Registration Statement on Form S-1 relating to the Lucent Common
Stock. See "Additional Information." Such conditions are for the sole
benefit of AT&T and will not give rise to or create any duty on the part
of AT&T or the AT&T Board of Directors to waive or not waive any such
condition.
Additional Information
The Lucent Common Stock is registered under the Securities Exchange
Act of 1934 (the "Exchange Act"). Lucent Technologies and AT&T are each
subject to the reporting requirements of the Exchange Act, and in
accordance therewith have filed registration statements, reports and other
information (collectively, the "SEC Reports") with the Securities and
Exchange Commission (the "SEC"). For further information pertaining to
Lucent Technologies (including financial statements and other financial
information), the Lucent Common Stock, the Lucent Preferred Share Purchase
Rights and related matters, AT&T shareowners are urged to read Lucent
Technologies' SEC Reports.
The SEC Reports can be inspected and copied at the public reference
facilities of the SEC at 450 Fifth Street, N.W., Washington, D.C.; 7 World
Trade Center, Suite 1300, New York, New York; and 500 West Madison Street,
Suite 1400, Chicago, Illinois. Copies of such material also can be
obtained at prescribed rates from the Public Reference Section of the SEC,
450 Fifth Street, N.W., Washington, D.C. 20549. The SEC Reports can also
be inspected at the New York Stock Exchange, 20 Broad Street, New York,
New York; and, in the case of the AT&T SEC Reports, at the Chicago Stock
Exchange, 440 South LaSalle Street, Chicago, Illinois and, the Pacific
Stock Exchange, 301 Pine Street, San Francisco, California.
