1 Exhibit 13
Our strategic restructuring will launch three new
customer-focused companies.
A Discussion and Analysis of Our Results of Operations and Financial Condition
Record revenues in 1995 reflected growth in long distance and wireless
communications services, increased sales of network telecommunications and
business telephone systems and growth in financial services and leasing.
Customer demand in the global information industry continues to rise, spurred by
worldwide economic growth, technological advances and the declining relative
cost of information technology.
Notwithstanding this revenue growth, after evaluating market conditions,
including economic, financial, governmental and technological factors, we
concluded that changes would be in the best interests of our stakeholders. On
September 20, 1995 we announced our plan to separate AT&T Corp. (AT&T) 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.) and transaction-intensive
computing (formerly AT&T Global Information Solutions, now NCR Corporation).
Our goal is to reduce the complexity of our operations making our businesses
more competitive and responsive to customers by eliminating some strategic and
internal conflicts. Separating into three independent companies will enhance
our ability to focus on strategic businesses that add value to customers, to
take advantage of new opportunities and to improve cost structures and operating
efficiencies. We are planning an initial public offering of approximately 15%
of Lucent Technologies Inc. (Lucent) common stock in the first half of 1996. We
expect to distribute to our shareowners, subject to certain conditions, all of
our remaining interest in Lucent and all of our interest in NCR Corporation
(NCR) by the end of 1996. Also announced as part of the restructuring was our
intent to pursue the sale of our remaining 86% interest in AT&T Capital
Corporation (AT&T Capital). Our goal is to complete all of these actions by the
end of 1996. However, our plan is subject to several conditions, including
receipt of a favorable tax ruling, other required approvals, and the absence of
events or developments that would cause the plan to have a material adverse
impact on AT&T or its shareowners. We expect transactions associated with this
plan to be tax-free to shareowners. Pages 17-19 of this report show summary
financial information for the three separate companies.
In the fourth quarter of 1995, we recorded restructuring and other charges
of approximately $6.2 billion before taxes primarily related
to our plans to separate into three companies as described above. The charges
reduced net income by approximately $4.2 billion, or $2.61 per share. As a
result, net income for the year was $139 million, or $.09 per share. Excluding
these charges, net income increased 16.6% in 1995 compared with 1994 to $5,492
million ($3.45 per share).
The charges cover plans to sell several businesses, including the AT&T
Microelectronics Interconnect business and AT&T Paradyne. We
also plan to close our 338 AT&T owned retail stores (the Phone Center Stores) by
May 1996, to realign our consumer products distribution
2
ELEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(UNAUDITED)
AT&T Corp. and Subsidiaries
Dollars in millions (except per share amounts)
1995* 1994 1993* 1992 1991* 1990 1989 1988* 1987 1986* 1985
- ------------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Total revenues $79,609 $75,094 $69,351 $66,647 $64,455 $63,228 $61,604 $62,067 $60,726 $61,975 $63,159
Research and
development expenses 3,718 3,110 3,111 2,924 3,114 2,935 3,098 2,988 2,810 2,599 2,527
Operating income (loss) 1,215 7,949 6,498 6,529 1,428 5,358 4,751 (2,500) 4,071 974 3,561
Income (loss) before extraordinary
item and cumulative effects
of accounting changes 139 4,710 3,702 3,442 171 3,475 2,820 (1,527) 2,374 609 1,856
Net income (loss) 139 4,710 (5,906) 3,442 171 3,666 2,820 (1,527) 2,374 434 1,856
Earnings (loss) per
common share before extraordinary
item and cumulative effects
of accounting changes 0.09 3.01 2.39 2.27 0.12 2.38 1.95 (1.06) 1.61 0.36 1.21
Earnings (loss) per
common share 0.09 3.01 (3.82) 2.27 0.12 2.51 1.95 (1.06) 1.61 0.24 1.21
Dividends declared per
common share 1.32 1.32 1.32 1.32 1.32 1.32 1.20 1.20 1.20 1.20 1.20
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS AND CAPITAL
Property, plant and
equipment - net $22,264 $21,279 $20,434 $20,209 $19,286 $18,906 $17,362 $16,793 $22,124 $22,247 $23,182
Total assets 88,884 79,262 69,393 66,104 62,071 57,036 45,228 41,945 45,583 44,305 44,824
Long-term debt including
capital leases 11,635 11,358 11,802 14,166 13,682 14,579 10,116 10,172 9,060 8,234 8,104
Common shareowners'
equity 17,274 17,921 13,374 20,313 17,973 17,928 15,727 13,694 16,913 15,849 16,945
Net capital expenditures 5,997 4,572 4,142 4,043 4,086 4,120 3,959 4,453 3,885 3,977 4,303
- ------------------------------------------------------------------------------------------------------------------------------
3
ELEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA (Cont'd)
(UNAUDITED)
AT&T Corp. and Subsidiaries
Dollars in millions (except per share amounts)
1995* 1994 1993* 1992 1991* 1990 1989 1988* 1987 1986* 1985
- ------------------------------------------------------------------------------------------------------------------------------
OTHER INFORMATION
Operating income (loss)
as a percentage of
revenues 1.5% 10.6% 9.4% 9.8% 2.2% 8.5% 7.7% (4.0)% 6.7% 1.6% 5.6%
Net income (loss) as a
percentage of revenues 0.2% 6.3% (8.5)% 5.2% 0.3% 5.8% 4.6% (2.5)% 3.9% 0.7% 2.9%
Return on average common
equity 0.7% 29.5% (47.1)% 17.6% 0.9% 21.2% 19.1% (8.9)% 14.3% 2.0% 10.6%
Data at year-end:
Stock price per share $64.75 $50.25 $52.50 $51.00 $39.125 $30.125 $45.50 $28.75 $27.00 $25.00 $25.00
Book value per common
share $10.82 $11.42 $ 8.65 $13.31 $12.05 $12.33 $10.92 $ 9.57 $11.87 $11.04 $11.73
Debt ratio 62.0% 58.3% 64.4% 53.1% 54.8% 53.5% 45.0% 45.8% 38.4% 39.6% 39.9%
Debt ratio excluding
financial services 44.3% 34.1% 49.1% 40.8% 46.0% 47.6% 39.3% 42.2% 35.2% 37.6% 38.4%
Employees 299,300 304,500 317,700 319,000 322,300 333,400 343,000 367,400 366,200 379,900 400,400
------------------------------------------------------------------------------------------------------------------------------
<FN>
*1995 data reflect $7.8 billion of pretax business restructuring and other charges.
1993 data reflect a $9.6 billion net charge for three accounting changes.
1991 data reflect $4.5 billion of pretax business restructuring and other charges.
1988 data reflect a $6.7 billion pretax charge due to accelerated digitization of the long distance network.
1986 data reflect $3.2 billion of pretax charges for business restructuring, an accounting change and other items.
</FN>
/TABLE
4
channels and to consolidate and reorganize corporate and business unit
operations over the next two years. Accordingly, the fourth-quarter
charges included separation costs for nearly 40,000 employees, of
which about 24,000 were management and 16,000 were occupational. We
expect 70% of all separations to be completed by the end of 1996, with
the majority of the remainder being completed in 1997.
During the third quarter of 1995, we approved NCR's plans to
refocus its business. The goal is to return NCR to profitability.
Major aspects of the plan are to discontinue the manufacture of
personal computers and their sale through reseller channels, to reduce
the number of industry markets it serves and to consolidate facilities
globally. NCR expects to complete these actions during 1996. As a
result, in the third quarter of 1995, AT&T recorded charges of
approximately $1.6 billion before taxes, which reduced net income by
approximately $1.2 billion, or $0.74 per share.
The pretax total of the third and fourth quarter 1995 charges was
recorded as $670 million in costs of telecommunications services,
$1,676 million in costs of products and systems, $717 million in costs
of rentals and other services, $6 million in costs of financial
services and leasing, $4,359 million in selling, general and
administrative expenses and $417 million in research and development
expenses. If viewed by type of cost, the pretax charges reflect
$3,417 million for employee separations and other related costs,
$2,533 million for asset write-downs, $895 million for closing,
selling and consolidating facilities and $1,000 million for other
items. (See also Note 8 to the consolidated financial statements.)
In 1993 we provided $498 million before taxes for restructuring
activities. These charges covered actions at NCR to reduce its
workforce through early retirement and voluntary separation programs,
actions at our telecommunications services units to centralize support
services, actions to close plants that manufactured telecommunications
network systems and actions to restructure operations that serviced
the U.S. federal government. If viewed by type of cost, the charges
reflect $235 million for employee separations and other related
matters, $171 million for facility closings and $92 million for other
related items. These charges were recorded as $13 million in costs of
products and systems, $90 million in costs of other services, $373
million in selling, general and administrative expenses and $22
million in research and development expenses.
All parts of our business face substantial and intensifying
competition. Product pricing and technology are under continual
competitive pressure, and business and market conditions are changing
rapidly. Our business leaders must continuously reassess their
resource needs and redirect them as necessary to address market
conditions and to reduce costs. Such steps can include the expansion
of service offerings to provide larger bundles of services sought by
customers. They can also include closing and consolidating
facilities, disposing of assets, reducing the workforce or withdrawing
from markets. Actions to enhance efficiency through continuous
improvement are part of our commitment to quality.
The sections that follow describe our main revenue streams. Within
these sections we describe the main service and product lines of the
public companies that will emerge from our strategic restructuring.
5
******************************************************************
A chart appears containing the following information:
AT&T versus S&P 500
Total shareowner return assuming
reinvestment of dividends
Your investment has outperformed the S&P 500 since the largest
divestiture in corporate history, which resulted from a consent
decree, in 1984. Only twelve years later we're preparing for the
second largest divestiture in corporate history; this time it's our
choice.
@: AT&T
#: S&P 500
600
@
#
500
@
@ @
# # 400
#
@ #
@
300
#
#
@
@# 200
@# @#
@#
@
@# # 100
1/84 84 85 86 87 88 89 90 91 92 93 94 95 000
Assumes $100 invested in AT&T common stock and in the S&P 500 index on
January 1, 1984 and all dividends reinvested.
******************************************************************
6
Telecommunications Services
These revenues, which include traditional long distance, wireless
services and other communications services, grew 6.0% in 1995 and 4.3%
in 1994. The gains were mostly due to higher volumes, as the AT&T
network handled a record 61.6 billion calls in 1995. Billed minutes
for traditional, time-billed long distance services rose nearly 9.0%
in 1995, compared with an increase of more than 7.5% in 1994 and about
5.5% in 1993. In particular, we saw volume growth in calling card,
business inbound services and consumer international services.
Volume growth exceeds revenue growth because more customers are
taking advantage of our many calling plans and promotions. However,
the gap between revenues and volume growth narrowed in 1995 to 4%.
This narrowing reflected less movement among calling plans by both
business and residential customers and some targeted pricing actions.
The merger of AT&T and McCaw Cellular Communications, Inc. (McCaw)
in 1994 and the acquisition of personal communications services (PCS)
licenses in 1995 strengthened the competitive position of our
communications services business. These initiatives will create new
bundled offering opportunities, thereby enhancing our prospects for
growth in revenues and earnings. The purchase of the minority owners'
stake in LIN Broadcasting Corporation (LIN) in October 1995 gave us
increased control of important cellular markets. AT&T now has the
right to provide cellular services or PCS in 23 of the nation's top 25
markets. AT&T Wireless Services, formerly McCaw, is the leading U.S.
provider of wireless communications services.
Total revenues from wireless services, which include cellular and
messaging services, grew 28.3% to $2,926 million in 1995, from $2,280
million in 1994 and $1,760 million in 1993, mainly due to additional
cellular service subscribers. Having met government conditions, in
1995 we were allowed to begin to jointly market long distance and
cellular services. Thus far we've had a favorable response to this
promotion. Cellular customers, reported on the same basis as
consolidated wireless services revenues, increased to 3.9 million at
year-end 1995, from 2.8 million in 1994 and 1.9 million in 1993.
Cellular customers served by companies in which AT&T has or shares a
controlling interest increased to 5.5 million at year-end 1995, from
4.0 million in 1994 and 3.0 million in 1993. Average revenue per
subscriber declined in 1995 reflecting pricing pressures experienced
by all cellular service providers, as well as lower average usage per
subscriber attributed to growth in subscribers for emergency and other
personal use.
We also furthered our strategy of providing a broad package of
telecommunications services by launching AT&T branded on-line
services, such as the AT&T Learning Network, the AT&T Business
Network, AT&T Easy World Wide Web Service and Personal Online
Services. These services provide dial-up and dedicated internet
access, navigational tools and information directories, hosting and
transaction services, and content.
In February 1996, the Telecommunications Act of 1996 (the
"Telecommunications Act") became law. The Telecommunications Act
preempts state and local requirements which prohibit or have the
effect of prohibiting an entity from providing telecommunications
7
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. Although the
Telecommunications Act permits interexchange carriers and others to
begin providing local exchange service at any time, negotiations with
LECs over access and interconnection agreements and the adoption of
implementing rules and regulations will be necessary before effective
local exchange competition commences.
The Telecommunications Act permits immediate RBOC provision of
interexchange services outside of their home service areas and certain
incidental interexchange services in their home service areas, such as
those provided in conjunction with commercial mobile and cellular
services. In addition, an RBOC is permitted to provide interexchange
services originating in any state in its region upon receiving FCC
approval, which is subject to a number of conditions, including that
the RBOC has implemented the Telecommunications Act checklist of
conditions throughout such state and, generally has entered into an
interconnection agreement with a facilities-based competitor upon
request. Once approved to provide interexchange services in a single
in-region state, an RBOC is also permitted to begin manufacturing
telecommunications equipment.
AT&T believes that the Telecommunications Act's provisions for the
opening of local exchange markets to competitive entry are significant
and that the restrictions placed on RBOC entry into in-region
interexchange services should promote service competition in the
RBOC's monopoly markets before RBOC provision of in-region
interexhange services. Nonetheless, there is no assurance that, in
the administration of the Telecommunications Act, the rules and
regulations to be adopted will result in meaningful facilities-based
competition prior to RBOC provision of in-region interexchange
service.
To the extent that such implementing rules and regulations do not
contain adequate provision for facilities-based local exchange
competition, there is a substantial risk that AT&T and other
interexchange service providers would be at a disadvantage to the
RBOCs in the provision of local exchange services. In addition,
regardless of provisions for facilities-based local exchange
competition, the simultaneous entrance of seven RBOC competitors for
interexchange services is likely to adversely affect AT&T's
long-distance revenues and could adversely affect earnings. There is
still a significant amount of uncertainty as to the extent, timing and
impact on AT&T of the RBOCs entrance into interexchange services.
Similarly, the impact of AT&T's entrance into local services cannot
reasonably be predicted. Notwithstanding the strong local entry
provisions contained in the Telecommunications Act, various factors,
including start-up costs associated with entering new markets, local
conditions and obstacles and the final form of implementing rules and
regulations, could adversely affect future revenues and earnings.
Nevertheless, the legislation, plus other public policy and
technological changes, will likely open new markets for AT&T in
different areas of communications services. AT&T's competitive
8
strategy includes using its networking capabilities, respected brand
name and other resources to take advantage of these new opportunities
as they arise.
Costs of telecommunications services include $670 million of
restructuring and other charges in 1995. Excluding these charges, the
gross margin percentage on telecommunications services rose to 44.9%
in 1995 from 42.4% in 1994 and 39.9% in 1993. This upward trend is
mainly the result of lower per-minute access costs - costs for
reaching customers through local networks. The Federal Communications
Commission (FCC) approved changes to the price-setting methodology for
access costs, effective August 1995. These changes included a
reduction in the maximum prices (price caps) local telephone companies
can charge for connections. These price caps will be adjusted
annually for inflation and changes in productivity. Additionally, the
local telephone companies are required to use higher productivity
factors in the future, which should lead to lower charges.
*********************************************************************
The Pace of Change in the Global Information Industry
We must anticipate and react quickly to continuous and rapid changes
in our markets. Technological developments create new markets,
shorten product life cycles and hasten the convergence of different
areas of the global information industry. The rapid growth, enormous
size and global scope of this industry attract new entrants and
encourage existing competitors to broaden their offerings. Alliances,
joint ventures, mergers and acquisitions between market participants
and regulatory and legislative decisions that affect these markets,
further alter the competitive landscape.
Current and potential competitors in telecommunications services
include local telephone companies, other long distance carriers, cable
companies, internet service providers, wireless service providers and
other companies that offer network services. Other entrants from
adjacent segments of the communications and information services
industries, include providers of business information systems, systems
integrators and companies outside the U.S. seeking to expand their
markets. Some of these companies already have a strong market
presence, brand recognition and existing direct customer
relationships. All of these conditions contribute to substantial and
intensifying competition.
Public policy changes including the Telecommunications Act are
likely to bring not only increased competitive pressures, but may also
open new markets to AT&T. Our strategy is to use our strong
networking capabilities, a well-known and respected brand name and
other strengths to capitalize on opportunities that arise.
*********************************************************************
9
********************************************************************
A pie chart appears containing the following information:
1995 SOURCES OF REVENUES
As percentage of total revenue
The markets for our products and systems are growing fastest outside
the U.S. as many countries expand and modernize their
telecommunications infrastructure. Global competition in
telecommunications services is developing now and will likely
accelerate.
11% International Revenues
From operations located in other countries
15% International Revenues
From U.S. operations (international telecommunications
services and exports)
74% U.S. Revenues
*******************************************************************
Products and Systems
Products and systems sales climbed 5.9% in 1995 and 18.1% in 1994,
reflecting continued growth in sales both inside and outside of the
United States.
10
Products and Systems
Dollars in millions 1995 1994 1993
Revenues
Telecommunications network
products and systems $10,665 $ 9,785 $ 8,345
Communications products
and systems 4,899 4,494 3,692
Microelectronics products and
other* 2,798 2,674 2,418
Computer products and systems 4,050 4,208 3,470
Products and systems $22,412 $21,161 $17,925
Gross margin percentage 28.4% 37.3% 38.8%
*Other product revenues are mainly from computing media that customers
use with automated teller machines and retail scanning equipment, and
business forms.
Most of the revenues from telecommunications network products and
systems, communications products and systems, and microelectronics
products are from units that will be a part of Lucent.
Revenues from telecommunications network products and systems rose
9.0% in 1995 and 17.3% in 1994. In both years we had higher sales
both inside and outside of the United States. The growth outside of
the U.S. was due primarily to increased sales to service providers.
In the U.S. sales increased to independent telephone companies, cable
companies and competitive access providers. About $243 million of the
1994 increase in revenues came from consolidating AG Communications
Systems Corporation when we raised our ownership to 80%. Sales of
switching and transmission equipment to the local telephone companies
declined in 1995. We believe that was due to delays in spending by
those customers and recent legislative initiatives which caused
reluctance to purchase from a potential competitor.
Sales outside of the U.S. of telecommunications network products and
systems rose $730 million or 27.2% in 1995, led by strong sales in
Saudi Arabia and China. Most systems and equipment for
telecommunications networks are sold under contracts that produce
revenues for several years. In 1994 we were awarded a $4 billion
contract to build a fully digital communications network in Saudi
Arabia. This contract will launch AT&T's GSM (global systems for
mobile communications) offerings and is expected to be completed by
the beginning of the next decade.
Revenues from sales of business communications products and systems
rose 9.0% in 1995 and 21.7% in 1994. Sales of business communications
equipment grew both inside and outside of the U.S. the last two years.
In 1995 U.S. growth was largely due to increased sales of private
branch exchanges (PBXs), including Definity# products and
voice-processing systems. Sales of business communications products
outside of the U.S. increased $89 million or 26.5% in 1995, led by
increases in the United Kingdom, Canada and France. In 1994 we also
had higher sales of Definity PBX products, partly reflecting upgrades
to accommodate changes in the North American Numbering Plan and sales
of
___________
# Registered Trademark
11
Conversant# voice-processing products. Growth in sales outside the
U.S. in 1994 reflected acquisitions in Europe and Latin America as
well as higher demand.
Revenues from sales of consumer communications products declined in
1995 mainly because of competitive pricing pressures and an increasing
proportion of lower-margin products. The decline was due to lower
sales of corded telephones and telephone answering machines which was
partially offset by higher sales of cordless and cellular phones. In
1994 revenues rose again primarily because of strong consumer sales of
cellular and cordless phones. In 1995 we introduced three pagers, the
first in a line that will include alphanumeric models in early 1996
and two-way pagers designed for eventual use with PCS. In January
1996 we announced our intention to close the 338 AT&T Phone Center
Stores most of which will be closed by May 1996.
AT&T Submarine Systems, Inc. (Submarine Systems) supplies and
constructs submarine cable systems and is a part of the communications
services units. Revenues from these systems fall within the
communications products and systems category. This unit had revenues
of almost $900 million in 1995 which reflected growth of more than 14%
over 1994. Revenues in 1994 increased almost 12% compared with 1993.
Revenues from sales of microelectronics components (including
integrated circuits, digital signal processors and power systems) and
other products grew 4.6% in 1995 and 10.6% in 1994. The growth
occurred despite the sale of the NCR microelectronics unit in early
1995, which had 1994 revenues of $383 million. Most of the revenue
increase in microelectronic components reflected increased sales of
integrated circuits, both inside and outside of the United States.
NCR is responsible for the majority of our sales of computer
products and systems. Revenues from these sales declined 3.7% in 1995
after rising 21.3% in 1994. The decline in revenues was primarily due
to lower sales of personal computers and large systems. Price
competition for personal computers was severe. Most personal computers
from different manufacturers use the same or comparable
microprocessors and software, leading customers to focus increasingly
on price. This is one of the reasons that NCR is discontinuing the
manufacture of personal computers. In 1994 we changed the end of the
fiscal year from November to December for NCR operations outside of
the United States. This was done to report essentially all of our
operations on a calendar year. This change added $223 million in
revenues ($113 million of product sales) and a marginal loss in 1994.
Cost of products and systems included $1,676 million in provisions
for business restructuring and other charges in 1995 and $13 million
in 1993. Apart from these provisions, the rise in cost of products
and systems is mainly associated with the higher sales volumes.
Excluding the charges, the gross margin percentage on products was
35.9% in 1995, compared with 37.3% in 1994 and 38.9% in 1993. The
rising proportion of lower-margin products in the sales mix led to the
margin decline in both years.
Rentals and Other Services
Revenues from rentals and other services for computer products and
systems come primarily from NCR. The services are mainly professional
________
#Registered Trademark
12
services - such as designing solutions and systems for customers - and
maintenance contracts.
Rentals and Other Services
Dollars in millions 1995 1994 1993
Revenues
Computer products and systems $2,841 $2,818 $2,641
Communications products and
systems services 1,755 1,680 1,457
Communications products and
systems rentals 795 955 1,174
Other* 798 763 871
Rentals and other services $6,189 $6,216 $6,143
Gross margin percentage 33.8% 47.1% 46.0%
*Other revenues are mainly from telemarketing services, information
technology services, facility rentals and licenses and royalties.
Revenues from maintenance contracts for communications products grew
as a result of increases in related sales. Rental revenues - from
renting telephone sets or answering machines to consumers and PBX
equipment to businesses - continued to decline and are expected to
continue to decline in future years.
"Other" revenues are mainly from the activities of units that will
remain with AT&T after our reorganization. An example is
telemarketing services provided by AT&T American Transtech.
Provisions for business restructuring and other charges added $717
million to cost of rentals and other services in 1995 and $90 million
in 1993. Excluding these changes, the gross margin percentage was
45.4% in 1995, compared with 47.1% in 1994 and 47.4% in 1993. This
decline was due mainly to the shifting mix of revenues, particularly
the declining proportion of high-margin rentals.
Financial Services and Leasing
These revenues come mainly from AT&T Universal Card Services
(Universal Card) and AT&T Capital. As previously announced, AT&T
intends to pursue the sale of AT&T Capital. Both revenues and
earnings for these two companies continued to grow over the past two
years because of their continued earning asset growth.
Financial Services and Leasing
Dollars in millions 1995 1994 1993
Revenues
AT&T Capital $1,577 $1,384 $1,360
Universal Card 2,250 1,782 1,228
Eliminations, adjustments
and other* (96) (49) (84)
Financial services and leasing $3,731 $3,117 $2,504
Gross margin percentage 29.1% 31.0% 31.7%
Universal Card Information:
Total book and managed finance
receivables $14,118 $12,380 $9,154
Accounts in millions 17.6 15.1 11.7
*Other revenues are mainly from lease finance assets that AT&T
retained when AT&T Capital was reorganized in 1993 as well as
elimination of lease revenues from AT&T affiliates.
13
The gross margin percentage for these services declined in 1995 due
to competitive pricing pressures and to higher credit losses and fraud
at Universal Card. In 1994 rising interest rates narrowed margins.
Both Universal Card and AT&T Capital set reserves for losses based on
experience, current delinquencies and the outlook for the economy.
The continuing growth of Universal Card is illustrated by its
receivables and number of customer accounts. Universal Card's "book"
and managed receivables, which include the $3.5 billion securitized in
1995, were $14.1 billion at December 31, 1995, up 14.0% from year-end
1994. Universal Card will retain the servicing and customer
relationships of the credit card accounts that were securitized.
Universal Card did not securitize receivables before 1995.
The intent to pursue the sale of AT&T Capital does not affect AT&T
Capital's role as a provider of AT&T's customer financing pursuant to
an operating agreement between AT&T and AT&T Capital. We expect that
at the completion of the restructuring, AT&T Capital will retain its
current operating agreements regarding its leasing arrangements with
AT&T, Lucent and NCR. The sale of AT&T Capital also will not affect
AT&T's unconditional guarantee of all of the AT&T Capital outstanding
debt at the end of March 1993. The guaranteed debt amounted to $417
million at the end of 1995. AT&T Capital's debt issued subsequent to
March 1993 relies on its own credit.
Operating Expenses
Selling, general and administrative expenses included $4,359 million
of restructuring and other charges in 1995, $246 million of
merger-related expenses in 1994 and $373 million of restructuring and
other charges in 1993. Excluding these charges, such expenses were
26.1% of total revenues in 1995, compared with 25.8% in 1994 and 25.5%
in 1993. Part of the 1995 increase was related to our response to
competitive conditions and to our increased global presence, resulting
in increased spending on sales and sales support efforts. We focused
advertising expenditures on retaining and winning back residential
customers of traditional long distance services and acquiring new
cellular subscribers.
In 1994 expenses of $246 million related to the merger of AT&T and
McCaw reduced net income by $187 million, or $0.12 per share. We
accounted for the merger with McCaw as a pooling of interests.
Therefore, we restated AT&T's financial statements to include McCaw's
results in all periods before the merger.
Research and development expenditures are mainly for work on
wireless systems technology, advanced communications services devices,
and projects aimed at international growth. These expenses included
$417 million of restructuring and other charges in 1995 and $22
million of such charges in 1993. Excluding those charges, research
and development expenses were 4.1% of total revenues in 1995 and 4.1%
in 1994 compared with 4.5% in 1993.
As required by changes in accounting standards, we adopted new
methods of accounting for retiree benefits, postemployment benefits
and income taxes in 1993. We recorded cumulative effects of
accounting changes to reflect our financial statements at the position
they would have been in if we had always used the new methods. As a
14
result, we took a $9.6 billion after-tax charge which caused a
reported net loss in 1993. The accounting changes did not affect cash
flows.
Similar to other manufacturers, we use, dispose of and remove
substances regulated under environmental protection laws. We have
been named a potentially responsible party (PRP) at a number of
Superfund sites. At most of these sites, our share of the costs is
limited and other PRPs are expected to contribute to the cleanup
costs. We regularly review potential cleanup costs and costs of
compliance with environmental laws and regulations. We provide
reserves for these potential costs and routinely review their
adequacy. In addition, we forecast our expenses and capital
expenditures for existing and planned compliance programs as part of
our regular corporate planning process. We believe that cleanup costs
and costs related to environmental proceedings and ongoing compliance
with present laws will not have a material effect on our future
expenditures, annual consolidated financial statements or competitive
position beyond that provided for at year-end.
In October 1995 the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." This standard establishes
a fair value method for accounting for stock-based compensation plans
either through recognition or disclosure. Upon adoption, which is
required in 1996, we intend to disclose rather than record these
computations. Adopting this standard will not affect our reported
earnings, financial condition or cash flows.
In March 1995 the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
of." Although the standard does not require adoption until fiscal
year 1996, we implemented it effective October 1, 1995. Under this
standard, we consider whether we can recover our costs for impaired
assets whenever events or changes in circumstances call that recovery
into question. The adoption of this standard did not materially
affect our reported earnings, financial condition or cash
flows because this was essentially the same method we used in the past
to measure and record asset impairments. Our 1995 restructuring and
other charges included recognition of asset impairments.
Other Income Statement Items
The majority of other income-net is from transactions, such as sales
of assets, that are individually immaterial. In 1995 it reflects
gains from selling the NCR microelectronics unit and several other
properties. We also sold properties and recognized gains in 1994 but
these were partially offset by losses on the shutdown of a subsidiary,
EO Inc., and the uninsured portion of a lost satellite. In 1993 we
had a $217 million gain from exchanging our remaining 77% interest in
UNIX System Laboratories, Inc. for stock in Novell, Inc. We
subsequently recognized declines in the value of the Novell stock.
Also included in other income are earnings and losses from
investments, increases in value of corporate-owned life insurance
policies on officers, and minority owners' interests in the earnings
15
or losses of subsidiaries. Before we redeemed the preferred stock of
a subsidiary in mid-1994, we recorded the dividends on those shares as
a charge against other income-net.
Interest expense increased slightly in 1995 compared with 1994
despite higher levels of average debt. This was due to lower average
rates on long-term debt in 1995. The decline in interest expense in
1994 was mainly due to refinancing long-term debt at more favorable
rates.
The effective income tax rate is the provision for income taxes as a
percentage of income before taxes and cumulative effects of accounting
changes. The effective tax rate of 85.1% for 1995 was impacted by the
restructuring and other charges recognized. Excluding business
restructuring and other charges, such as merger-related expenses from
all three years, our effective tax rate was 37.5% in 1995, compared
with 37.9% and 38.3% in 1994 and 1993, respectively. The decline in
1994 compared with 1993 was mainly due to credits for foreign tax
payments and the deferred tax effects of redeeming preferred stock.
The effective tax rate in 1995 remained at essentially the same level
as 1994 primarily due to lower state tax rates.
Cash Flows
Operating cash flow increased in both 1995 and 1994, mainly because of
higher income before restructuring and other charges. About $160
million of the 1995 pretax charges for business restructuring and
other related items required cash payments during the year. Another
$4.4 billion of the pretax charges will also require future cash
payments primarily in 1996 and 1997.
Most of our capital expenditures support telecommunications network
services, providing for growth in calling volumes, the introduction of
new technology and enhanced reliability.
Another large part of our investing activities is purchasing
finance assets. Our investments in finance assets, which include
credit card receivables, leases and equipment for rentals, fuel the
growth in revenues and earnings from AT&T Capital and Universal Card.
The $1.68 billion purchase of PCS licenses in 1995 is intended to
permit us to offer broadband PCS in 21 major trading areas.
Additionally, in 1995 we completed the $3.3 billion acquisition of the
minority owners' stake in LIN, a subsidiary of AT&T Wireless Services.
We will continue to make substantial investments in our
communications services business. Notable plans include the buildout
of PCS sites, preparing to provide local services in the U.S. and
funding a variety of projects and joint ventures to offer
telecommunications services in other countries.
We intend to conclude an agreement for 49% of a joint venture with
Grupo Alfa to offer services in Mexico when that country opens to
competition in 1997. We will supply our share of the investment up to
$1 billion over the next four to six years. We also have a 40% stake
in UniWorld, a joint venture with Unisource, that began operations in
January 1996, providing services to multinational business customers
in Europe. The venture was formed initially with about $200 million
in assets, but may expand, partly because of possible entry into other
markets.
Investing activities at Lucent focus on manufacturing and research
16
and development. In 1995, we agreed to purchase part of the public
network assets of N.V. Philips' Communications Systems division for
approximately $260 million. This acquisition would give us products
and an employee base to improve our access to cellular equipment
markets in Europe, South America and Southeast Asia.
Competition in communications and computing is global and
increasingly involves multinational firms and partners from different
nations. We believe commitments of resources to expand globally are
necessary for future growth. Although we reported operating losses
for the past three years in our units outside of the U.S., we continue
to believe that these operations and markets provide excellent
opportunities for future revenues and earnings.
For all three years, operating cash flows covered capital
expenditures and dividend payments. Operating cash also helped fund
other investing activities such as our purchases of PCS licenses and
the remaining 48% of LIN in 1995. We expect operating cash will
continue covering capital expenditures and dividends in 1996.
The ratio of total debt to total capital (debt plus equity)
increased to 62.0% at December 31, 1995, compared with 58.3% at
December 31, 1994, mainly because of lower equity caused by the 1995
charges and the increase in debt associated with acquiring PCS
licenses and the remaining interest in LIN. Most of our debt supports
financial services and leasing operations. Excluding financial
services and leasing operations and the impact of the restructuring
and other charges taken in 1995, our debt ratio would have been 44.3%
at December 31, 1995, compared with 34.1% at December 31, 1994.
AT&T has raised all necessary external financing through issuances
of commercial paper and long-term debt, as well as asset-backed
securities and equity. Additionally, we have unused available lines
of credit totaling approximately $12.4 billion at December 31, 1995.
We expect to be able to arrange any future needed financing using
these same sources, with the timing of issue, principal amount
and form depending on our needs and the prevailing market and economic
conditions. Under a Master Trust, $3.5 billion of notes backed by
Universal Card receivables were issued in 1995.
In 1995 our debt issuances were primarily to support our financial
services and leasing businesses. Much of the financing activity in
1993 and 1994 was refinancing, generally to get lower rates, but
sometimes to change maturities. In each of the past three years, we
issued new shares of common stock in our shareowner and employee
purchase plans. The dilution in earnings per share from new issuances
for these plans was not material.
Our asset and liability management strategy for our financial
services business is to match the average maturities of our borrowings
with the average cash flows of our portfolio assets and to match
floating-rate assets with floating-rate debt and fixed-rate assets
with fixed-rate debt. Cash flow projections are based on assumptions
about customer prepayments, refinancings and charge-offs that are
derived from our past experience as well as current customer
preferences, competitive market conditions, portfolio growth rates and
our portfolio mix. We issue commercial paper and long-term notes and
use interest rate swaps to achieve a matched portfolio position in our
finance assets.
17
Foreign currency contracts and options are used to limit risks due
to changing currency exchange rates. We do not speculate on interest
rates or foreign currency rates. Instead, we seek to reduce the
possible effects of fluctuations in these rates. This leads to more
stable earnings in periods when these rates are changing.
The notional amounts of derivative contracts do not represent
direct credit exposure or future cash requirements. Credit exposure
is determined by the market value of derivative contracts that are in
a gain position as well as the ability of the counterparties to
perform its payment obligation under the agreements. We control
credit risk of our derivative contracts through credit approvals,
exposure limits and other monitoring procedures. There were no past
due amounts related to our derivative contracts at December 31, 1995,
nor have there been any charge-offs during the three years ended
December 31, 1995.
We sell equity interests in AT&T subsidiaries only when
opportunities or circumstances warrant. We have no current plans to
sell material interests in subsidiaries beyond those announced and
described previously.
Financial Condition, Including Liquidity
Our cash account includes funds to finance the day-to-day business and
funds for pending transactions.
We turned over our inventory 3.1 times in 1995, compared with 3.2
times in 1994. This slight decline reflects higher levels of shipped
but not invoiced inventory due to terms and conditions of large
network contracts. Accounts receivable turned over an average of 5.7
times in 1995, compared with 6.0 times in 1994. The decrease in 1995
relates to lower turnover levels in our computer business, where
revenues have been declining at a greater rate than the related
receivables, as well as the impacts of some billing takebacks from the
local telephone service carriers for our long distance service
business.
The fair value of our pension plan assets is greater than our
projected pension obligations. We record pension income when our
expected return on plan assets plus amortization of the transition
asset (created by our 1986 adoption of the current standard for
pension accounting) is greater than the interest cost on our projected
benefit obligation plus service cost for the year. Consequently, we
continued to have pension income that added to our prepaid pension
costs in 1995.
Higher payroll and benefit related liabilities and other
liabilities are associated with the restructuring and other charges
recorded in 1995.
Other aspects of our financial condition that relate closely to our
investing and financing activity - such as finance receivables,
plant, licensing costs and debt - have been discussed in the section
on cash flows.
Strategic Restructuring
As announced in September 1995 and discussed elsewhere in this report,
AT&T intends to implement a strategic restructuring to separate AT&T
into three independent, publicly held, global companies. Our
18
plans are subject to several conditions, including receipt of a
favorable tax ruling, other required approvals, and the absence of
events or developments that would have a material adverse impact on
AT&T or its shareowners.
We plan an initial public offering of approximately a 15% interest
in Lucent in the first half of 1996. By the end of 1996, AT&T
intends, subject to certain conditions, to distribute its remaining
interest in Lucent and its interest in NCR to AT&T's shareowners.
The following financial information for Lucent and NCR reflects
those entities as if they had been operating as stand-alone companies
in the periods presented. For example, sales to other entities of
AT&T are included in revenues. Therefore, the sum of the entities'
amounts do not equal consolidated AT&T's results of operations or
financial condition.
The "As Adjusted" column for 1995, excludes the restructuring and
other charges recorded in 1995 as discussed previously.
********************************************************************
A pie chart appears containing the following information:
1995 REVENUES FOR THE FOUR COMPANIES
Shown in percentages of the $82.8 billion total before eliminations
Revenues and profits from transactions between companies are removed
(eliminated) from the income statement while they are a part of AT&T.
Once the companies are separate, these revenues and profits will
remain in their income statements.
62% AT&T Corp.
6.2% Growth* 1993-1995
26% Lucent
9.9% Growth* 1993-1995
10% NCR
6.0% Growth* 1993-1995
2% AT&T Capital
7.7% Growth* 1993-1995
*Compounded Annual Growth Rate
********************************************************************
19
Lucent Technologies Inc.
Lucent includes our businesses that develop, manufacture and service
systems and software for telecommunications applications within the
global telecommunications networking industry. These integrated
systems enable network operators and business enterprises to connect,
route, manage and store information between and within locations.
They range in size from large global public telephone networks to
small-business communications systems and support functions ranging
from simple voice-only applications to complex multifunctional service
offerings. Additionally, substantially all of Bell Laboratories is a
part of this company.
The following table provides summary financial information for
Lucent. It reflects the results of operations of the businesses
transferred to Lucent from AT&T. As a result, the financial
information has been derived from the financial statements of AT&T
using the historical results of operations and historical basis of
assets and liabilities of such businesses. Additionally, it includes
certain assets, liabilities and expenses that were not historically
recorded at the level of, but are primarily associated with, this
business. We believe the assumptions underlying the financial
information to be reasonable. However, the financial information may
not necessarily reflect the results of operations or financial
position of Lucent in the future, or what the results of operations or
financial position would have been had Lucent been a separate,
stand-alone entity during the periods presented.
20
Lucent Technologies Inc. 1995
Dollars in millions 1995 As Adjusted* 1994 1993
External revenues $19,294 $19,294 $17,628 $15,767
Internal revenues 2,119 2,119 2,137 1,967
Total revenues $21,413 $21,413 $19,765 $17,734
Gross margin $ 8,468 $ 9,360 $ 8,428 $ 7,646
Operating expenses 9,468 7,559 7,457 6,977
Operating income $(1,000) $ 1,801 $ 971 $ 669
Income before
income taxes $(1,116) $ 1,685 $ 854 $ 666
Total assets $19,722 - $17,340 $17,109
*As adjusted excludes the restructuring and other charges recorded in
1995.
The "internal revenues" in this table represent sales to other
units of AT&T and its affiliates. They do not include any revenues
from sales between operating units of Lucent, which will continue to
be eliminated in consolidation. Most internal revenues are for
network equipment sold to AT&T for the construction and maintenance of
the AT&T Worldwide Intelligent Network, which will remain at AT&T.
As part of AT&T's strategic restructuring, Lucent underwent a
comprehensive review of its operations. Approximately 23,000 of the
total positions to be eliminated come from Lucent. Lucent intends to
focus its investments on its core technologies, primarily through
expanded and targeted research and development efforts. Consequently,
Lucent will exit tangential product lines and markets, including AT&T
Paradyne which manufactures certain data communications equipment and
AT&T Microelectronics Interconnect products business which
manufactures backplanes and printed circuit boards. Lucent's
reorganization efforts also include plans to close all of its 338
Phone Center Stores, most of which will be closed by May 1996. As a
result, Lucent recorded restructuring and other charges in 1995 of
$2,801 million ($1,847 million after taxes). The pretax charges
included $1,509 million for employee separations and other related
items, $627 million for asset write-downs, $202 million for closing,
selling and consolidating facilities and $463 million for other items.
NCR Corporation
We plan to make NCR a stand-alone business focused on transaction-
intensive computing. The new strategy centers around more profitable
products such as massively parallel computer processors, automated
teller machines and retail scanning equipment. This direction also
enhances the company's primary strategy which is to help businesses
use new technology to collect and use information to enhance customer
service. Although NCR is ceasing the manufacture of personal
computers, it will continue to offer personal computers manufactured
by others as part of its total solutions approach.
The following table provides summary financial information for NCR.
It reflects the results of operations of the businesses to be
transferred to NCR from AT&T. As a result, the financial information
has been derived from the financial statements of AT&T using the
historical results of operations and historical basis of assets and
liabilities of such businesses. Additionally, it includes certain
21
assets, liabilities and expenses that were not historically recorded
at the level of, but are primarily associated with, this business. We
believe the assumptions underlying the financial information to be
reasonable. However, the financial information may not necessarily
reflect the results of operations or financial position of NCR in the
future, or what the results of operations or financial position would
have been had NCR been a separate, stand-alone entity during the
periods presented.
NCR Corporation 1995
Dollars in millions 1995 As Adjusted* 1994 1993
External revenues $ 7,531 $ 7,531 $ 7,939 $ 6,879
Internal revenues 631 631 522 386
Total revenues $ 8,162 $ 8,162 $ 8,461 $ 7,265
Gross margin $ 973 $ 1,904 $ 2,671 $ 2,524
Operating expenses 3,344 2,624 2,773 2,805
Operating income $(2,371) $ (720) $ (102) $ (281)
Income (loss) before
income taxes $(2,354) $ (703) $ 3 $ (264)
Total assets $ 5,181 - $ 6,006 $ 5,207
*As adjusted excludes the restructuring and other charges recorded in
1995.
The "internal revenues" in this table primarily represent sales of
computer products to other units of AT&T and its affiliates.
NCR, as a result of continuing operating losses, has taken decisive
action in 1995 to create a smaller, more focused business,
concentrating on the three industries in which it has a leading
position - retailing, financial and communications.
This resulted in restructuring and other charges in the third
quarter of 1995, of approximately $1.6 billion before taxes ($1.2
billion after taxes). The pretax charges reflect $698 million for
employee separations and other related costs, $564 million for asset
write-downs, $196 million for closing, selling and consolidating
facilities and $191 million for other items.
Ongoing AT&T
The ongoing business of AT&T will include communications services,
wireless services, AT&T Solutions consulting services and our
Universal Card business. Building on the skills from Bell
Labortories, we will also create an AT&T Laboratories unit that will
continue research and development for the ongoing AT&T.
The following table provides summary financial information for the
operations of AT&T that will remain with AT&T.
22
AT&T without Lucent, NCR and AT&T Capital
1995
Dollars in millions 1995 As Adjusted* 1994 1993
Total revenues $51,374 $51,374 $48,315 $45,556
Gross margin $21,305 $22,395 $20,052 $17,973
Operating expenses 15,927 13,877 12,421 11,259
Operating income $ 5,378 $ 8,518 $ 7,631 $ 6,714
Income before income
taxes $ 5,168 $ 8,308 $ 7,289 $ 6,398
Total assets $55,603 - $49,167 $42,724
*As adjusted excludes the restructuring and other charges recorded in
1995.
The main differences between the information above and the
consolidated AT&T results are the exclusion of Lucent, NCR and AT&T's
interest in AT&T Capital.
The businesses that are part of the ongoing AT&T recorded
restructuring and other charges of $3,140 million ($2,104 after
taxes)in 1995 related to AT&T's plans to separate into three
companies. The pretax charges cover consolidating and reorganizing
numerous corporate and business unit operations during the next two
years including force reductions of 17,000 positions as well as the
write-down in value of some unnecessary network facilities, of
nonstrategic wireless assets and some investments. The pretax charges
cover $956 million for employee separations and other related items,
$1,342 million for asset write-downs, $497 million for closing,
selling and consolidating facilities and $345 million for other items.
In connection with the plan to separate into three companies, AT&T,
Lucent and NCR have entered into various agreements. These agreements
generally provide for the separation and distribution of the operating
assets and liabilities, and pension plan assets and liabilities, as
well as tax sharing and allocation. Additionally, various interim
services agreements provide for certain data processing services,
telecommunications services and certain support services on specified
terms.
*********************************************************************
In accordance with SEC rules and regulations, as uncertainties
surrounding our plan to separate are cleared, we will provide more
financial information. If you are interested in directly receiving
this information as it is made public, it will be available by calling
AT&T Shareowner Services toll-free at 1 800 348-8288.
*********************************************************************
23
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and
objectivity of the financial statements and all other financial
information included in this report. Management is also
responsible for maintaining a system of internal controls as a
fundamental requirement for the operational and financial
integrity of results.
The financial statements which reflect the consolidated
accounts of AT&T and subsidiaries and other financial
information shown, were prepared in conformity with generally
accepted accounting principles. Estimates included in the
financial statements were based on judgments of qualified
personnel.
To maintain its system of internal controls, management
carefully selects key personnel and establishes the
organizational structure to provide an appropriate division of
responsibility. We believe it is essential to conduct business
affairs in accordance with the highest ethical standards as set
forth in the AT&T Code of Conduct. These guidelines and other
informational programs are designed and used to ensure that
policies, standards and managerial authorities are understood
throughout the organization. Our internal auditors monitor
compliance with the system of internal controls by means of an
annual plan of internal audits. On an ongoing basis, the system
of internal controls is reviewed, evaluated and revised as
necessary in light of the results of constant management
oversight, internal and independent audits, changes in AT&T's
business and other conditions.
Management believes that the system of internal controls,
taken as a whole, provides reasonable assurance that (1)
financial records are adequate and can be relied upon to permit
the preparation of financial statements in conformity with
generally accepted accounting principles, and (2) access to
assets occurs only in accordance with management's
authorizations.
The Audit Committee of the Board of Directors, which is
composed of directors who are not employees, meets periodically
with management, the internal auditors and the independent
auditors to review the manner in which these groups of
individuals are performing their responsibilities and to carry
out the Audit Committee's oversight role with respect to
auditing, internal controls and financial reporting matters.
Periodically, both the internal auditors and the independent
auditors meet privately with the Audit Committee. These auditors
also have access to the Audit Committee and its individual
members at any time.
24
The financial statements in this annual report have been
audited by Coopers & Lybrand L.L.P., Independent Auditors. Their
audits were conducted in accordance with generally accepted
auditing standards and include consideration of the internal
control structure and selective tests of transactions. Their
report follows.
Richard W. Miller Robert E. Allen
Executive Vice President, Chairman of the Board,
Chief Financial Officer Chief Executive Officer
REPORT OF INDEPENDENT AUDITORS
To the Shareowners of AT&T Corp.:
We have audited the consolidated balance sheets of AT&T Corp.
and subsidiaries (AT&T) at December 31, 1995 and 1994, and the
related consolidated statements of income, changes in shareowners'
equity and cash flows for the years ended December 31, 1995, 1994 and
1993. These financial statements are the responsibility of AT&T's
management. Our responsibility is to express an opinion on these
financial statements 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 AT&T at December 31, 1995 and 1994, and the
consolidated results of their operations, changes in their
shareowners' equity and their cash flows for the years ended December
31, 1995, 1994 and 1993, in conformity with generally accepted
accounting principles.
As discussed in Note 3 to the financial statements, in 1993
AT&T 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
25
CONSOLIDATED STATEMENTS OF INCOME AT&T CORP. AND SUBSIDIARIES
Years Ended December 31
Dollars in millions (Except per share amounts) 1995 1994 1993
SALES AND REVENUES
Telecommunications services $47,277 $44,600 $42,779
Products and systems 22,412 21,161 17,925
Rentals and other services 6,189 6,216 6,143
Financial services and leasing 3,731 3,117 2,504
TOTAL REVENUES 79,609 75,094 69,351
COSTS
Telecommunications services
Access and other interconnection costs 17,618 17,797 17,772
Other costs 9,123 7,873 7,937
Total telecommunications services 26,741 25,670 25,709
Products and systems 16,045 13,273 10,966
Rentals and other services 4,098 3,287 3,319
Financial services and leasing 2,646 2,152 1,711
TOTAL COSTS 49,530 44,382 41,705
GROSS MARGIN 30,079 30,712 27,646
OPERATING EXPENSES
Selling, general and administrative expenses 25,146 19,653 18,037
Research and development expenses 3,718 3,110 3,111
TOTAL OPERATING EXPENSES 28,864 22,763 21,148
OPERATING INCOME 1,215 7,949 6,498
Other income - net 458 293 546
Loss on sale of stock by subsidiary - - 9
Interest expense 738 724 1,032
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECTS OF
ACCOUNTING CHANGES 935 7,518 6,003
Provision for income taxes 796 2,808 2,301
Income before cumulative
effects of accounting changes 139 4,710 3,702
Cumulative effects on prior years
of changes in accounting for:
Postretirement benefits (net of income
tax benefit of $4,294) - - (7,023)
Postemployment benefits (net of income
tax benefit of $681) - - (1,128)
Income taxes - - (1,457)
Cumulative effects of accounting changes - - (9,608)
NET INCOME (LOSS) $ 139 $ 4,710 $(5,906)
Weighted average common
shares outstanding (millions) 1,592 1,564 1,547
PER COMMON SHARE:
Income before cumulative effects
of accounting changes $ 0.09 $ 3.01 $ 2.39
Cumulative effects of accounting changes - - (6.21)
NET INCOME (LOSS) $ 0.09 $ 3.01 $ (3.82)
The notes on pages 38 through 50 are an integral part of the consolidated
financial statements.
26
CONSOLIDATED BALANCE SHEETS AT&T CORP. AND SUBSIDIARIES
At December 31
Dollars in millions 1995 1994
ASSETS
Cash and temporary cash investments $ 908 $ 1,208
Receivables, less allowances of $1,583 and $1,251
Accounts receivable 15,493 13,671
Finance receivables 13,782 14,952
Inventories 4,074 3,633
Deferred income taxes 4,460 3,030
Other current assets 792 1,117
TOTAL CURRENT ASSETS 39,509 37,611
Property, plant and equipment - net 22,264 21,279
Licensing costs, net of accumulated
amortization of $743 and $613 8,056 4,251
Investments 3,885 2,708
Long-term finance receivables 5,389 4,513
Net investment in operating leases of
finance subsidiaries 888 756
Prepaid pension costs 4,664 4,151
Other assets 4,229 3,993
TOTAL ASSETS $88,884 $79,262
LIABILITIES
Accounts payable $ 7,071 $ 6,011
Payroll and benefit-related liabilities 6,256 4,105
Postretirement and postemployment
benefit liabilities 405 1,029
Debt maturing within one year 16,589 13,666
Dividends payable 527 518
Other current liabilities 8,524 5,601
TOTAL CURRENT LIABILITIES 39,372 30,930
Long-term debt including capital leases 11,635 11,358
Long-term postretirement and postemployment
benefit liabilities 8,908 8,754
Other long-term liabilities 5,170 4,285
Deferred income taxes 5,199 3,913
Unamortized investment tax credits 199 232
Other deferred credits 400 776
TOTAL LIABILITIES 70,883 60,248
MINORITY INTERESTS 727 1,093
COMMON SHAREOWNERS' EQUITY
Common shares par value $1 per share 1,596 1,569
Authorized shares: 2,000,000,000
Outstanding shares: 1,596,005,351 at December 31, 1995;
1,569,006,000 at December 31, 1994
Additional paid-in capital 16,614 15,825
Guaranteed ESOP obligation (254) (305)
Foreign currency translation adjustments 5 145
Retained earnings (deficit) (687) 687
TOTAL COMMON SHAREOWNERS' EQUITY 17,274 17,921
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $88,884 $79,262
The notes on pages 38 through 50 are an integral part of the consolidated
financial statements.
27
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
AT&T CORP. AND SUBSIDIARIES
Years Ended December 31
Dollars in millions 1995 1994 1993
Common shares
Balance at beginning of year $ 1,569 $ 1,547 $ 1,526
Shares issued:
Under employee plans 13 11 6
Under shareowner plans 13 8 8
Other 1 3 7
Balance at end of year 1,596 1,569 1,547
Additional paid-in capital
Balance at beginning of year 15,825 14,324 13,485
Shares issued:
Under employee plans 602 538 183
Under shareowner plans 687 424 450
Other 31 133 208
Shares repurchased (4) (2) (4)
Preferred stock redemption - 408 -
Dividends declared (527) - -
Other changes - - 2
Balance at end of year 16,614 15,825 14,324
Guaranteed ESOP obligation
Balance at beginning of year (305) (355) (407)
Amortization 51 50 52
Balance at end of year (254) (305) (355)
Foreign currency translation adjustments
Balance at beginning of year 145 (32) 65
Translation adjustments (140) 177 (97)
Balance at end of year 5 145 (32)
Retained earnings (deficit)
Balance at beginning of year 687 (2,110) 5,644
Net income 139 4,710 (5,906)
Dividends paid (1,570) (1,940) (1,780)
Other changes 57 27 (68)
Balance at end of year (687) 687 (2,110)
Total Shareowners' Equity $17,274 $17,921 $13,374
In March 1990 we issued 13.4 million new shares of common stock in
connection with the establishment of an ESOP feature for the nonmanagement
savings plan. The shares are being allocated to plan participants over ten
years commencing in July 1990 as contributions are made to the plan.
We have 100 million authorized shares of preferred stock at $1 par value. No
preferred stock is currently issued or outstanding.
The notes on pages 38 through 50 are an integral part of the consolidated
financial statements.
28
CONSOLIDATED STATEMENTS OF CASH FLOWS AT&T CORP. AND SUBSIDIARIES
Years Ended December 31
Dollars in millions 1995 1994 1993
OPERATING ACTIVITIES
Net income (loss) $ 139 $ 4,710 $(5,906)
Adjustments to reconcile net income(loss) to
net cash provided by operating activities:
Restructuring and other charges 7,685 - 498
Cumulative effects of accounting changes - - 9,608
Depreciation and amortization 4,845 4,633 4,702
Provision for uncollectibles 2,378 1,929 1,665
Increase in accounts receivable (3,386) (2,673) (2,211)
Increase in inventories (1,206) (394) (594)
Increase (decrease) in accounts payable 1,043 1,125 (295)
Net decrease (increase) in other operating
assets and liabilities 366 (793) (1,579)
Other adjustments for noncash items - net (2,174) 509 1,505
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,690 9,046 7,393
INVESTING ACTIVITIES
Capital expenditures, net of proceeds from
sale or disposal of property, plant and
equipment of $414, $354 and $198 (5,997) (4,572) (4,142)
Increase in finance assets,
net of lease-related repayments of
$3,960, $3,760 and $3,703 (3,785) (5,315) (4,222)
Cash proceeds from securitizations of
finance receivables 3,747 303 586
Additions to licensing costs (1,978) (293) (89)
Net increase in investments (228) (165) (453)
(Acquisitions)dispositions,net of cash acquired (3,355) 144 (228)
Other investing activities - net (357) 53 (86)
NET CASH USED IN INVESTING ACTIVITIES (11,953) (9,845) (8,634)
FINANCING ACTIVITIES
Proceeds from long-term debt issuances 5,504 6,134 4,386
Retirements of long-term debt (4,519) (5,637) (5,879)
Issuance of common shares 1,214 973 1,053
Dividends paid (2,088) (1,870) (1,774)
Increase in short-term borrowings - net 1,760 1,746 2,586
Other financing activities - net 87 (32) 25
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,958 1,314 397
Effect of exchange rate changes on cash 5 22 3
Net increase (decrease) in cash and
temporary cash investments (300) 537 (841)
Cash and temporary cash investments at
beginning of year 1,208 671 1,512
Cash and temporary cash investments at
end of year $ 908 $ 1,208 $ 671
The notes on pages 38 through 50 are an integral part of the consolidated
financial statements.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT&T CORP. AND SUBSIDIARIES (AT&T)
(Dollars in Millions, except per share amounts)
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include all majority-owned
subsidiaries. Investments in which we exercise significant influence
but which we do not control (generally a 20% - 50% ownership interest)
are accounted for under the equity method of accounting. Generally,
investments in which we have a less than 20% ownership interest are
accounted for under the cost method of accounting. The fiscal year of
most AT&T operations ends December 31.
CURRENCY TRANSLATION
For operations outside of the U.S. that prepare financial statements
in currencies other than the U.S. dollar, we translate income
statement amounts at average exchange rates for the year, and we
translate assets and liabilities at year-end exchange rates. We
present these translation adjustments as a separate component of
shareowners' equity.
REVENUE RECOGNITION
REVENUE FROM BASIS OF RECOGNITION
Telecommunications Services Minutes of traffic processed
and contracted fees
Products and Systems Percentage-of-completion method
for most long-term contracts;
upon performance of
contractual obligations for
others
Rentals and Other Services Proportionately over contract
periods or as services are
performed
Financial Services and Leasing Over the life of the finance
receivables using the
interest method, or straight-
line over life of operating
leases
SOFTWARE PRODUCTION COSTS
Until technological feasibility is established, we expense the costs
of developing computer software that we plan to sell, lease or
otherwise market, as incurred. After that time, we capitalize the
remaining software production costs and amortize them to costs over
the estimated period of sales and revenues.
ADVERTISING COSTS
We expense costs of advertising as incurred. Advertising expense was
$2,265, $2,219 and $1,665 in 1995, 1994 and 1993, respectively.
INVESTMENT TAX CREDITS
We amortize investment tax credits as a reduction to the provision for
income taxes over the useful lives of the property that produced the
credits.
30
EARNINGS PER SHARE
We use the weighted average number of shares of common stock and
common stock equivalents outstanding during each period to compute
earnings per common share. Common stock equivalents are stock
options that we assume to be exercised for the purposes of this
computation.
TEMPORARY CASH INVESTMENTS
We consider all highly liquid investments with original maturities of
generally three months or less to be temporary cash investments.
INVENTORIES
We state inventories at the lower of cost or market (i.e., net
realizable value or replacement cost). Cost includes material, labor
and manufacturing overhead. We determine cost principally on a
first-in, first-out (FIFO) basis.
PROPERTY, PLANT AND EQUIPMENT
We state property, plant and equipment at cost and determine
depreciation using either the group or unit method. The unit method
is used primarily for laboratory equipment, large computer systems,
and certain international earth stations and submarine cables. When
we sell assets that were depreciated using the unit method, we include
the gains or losses in operating results. The group method is used
for most other depreciable assets. When we sell or retire plant that
was depreciated using the group method, we deduct the original cost
from the plant account and from accumulated depreciation.
We use accelerated depreciation methods for factory facilities and
digital equipment used in the telecommunications network, except
switching equipment placed in service before 1989 and certain high
technology computer processing equipment. All other plant and
equipment is depreciated on a straight-line basis.
LICENSING COSTS
Licensing costs are costs incurred to develop or acquire cellular,
personal communications services (PCS) and messaging licenses.
Generally, amortization begins with the commencement of service to
customers and is computed using the straight-line method over a period
of 40 years.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of
net assets acquired in business combinations treated as purchases. We
amortize goodwill on a straight-line basis over the periods benefited,
principally in the range of 10 to 40 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 cash flows is less than the carrying amount of the
asset, a loss is recognized.
DERIVATIVE FINANCIAL INSTRUMENTS
We use various financial instruments, including derivative financial
instruments, for purposes other than trading. We do not use
derivative financial instruments for speculative purposes.
Derivatives, used as part of our risk management strategy, must be
designated at inception as a hedge and measured for effectiveness both
at inception and on an ongoing basis. Gains and losses that do not
qualify as hedges are recognized in other income or expense.
31
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 revenues and expenses during the
period reported. Actual results could differ from those estimates.
Estimates are used when accounting for long-term contracts,
allowance for doubtful accounts, inventory obsolescence, product
warranty reserves, depreciation and amortization, employee benefit
plans, taxes, restructuring reserves and contingencies.
RECLASSIFICATIONS
We reclassified certain amounts for previous years to conform with
the 1995 presentation.
2. RESTRUCTURING OF AT&T
On September 20, 1995, we announced a plan to separate AT&T into three
independent, publicly held, global companies that will each focus on
serving certain core businesses: communications services (AT&T),
communications systems and technology (Lucent Technologies Inc.) and
transaction-intensive computing (NCR Corporation). We are planning an
initial public offering of approximately 15% of Lucent Technologies
Inc. (Lucent) common stock in the first half of 1996 with our
remaining interest in Lucent and NCR Corporation (NCR) being spun off
to AT&T shareowners by the end of 1996. The plan also includes our
intention to pursue the sale of our remaining interest in AT&T Capital
Corporation (AT&T Capital) in 1996. Our plan is subject to several
conditions, including receipt of a favorable tax ruling and other
approvals, and the absence of events or developments that would have a
material adverse impact on AT&T or its shareowners. In connection
with the plan AT&T, Lucent and NCR have entered into various
agreements. These agreements generally provide for the separation and
distribution of the operating assets and liabilities and pension plan
assets and liabilities, as well as tax sharing and allocation.
Additionally, various interim service agreements provide for certain
data processing services, telecommunication services and certain
support services on specified terms.
3.CHANGES IN ACCOUNTING PRINCIPLES
IMPAIRMENT OF LONG-LIVED ASSETS
Effective October 1, 1995, we adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for 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 this
standard did not materially affect our reported earnings, financial
condition or cash flows because this was essentially the same method
we used in the past to measure and record asset impairments. Our 1995
restructuring and other charges included recognition of asset
impairments.
POSTRETIREMENT BENEFITS
We adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," effective January 1, 1993. This
standard requires us to accrue estimated future retiree benefits
32
during the years employees are working and accumulating these
benefits. Previously, we expensed health care benefits as claims were
incurred and life insurance benefits as plans were funded.
In 1993, we recorded a one-time pretax charge for the unfunded
portions of these liabilities of $11,317 ($7,023, or $4.54 per share,
after taxes). Apart from these cumulative effects on prior years of
the accounting change, this change in accounting had no material
effect on net income and it does not affect cash flows.
POSTEMPLOYMENT BENEFITS
We also adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," effective January 1, 1993. Analogous to
SFAS No. 106, this standard requires us 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, we recognized costs for separations when they
were approved and disability benefits when they were paid.
We recorded a one-time pretax charge for the unprovided portion of
these liabilities of $1,809 ($1,128, or $0.73 per share, after taxes).
This change does not affect cash flows.
INCOME TAXES
We also adopted SFAS No. 109, "Accounting for Income Taxes,"
effective January 1, 1993. Among other provisions, this standard
requires us to compute deferred tax amounts using the enacted
corporate income tax rates for the years in which the taxes will be
paid or refunds received.
The adoption of this standard reduced net income by $1,457 ($0.94
per share). Apart from these cumulative effects on prior years of the
accounting change, this new accounting method had no material effect
on net income in 1993. Unless Congress changes tax rates, we do not
expect this change to affect net income materially in future periods.
This change does not affect cash flows.
STOCK-BASED COMPENSATION
In 1996 we will adopt SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard establishes a fair value method for
accounting for stock-based compensation plans either through
recognition or disclosure. We intend to adopt this standard by
disclosing the pro forma net income and earnings per share amounts
assuming the fair value method was adopted on January 1, 1995. The
adoption of this standard will not impact our results of operations,
financial position or cash flows.
4.MERGER WITH MCCAW CELLULAR COMMUNICATIONS, INC. (McCaw)
On September 19, 1994, AT&T merged with McCaw, now AT&T Wireless
Services. As a result, 197.5 million shares of McCaw common stock
were converted into shares of AT&T common stock. In addition, AT&T
assumed 11.3 million McCaw stock options which were converted into
AT&T stock options at the same exchange ratio. The merger was
accounted for as a pooling of interests, and the consolidated
financial statements were restated for all periods prior to the merger
to include the accounts and operations of McCaw. Merger related
expenses of $246 incurred in 1994 ($187 net of taxes) were reported as
selling, general and administrative expenses.
33
5.PURCHASE OF REMAINING 48% OF LIN BROADCASTING
On October 3, 1995, we acquired the remaining 48% of LIN Broadcasting
Corporation (LIN), now a wholly-owned subsidiary of AT&T Wireless
Services, for a total purchase price of approximately $3.3 billion.
The acquisition was accounted for using the purchase method.
Accordingly, we allocated the purchase price to assets acquired and
liabilities assumed based on their fair values. The allocations were
$2.0 billion to licensing costs, $.9 billion to investments, $1.1
billion to goodwill and $.7 billion to deferred taxes. The goodwill
and the licensing costs are being amortized on a straight-line basis
over 35 years. The initial 52% interest of LIN was acquired by McCaw
on March 1, 1990. Accordingly, the results of operations, assets and
liabilities of LIN have been included in the consolidated financial
statements since March 1, 1990.
6.PREFERRED STOCK REDEMPTION
On June 24, 1994, LCH Communications (LCH), a subsidiary of LIN
Broadcasting Corporation, redeemed all $1.3 billion of its
outstanding redeemable preferred stock held by Comcast Cellular
Communications, Inc. in exchange for all of the capital stock of one
of LCH's subsidiaries.
As a result of the redemption, we eliminated the net assets and
recorded a gain on the sale of assets of $12 and a tax benefit of $74.
The $784 difference between the book value of the preferred stock and
the fair value of the assets exchanged was recorded as $408 of
additional paid-in capital and $376 of minority interests.
7.SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
1995 1994 1993
INCLUDED IN COSTS
Amortization of software production costs $ 365 $ 370 $ 359
Amortization of licensing costs 133 115 108
COST OF FINANCIAL SERVICES AND LEASING
Interest expense $1,049 $ 725 $ 506
Depreciation, provision for losses
and other 1,597 1,427 1,205
Total $2,646 $2,152 $1,711
INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Amortization of goodwill $ 128 $ 97 $ 89
OTHER INCOME - NET
Interest income $ 101 $ 72 $ 141
Royalties and dividends 74 30 59
Minority interests in earnings
of subsidiaries (73) (64) (9)
Miscellaneous - net 356 255 355
Total other income-net $ 458 $ 293 $ 546
In June 1993 we sold our remaining 77% interest in UNIX System
Laboratories, Inc. to Novell, Inc. (Novell) in exchange for
approximately 3% of Novell's common stock. Our gain on the sale was
$217. Between 1995 and 1994 we subsequently recognized a cumulative
decline of $107 in the value of the stock of Novell.
34
1995 1994 1993
DEDUCTED FROM INTEREST EXPENSE
Capitalized interest $121 $47 $72
SUPPLEMENTARY BALANCE SHEET INFORMATION
AT DECEMBER 31 1995 1994
INVENTORIES
Completed goods $ 2,293 $ 2,022
Work in process and raw materials 1,781 1,611
Total inventories $ 4,074 $ 3,633
PROPERTY, PLANT AND EQUIPMENT
Land and improvements $ 772 $ 761
Buildings and improvements 9,562 9,240
Machinery, electronic and other equipment 38,729 34,797
Total property, plant and equipment 49,063 44,798
Accumulated depreciation (26,799) (23,519)
Property, plant and equipment - net $22,264 $21,279
INVESTMENTS
Accounted for by the equity method $ 3,329 $ 2,314
Stated at cost or fair value 556 394
Total investments $ 3,885 $ 2,708
OTHER ASSETS
Unamortized software production costs $ 489 $ 483
Unamortized goodwill 1,735 1,007
Deferred charges 378 746
Other 1,627 1,757
Total other assets $ 4,229 $ 3,993
SUPPLEMENTARY CASH FLOW INFORMATION
1995 1994 1993
Interest payments net of
amounts capitalized $ 1,691 $ 1,445 $ 1,728
Income tax payments 1,893 2,047 1,733
The following table displays the noncash items excluded from the
consolidated statements of cash flows:
Machinery and equipment acquired under
capital lease obligations $ 41 $ 13 $ 15
EXCHANGE OF STOCK
Net assets $ - $ 2 $ (43)
Investments - - 260
Licenses 32 134 96
Total $ 32 $ 136 $ 313
ACQUISITION/DISPOSITION ACTIVITIES
Net receivables $ (46) $ 24 $ (19)
Inventories 72 (10) (1)
Property, plant and equipment (106) 3 (132)
Licensing costs (1,960) (79) 5
Accounts payable 1 (8) 7
Short-term and long-term debt (450) 47 3
Other operating assets and liabilities-net (866) 167 (91)
Net noncash items consolidated (3,355) 144 (228)
Net cash (used for) received from
acquisitions/dispositions $(3,355) $ 144 $ (228)
35
8.BUSINESS RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1995, we recorded a pretax charge of $6,248
to cover restructuring costs of $5,336 and asset impairments and other
charges of $912. Our fourth quarter charges include plans to
restructure our consumer products business to implement major process
improvements in how it designs, manufactures and distributes those
products; consolidating and reorganizing numerous corporate and
business unit operations during the next two years; and selling the
AT&T Microelectronics Interconnect business and AT&T Paradyne.
Accordingly, the fourth quarter restructure charge of $5,336 included
the separation costs for nearly 40,000 employees, of which about
24,000 were management and 16,000 were occupational. As of December
31, 1995, approximately 7,400 management employees have accepted a
voluntary severance package and will leave in early 1996. We expect
70% of all separations to be completed by the end of 1996 with the
majority of the remaining separations being completed during 1997.
The force reductions include about 10,000 corporate-wide staff jobs in
functions such as information systems, human resources, financial
operations, legal and public relations. The remaining separations will
occur within the operating units of the ongoing AT&T and Lucent. The
restructuring charge also included costs associated with early
termination of building leases and asset write-downs as part of our
plan to sell certain businesses and to restructure our operations.
In the third quarter of 1995, we approved the restructuring plans
of NCR and recorded a pretax charge totaling $1,597 to cover
restructuring costs of $1,547 and other charges of $50. NCR's plans
include discontinuing the manufacture of personal computers,
consolidating facilities globally, reducing industry markets served,
as well as separating about 7,200 employees, including 3,200 in
foreign locations. We expect to complete all NCR's restructuring
plans by the end of 1996. As of December 31, 1995, about 4,900
employees have left NCR and the remainder will leave in 1996.
In 1993 we recorded a $498 pretax provision for business
restructuring. Of the total provision, $227 was related to costs at
NCR and $215 was for restructuring customer support functions for
telecommunications services. The remainder of the provision consisted
of $23 related to closing plants and $33 related to operations that
service the U.S. federal government. The total 1993 provision of $498
was recorded as $13 in costs of products and systems, $90 in costs of
other services, $373 in selling, general and administrative expenses
and $22 in research and development expenses.
The following table displays a rollforward of the liabilities for
business restructuring from December 31, 1993 to December 31, 1995:
36
Dec. 31, Dec.31,
1993 1994
1994
______________________________________
Type of Cost Balance Additions Other Payments Balance
Employee
separations $ 356 $ 5 $ (52) $(265) $ 44
Facility closings 788 21 4 (172) 641
Other 296 8 (67) (28) 209
Total $1,440 $34 $(115) $(465) $894
___________________________________________________________________________
Dec.31, Dec.31,
1994 1995 1995
________________________________
Type of Cost Balance Additions Other Payments Balance
Employee
separatons $ 44 $2,712 $(22) $(165) $2,569
Facility closings 641 895 (51) (277) 1,258
Other 209 837 (10) (86) 950
Total $894 $4,444 $(83) $(478) $4,777
___________________________________________________________________________
Other represents reversals of business restructuring reserves no
longer required.
The December 31, 1993 business restructuring balance included
reserves primarily for real estate, NCR and reengineering operator
services. As of December 31, 1995, $469 of the $1,440 December 31,
37
1993 balance remained. This balance is related to excess space at some
locations and is expected to be fully utilized over the remaining
terms of the leases.
We believe that the liabilities for business restructuring of
$4,777 at December 31, 1995 are adequate to complete our plans.
In 1995 in addition to recording restructuring liabilities of
$4,444, asset impairments of $1,734 (which were credited directly to
the related asset balances) and $705 of benefit plan losses were
included in the total restructure costs of $6,883. Benefit plan losses
relate to our pension and other employee benefit plans and primarily
represent losses in the current year for actuarial changes that
otherwise might have been amortized over future periods.
The fourth quarter charge also included $799 for writing down
certain impaired assets, including the write-down in the value of some
unnecessary network facilities, the write-down of nonstrategic
wireless assets and the reduction in value of some investments. There
were no assets to be disposed of or sold included in these
write-downs. The third and fourth quarter charges also included $163
of other items, none of which individually exceed 1% of the total
charge.
The pretax total of the third and fourth quarter charges of $7,845
for 1995 was recorded as $670 in costs of telecommunications services,
$1,676 in costs of products and systems, $717 in costs of rentals and
others services, $6 in costs of financial services and leasing, $4,359
in selling, general and administrative expenses and $417 in research
and development expenses. If viewed by type of cost, the combined
charges reflect $3,417 for employee separations and other related
items; $2,533 for asset write-downs; $895 for closing, selling and
consolidating facilities; and $1,000 for other items. The total
combined charges reduced net income by $5,353 or $3.36 per share. Of
the total combined charges, we have made cash payments of $160 as of
December 31, 1995 and approximately $4.4 billion will result in
payment of cash in the future. Approximately, $3.3 billion related to
noncash items.
9.INCOME TAXES
The following table shows the principal reasons for the difference
between the effective tax rate and the United States federal statutory
income tax rate:
1995 1994 1993
U.S. federal statutory income tax rate 35% 35% 35%
Federal income tax at statutory rate $327 $2,631 $2,101
Amortization of investment tax credits (36) (33) (92)
State and local income taxes, net of
federal income tax effect 120 296 287
Amortization of intangibles 94 20 24
Foreign rate differential 106 36 45
Taxes on repatriated and accumulated
foreign income, net of tax credits 194 (71) (20)
Research credits (58) (66) (47)
Effect of tax rate change on
deferred tax assets - - (23)
Other differences-net 49 (5) 26
Provision for income taxes $796 $2,808 $2,301
Effective income tax rate 85.1% 37.4% 38.3%
The 1995 effective tax rate is high primarily due to the foreign tax
effects associated with the restructuring and other charges.
38
The U.S. and foreign components of income before income taxes and
the provision for income taxes are presented in this table:
INCOME BEFORE INCOME TAXES 1995 1994 1993
United States $ 1,799 $6,841 $5,705
Foreign (864) 677 298
Total $ 935 $7,518 $6,003
PROVISION FOR INCOME TAXES
CURRENT
Federal $ 1,606 $1,618 $ 925
State and local 390 300 206
Foreign 212 225 169
$ 2,208 $2,143 $1,300
DEFERRED
Federal $(1,023) $ 488 $ 910
State and local (205) 155 212
Foreign (148) 60 (41)
$(1,376) $ 703 $1,081
Deferred investment tax credits-net* (36) (38) (80)
Provision for income taxes $ 796 $2,808 $2,301
*Net of amortization of $36 in 1995, $33 in 1994 and $92 in 1993.
Deferred tax liabilities are taxes we expect to pay in future
periods. Similarly, deferred tax assets are recorded for expected
reductions in taxes payable in future periods. Deferred taxes arise
because of differences in the book and tax bases of certain assets and
liabilities. Deferred tax liabilities and assets consist of the
following:
1995 1994
LONG-TERM DEFERRED INCOME TAX LIABILITIES:
Property, plant and equipment $ 6,981 $ 5,872
Investments 792 343
Other 1,568 1,370
Total long-term deferred tax liabilities $ 9,341 $ 7,585
LONG-TERM DEFERRED INCOME TAX ASSETS:
Business restructuring $ 853 $ 479
Net operating loss/credit carryforwards 410 175
Employee pensions and other benefits-net 2,353 2,618
Reserves and allowances 329 141
Valuation allowance (293) (178)
Other 490 437
Total long-term deferred income tax assets $ 4,142 $ 3,672
Net long-term deferred income tax liabilities $ 5,199 $ 3,913
CURRENT DEFERRED INCOME TAX LIABILITIES:
Total current deferred income tax liabilities $ 210 $ 110
CURRENT DEFERRED INCOME TAX ASSETS:
Business restructuring $ 763 $ 99
Net operating loss/credit carryforwards 61 99
Employee pensions and other benefits 1,546 1,166
Reserves and allowances 1,472 1,126
Valuation allowance (61) -
Other 889 650
Total current deferred income tax assets $ 4,670 $ 3,140
Net current deferred income tax assets $ 4,460 $ 3,030
39
At December 31, 1995 we had net operating loss carryforwards (tax
affected) for federal and state income tax purposes of $115 and $98,
respectively, expiring through 2010. We also had foreign net
operating loss carryforwards (tax affected) of $192, of which $145 has
no expiration date, with the balance expiring by 2002. Federal and
foreign tax credit carryforwards amounting to $65 also exist. The
majority of these credits are not subject to expiration. We recorded
a valuation allowance to reflect the estimated amount of deferred tax
assets which, more likely than not, will not be realized.
10.LEASES
AS LESSOR
We provide financing on sales of our products and those of other
companies, primarily through AT&T Capital, and lease our products to
customers under sales-type leases. This table displays our net
investment in direct financing and sales-type leases that are
primarily included in finance receivables:
At December 31 1995 1994
Minimum lease payments receivable $6,699 $5,414
Estimated unguaranteed residual values 731 593
Unearned income (1,189) (1,006)
Allowance for credit losses (166) (127)
Net investment $6,075 $4,874
This table shows the scheduled maturities for our $6,699
minimum lease payments receivable on these leases at December 31,
1995:
1996 1997 1998 1999 2000 Later Years
$2,574 $1,868 $1,164 $637 $254 $202
We lease airplanes, energy-producing facilities and transportation
equipment under leveraged leases having original terms ranging from 10
to 30 years, expiring in various years from 1996 through 2026.
Leveraged leases are included in finance receivables on the balance
sheet. This table shows our net investment in leveraged leases:
At December 31 1995 1994
Rentals receivable (net of principal
and interest on nonrecourse notes) $ 885 $ 967
Estimated unguaranteed
residual values 787 781
Unearned income (396) (472)
Allowance for credit losses (34) (30)
Investment in leveraged leases 1,242 1,246
Deferred taxes (1,189) (1,066)
Net investment $ 53 $ 180
We lease assets to others through operating leases, the majority of
which are cancelable. Assets under operating leases, other than those
owned by our finance subsidiaries, are included in property, plant and
equipment. This table shows our net investment in operating leases:
At December 31 1995 1994
Machinery, electronic and other equipment $1,902 $1,391
Buildings and land 800 738
Less: Accumulated depreciation (1,142) (817)
Net investment $1,560 $1,312
40
This table shows the $1,030 of future minimum rentals receivable under
noncancelable operating leases at December 31, 1995:
1996 1997 1998 1999 2000 Later Years
$384 $224 $127 $60 $35 $200
AS LESSEE
We lease land, buildings and equipment through contracts that expire
in various years through 2026. Our rental expense under operating
leases was $1,088 in 1995, $1,098 in 1994 and $1,095 in 1993. The
table below shows our future minimum lease payments due under
noncancelable leases at December 31, 1995. Such payments total $2,796
for operating leases. The total of minimum rentals to be received in
the future under noncancelable subleases related to operating leases
as of December 31, 1995 was $586.
1996 1997 1998 1999 2000 Later Years
$546 $461 $360 $293 $238 $898
11.DEBT OBLIGATIONS
DEBT MATURING WITHIN ONE YEAR
The following table displays the details of debt maturing within one
year:
Amount 1995 1994 1993
Commercial paper $12,829 $10,777 $ 8,761
Long-term debentures and notes 3,236 2,535 2,019
Long-term lease obligations 36 30 52
Other 488 324 231
Total debt maturing within one year $16,589 $13,666 $11,063
Weighted Average Interest Rate (a)
Commercial paper 6.0% 4.7% 3.3%
Long-term debt 7.1% 9.7% 10.0%
Average Short-Term Debt Outstanding
During the Year
Amounts $10,016 $ 8,400 $ 8,010
Weighted average interest rate (a) 6.1% 4.6% 3.7%
Maximum amount of short-term debt at any
month end during the year $13,489 $11,357 $ 9,959
(a) Computed by dividing the average face amount of debt into the
aggregate related interest expense.
A consortium of lenders provides revolving credit facilities of $9.5
billion to AT&T and $2.0 billion to AT&T Capital. These credit
facilities were unused at December 31, 1995. Both AT&T and AT&T
Capital also maintain lines of credit with different consortiums of
primarily foreign banks totaling approximately $340 and $1,035,
respectively. At December 31, 1995, $304 and $638, respectively, of
these foreign lines of credit were unused. The credit facilities, as
described above, are intended for general corporate purposes, which
include support for AT&T's and AT&T Capital's commercial paper.
41
LONG-TERM OBLIGATIONS
This table shows the outstanding long-term debt obligations at
December 31:
Interest Rates (b) Maturities 1995 1994
DEBENTURES
4 3/8% to 4 3/4% 1996-1999 $ 750 $ 750
5 1/8% to 7 1/8% 2000-2001 500 500
8 1/8% to 9% 1996-2031 1,999 1,700
NOTES
4 1/4% to 7 3/4% 1995-2025 8,091 6,291
7 4/5% to 8 19/20% 1995-2025 1,397 348
9% to 13% 1995-2020 178 373
Variable rate 1995-2054 1,249 3,187
14,164 13,149
Long-term lease obligations 166 105
Other 1,140 1,062
Less: Unamortized discount-net 75 69
Total long-term obligations 15,395 14,247
Less: Amounts maturing within one year 3,760 2,889
Net long-term obligations $11,635 $11,358
(b)Note that the actual interest paid on our debt obligations may have
differed from the stated amount due to our entering into interest rate
swap contracts to manage our exposure to interest rate risk and our
strategy to reduce finance costs.
This table shows the maturities, at December 31, 1995, of the
$15,395 in total long-term obligations:
1996 1997 1998 1999 2000 Later Years
$3,760 $2,071 $1,709 $1,527 $779 $5,549
12.EMPLOYEE BENEFIT PLANS
PENSION PLANS
We sponsor noncontributory defined benefit plans covering the
majority of our 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. We compute 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.
42
Pension cost includes the following components:
1995 1994 1993
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)
*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 defined benefit plans:
At December 31 1995 1994
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
We used these rates and assumptions to calculate the projected
benefit obligation:
At December 31 1995 1994
Weighted-average discount rate 7.0% 8.7%
Rate of increase in future
compensation levels 5.0% 5.0%
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 the
consolidated balance sheets.
We are amortizing over approximately 15.9 years the unrecognized
transition asset related to our 1986 adoption of SFAS No. 87,
"Employers' Accounting for Pensions." We amortize prior service
costs primarily on a straight-line basis over the average remaining
service period of active employees. Our 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.
43
SAVINGS PLANS
We sponsor savings plans for the majority of our employees. The
plans allow employees to contribute a portion of their pretax and/or
after-tax income in accordance with specified guidelines. We match a
percentage of the employee contributions up to certain limits. Our
contributions amounted to $408 in 1995, $357 in 1994 and $351 in 1993.
13.POSTRETIREMENT BENEFITS
Our 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:
1995 1994
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
* The actual return on plan assets was $962 in 1995 and ($30) in 1994.
We had approximately 146,700 retirees in 1995, 144,900 in 1994 and
142,200 in 1993.
Our 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 our
postretirement benefit plans reconciled with the amounts recognized in
the consolidated balance sheets:
At December 31 1995 1994
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
We made these assumptions in valuing our postretirement benefit
obligation at December 31:
1995 1994
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%
We 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 our
44
accumulated postretirement benefit obligation at December 31, 1995 by
$646 and our 1995 postretirement benefit costs by $53.
14.STOCK OPTIONS
In our Long-Term Incentive Program, we grant stock options, stock
appreciation rights (SARs), either in tandem with stock options or
free-standing, and other awards. On January 1 of each year, 0.6% of
the outstanding shares of our common stock become available for
grant. The exercise price of any stock option is equal to or greater
than the stock price when the option is granted. When granted in
tandem, exercise of an option or SAR cancels the other to the extent
of such exercise. Before our mergers with McCaw, NCR and Teradata,
and our purchase of LIN, stock options were granted under the separate
stock option plans of those companies. No new options can be granted
under those plans.
Option transactions are shown below:
Number of Shares 1995 1994 1993
Balance at January 1 40,284,801 38,011,478 36,777,098
Options granted 13,276,698 5,803,142 7,261,355
Options assumed in purchase
of LIN 3,381,869 - -
Options and SARs exercised (8,181,161) (2,498,132) (5,766,132)
Average price $29.39 $25.04 $23.93
Options forfeited (1,073,142) (1,031,687) (260,843)
At December 31:
Options outstanding 47,689,065 40,284,801 38,011,478
Average price $43.21 $36.61 $33.52
Options exercisable 28,775,262 28,010,381 24,063,837
Shares available for grant 17,524,180 22,014,728 25,264,307
During 1995, 154,887 SARs were exercised and no SARs were granted.
At December 31, 1995, 685,897 SARs remained unexercised and all of
these were exercisable.
15.SEGMENT INFORMATION
INDUSTRY SEGMENTS
Our operations in the global information movement and management
industry involve providing wireline and wireless telecommunications
services, business information processing systems, and other systems,
products and services that combine communications and computers. Our
operations in the financial services and leasing industry involve
direct financing and finance leasing programs for our products and
the products of other companies, leasing products to customers under
operating leases and being in the general-purpose credit card
business. Miscellaneous other activities, including the distribution
of computer equipment through retail outlets, in the aggregate,
represent less than 10% of revenues, operating income and
identifiable assets and are included in the information movement and
management segment. Revenues between industry segments are not
material.
1995 1994 1993
REVENUES
Information movement and management $75,878 $71,977 $66,847
Financial services and leasing 3,731 3,117 2,504
$79,609 $75,094 $69,351
45
1995 1994 1993
OPERATING INCOME (LOSS)
Information movement and management $ 1,519 $ 8,107 $ 6,769
Financial services and leasing 486 394 339
Corporate and nonoperating (1,070) (983) (1,105)
Income before income taxes $ 935 $ 7,518 $ 6,003
ASSETS
Information movement and management $66,155 $56,551 $51,971
Financial services and leasing 21,368 21,462 17,033
Corporate assets 1,839 1,714 1,104
Eliminations (478) (465) (715)
$88,884 $79,262 $69,393
DEPRECIATION AND AMORTIZATION
Information movement and management $ 4,405 $ 4,193 $ 4,271
Financial services and leasing 440 440 431
CAPITAL EXPENDITURES
Information movement and management $ 5,853 $ 4,244 $ 3,839
Financial services and leasing 144 328 303
TOTAL LIABILITIES
Financial services and leasing $19,072 $19,463 $15,329
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.
1995 1994 1993
REVENUES - EXTERNAL CUSTOMERS
United States $70,896 $67,769 $63,775
Other geographic areas 8,713 7,325 5,576
$79,609 $75,094 $69,351
TRANSFERS BETWEEN GEOGRAPHIC AREAS
(ELIMINATED IN CONSOLIDATION)
United States $ 1,378 $ 1,679 $ 1,374
Other geographic areas 1,221 1,291 1,125
$ 2,599 $ 2,970 $ 2,499
OPERATING INCOME (LOSS)
United States $ 3,792 $ 8,651 $ 7,355
Other geographic areas (1,787) (150) (247)
Corporate and nonoperating (1,070) (983) (1,105)
Income before income taxes $ 935 $ 7,518 $ 6,003
ASSETS
United States $76,624 $69,718 $63,194
Other geographic areas 12,085 9,361 6,901
Corporate assets 1,839 1,714 1,104
Eliminations (1,664) (1,531) (1,806)
$88,884 $79,262 $69,393
Data on other geographic areas pertain to operations that are
located outside of the U.S. Our revenues from all international
activities, including those in the table, international
46
telecommunications services and exports, provided 26.2% of
consolidated revenues in 1995, 25.2% in 1994, and 24.4% in 1993.
Corporate assets are principally cash and temporary cash
investments.
CONCENTRATIONS
As of December 31, 1995, we are not aware of any significant
concentration of business transacted with a particular customer,
supplier or lender that could, if suddenly eliminated, severely impact
our operations. We also do not have a concentration of available
sources of supply materials, labor, services, or licenses or other
rights that could, if suddenly eliminated, severely impact our
operations.
16.CONTINGENCIES
In the normal course of business we are 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, we are unable to ascertain
the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at December 31, 1995.
These matters could affect the operating results of any one quarter
when resolved in future periods. However, we believe that after final
disposition, any monetary liability or financial impact to us beyond
that provided for at year-end would not be material to our annual
consolidated financial statements.
AT&T and Lucent have entered into an agreement pursuant to which
AT&T and affiliates will purchase from Lucent products and services
totaling at least $3,000 cumulatively for the calendar years 1996,
1997 and 1998.
17.FINANCIAL INSTRUMENTS
In the normal course of business we use various financial
instruments, including derivative financial instruments, for
purposes other than trading. We do not use derivative financial
instruments for speculative purposes. These instruments include
commitments to extend credit, letters of credit, guarantees of debt,
interest rate swap agreements and foreign currency exchange contracts.
Interest rate swap agreements and foreign currency exchange contracts
are used to mitigate interest rate and foreign currency exposures.
Collateral is generally not required for these types of instruments.
By their nature all such instruments involve risk, including the
credit risk of nonperformance by counterparties, and our maximum
potential loss may exceed the amount recognized in our balance sheet.
However, 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. We control our
exposure to credit risk through credit approvals, credit limits and
monitoring procedures and we believe that our reserves for losses are
adequate. We do not have any significant exposure to any individual
customer or counterparty, nor do we have any major concentration of
credit risk related to any financial instruments.
COMMITMENTS TO EXTEND CREDIT
We participate in the general-purpose credit card business through
AT&T Universal Card Services Corp., a wholly-owned subsidiary. We
purchase essentially all cardholder receivables under an agreement
47
with the Universal Bank, a subsidiary of Synovus Financial
Corporation, which issues the cards. The unused portion of available
credit was approximately $72,179 at December 31, 1995 and $75,445 at
December 31, 1994. This represents the receivables we would need to
purchase if all Universal Card accounts were used up to their full
credit limits. The potential risk of loss associated with, and the
estimated fair value of, the unused credit lines is not considered to
be significant.
LETTERS OF CREDIT
Letters of credit are purchased guarantees that ensure our
performance or payment to third parties in accordance with specified
terms and conditions.
GUARANTEES OF DEBT
From time to time, we guarantee the financing for product purchases
by customers outside the U.S., and the debt of certain unconsolidated
joint ventures.
INTEREST RATE SWAP AGREEMENTS
We enter into interest rate swaps to manage our exposure to
changes in interest rates and to lower our overall costs of financing.
We enter into swap agreements to manage the fixed/floating mix of our
debt portfolio in order to reduce aggregate risk to interest rate
movements. Interest rate swaps also allow us to raise funds at
floating rates and effectively swap them into fixed rates that are
lower than those available to us if fixed-rate borrowings were made
directly. These agreements involve the exchange of floating-rate for
fixed-rate payments or fixed-rate for floating-rate payments without
the exchange of the underlying principal amount. Fixed interest rate
payments are at rates ranging from 4.68% to 11.59%. Floating-rate
payments are based on rates tied to prime, LIBOR or U.S. Treasury
bills. Interest rate differentials paid or received under these swap
contracts are recognized over the life of the contracts as adjustments
to the effective yield of the underlying debt. If we terminate 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.
The following table indicates the types of swaps in use at December
31, 1995 and 1994 and their weighted average interest rates. Average
variable rates are those in effect at the reporting date and may
change significantly over the lives of the contracts.
1995 1994
Fixed to variable swaps-notional amount $1,657 $ 746
Average receive rate 6.46% 6.82%
Average pay rate 5.63% 5.91%
Variable to fixed swaps-notional amount $2,896 $3,677
Average pay rate 6.23% 5.56%
Average receive rate 5.83% 6.11%
The weighted average remaining terms of the swap contracts are
5 years for both 1995 and 1994.
FOREIGN EXCHANGE
We enter into foreign currency exchange contracts, including forward,
option and swap contracts, to manage our exposure to changes in
currency exchange rates, principally Canadian dollars, Deutsche
48
marks, pounds sterling and Japanese yen. Some of the contracts
involve the exchange of two foreign currencies, according to the local
needs of foreign subsidiaries. The use of these derivative financial
instruments allows us to reduce our 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. Our 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, gains and losses are deferred in other current assets and
liabilities. These deferred gains and losses are recognized as
adjustments to the underlying hedged transactions when the future
sales and purchases are recognized, or immediately if the commitment
is cancelled. Gains or losses on foreign exchange contracts that are
designated for forecasted transactions are recognized in other income
as the exchange rates change. Amounts deferred relating to firm
commitments at December 31, 1995 and 1994, were unrealized gains of $9
and $4, respectively, and unrealized losses of $7 and $10,
respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS INCLUDING DERIVATIVE FINANCIAL
INSTRUMENTS
The tables below show 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 our exposure. Our exposure is limited to the fair value of
the contracts with a positive fair value plus interest receivable, if
any, at the reporting date.
Financial instrument Valuation method
Universal Card finance receivables Carrying amounts. These accrue
interest at a prime-based
rate.
Other finance receivables excluding Future cash flows discounted
leases at market rates.
Debt excluding capital leases Market quotes or based on rates
available to us for debt with
similar terms and maturities.
Letters of credit Fees paid to obtain the
obligations.
Guarantees of debt Costs to terminate agreements.
Interest rate swap agreements Gains or losses to
terminate agreements.
Interest rate cap agreements Costs to obtain agreements.
Foreign exchange contracts Market quotes.
1995 1994
Carrying Fair Carrying Fair
Amount Value Amount Value
ON BALANCE SHEET INSTRUMENTS
Assets:
Finance receivables
other than leases $12,064 $12,108 $13,553 $13,528
Liabilities:
Debt excluding capital leases 28,058 28,717 24,919 24,449
49
1995 1994
Contract/ Contract/
Notional Notional
Amount Amount
DERIVATIVES AND OFF BALANCE SHEET
INSTRUMENTS
Interest rate swap agreements $4,553 $ 4,423
Interest rate cap agreements - 1,333
Foreign exchange:
Forward contracts 3,260 3,068
Swap contracts 756 340
Option contracts 22 -
Letters of credit 919 834
Guarantees of debt 731 518
1995
Carrying Fair
Amount Value
Asset Liab. Asset Liab.
DERIVATIVES AND OFF BALANCE SHEET
INSTRUMENTS
Interest rate swap agreements $12 $ 8 $65 $99
Foreign exchange:
Forward contracts 44 46 29 48
Swap contracts 1 10 7 66
Letters of credit - - 2 -
1994
Carrying Fair
Amount Value
Asset Liab. Asset Liab.
DERIVATIVES AND OFF BALANCE SHEET
INSTRUMENTS
Interest rate swap agreements $ 9 $ 2 $142 $27
Interest rate cap agreements 2 - 2 -
Foreign exchange:
Forward contracts 37 39 44 61
Swap contracts - 5 16 6
Letters of credit - - 2 -
SECURITIZATION OF RECEIVABLES
For the years ended December 31, 1995, 1994 and 1993, we securitized
portions of our short-term and long-term finance receivable portfolios
amounting to $3,575, $259 and $562, with proceeds received of $3,579,
$288 and $649, respectively. We continue to service these accounts
for the purchasers. At December 31, 1995 and 1994, $4,059 and $853,
respectively, of receivables previously securitized remained
outstanding. Our maximum exposure under limited recourse provisions,
in the unlikely event that all such receivables became uncollectible,
amounted to $255 at December 31, 1995 and $353 at December 31, 1994.
We have recorded a liability for the amount that we expect to
reimburse to the purchasers.
18.AT&T CREDIT HOLDINGS, INC.
In connection with a March 31, 1993 legal restructuring of AT&T
Capital Holdings, Inc. (formerly AT&T Capital Corporation), we issued
a direct, full and unconditional guarantee of all the outstanding
public debt of AT&T Credit Holdings, Inc. (formerly AT&T Credit
Corporation). At December 31, 1995, $417 of the guaranteed debt
remained outstanding.
50
AT&T Credit Holdings, Inc. holds the majority of AT&T's investment
in AT&T Capital and the lease finance assets of the former AT&T
Credit Corporation. The table below shows summarized consolidated
financial information for AT&T Credit Holdings, Inc. The summarized
financial information includes transactions with AT&T that are
eliminated in consolidation.
1995 1994 1993
Total revenue $ 1,762 $1,437 $1,432
Interest expense 422 302 284
Selling, general and administrative expense 444 387 329
Income before cumulative effect of
change in accounting 119 92 70
Cumulative effect on prior years of change in
accounting for income taxes (SFAS No. 109) - - 22
Net income $ 119 $ 92 $ 48
Finance receivables $ 9,111 $7,726
Net investment in operating lease assets 1,118 903
Total assets 11,061 9,468
Total debt 7,028 5,682
Total liabilities 9,750 8,299
Minority interest 299 270
Total shareowners' equity $ 1,012 $ 899
19.SALE OF STOCK BY SUBSIDIARY
In August 1993, AT&T Capital sold 5,750,000 shares of common stock in
an initial public offering and approximately 850,000 shares of common
stock in a management offering. The shares sold represented
approximately 14% of the shares outstanding, decreasing our ownership
to 86%. The share were sold at $21.50 per share, yielding net proceeds
of $115 excluding $18 of recourse loans attributable to the management
offering. Because of these loans, we recorded a $9 loss on the sale
in 1993.
The plan announced on September 20, 1995 includes our intent to
sell our remaining 86% interest in AT&T Capital either to another
company or through a public offering. While the sale requires changes
to certain existing agreements between AT&T and AT&T Capital, we
expect the sale to be completed by the end of 1996. The recourse
loans attributable to the management offering will become due and
payable upon disposition of our remaining interest.
20.QUARTERLY INFORMATION (UNAUDITED)
1995 First Second Third Fourth
Total revenues $18,262 $19,512 $19,704 $22,131
Gross margin 7,545 8,144 7,361 7,029
Net income (loss) 1,198 1,355 262 (2,676)
Per common share:
Net income (loss) .76 .85 .16 (1.67)
Dividends declared .33 .33 .33 .33
Stock price*:
High 53 1/4 53 3/4 66 3/8 68 1/2
Low 47 5/8 47 7/8 51 3/8 60 1/4
Quarter-end close 51 3/4 53 65 3/4 64 3/4
51
1994 First Second Third Fourth
Total revenues $17,097 $18,238 $18,649 $21,110
Gross margin 6,952 7,390 7,747 8,623
Net income 1,074 1,248 1,050 1,338
Per common share:
Net income .69 .80 .67 .85
Dividends declared .33 .33 .33 .33
Stock price*:
High 57 1/8 57 1/8 55 7/8 55 1/4
Low 50 5/8 49 1/2 52 1/2 47 1/4
Quarter-end close 51 1/4 53 3/8 54 50 1/4
* Stock prices obtained from the Composite Tape.
In the fourth quarter of 1995, we recorded $6,248 of charges which
reduced net income by $4,181 or $2.61 per share.
In the third quarter of 1995, we recorded $1,597 of charges at NCR
which reduced net income by $1,172 or $0.74 per share.
In the third quarter of 1994, we recorded $227 of costs
($169 net of taxes or 11 cents per share) related to the McCaw merger
primarily consisting of legal and investment banking fees and bonus
pool funding.
52
BOARD OF DIRECTORS
ROBERT E. ALLEN, 60
Chairman of the Board and Chief Executive Officer of AT&T since 1988. Director
since 1984. 6,8
KENNETH T. DERR, 59
Chairman and Chief Executive Officer of Chevron Corporation, an international
oil company. Elected to Board in 1995.
M. KATHRYN EICKHOFF, 56
President of Eickhoff Economics Inc., a business consulting firm.
Elected to board in 1987. 1,5
WALTER Y. ELISHA, 63
Chairman and Chief Executive Officer of Spring Industries, Inc., a textile
manufacturing firm. Director since 1987. 2,4,7
PHILIP M. HAWLEY, 70
Retired Chairman and Chief Executive Officer of Broadway Stores, Inc.
(formerly Carter Hawley Hale Stores, Inc.), department stores.
Director since 1982. 2,3,4
CARLA A. HILLS,* 61
Chairman and Chief Executive Officer of Hills & Company international
consulting firm and former U.S. Trade Representative. Elected to
Board in 1993. 1,2,5
BELTON K. JOHNSON, 66
Former owner of Chaparrosa Ranch. Chairman of Belton K. Johnson Interests.
Director since 1974. 3,5,6,8
RALPH S. LARSEN, 57
Chairman and Chief Executive Officer of Johnson & Johnson, a
diversified health care company. Elected to Board in 1995.
DREW LEWIS,* 64
Chairman and Chief Executive Officer of Union Pacific Corporation, a rail
transportation, natural resources and trucking company.
Elected to Board in 1989. 1,2,5
ALEX J. MANDL, 52
President and Chief Operating Officer of the new AT&T. Served as
Chief Financial Officer of AT&T and Group Head of AT&T Communications
Services since joining the company in 1991. Elected to Board in 1996.
DONALD F. McHENRY, 59
President of IRC Group, international relations consultants; educator and former
U.S. Ambassador to the United Nations. Director since 1986. 3,7
VICTOR A. PELSON, 58
Chairman of AT&T Global Operations Team and Executive Vice President of AT&T.
Elected to Board in 1993. 5
53
DONALD S. PERKINS,* 68
Retired Chairman, Jewel Companies, Inc. Director since 1979. 2,3,6,7,8
HENRY B. SCHACHT,+ 61
Chairman of the Executive Committee and former Chief Executive Officer
of Cummins Engine Company, Inc., manufacturer of diesel engines. Elected
to Board in 1981. 1,5
MICHAEL I. SOVERN, 64
President Emeritus and Chancellor Kent Professor of Law at Columbia University.
Director since 1984. 1,4
FRANKLIN A. THOMAS,* 61
President of the Ford Foundation. Elected to Board in 1988. 1,2,5
JOSEPH D. WILLIAMS, 69
Retired Chairman and Chief Executive Officer of Warner-Lambert
Company, a pharmaceutical, health care and consumer products company.
Director since 1984. 4,6,7
THOMAS H. WYMAN, 66
Chairman of S.G. Warburg & Co. Inc., investment bankers. Director since 1981.
2,4,7
Our thanks and best wishes to Philip Hawley and Vic Pelson, who will
retire March 1996.
*Expected to join the Board of Lucent Technologies.
+Will resign to become Chairman and CEO of Lucent Technologies
coincident with the company's Initial Public Offering.
1. Audit Committee
2. Committee on Directors
3. Committee on Employee Benefits
4. Compensation Committee
5. Corporate Public Policy Committee
6. Executive Committee
7. Finance Committee
8. Proxy Committee
1995 MANAGEMENT EXECUTIVE COMMITTEE
The Management Executive Committee of the integrated AT&T was dissolved as
1995 ended and new leadership teams were formed. Our thanks and best wishes
to those officers who went on to other assignments in the new operating units
(indicated on page 52), as well as to John Mayo, who retired in February 1995
as President of AT&T Bell Laboratories; Vic Pelson, who will retire in
March; and Dick Bodman, who will retire in April to become Managing General
Partner of a new AT&T venture capital fund.
54
NEW LEADERSHIP TEAMS
______________________________________________________________________________
AT&T
ROBERT E. ALLEN*
Chairman and Chief Executive Officer. 1,2
ALEX J. MANDL*
President and Chief Operating Officer. 1,2
_____
HARRY BENNETT
Vice President and General Manager and Acting Head- Local Services
HAROLD W. BURLINGAME*
Executive Vice President - Human Resources. 2
PIER CARLO FALOTTI
President - AT&T International and AT&T Europe. 2
STEVEN W. HOOPER
President and Chief Executive Officer - AT&T Wireless Services
DAVID K. HUNT
President and Chief Executive Officer - AT&T Universal Card Services
FRANK IANNA
Vice President and General Manager - Network and Computing Services Division
MARILYN LAURIE*
Executive Vice President - Public Relations and Employee Information. 2
GAIL J. McGOVERN
Executive Vice President - Business Markets Division. 2
VICTOR E. MILLAR
President and Chief Executive Officer - AT&T Solutions
RICHARD W. MILLER*
Senior Executive Vice President and Chief Financial Officer. 1,2
JOSEPH P. NACCHIO
Executive Vice President - Consumer and Small Business Division. 2
JOSEPH C. PETRILLO
Executive Vice President - Strategy and New Offer Development. 2
RON J. PONDER
Executive Vice President - Operations and Service Management and
Chief Information Officer. 2
55
JOHN D. ZEGLIS *
General Counsel and Senior Executive Vice President - Policy Development and
Operations Support. 1,2
Other officers:
S. LAWRENCE PRENDERGAST
Vice President and Treasurer
MAUREEN B. TART
Vice President and Controller
MARILYN J. WASSER
Vice President - Law and Secretary
1. Chairman's Office
2. Executive Policy Council
______________________________________________________________________________
LUCENT TECHNOLOGIES
HENRY B. SCHACHT
Chairman-designate and Chief Executive Officer
RICHARD A. McGINN*
President and Chief Operating Officer and Director-designate
_____
CURTIS R. ARTIS
Senior Vice President - Human Resources
JAMES K. BREWINGTON
President - Network Systems Product Realization
GERALD J. BUTTERS
President - Network Systems North American Region
JOSEPH S. COLSON, JR.
President - Network Systems AT&T Customer Business Unit
CURTIS J. CRAWFORD
President - Microelectronics
CARLETON S. FIORINA
Executive Vice President - Corporate Operations
KATHLEEN M. FITZGERALD
Senior Vice President - Public Relations and Investor Relations
WILLIAM B. MARX JR.*
Senior Executive Vice President
ARUN N. NETRAVALI
Vice President - Research, Bell Laboratories
WILLIAM T. O'SHEA*
President - Network Systems International Regions and Professional Services
56
DONALD K. PETERSON
Executive Vice President and Chief Financial Officer
RICHARD J. RAWSON
Senior Vice President and General Counsel
PATRICIA F. RUSSO
President - Business Communications Systems
DANIEL C. STANZIONE*
President - Bell Laboratories and President - Network Systems
______________________________________________________________________________
NCR
LARS NYBERG*
Chief Executive Officer
_____
RAYMOND G. CARLIN
Senior Vice President - The Americas Region
ROBERT R. CARPENTER
Senior Vice President - Worldwide Services
ROBERT A. DAVIS
Senior Vice President - Quality and Reengineering
WILLIAM J. EISENMAN
Senior Vice President - Computer Systems Group
DANIEL J. ENNEKING
Senior Vice President - Systemedia Group
RICHARD H. EVANS
Senior Vice President - Global Human Resources
ANTHONY E. FANO
Senior Vice President - Retail Systems Group
RONALD L. FOWINKLE
Senior Vice President and Chief Information Officer
JOHN L. GIERING
Senior Vice President and Chief Financial Officer
57
JONATHAN S. HOAK
Senior Vice President and General Counsel
PER-OLOF LOOF
Senior Vice President - Financial Systems Group
DENNIS A. ROBERTSON
Senior Vice President and Chief Technical Officer
JOSE LUIS SOLLA
Senior Vice President - Europe, Middle East/Africa Region
HIDEAKI TAKAHASHI
Senior Vice President - Asia/Pacific Region
MICHAEL P. TARPEY
Senior Vice President - Public Relations
*Former member AT&T Management Executive Committee
58
INVESTOR INFORMATION
CORPORATE HEADQUARTERS
AT&T
32 Avenue of the Americas
New York, NY 10013-2412
Internet users can access information on AT&T and its
products and services at: http://www.att.com/.
ANNUAL MEETING
The 111th Annual Shareowners Meeting will convene at 9:30 a.m.
Wednesday, April 17, 1996, at the James L. Knight International
Center in the Convention Center in Miami, Florida.
SHAREOWNER SERVICES
Questions about stock-related matters should be directed to
AT&T's shareowner services and transfer agent, First Chicago
Trust Co. Of NY:
AT&T
c/o First Chicago Trust Co. of NY
P.O. Box 2575
Jersey City, NJ 07303-2575
800-348-8288
Shareholders with e-mail addresses can send inquiries
electronically. First Chicago Trust's Internet address is
fctc@attmail.com. AT&T Mail Service subscribers should
address inquiries to !fctc.
Persons outside the U.S. may call collect to 201-324-0293.
Persons using a telecommunications device for the deaf (TDD)
or a teletypewriter (TTY) may call: 800 822-2794.
The First Chicago Trust address to which banks and brokers
may deliver certificates for transfer is 14 Wall Street in
New York City.
To hear information or ask questions about AT&T's
restructuring, call our special toll-free number:
800 756-8500.
DIVIDEND REINVESTMENT
The Dividend Reinvestment and Stock Purchase Plan provides
owners of common stock a convenient way to purchase additional
shares. You may write or call First Chicago Trust for a
prospectus and enrollment form.
59
STOCK DATA
AT&T (ticker symbol "T") is listed on the New York Stock
Exchange, as well as on the Boston, Midwest, Pacific and
Philadelphia exchanges in the U.S., and on stock exchanges
in Brussels, London, Paris, Geneva and Tokyo.
Shareowners of record as of December 29, 1995: 2,190,940.
PUBLICATIONS
AT&T's annual report to the Securities and Exchange
Commission, Form 10-K, is available without charge by
writing or calling First Chicago Trust Co.
The following publications are available by writing or
calling the sources indicated:
AT&T Capital Corporation
Annual Report and/or Form 10-K:
Corporate Communications
44 Whippany Road
Morristown, NJ 07962-1983
800 235-4288 or 201 397-3000
AT&T Foundation Report
Room 3100
1301 Avenue of the Americas
New York, NJ 10019-1035
AT&T and the Environment
Department AR
131 Morristown Road
Room B1220
Basking Ridge, NJ 07920-1650