-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DqY9OqJ1+Ab2wHhqzstn5DyyqQrX5eayFy97dZBu/Si0ZP3l+sAlbE8DIkR0oA7Z SMj68y56L55awL1tS3dyUw== 0000005907-95-000066.txt : 19951121 0000005907-95-000066.hdr.sgml : 19951121 ACCESSION NUMBER: 0000005907-95-000066 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951109 SROS: BSE SROS: CSX SROS: NYSE SROS: PHLX SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AT&T CORP CENTRAL INDEX KEY: 0000005907 STANDARD INDUSTRIAL CLASSIFICATION: 4813 IRS NUMBER: 134924710 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01105 FILM NUMBER: 95588887 BUSINESS ADDRESS: STREET 1: 32 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10013 BUSINESS PHONE: 2123875400 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN TELEPHONE & TELEGRAPH CO DATE OF NAME CHANGE: 19920703 10-Q 1 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q ..X.. QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995 OR ..... TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________to _____________ Commission file number 1-1105 AT&T CORP. A New York I.R.S. Employer Corporation No. 13-4924710 32 Avenue of the Americas, New York, New York 10013-2412 Telephone - Area Code 212-387-5400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ..X No ..... At October 31, 1995 1,591,865,000 common shares were outstanding. 2 AT&T Form 10-Q - Part I PART I - FINANCIAL INFORMATION CONSOLIDATED STATEMENTS OF INCOME (Dollars in Millions Except Per Share Amounts) (Unaudited) For the Three For the Nine Months Ended Months Ended September 30, September 30, 1995 1994 1995 1994 Sales and Revenues Telecommunications services.......... $12,088 $11,275 $35,235 $33,298 Products and systems................. 5,144 5,068 14,904 14,075 Rentals and other services........... 1,522 1,498 4,572 4,389 Financial services and leasing....... 950 808 2,767 2,222 Total revenues....................... 19,704 18,649 57,478 53,984 Costs Telecommunications services Access and other interconnection costs............ 4,364 4,397 13,299 13,420 Other costs........................ 2,189 1,996 6,147 5,943 Total telecommunications services.... 6,553 6,393 19,446 19,363 Products and systems (e)............. 3,985 3,179 10,240 8,755 Rentals and other services (e)....... 1,106 757 2,730 2,253 Financial services and leasing....... 699 573 2,012 1,524 Total costs.......................... 12,343 10,902 34,428 31,895 Gross margin......................... 7,361 7,747 23,050 22,089 Operating Expenses Selling, general and administrative expenses (e)........ 5,642 4,985 15,403 14,074 Research and development expenses (e) 950 808 2,628 2,278 Total operating expenses............. 6,592 5,793 18,031 16,352 Operating income..................... 769 1,954 5,019 5,737 Other income (loss)- net ............ 128 (18) 341 217 Interest expense .................... 197 190 529 551 Income before income taxes........... 700 1,746 4,831 5,403 Provision for income taxes (e)....... 438 696 2,016 2,031 Net Income .......................... $ 262 $ 1,050 $ 2,815 $ 3,372 Weighted average common shares outstanding (millions)............ 1,594 1,567 1,588 1,562 Earnings per common share............ $ .16 $ .67 $1.77 $2.16 Dividends declared per common share...................... $ .33 $ .33 $ .99 $ .99 See Notes to Consolidated Financial Statements. 3 AT&T Form 10-Q - Part I CONSOLIDATED BALANCE SHEETS (Dollars in Millions Except Per Share Amount) (Unaudited) September 30, December 31, 1995 1994 ASSETS Cash and temporary cash investments.... $ 4,082 $ 1,208 Receivables less allowances of $1,408 and $1,251 Accounts receivable.................. 14,027 13,671 Finance receivables.................. 14,934 14,952 Inventories (b)........................ 4,796 3,633 Deferred income taxes.................. 3,414 3,030 Other current assets................... 944 1,117 Total current assets................... 42,197 37,611 Property, plant and equipment, net of accumulated depreciation of $24,682 and $23,519 ................. 21,781 21,279 Licensing cost, net of accumulated amortization of $702 and $613........ 6,028 4,251 Investments............................ 2,824 2,708 Long-term finance receivables.......... 5,214 4,513 Net investment in operating leases of finance subsidiaries.............. 826 756 Prepaid pension costs.................. 4,680 4,151 Other assets........................... 3,711 3,993 TOTAL ASSETS........................... $87,261 $79,262 (CONT'D) 4 AT&T Form 10-Q - Part I CONSOLIDATED BALANCE SHEETS (CONT'D) (Dollars in Millions Except Per Share Amount) (Unaudited) September 30, December 31, 1995 1994 LIABILITIES AND DEFERRED CREDITS Accounts payable....................... $ 6,172 $ 6,011 Payroll and benefit-related liabilities.......................... 3,602 4,105 Postretirement and postemployment benefit liabilities.................. 691 1,029 Debt maturing within one year.......... 16,001 13,666 Dividends payable...................... 529 518 Other current liabilities.............. 7,657 5,601 Total current liabilities.............. 34,652 30,930 Long-term debt including capital leases............................... 13,073 11,358 Postretirement and postemployment benefit liabilities.................. 8,759 8,754 Other liabilities...................... 4,045 4,285 Deferred income taxes.................. 4,578 3,913 Unamortized investment tax credits..... 207 232 Other deferred credits................. 521 776 Total liabilities & deferred credits... 65,835 60,248 Minority interests..................... 1,134 1,093 SHAREOWNERS' EQUITY Common stock - par value $1 per share.. 1,591 1,569 Authorized shares: 2,000,000,000 Outstanding shares: 1,590,843,000 at September 30, 1995 1,569,006,000 at December 31, 1994 Additional paid-in capital............. 16,795 15,825 Guaranteed ESOP obligation............. (254) (305) Foreign currency translation adjustments.......................... 204 145 Retained earnings...................... 1,956 687 Total shareowners' equity.............. 20,292 17,921 TOTAL LIABILITIES/SHAREOWNERS' EQUITY.. $87,261 $79,262 See Notes to Consolidated Financial Statements. 5 AT&T Form 10-Q - Part I CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Millions) (Unaudited) For the Nine Months Ended September 30, 1995 1994 Operating Activities Net income .............................. $ 2,815 $ 3,372 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and licensing cost amortization........................ 3,189 2,937 Provision for uncollectibles.......... 1,689 1,406 (Increase) in accounts receivable..... (1,351) (1,334) (Increase) in inventories............. (1,305) (1,094) Increase in accounts payable.......... 150 445 Net decrease in other operating assets and liabilities.............. 1,099 431 Other adjustments for non-cash items - net......................... 7 (68) Net cash provided by operating activities............................. 6,293 6,095 Investing Activities Capital expenditures net of proceeds from sale or disposal of property, plant and equipment of $223 and $195. (3,577) (2,738) (Increase) in finance assets, net of lease-related repayments of $2,949 and $2,720................. (1,890) (3,211) Cash proceeds from securitizations of finance receivables.................. 1,171 79 (Acquisitions) of licenses.............. (1,877) (223) Net decrease/(increase)in investments.. 286 (76) (Acquisitions)/dispositions, net of cash acquired........................ (532) 134 Other investing activities - net....... 22 172 Net cash (used in) investing activities.. (6,397) (5,863) Financing Activities Proceeds from long-term debt issuances. 4,068 4,465 Retirements of long-term debt.......... (1,936) (5,037) Issuance of common shares.............. 974 524 Dividends paid......................... (1,560) (1,344) Increase in short-term borrowings - net..................... 1,492 2,193 Other financing activities - net....... 2 (49) Net cash provided by financing activities................... 3,040 752 (CONT'D) 6 AT&T Form 10-Q - Part I CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D) (Dollars in Millions) (Unaudited) For the Nine Months Ended September 30, 1995 1994 Effect of exchange rate changes on cash........................ (62) 26 Net increase in cash and temporary cash investments............. 2,874 1,010 Cash and temporary cash investments at beginning of year................... 1,208 671 Cash and temporary cash investments at end of period....................... $ 4,082 $ 1,681 See Notes to Consolidated Financial Statements. 7 AT&T Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) (a) The consolidated financial statements have been prepared by AT&T Corp. ("AT&T" or the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of man- agement, include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the consolidated re- sults of operations, financial position and cash flows for each period presented. The consolidated results for interim periods are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with AT&T's 1994 Annual Report to Shareowners and Form 10-K for the year ended December 31, 1994 and the current year's previously issued Forms 10-Q. (b) Inventories at September 30, 1995 and December 31, 1994 were as follows: September 30, December 31, 1995 1994 Completed goods .............. $2,502 $2,022 Work-in-process and raw materials ................. 2,294 1,611 Total inventories ............ $4,796 $3,633 8 AT&T Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) (c) In connection with a March 31, 1993 legal restructuring of AT&T Capital Holdings, Inc. (formerly AT&T Capital Corporation), AT&T issued a direct, full and unconditional guarantee of all the public debt of AT&T Credit Holdings, Inc. (formerly AT&T Credit Corporation) and certain public debt of its majority owned subsidiary, AT&T Capital Corporation, outstanding at March 31, 1993. At September 30, 1995, $517 million of the guaranteed debt remained outstanding. AT&T Credit Holdings, Inc. holds the majority of AT&T's investment in AT&T Capital Corporation and the lease finance assets of the former AT&T Credit Corporation. The table following shows summarized consolidated financial information for AT&T Credit Holdings, Inc., which consolidates the accounts of AT&T Capital Corporation. The summarized financial information includes transactions with AT&T that are eliminated in consolidation. For the Nine Months Ended September 30, 1995 1994 Total revenue $1,269 $1,043 Interest expense 309 219 Selling, general and administrative expense 328 286 Net income 76 59 At At September 30, December 31, 1995 1994 Finance receivables $8,788 $7,726 Net investment in operating leases 1,034 903 Total assets 10,509 9,468 Total debt 6,618 5,682 Total liabilities 9,260 8,299 Minority interest 290 270 Total shareholder's equity 959 899 9 AT&T Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) (d) On September 20, 1995, AT&T announced that it plans to separate the company into three publicly-held stand-alone global businesses that will each be focused on serving certain core businesses: communication services, communications systems and technology and computers (the "Plan"). In addition, AT&T plans to sell its remaining interest in AT&T Capital Corporation ("AT&T Capital"). The Plan was based on a comprehensive evaluation of business, economic, financial, regulatory and technological factors. The Plan's goal is to remove complexity from the businesses and reduce strategic and internal conflicts. The Plan is targeted to be completed by the end of 1996, but remains subject to a number of conditions. These conditions include the receipt of a favorable tax ruling and any other necessary approvals. In addition, AT&T is considering an initial public offering for approximately 15 percent of the shares of the new communications systems and technology company in the first half of 1996. The full impact of the Plan on AT&T's financial position, results of operations and cash flows cannot be predicted at this time. Additional charges may be necessary in the future as decisions are made regarding the Plan. (e) During the third quarter, AT&T approved plans at its computer unit, Global Information Solutions ("GIS"), to discontinue the manufacturing of personal computers and to consolidate facilities throughout the U.S. and internationally. The plan is expected to be completed before the end of 1996. As a result, in the third quarter AT&T recorded pre-tax charges of approximately $1.6 billion. Approximately 7,200 employees and approximately 1,300 contractors will be eliminated. As of the date of this filing, approximately 5,400 employees have been notified that their positions have been eliminated. The remainder have been identified and will be notified shortly. Of the total charge, approximately $1.2 billion will result in payments of cash in the future and approximately $0.4 billion related to noncash items. The charges reduced net income by approximately $1.2 billion, or $0.74 per share. The charges were recorded as $635 million of costs of products, $270 million of costs of rentals and others services, $589 million of selling, general and administrative expenses, and $103 million of research and development costs. The charges include separation and other related costs of $664 million; facility closings of $181 million; and asset write-downs and other items of $752 million. 10 AT&T Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) (f) SUBSEQUENT EVENTS - On October 3, 1995, AT&T acquired the remaining 48% of LIN Broadcasting Corporation ("LIN") for a total purchase price of approximately $3.3 billion. The accounting effects of this purchase will be reflected in the fourth quarter of 1995. 11 AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW On September 20, 1995, AT&T announced that it plans to separate the company into three publicly-held stand-alone global businesses that will each be focused on serving certain core businesses: communication services, communications systems and technology and computers. In addition, AT&T plans to sell its remaining interest in AT&T Capital. The Plan was based on a comprehensive evaluation of business, economic, financial, regulatory and technological factors. The Plan's goal is to remove complexity from the businesses and reduce strategic and internal conflicts. The Plan is targeted to be completed by the end of 1996, but remains subject to a number of conditions. These conditions include the receipt of a favorable tax ruling and any other necessary approvals. In addition, AT&T is considering an initial public offering for approximately 15 percent of the shares of the new communications systems and technology company in the first half of 1996. The full impact of the Plan on AT&T's financial position, results of operations and cash flows cannot be predicted at this time. Additional charges may be necessary in the future as decisions are made regarding the Plan. During the third quarter, AT&T approved GIS' plans to discontinue the manufacturing of personal computers and to consolidate facilities throughout the U.S. and internationally. As a result, in the third quarter AT&T recorded pre-tax charges of approximately $1.6 billion (the "charges"). The charges reduced net income by approximately $1.2 billion, or $0.74 per share.(See also Note (e).) The charges were recorded as $635 million of costs of products, $270 million of costs of rentals and others services, $589 million of selling, general and administrative expenses, and $103 million of research and development costs. The charges include separation and other related costs of $664 million; facility closings of $181 million; and asset write-downs and other items of $752 million. It is expected that the efforts associated with these charges will favorably impact future results of operations in the form of reduced costs and expenses. AT&T reported quarterly net income of $262 million, or $.16 per share. As a result of the charges, net income declined 75.1 percent compared with the same prior year quarterly net income of $1.050 billion, or $.67 per share. Excluding the charges in 1995 and expenses related to the merger with McCaw Cellular Communications, Inc. and other non-recurring charges in 1994, AT&T's quarterly net income was $1.433 billion, or 0.90 per share, an 11.7 percent increase over the same quarter in 1994. 12 AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION For the nine-month period, AT&T reported net income of $2.815 billion, or $1.77 per share, a 16.5 percent decline compared with the same nine-month period net income of $3.372 billion, or $2.16 per share in 1994. For the nine-month period, AT&T's net income, excluding the charges in 1995 and merger-related expenses and other non-recurring charges in 1994, was $3.987 billion, or $2.51 per share, a 12.2 percent increase over the same period in 1994. Total revenues rose to $19.704 billion in the quarter, a 5.7 percent increase from $18.649 billion in the same period of 1994. For the nine- month period, total revenues increased to $57.478 billion, a 6.5 percent increase compared with $53.984 billion in the same year-ago period. The increases were led by strong revenue growth in telecommunications services, including wireless services. Total costs increased $1.441 billion compared with the same year-ago quarter, reducing overall gross margin to 37.4 percent. These changes resulted primarily from the charges at GIS in third quarter of 1995. Excluding the charges in 1995, total costs increased $537 million compared with the third quarter of 1994, largely as a result of higher sales. Additionally, the overall gross margin percentage for the quarter increased to 41.9 percent from 41.5 percent compared with the same period of 1994. Excluding the charges in 1995 and the merger-related expenses and other non-recurring charges in 1994, operating margins were relatively flat. RESULTS OF OPERATIONS TELECOMMUNICATIONS SERVICES Telecommunications services quarterly revenues, including wireless services revenues, rose to $12.088 billion, a 7.2 percent increase compared with the same period of 1994. The revenue increase was largely due to higher volumes, led by strong growth in 800 services. The volumes of billed minutes for switched long distance services increased more than 8.5 percent for the third quarter of 1995 compared with the third quarter of 1994. For the nine-month period, telecommunications service revenues, including wireless services revenues, grew 5.8 percent to $35.235 billion compared with $33.298 billion in the same period of 1994. Telecommunications services revenues, excluding wireless services, grew 6.1 percent for the quarter and 4.6 percent for the nine-month period compared with the same year-ago periods. The revenue to volume growth "gap" narrowed for the quarter over the comparable period of 1994, reflecting the slowing of business and residential customers movement to and among calling plans and the impact of targeted pricing actions. 13 AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Wireless services revenues, including cellular, messaging and air-to-ground services revenues, grew to $758 million, a 28.4 percent increase compared with year-ago quarterly revenues of $590 million. The increase was driven by a continued strong increase in subscribers; however, the average revenue per subscriber has declined compared with the same quarter of 1994 primarily due to below average usage by new customers. For the nine-month period, wireless services revenues rose to $2.134 billion, a 29.3 percent increase over revenues of $1.651 billion in the comparable period of 1994. Total cellular subscribers served by companies in which AT&T has or shares a controlling interest increased to almost 5.0 million at September 30, 1995 compared with 3.6 million at September 30, 1994. Cost of telecommunications services increased $160 million for the quarter compared with the same year-ago period. Gross margin percentage improved to 45.8 percent in the quarter from 43.3 percent in the comparable period of 1994. For the nine-month period, cost of telecomunications services were relatively flat and gross margin improved to 44.8 percent from 41.8 percent compared with the same period of 1994. For both periods, the gross margin percentage increases were largely due to lower access and other interconnection costs per minute. PRODUCTS AND SYSTEMS Sales of products and systems increased 1.5 percent for the quarter and 5.9 percent for the nine-month period over the comparable periods of 1994. For the quarter, the growth was led by higher sales of communications products and systems and microelectronic products partially offset by lower sales of telecommunication network products and systems. For the nine-month period, all areas experienced revenue growth, particularly sales of communications products and systems. 14 AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Three months Nine Months ended ended September 30, September 30, Revenues in millions 1995 1994(1) 1995 1994(1) Telecommunications network products and systems $2,189 $2,328 $6,582 $6,478 Computer products and systems 1,034 1,011 2,909 2,677 Communications products and systems 1,236 1,061 3,392 3,037 Microelectronic products, special-design products for U.S. government, and other* 685 668 2,021 1,883 Products and Systems $5,144 $5,068 $14,904 $14,075 (1) Reclassified to conform with current presentation. *"Other" is composed principally of media, predominantly for use with automated teller machines and point-of-sale equipment, and business forms. Telecommunications network products and systems revenues decreased 6.0 percent for the quarter over the comparable period of 1994, primarily due to lower sales to the Regional Bell Operating Companies ("RBOCs") for switching and transmission equipment. Sales in the U.S. were lower than the year-ago quarter as higher sales to independent telephone companies, cable companies and competitive access providers were more than offset by lower sales to the RBOCs. For the quarter, revenues from outside of the U.S. were also down compared with the same period of 1994 primarily due to customer delays. Telecommunications network products and systems revenues for the nine-month period compared with the same period of 1994 increased slightly. For the year-to-date period, revenues in the U.S. were down slightly while revenues from outside of the U.S. continue to outpace 1994 revenues. The growth in non-U.S. revenues was led by higher sales in the Europe/Middle East/Africa region principally due to a large Saudi Arabian contract. Revenues from computer products and systems sales increased 2.3 percent for the quarter and 8.7 percent for the nine-month period compared with the same year-ago periods, led by higher sales of mid-range servers and personal computer products at GIS. Revenues from sales of communications products and systems increased 16.5 percent for the quarter and 11.7 percent for the nine-month period compared with the same year-ago periods. The increases for both periods were due to higher sales of business communications equipment both inside and outside of the U.S. as well as higher revenues from submarine cable operations and strong consumer sales of cordless telephones. 15 AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION As a category, sales of microelectronics products, special-design products for the federal government and other product sales increased 2.6 percent for the quarter and 7.4 percent for the nine-month period over the comparable periods of 1994. The increases for both periods were led by continued strong global growth in sales of microelectronic components. The revenues for 1994 included sales of microelectronic products from GIS's microelectronics unit, which was sold in early 1995, of $92 million for the quarter and $273 million for the nine-month period. Costs of products and systems increased 25.4 percent for the quarter and 17.0 percent for the year-to-date period from the same periods of 1994, primarily due to the charges at GIS. Excluding the charges, products and systems costs increased 5.4 percent and 9.7 percent for the quarter and nine-month periods, respectively, compared with the same year-ago periods. The increases were due to the higher sales volumes in the periods. The gross margin percentage, as reported, declined to 22.5 percent for the quarter and 31.3 percent for the nine-month period compared to 37.3 percent for the third quarter of 1994 and 37.8 percent for the nine-month period of 1994. The decreases for both periods were also driven by the charges at GIS. Excluding the charges, products and systems margins decreased to 34.9 percent for the quarter and to 35.6 percent for the year-to-date period. The declines for both periods were principally related to fewer sales of higher margin computer products in 1995 and a lower margin mix of product sales in many parts of the business. RENTALS AND OTHER SERVICES Rentals and other services revenues increased 1.6 percent for the quarter and 4.2 percent for the nine-month period compared with the same periods of 1994. Three months Nine months ended ended September 30, September 30, Revenues in millions 1995 1994(1) 1995 1994(1) Computer products and systems $ 683 $ 645 $ 2,056 $ 1,902 Communications products and systems rentals 209 232 613 732 Communications products and systems services 448 432 1,285 1,219 Other* 182 189 618 536 Rentals and Other Services $1,522 $1,498 $ 4,572 $ 4,389 (1) Reclassified to conform with current presentation. *"Other" is composed principally of telemarketing services, information technology services and facility rentals. 16 AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Rentals and services revenues for computer products and systems increased for the quarter and nine-month periods largely because of increases in professional services as well as increases in traditional maintenance services. The decrease in rentals revenues for communications products and systems for the quarter and nine-month periods was largely due to the expected continued erosion of the base of rental customers. Revenues from communications products and systems services increased for the quarter and nine-month periods because of the continued growth in maintenance contract revenues for business customers. Other rentals and services revenues decreased slightly for the quarter compared with the same quarter a year-ago. For the first nine months of 1995 compared with the same year-ago period, the increase in other rentals and services revenues was principally due to higher licensing and royalty fees. Cost of rentals and other services increased 46.2 percent for the quarter and 21.2 percent for the nine-month periods compared with the same periods of 1994. The gross margin percentage decreased to 27.3 percent and to 40.3 percent for the quarter and nine-month periods of 1995, respectively, from 49.5 percent and 48.7 percent for the quarter and nine-month periods of 1994, respectively. The declines for both periods principally reflect the GIS charges. Excluding the charges in 1995, the gross margin percentages declined to 45.0 percent and to 46.2 percent for the quarter and the nine- month periods, respectively, compared with the same periods of 1994. For both periods, these declines reflect the continuing erosion of the higher margin communications products rental base, offset partially by increases in higher margin licensing and royalty fees. In addition, the gross margin percentage declines both reflect the partial spin-off of LIN Broadcasting's television operations at the end of 1994. FINANCIAL SERVICES AND LEASING Financial services and leasing revenues increased 17.5 percent for the quarter and 24.5 percent for the first nine months of 1995 compared with the same year-ago periods, led by continued strong portfolio asset growth at both AT&T Universal Card Services Corp. ("Universal Card") and AT&T Capital. 17 AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Three months Nine months ended ended September 30, September 30, In millions 1995 1994 1995 1994 AT&T Capital $ 396 $ 348 $ 1,141 $ 1,007 Universal Card 586 477 1,699 1,249 Eliminations, adjustments and other* (32) (17) (73) (34) Financial services and leasing revenues $ 950 $ 808 $ 2,767 $ 2,222 Universal Card Information: At September 30, 1995 1994 Total book and managed finance receivables $12,970 $11,152 Cardholder accounts 16.8 14.6 * "Other" is composed principally of revenues from certain lease finance assets AT&T retained when AT&T Capital was reorganized as well as the elimination of lease revenues from AT&T affiliates. AT&T Capital revenues increased 13.6 percent for the quarter and 13.3 percent for year-to-date period compared with the same periods of 1994. Universal Card revenues increased 22.7 percent for the quarter and 36.0 percent for the nine-month period of 1995 compared with the same periods of 1994. These increases were primarily due to higher earning assets at both AT&T Capital and Universal Card. Universal Card book receivables were $12.0 billion at the end of the quarter, excluding the $1 billion of receivables that were securitized during the quarter. Universal Card will retain the servicing and customer relationships of the credit card accounts. The increase in cost of financial services and leasing was primarily associated with portfolio asset growth for the quarter and nine-month periods of 1995. The gross margin percentage decreased to 26.4 percent for the quarter and to 27.3 percent for the first nine months of 1995 compared with 29.1 percent and 31.4 percent in the quarter and nine-month periods of 1994, respectively. The gross margin decreases for both periods are due to competitive pressures and increases in credit and fraud losses at Universal Card. 18 AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OPERATING EXPENSES Total operating expenses increased 13.8 percent for the quarter and 10.3 percent for the nine-month period over the comparable periods of 1994 largely due the charges at GIS recorded in the third quarter of 1995. These charges added $589 million to the growth in selling, general and administrative expenses as well as $103 million of research and development expenses for the quarter and nine-month periods over the comparable periods of 1994. (See also Note (e).) Excluding the charges in 1995 and the merger-related expenses and other non-recurring charges in 1994, selling, general and administrative expenses increased for the quarter and year-ago periods largely because of higher spending for advertising and promotions, for sales and sales support activities focused towards telecommunications services markets and for expenses related to global expansion. Research and development expenses, excluding the charges in 1995, were up for the quarter and first nine months of 1995 mainly as the result of work related to broadband networks, wireless technologies and enhanced services. In October 1995, The Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS")No. 123, "Accounting for Stock- Based Compensation." The standard establishes a fair value method for accounting for or disclosing stock-based compensation plans. The standard is effective for financial statements for fiscal years beginning after December 31, 1995. For AT&T, this means the standard would be effective for 1996. AT&T will most likely 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. As a result, management does not expect the adoption of this standard to have any impact on AT&T's results of operations and financial position. OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES Other Income - net increased $146 million for the quarter compared with the same year-ago quarter. Other income in 1994 was a net loss due to losses associated with the shutdown of AT&T's EO Inc. unit and a failed telecommunications satellite launch. The provision for income taxes decreased $258 million for the quarter largely due to lower income before income taxes resulting from the charges at GIS. The effective tax rate rose to 62.6 percent compared with 39.9 percent in the third quarter of 1994. Excluding the charges in 1995 and the non-recurring charges in 1994, the effective tax rate decreased to 37.6 percent from 38.3 percent in the year-ago quarter due to a benefit from a reduced state tax rate and the recognition of future deferred tax assets associated with foreign entities. For the first nine months of 1995, the effective tax rate as reported increased to 41.7 percent from 37.6 percent in the same period of 1994. Excluding the charges in 1995 and the non- recurring charges in 1994, the effective tax rate decreased to 38.0 percent from 38.3 percent compared with the same period of 1994. 19 AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY Total assets increased approximately $8.0 billion, or 10.1 percent, from year-end 1994. The increase was due to higher levels of cash in anticipation of the closing of the purchase of LIN (See also Note (f).) as well as higher licensing costs, inventories and finance receivables. The increase in licensing costs principally represents the purchase of personal communications services ("PCS") licenses, totaling $1.7 billion in 1995. Inventories increased reflecting the seasonal build-up in anticipation of higher product and system sales in the fourth quarter. The increase in finance receivables is the result of the growth in credit card and leasing operations. Working capital, defined as current assets less current liabilities, increased $864 million from year-end primarily resulting from higher cash and inventory levels partially offset by increases in other current liabilities. Other current liabilities were higher largely due to the reserves established for the charges at GIS as well as higher current taxes payable. The increases in debt maturing within one year and long-term debt primarily resulted from the purchase of the PCS licenses and the purchase of LIN completed on October 3, 1995. Decreases in payroll and benefit-related liabilities reflect the annual payment of year-end bonuses in the first quarter of 1995. Future financing is contemplated to be arranged as necessary to meet AT&T's capital and other requirements with the timing of issue, principal amount and form depending on the Company's needs, prevailing market and general economic conditions. AT&T anticipates obtaining all necessary external financing through issuances of commercial paper, long-term debt and equity, asset-backed financings (or securitizations) and available lines of credit. 20 AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION In August 1995, the Company issued $1.0 billion of notes under a Master Trust which were securitized with Universal Card receivables. The proceeds from the securitized receivables were used by Universal Card for corporate business purposes, including repaying intercompany loans to AT&T and other affiliates. The Master Trust has agreed to again issue approximately $1.5 billion of notes which will be securitized with Universal Card receivables in November 1995. By using this alternative financing program, AT&T has diversified its funding sources. Universal Card will retain its servicing and customer relationships of the credit card accounts. In the normal course of our business, we use certain derivative financial instruments, mainly interest rate contracts and foreign currency exchange rate contracts. The interest rate contracts allow us to limit the effects of changing interest rates and protect our margins on financial services and leasing transactions. The foreign currency contracts and options allow us to manage our exposure to changing currency exchange rates. AT&T does not use derivative financial instruments for speculative purposes. We design our credit policies to limit the risks of dealing with other parties to these instruments. In our view, the risks to AT&T from our use of these derivative financial instruments are small and the benefits include more stable earnings in periods when interest rates or currency exchange rates are changing. In March 1995, The Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The standard requires that long-lived assets and certain identifiable intangibles to be 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. This standard must be adopted for fiscal years beginning after December 15, 1995, for AT&T, that would be 1996. Management is currently assessing the impact of the adoption on AT&T's results of operations and financial position. CASH FLOWS Cash flows provided by operating activities were relatively flat compared with the same nine-month period of 1994. 21 AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Of the total charges taken in the third quarter of 1995 at GIS, approximately $1.2 billion will result in future cash payments. AT&T anticipates that it will pay out approximately $500 million relating to these charges in the fourth quarter of 1995 and the remainder throughout 1996. Cash from operations will be used to fund this cash outflow. The growth in cash flows used in investing activities was largely the result of increased acquisitions of PCS licenses, capital expenditures and net acquisitions of businesses compared with the same nine-month period of 1994. The increase in capital expenditures is primarily due to enhancing and expanding our wireless services. These increases were partially offset by lower growth levels of finance assets and proceeds received from securitized finance receivables. In June 1995, the Federal Communications Commission ("FCC") granted to AT&T broadband PCS licenses covering the 21 major trading areas that AT&T successfully bid for in the PCS auction which concluded March 13, 1995. Accordingly, in June 1995 AT&T paid the FCC the remaining 80% (totaling $1.34 billion) due on the licenses. On October 3, 1995, AT&T acquired the remaining 48% of LIN for a total purchase price of approximately $3.3 billion. Cash flows provided by financing activities increased primarily due to decreased retirements of long-term debt compared with the same nine-month period of 1994. The ratio of total debt to total capital (total debt and equity) increased to 58.9 percent at September 30, 1995, compared with 58.3 percent at December 31, 1994. Excluding financial services and leasing operations, the debt ratio was 39.5 percent at September 30, 1995 compared with 34.1 percent at December 31, 1994. 22 AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION LEGISLATIVE AND REGULATORY DEVELOPMENTS AT&T currently faces significant competition in its markets and expects that the level of competition will continue to increase. As regulatory, legislative and technological changes occur, AT&T anticipates that new and different competitors will enter the communications services and equipment markets. These may include entrants from other segments of the telecommunications and information services industries and/or global competitors seeking to expand their market opportunities. Such new competitors may enter with a strong market presence, well recognized names and pre-existing direct customer relationships. Depending on the timing of, circumstances of, and any competitive inequities not addressed by regulatory or legislative conditions or restrictions placed on the entry of these competitors into the market, AT&T's future revenues and net income could be adversely affected. In this regard, Congress has taken steps towards the enactment of telecommunications legislation in 1995 with the passage of S.652 in the Senate and H.R.1555 in the House of Representatives. Both bills would permit the RBOCs to provide interexchange services upon the satisfaction of certain enumerated criteria, mostly related to the opening of the local exchange markets to competitive entry. RBOCs could apply to the FCC to demonstrate satisfaction of such criteria immediately, under S.652, or after six months, under H.R.1555, following enactment of legislation. AT&T believes that the timing of, and conditions and restrictions placed on, RBOC entry into interexchange services by either bill does not adequately assure the presence of facilities - based local exchange services competition in the RBOCs' former monopoly markets before the RBOCs may provide interexchange services. To the extent that such legislation was enacted without adequate provision for full local exchange competition as a precondition to the RBOCs' provision of interexchange services, AT&T's revenues and income could be adversely affected during a period of increased interexchange competition and prior to effective local exchange competition. Nevertheless, the legislation, plus other regulatory and technological changes, also may open new markets for AT&T in different segments of communications services, end-to-end services, value-added services and multimedia services. AT&T's competitive strategy includes using its networking capabilities, respected brand name and other resources to take advantage of these new opportunities as they arise. On April 28, 1995, the U.S. District Court for the District of Columbia ("District Court") entered an Order which specifies the conditions and limitations under which, and a procedure whereby, RBOCs may become authorized to provide interexchange services to cellular subscribers. The conditions and limitations require, among other things, that, before the RBOC may provide such interexchange services, there are no legal or regulatory barriers to the provision of, and that there is at least one non-RBOC providing, access between the cellular switches and the long distance carriers' points of presence. Three RBOCs have applied to the Department of Justice for such authority. 23 AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION On April 3, 1995, the United States Department of Justice ("DOJ") filed a motion with the District Court for a waiver of the Modification of Final Judgment. The waiver would allow Ameritech Corporation to provide interexchange services to customers in the Chicago, Illinois and Grand Rapids, Michigan LATAs. This would be conducted under the supervision of the DOJ only after local competition is found to exist and would be subject to separate subsidiary, nondiscrimination and marketing safeguards. AT&T has consented to the entry of this modification and has applied to the respective state commissions to provide local service in these LATAs. On October 12, 1995, the FCC granted AT&T's long-pending motion to reclassify it as nondominant in the provision of domestic interexchange services. The basis for the ruling significantly reduces regulatory requirements on AT&T, and it places AT&T on a more equal regulatory footing with its interexchange service competitors. 24 AT&T Form 10-Q - Part II Part II - Other Information Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: Exhibit Number 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule (b) Reports on Form 8-K: Forms 8-K dated July 3, 1995 and September 20, 1995 were filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits). 25 AT&T Form 10-Q SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AT&T Corp. Date November 8, 1995 M. B. Tart Vice President and Controller (Principal Accounting Officer) 26 AT&T Form 10-Q Exhibit Index Exhibit Number 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule EX-12 2 1 Exhibit 12 Form 10-Q For the Nine Months Ended September 30, 1995 AT&T Corp. Computation of Ratio of Earnings to Fixed Charges (Dollars in Millions) (Unaudited) For the Nine Months Ended September 30, 1995 Earnings Before Income Taxes .......................... $4,831 Less Interest Capitalized during the Period........................................... 46 Less Undistributed Earnings of Less than 50% Owned Affiliates..................................... 86 Add Fixed Charges...................................... 1,564 Total Earnings......................................... $6,263 Fixed Charges Total Interest Expense Including Capitalized Interest.. $1,287 Interest Portion of Rental Expense..................... 277 Total Fixed Charges................................ $1,564 Ratio of Earnings to Fixed Charges..................... 4.0 EX-27 3
5 This schedule contains summary financial information extracted from the unaudited balance sheet of AT&T at September 30, 1995 and the unaudited consolidated statement of income for the nine-month period ended September 30, 1995 and is qualified in its entirety by reference to such financial statements. 1,000,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 4,082 3,819 14,027 1,408 4,796 42,197 46,463 24,682 87,261 34,652 13,073 1,591 0 0 18,701 87,261 14,904 57,478 10,240 34,428 18,031 1,689 529 4,831 2,016 2,815 0 0 0 2,815 $1.77 0
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