NCR Corp · 10-12B · On 9/26/96
Filed On 9/26/96 · SEC File 1-00395 · Accession Number 950123-96-5211
As Of Filer Filing On/For/As Docs:Pgs Issuer Agent
9/26/96 NCR Corp 10-12B 7:240 950123
Registration of Securities (General Form) · Form 10
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-12B Ncr Corporation 125 712K
2: EX-2 Distribution Agreement 26 97K
3: EX-3.1 Amended and Restated Charter 12 48K
4: EX-3.2 Bylaws 12 59K
5: EX-4.2 Preferred Share Purchase Rights Plan 61 187K
6: EX-21 Subsidiaries 3 15K
7: EX-27 Financial Data Schedule 1 9K
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10
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GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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NCR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MARYLAND 31-0387920
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1700 SOUTH PATTERSON BLVD.
DAYTON, OHIO 45479
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (937) 445-5000
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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COMMON STOCK, PAR VALUE $.01 PER SHARE
PREFERRED SHARE PURCHASE RIGHTS
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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November , 1996
Dear Shareowner:
The Board of Directors of AT&T Corp. has authorized the distribution to the
AT&T shareowners of all of the outstanding shares of common stock of NCR
Corporation, which is currently a wholly owned subsidiary of AT&T. The
distribution of the shares of NCR is expected to occur on December 31, 1996.
The distribution of NCR will complete the restructuring announced by AT&T
on September 20, 1995. Pursuant to the restructuring, AT&T has split into three
separate companies: NCR, which engages in the information technology business;
Lucent Technologies Inc., which engages in the telecommunications systems,
software and products businesses; and the continuing AT&T, which engages in the
communications services and credit card businesses. Earlier this year, Lucent
Technologies separated from AT&T by means of an initial public offering of
approximately 17.6% of its common stock in April, followed by a distribution by
AT&T to AT&T's shareowners of the remaining common stock of Lucent on
, 1996. AT&T also sold its 86% interest in AT&T Capital Corporation
as part of the sale of AT&T Capital consummated on , 1996.
If you are an AT&T shareowner at the close of business on December ,
1996, the record date for the distribution, you will receive one share of NCR
common stock for each shares of AT&T common stock you own on that
date, with cash to be paid in lieu of any fractional interest in a share to any
holder who receives certificates for NCR shares or who would be entitled to less
than one whole share of NCR. We expect that NCR stock certificates will be
mailed or, alternatively, that book-entry credit for shares of NCR common stock
will be made, beginning on or about December 31, 1996.
is acting as distribution agent and will be responsible for
mailing NCR share certificates or making book-entry credits to holders of
record. NO ACTION IS REQUIRED BY AT&T SHAREOWNERS IN ORDER TO RECEIVE NCR
SHARES. A shareowner vote is not required in connection with the matter and,
accordingly, your proxy is not being sought. Questions about NCR and other
matters relating to the distribution should be addressed to ,
, number: .
The attached Information Statement, which is being distributed to all AT&T
shareowners in connection with the distribution, describes the NCR distribution
in detail and contains important information about NCR, including financial
statements and other financial information. I urge you to read it carefully.
Sincerely,
A REGISTRATION STATEMENT RELATING TO THE COMMON STOCK AND THE PREFERRED
SHARE PURCHASE RIGHTS OF NCR CORPORATION HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. INFORMATION
CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
PRELIMINARY COPY DATED SEPTEMBER 26, 1996
-- FOR INFORMATION ONLY --
INFORMATION STATEMENT
NCR CORPORATION
COMMON STOCK, PAR VALUE $.01
PREFERRED SHARE PURCHASE RIGHTS
This Information Statement is being furnished to shareowners of AT&T Corp.,
a New York corporation ("AT&T"), in connection with the distribution (the
"Distribution") by AT&T to its shareowners of all of the outstanding shares of
common stock, par value $.01 per share (the "NCR Common Stock"), of its wholly
owned subsidiary, NCR Corporation, a Maryland corporation ("NCR" or the
"Company").
It is expected that the Distribution will be made on December 31, 1996, on
the basis of one share of NCR Common Stock for each shares of common stock,
$1.00 par value, of AT&T (the "AT&T Common Stock") held on December , 1996
(the "Record Date"), with cash being paid in lieu of fractional interests in a
share of NCR Common Stock to any holder who receives certificates for NCR shares
or who would be entitled to less than one whole share of NCR. No payment need be
made by shareowners of AT&T for the shares of NCR Common Stock to be received by
them in the Distribution. AT&T shareowners will not be required to surrender or
exchange shares of AT&T Common Stock in order to receive shares of NCR Common
Stock. Each share of NCR Common Stock issued in the Distribution will be
accompanied by one Preferred Share Purchase Right.
There is currently no public market for NCR Common Stock, although it is
expected that a "when-issued" trading market may develop on or about the Record
Date. An application is expected to be filed to list shares of NCR Common Stock
on the New York Stock Exchange (the "NYSE"), under the symbol "NCR."
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WE ARE NOT ASKING YOU FOR A PROXY
AND YOU ARE REQUESTED NOT TO
SEND US A PROXY.
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THIS INFORMATION STATEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. ANY SUCH OFFERING
MAY ONLY BE MADE BY MEANS OF A SEPARATE PROSPECTUS PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT AND
OTHERWISE IN COMPLIANCE WITH APPLICABLE LAW.
The date of this Information Statement is November , 1996.
TABLE OF CONTENTS
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PAGE
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Available Information...................... ii
Summary.................................... 1
The Distribution......................... 1
NCR Corporation.......................... 3
Summary Historical Financial Data........ 6
Introduction............................... 8
Risk Factors............................... 8
Historical Losses........................ 9
Risks Relating to Implementation of New
Business Strategy...................... 9
Future Capital Requirements; Absence of
AT&T Funding........................... 9
Dependence on New Product Development.... 10
Reliance on Suppliers and Partners....... 10
Competition.............................. 11
Seasonality.............................. 12
Reliance on AT&T Entities; Industry
Focus.................................. 12
Risk of Foreign Operations and Foreign
Exchange............................... 13
Certain Legal Matters; Potential
Environmental Liabilities.............. 13
Risk of Intellectual Property
Infringement Claims.................... 14
Limited Relevance of Historical Financial
Information............................ 15
Absence of History as a Stand-alone
Company................................ 15
Absence of a Public Market for NCR Common
Stock.................................. 15
Possibility of Substantial Sales of NCR
Common Stock........................... 15
Certain Antitakeover Effects............. 16
The Distribution........................... 16
Background of and Reasons for the
Distribution........................... 16
Manner of Effecting the Distribution..... 17
Certain Federal Income Tax Consequences
of the Distribution.................... 17
Listing and Trading of NCR Common
Stock.................................. 18
Conditions; Termination.................. 19
Dividend Policy............................ 19
Financing.................................. 19
Business................................... 19
Overview................................. 19
Restructuring and Turnaround............. 20
Strategy................................. 22
Business Unit Overview................... 23
Retail Systems Group..................... 24
Financial Systems Group.................. 27
Computer Systems Group................... 29
Worldwide Services....................... 31
Systemedia Group......................... 33
Research and Development................. 34
Backlog.................................. 34
Sources and Availability of Raw
Materials.............................. 35
Patents and Trademarks................... 35
Employees................................ 35
Legal Proceedings and Environmental
Matters................................ 35
Properties............................... 36
Capitalization............................. 38
PAGE
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Selected Financial Data.................... 39
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 40
Overview................................. 40
Restructuring............................ 41
Results of Operations.................... 43
Financial Condition, Liquidity and
Capital Resources...................... 49
Recently Issued Accounting
Pronouncements......................... 52
Products and Technology.................. 52
Legal Proceedings and Environmental
Matters................................ 53
Forward Looking Statements............... 54
Management................................. 55
Directors and Executive Officers of
NCR.................................... 55
Committees of the NCR Board of
Directors.............................. 57
Compensation of Directors................ 57
Annual Meeting........................... 58
Stock Ownership of Executive Officers and
Directors.............................. 58
Executive Compensation................... 59
Option and SAR Grants of AT&T Common
Stock to Executive Officers............ 61
Employment Agreements.................... 62
Savings Plan............................. 63
Retirement Benefits...................... 64
NCR Stock Incentive Plans................ 66
Other Benefit Plans...................... 67
Arrangements Among AT&T, NCR and
Lucent................................... 69
NCR Distribution Agreement............... 69
Separation and Distribution Agreement.... 72
Employee Benefits Agreement.............. 75
Purchase Agreements...................... 76
Interim Services and Systems Replication
Agreement.............................. 77
Patent Licenses and Related Matters...... 77
Technology Licenses and Related
Matters................................ 78
Tax Agreements........................... 78
Real Estate Agreements................... 79
Other Agreements......................... 79
Description of NCR Capital Stock........... 80
Authorized Capital Stock................. 80
Common Stock............................. 80
Preferred Stock.......................... 80
Certain Antitakeover Effects............... 81
Board of Directors....................... 81
Stockholder Action by Unanimous Written
Consent; Limitations on Call of Special
Meetings............................... 81
Advance Notice Procedures................ 82
Amendment................................ 82
Rights Plan.............................. 83
Maryland Business Combination Statute.... 85
GCL Business Combination Vote
Requirements........................... 85
Control Share Acquisition Statute........ 85
Liability of Directors and Officers;
Indemnification.......................... 85
Index to Financial Statements.............. F-1
i
AVAILABLE INFORMATION
NCR has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form 10 (the "Registration Statement")
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with
respect to the NCR Common Stock and Preferred Share Purchase Rights described
herein. This Information Statement does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information, reference is made hereby to the Registration Statement,
exhibits and schedules. Statements contained herein concerning any documents are
not necessarily complete and, in each instance, reference is made to the copies
of such documents filed as exhibits to the Registration Statement. Each such
statement is qualified in its entirety by such reference. Copies of these
documents may be inspected without charge at the principal office of the
Commission at 450 5th Street, N.W., Washington, D.C. 20549, and at the Regional
Offices of the Commission at 7 World Trade Center, Suite 1300, New York, New
York 10048, at Citicorp Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661, and at 5670 Wilshire Boulevard, Suite 1100, Los Angeles,
California 90036, and copies of all or any part thereof may be obtained from the
Commission upon payment of the charges prescribed by the Commission. Copies of
such material may also be obtained from the Commission's Web Site
(http://www.sec.gov).
Following the Distribution, NCR will be required to comply with the
reporting requirements of the Exchange Act and will file annual, quarterly and
other reports with the Commission. NCR will also be subject to the proxy
solicitation requirements of the Exchange Act and, accordingly, will furnish
audited financial statements to its stockholders in connection with its annual
meetings of stockholders. In the event of the listing of the NCR Common Stock on
the NYSE, NCR will be required to file with the NYSE copies of such reports,
proxy statements and other information which then can be inspected at the
offices of the NYSE at 20 Broad Street, New York, New York 10005.
NO PERSON IS AUTHORIZED BY AT&T OR NCR TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS INFORMATION STATEMENT,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED.
------------------------
This Information Statement contains trademarks, service marks or registered
marks of NCR, AT&T, their respective subsidiaries and other companies.
For the purposes of this Information Statement, the following terms are
used to refer to the items that NCR provides to its customers:
A "product" refers to individual hardware, software, and consumable
supplies. Examples of products are automated teller machines ("ATMs"),
barcode scanners, paper rolls, and NCR's Teradata(R) relational database.
A "system" refers to combinations of hardware, operating systems
software, and basic services. "Basic services" primarily includes system
installation. Examples of systems are point of sale systems (which could
combine point of sale terminals, barcode scanners, servers, operating
system software, and basic installation services) and computer systems
(which could combine WorldMark(TM) servers, UNIX(R) or Microsoft Windows
NT(R) operating systems, and basic installation services).
A "solution" refers to combinations of hardware, operating system
software, application software, consumable supplies, and value added
services. "Value added services" include items such as consulting services,
implementation services, and database design services. Examples of
solutions are NCR's High Availability Transaction Processing solutions and
Scalable Data Warehousing solutions.
NCR's High Availability Transaction Processing solutions are designed to
ensure minimum system downtime for customers' business critical
applications. These business critical applications can include financial
reporting applications, credit card authorization systems, and order
entry systems. NCR's High Availability Transaction Processing solution
integrates hardware, software, and services with the customers'
application to provide high levels of availability.
ii
Scalable Data Warehousing solutions are designed to help customers
store, retrieve, and analyze large volumes of detailed data coming from
a wide range of transactional and operational systems. For example,
Scalable Data Warehousing would allow retailers to analyze individual
transactions from their point of sale systems, to determine the volume
of individual products sold in each store location, and to facilitate
decision making in areas such as merchandising and inventory. These
solutions are scalable, in that customers can increase the size of these
solutions from small (10 gigabytes of data), to very large (over 1
terabyte of data, which is equivalent to 1,000 gigabytes) all within the
same hardware and software platform.
An "offering" refers to all of the items that NCR provides to its
customers, and can include products, systems, solutions, and services. The
different services that NCR provides to customers are referred to as
"service offerings."
See "Business" for a description of these products, services, systems,
and solutions.
iii
SUMMARY
This summary is qualified by the more detailed information set forth
elsewhere in this Information Statement, which should be read in its entirety,
including the discussion of certain factors set forth under "Risk Factors."
Unless the context otherwise requires, as used herein the term "NCR" or the
"Company" includes NCR and its subsidiaries.
THE DISTRIBUTION
Distributing Company....... AT&T Corp., a New York corporation.
Shares to be Distributed... Approximately million shares of NCR Common
Stock, representing all of the outstanding shares
of NCR Common Stock. All such shares are currently
held by AT&T.
Distribution Ratio......... One share of NCR Common Stock for each
shares of AT&T Common Stock. Cash will be paid in
lieu of any fractional interest in a share of NCR
Common Stock to any holder who receives
certificates for NCR shares or who would be
entitled to less than one whole share of NCR. No
payment need be made by shareowners of AT&T for the
shares of NCR Common Stock to be received by them
in the Distribution, nor will they be required to
surrender or exchange shares of AT&T Common Stock
in order to receive NCR Common Stock. See "The
Distribution -- Manner of Effecting the
Distribution." Shareowners who hold fewer than
shares of AT&T Common Stock will receive
a cash payment in lieu of a fractional share and
will not receive any shares of NCR Common Stock.
Federal Income Tax
Consequences............. The Distribution is subject to receipt of a ruling
from the Internal Revenue Service ("IRS") to the
effect that for United States federal income tax
purposes no gain or loss will be recognized by
holders of AT&T Common Stock upon receipt of NCR
Common Stock in the Distribution, except with
respect to cash received in lieu of fractional
interests in shares of NCR Common Stock, and that
no gain or loss will be recognized by AT&T or NCR
in respect of the Distribution. AT&T shareowners
are urged to consult their own tax advisors as to
the specific tax consequences of the Distribution
to them. See "The Distribution -- Certain Federal
Income Tax Consequences of the Distribution."
Risk Factors............... Shareowners should consider certain factors
discussed under "Risk Factors."
Background of and Reasons
for the Distribution..... The Distribution to AT&T shareowners of all the
outstanding shares of NCR Common Stock will
complete the restructuring announced by AT&T on
September 20, 1995. Pursuant to the restructuring,
AT&T has split into three separate companies: NCR;
Lucent Technologies Inc., a Delaware corporation
("Lucent"), which engages in the telecommunications
systems, software and products businesses; and the
continuing AT&T, which engages in the
communications services and credit card businesses.
Earlier this year, Lucent was separated from AT&T
by means of an initial public offering of
approximately 17.6% of the Lucent common stock (the
"Lucent Common Stock") on April 10, 1996, followed
by the distribution by AT&T to AT&T's shareowners
of the remaining Lucent Common Stock on
, 1996 (the "Lucent
1
Distribution"). AT&T also sold its 86% interest in
AT&T Capital Corporation ("AT&T Capital") as part
of the sale of AT&T Capital consummated on
, 1996.
The restructuring of AT&T responds to changes in
customer needs and demands, public policy, and
technology in the industries in which AT&T has
operated in the past. In AT&T's view, these changes
are creating a new industry structure in which,
increasingly, the advantages of vertical
integration are outweighed by its costs and
disadvantages. In particular, these changes have
resulted in, among other things, a situation in
which, to varying degrees, many of the actual and
potential customers of Lucent and NCR are or will
be competitors of AT&T's communications services
businesses. NCR believes that its efforts to target
the communications industry have been hindered by
the reluctance of AT&T's communications services
competitors to make purchases from an AT&T
subsidiary, and that in some cases the
unwillingness of these competitors to share
proprietary information, such as customer data and
marketing strategies, with NCR has made it more
difficult for NCR to market information technology
solutions to these companies. Finally, the demands
created by this new industry structure have also
heightened the need for focused management time and
attention in each of the businesses previously
conducted by AT&T, including the information
technology business operated by NCR. For these
reasons, AT&T determined to separate its businesses
by means of its restructuring.
Trading Market............. There is currently no public market for NCR Common
Stock, although a "when-issued" trading market is
expected to develop prior to the Distribution Date.
An application is expected to be filed to list the
NCR Common Stock on the NYSE, under the symbol
"NCR." See "Risk Factors -- Absence of a Public
Market for NCR Common Stock" and "-- Possibility of
Substantial Sales of NCR Common Stock" and "The
Distribution -- Listing and Trading of NCR Common
Stock."
Record Date................ December , 1996.
Distribution Date.......... Expected to be December 31, 1996 (the "Distribution
Date"). Commencing on or about the Distribution
Date, (the "Distribution Agent")
will commence mailing share certificates or making
book-entry credits for shares of NCR Common Stock
to holders of AT&T Common Stock on the Record Date.
AT&T shareowners will not be required to make any
payment or to take any other action to receive the
NCR Common Stock to which they are entitled in the
Distribution. See "The Distribution -- Manner of
Effecting the Distribution."
Distribution Agent......... will be the Distribution Agent for the
Distribution.
Conditions to the
Distribution............. The Distribution is conditioned upon, among other
things: (a) the receipt by AT&T of a ruling from
the IRS to the effect that the Distribution
qualifies as a tax-free distribution under Section
355 of the Internal Revenue Code of 1986, as
amended (the "Code"); (b) the receipt of any
material governmental approvals and third party
consents necessary to consummate the Distribution;
(c) the absence of any order, injunction, decree or
other legal restraint or prohibition preventing the
consummation of the Distribution; (d) the failure
to occur of any other event that prevents the
consummation of the Distribution; (e) the
acceptance for listing on a mutually agreed stock
exchange or quotations
2
system, which is expected to be the NYSE, of the
NCR Common Stock (and related Preferred Share
Purchase Rights); and (f) the formal approval by
the Board of Directors of AT&T (the "AT&T Board")
of the Distribution. The AT&T Board may, but has no
obligation to, waive any of these conditions. In
addition, regardless of whether these conditions
are satisfied, the AT&T Board has reserved the
right to abandon, defer or modify the Distribution
and the related transactions described herein at
any time prior to the Distribution Date. See "The
Distribution -- Conditions; Termination" and
"Arrangements Among AT&T, NCR and Lucent -- NCR
Distribution Agreement."
Principal Businesses to Be
Retained by AT&T......... AT&T is among the world's communications leaders,
providing voice, data, and video telecommunication
services to large and small businesses, government
entities and consumers, and offering a general
purpose credit card and other services. AT&T and
its subsidiaries furnish local, regional, domestic
and international communication transmission
services. AT&T's wholly owned subsidiaries,
including AT&T Wireless Services, Inc. ("AT&T
Wireless"), provide cellular telephone and other
wireless services. In conjunction with its
subsidiaries (including AT&T Universal Card
Services Corp.), AT&T also provides billing,
directory, and credit and calling card services to
support its communications services business.
NCR CORPORATION
NCR Corporation............ NCR Corporation is currently a wholly owned
subsidiary of AT&T that is engaged in the
information technology business. NCR was merged
with a wholly owned subsidiary of AT&T on September
19, 1991.
NCR designs, develops, markets, and services
information technology products, services, systems,
and solutions worldwide. NCR's goal is to be a
world-class provider of commercial, open computing
systems for High Availability Transaction
Processing and Scalable Data Warehousing solutions
to customers in all industries. NCR also seeks to
take advantage of its expertise and market presence
in the retail, financial, and communications
industries to provide specific information
technology solutions to customers in these targeted
industries. NCR's systems and solutions are
supported by its Customer Support Services and
Professional Services offerings, and its Systemedia
business, which develops, produces, and markets a
complete line of consumable and media products.
NCR's offerings cover a broad range of its
customers' information technology needs: from
consumers' interaction and data collection, with
products including point of sale workstations,
barcode scanning equipment, and self-service
devices such as ATMs; through data processing, with
NCR's High Availability Transaction Processing
solutions; to data storage, manipulation, and
usage, with NCR's Teradata relational database
management system and Scalable Data Warehousing
offerings. NCR's computing platforms and associated
products span midrange servers, massively parallel
processing computer systems, computer network
servers and software systems, imaging and payment
systems,
3
workstations and peripherals, business forms, ink
ribbons, customized paper rolls, and other
consumable supplies and processing media.
NCR also provides Worldwide Customer Support
Services and Professional Services that include
hardware maintenance, software maintenance, data
warehousing service offerings, end-to-end
networking service and design, and the
implementation, integration and support of complex
solutions.
NCR operates through five business units: the
Computer Systems Group; the Financial Systems
Group; the Retail Systems Group; Worldwide
Services; and Systemedia.
The principal executive offices of NCR are located
at 1700 South Patterson Blvd., Dayton, Ohio 45479
and its telephone number at such location is (937)
445-5000. The Company was incorporated in Ohio in
1884 and was reincorporated in Maryland in 1926.
Business Strategy.......... In September 1995, NCR announced a restructuring of
the Company, based on five key initiatives: focus,
accountability, expense level reduction, process
improvements, and a sense of urgency. NCR's
business plan focuses on three basic components:
the level of resources to be deployed, the
processes through which the Company manages the
business, and the market opportunities to be
pursued. See "Business -- Restructuring and
Turnaround" and "-- Strategy," "Management's
Discussion and Analysis of Financial Condition and
Results of Operations," and "Risk Factors -- Risks
Relating to Implementation of New Business
Strategy."
Management of NCR.......... The executive officers of NCR following the
Distribution are expected to be persons who
currently serve as executive officers of NCR. See
"Management."
Intercompany Agreements.... NCR, AT&T and Lucent have entered into certain
intercompany agreements governing various interim
and ongoing relationships between and among the
three companies. In addition, NCR has entered into
the Operating Agreement (as defined below) with
AT&T Capital. See "Arrangements Among AT&T, NCR and
Lucent."
Preferred Share Purchase
Rights................... As of the Distribution Date, NCR will have adopted
a Preferred Share Purchase Rights Plan (the "Rights
Plan"). Certificates or book entry credits issued
in the Distribution representing shares of NCR
Common Stock will also initially represent an
equivalent number of associated Preferred Share
Purchase Rights of NCR (the "Rights"). See "Certain
Antitakeover Effects -- Rights Plan."
Certain Antitakeover
Effects.................. Certain provisions of NCR's Amended and Restated
Charter (the "Charter") and NCR's Bylaws (the
"Bylaws"), as each will be in effect as of the
Distribution, and of applicable Maryland state
corporation law have the effect of making more
difficult an acquisition of control of NCR in a
transaction not approved by NCR's Board of
Directors. See "Description of NCR Capital Stock"
and "Certain Antitakeover Effects." The Rights Plan
will also make more difficult an acquisition of
control of NCR in a transaction not approved by
NCR's Board of Directors. See "Certain Antitakeover
Effects -- Rights Plan."
4
Post-Distribution Dividend
Policy................... NCR does not anticipate the payment of any cash
dividends on NCR Common Stock in the foreseeable
future. Payment of dividends on NCR Common Stock is
also expected to be subject to such limitations as
may be imposed by NCR's credit facilities. The
declaration of dividends will be subject to the
discretion of the Board of Directors of NCR. See
"Dividend Policy" and "Financing."
Transfer Agent and
Registrar................ will be the Transfer Agent and
Registrar for NCR after the Distribution.
5
SUMMARY HISTORICAL FINANCIAL DATA
The following table presents summary historical financial data of NCR. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical consolidated financial statements and notes thereto included
elsewhere in this Information Statement. The consolidated statement of
operations data set forth below for each of the years ended December 31, 1995,
1994, and 1993 and the consolidated balance sheet data at December 31, 1995 and
1994 are derived from, and are qualified by reference to, the audited
consolidated financial statements included elsewhere in this Information
Statement, and should be read in conjunction with those financial statements and
notes thereto. The consolidated balance sheet data at December 31, 1993 are
derived from the audited consolidated balance sheet of NCR at December 31, 1993,
which is not included in this Information Statement. The consolidated statement
of operations data for each of the years ended December 31, 1992 and 1991 and
the consolidated balance sheet data at December 31, 1992 and 1991 are derived
from unaudited consolidated financial statements not included in this
Information Statement. The consolidated statement of operations data for each of
the six month periods ended June 30, 1996 and 1995, and the consolidated balance
sheet data as of June 30, 1996 and 1995 are derived from, and are qualified by
reference to, the unaudited interim financial statements included elsewhere
herein, and should be read in conjunction with those financial statements and
notes thereto. See "Index to Financial Statements."
The historical financial information may not be indicative of NCR's future
performance and does not necessarily reflect the financial position and results
of operations of NCR had NCR operated as a separate, stand-alone entity during
the periods covered. See "Risk Factors -- Limited Relevance of Historical
Financial Information."
6
NCR CORPORATION
SUMMARY HISTORICAL FINANCIAL DATA
(DOLLARS IN MILLIONS)
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SIX MONTHS
ENDED JUNE 30 YEARS ENDED DECEMBER 31
--------------- -----------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------ ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA
Revenues(3)(5).................... $3,265 $3,860 $ 8,162 $ 8,461 $ 7,265 $ 7,139 $ 7,246
Operating expenses(1)(6)
Cost of revenues................ 2,396 3,024 7,316 5,894 4,839 4,378 4,322
Selling, general and
administrative expenses...... 711 995 2,632 2,169 2,136 1,938 2,113
Research and development
expenses..................... 184 231 585 500 571 568 709
------ ------ ------- ------- ------- ------- -------
Income (loss) from operations..... (26) (390) (2,371) (102) (281) 255 102
Interest expense.................. 26 46 90 44 41 77 85
Other income, net(2)(4)........... (3) (78) (45) (130) (42) (77) (87)
------ ------ ------- ------- ------- ------- -------
Income (loss) before income taxes
and cumulative effects of
accounting changes.............. (49) (358) (2,416) (16) (280) 255 104
Income tax expense (benefit)...... 34 31 (136) 187 138 157 387
------ ------ ------- ------- ------- ------- -------
Income (loss) before cumulative
effects of accounting changes... (83) (389) (2,280) (203) (418) 98 (283)
Cumulative effects of accounting
changes(7)...................... -- -- -- -- (869) -- --
------ ------ ------- ------- ------- ------- -------
Net income (loss)................. $ (83) $ (389) $(2,280) $ (203) $(1,287) $ 98 $ (283)
====== ====== ======= ======= ======= ======= =======
FINANCIAL POSITION AND OTHER DATA
Cash and short-term investments... $ 825 $ 638 $ 338 $ 661 $ 343 $ 436 $ 391
Accounts receivable, net.......... 1,175 1,744 1,908 1,860 1,288 1,228 1,305
Inventories....................... 561 1,072 621 952 781 620 504
Property, plant and equipment,
net............................. 950 1,092 957 1,234 1,143 1,026 1,067
Total assets...................... 4,934 5,837 5,256 5,836 4,664 4,565 4,448
Short-term borrowings............. 40 70 45 73 40 118 105
Long-term debt.................... 99 612 330 642 115 142 229
Shareholder's equity.............. 859 1,499 358 1,690 1,032 1,831 1,628
Headcount (employees and
contractors).................... 38,600 46,700 41,100 50,000 52,500 53,800 54,000
---------------
(1) 1995 operating expenses include restructuring and other charges of $1,649.
(See Note 5 of Notes to Consolidated Financial Statements.)
(2) 1995 other income, net includes a gain on sale of the Microelectronics
components business of $51.
(3) The decrease in revenues beginning in the fourth quarter of 1995 and in the
six months ended June 30, 1996 is due largely to the Company's decision in
September 1995 to discontinue selling personal computers through high volume
indirect channels.
(4) 1994 other income, net includes a gain on sale of certain assets of $110.
(5) The fiscal year-end for locations outside the U.S. was changed from November
to December in 1994 to conform the domestic and international reporting
periods. This change increased reported revenues in 1994 by $223, however
the effect on loss from operations was not significant.
(6) 1993 operating expenses include restructuring and other charges of $219.
(See Note 5 of Notes to Consolidated Financial Statements.)
(7) NCR changed its methods of accounting for postretirement benefits,
postemployment benefits, and income taxes effective in 1993. (See Note 3 of
Notes to Consolidated Financial Statements).
7
INTRODUCTION
NCR is currently a wholly owned subsidiary of AT&T. The Distribution to
AT&T shareowners of all the outstanding shares of NCR Common Stock will complete
the restructuring announced by AT&T on September 20, 1995. Pursuant to the
restructuring, AT&T has split into three separate companies: NCR, which engages
in the information technology business; Lucent, which engages in the
telecommunications systems, software, and products businesses; and the
continuing AT&T, which engages in the communications services and credit card
businesses. Earlier this year, Lucent was separated from AT&T by means of an
initial public offering of approximately 17.6% of the Lucent Common Stock on
April 10, 1996, followed by the Lucent Distribution on , 1996. AT&T
also sold its 86% interest in AT&T Capital as part of the sale of AT&T Capital
consummated on , 1996. NCR, AT&T and, in certain cases, Lucent, have
entered into certain agreements governing various interim and ongoing
relationships between and among the three companies. In addition, NCR has
entered into the Operating Agreement with AT&T Capital. See "Arrangements Among
AT&T, NCR and Lucent."
The Distribution will be effected by distributing to holders of AT&T Common
Stock on the Record Date all of the outstanding shares of NCR Common Stock. On
the Distribution Date, AT&T will deliver the outstanding shares of NCR Common
Stock to , the Distribution Agent for transfer and distribution to
the holders of AT&T Common Stock as of the Record Date for the Distribution. It
is expected that the Distribution Date will be December 31, 1996. The
Distribution is conditioned upon, among other things, the receipt of a ruling
from the IRS that the transaction will be a tax-free spin-off for federal income
tax purposes, except to the extent of cash received instead of fractional
shares. See "The Distribution -- Certain Federal Income Tax Consequences of the
Distribution" and "-- Conditions; Termination."
Shareowners of AT&T with inquiries relating to the Distribution should call
AT&T toll-free at (800) 756-8500 (anytime, 24 hours a day, 7 days a week) or the
Distribution Agent at (800) , Monday through Friday, a.m. to
p.m. (Eastern time). After the Distribution Date, stockholders of NCR with
inquiries relating to their investment in NCR should contact the Distribution
Agent at the above number or NCR Investor Relations, at 1700 South Patterson
Boulevard, Dayton, Ohio 45479; or by telephone at (937) 445-5905, Monday through
Friday, 8:00 a.m. to 5:00 p.m. (Eastern time).
NO ACTION IS REQUIRED BY AT&T SHAREOWNERS IN ORDER TO RECEIVE THE NCR
COMMON STOCK TO WHICH THEY ARE ENTITLED IN THE DISTRIBUTION.
RISK FACTORS
Shareowners should carefully consider and evaluate all of the information
set forth in this Information Statement, including the risk factors listed
below. NCR also cautions readers that, in addition to the historical information
included herein, this Information Statement includes certain forward-looking
statements and information that are based on management's beliefs as well as on
assumptions made by and information currently available to management. When used
in this Information Statement, the words "expect," "anticipate," "intend," "
plan," " believe," "seek," "estimate," and similar expressions are intended to
identify such forward-looking statements. However, this Information Statement
also contains other forward-looking statements. Such statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions, including but not limited to the following factors, which could
cause NCR's future results and stockholder values to differ materially from
those expressed in any forward-looking statements made by or on behalf of NCR.
Many of such factors are beyond NCR's ability to control or predict. Readers are
cautioned not to put undue reliance on forward-looking statements. NCR disclaims
any intent or obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Forward Looking Statements."
8
HISTORICAL LOSSES
NCR has experienced net losses of $2,280 million, $203 million and $1,287
million for the years ended December 31, 1995, 1994, and 1993, respectively, and
net losses of $83 million and $389 million for the six months ended June 30,
1996 and 1995, respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and notes thereto included elsewhere in this Information Statement.
RISKS RELATING TO IMPLEMENTATION OF NEW BUSINESS STRATEGY
NCR announced a restructuring in September 1995, with the goal of creating
a more focused and efficient business. See "Business -- Restructuring and
Turnaround" and "-- Strategy." Although management believes that implementation
of its restructuring and strategic business plan has improved and should
continue to improve NCR's results of operations, there can be no assurance that
NCR will be successful in implementing its new business strategies or that it
will be able to maintain or improve upon its current operating performance.
Although improvements in operating results since the announcement of the
restructuring have come in part from expense reductions, further expense
reductions are not expected to drive material improvements in operating results.
As a result, NCR's ability to continue to improve its operating results will
depend primarily on its ability to increase revenues and to continue to improve
sales and services and rentals gross margins.
A key determinant of the success of NCR's strategy will be NCR's ability to
expand its data warehousing and professional services businesses. There can be
no assurances that NCR will not face unforeseen costs, delays or obstacles in
the implementation of its business plan, that these changes will have the
desired benefits, or that NCR's strategy will be successful. The success of
NCR's strategy will also depend, among other things, upon the technologies,
actions, products, and strategies of NCR's current and future competitors,
general domestic and foreign economic and business conditions, the condition of
the information technology industry and the industries in which NCR's customers
operate and other factors. See "-- Dependence on New Product Development" and
"-- Competition."
FUTURE CAPITAL REQUIREMENTS; ABSENCE OF AT&T FUNDING
In recent years, NCR's working capital and cash flow requirements have been
substantial. Since 1991, NCR's working capital, research and development,
capital expenditures, and other financing requirements have been met by AT&T's
corporate-wide cash management and funding policies. Net cash transfers from
AT&T were $1,034 million, $770 million, and $425 million for the years ended
December 31, 1995, 1994, and 1993, respectively, and $595 million for the six
months ended June 30, 1996. After the Distribution, AT&T will no longer provide
such funds to finance NCR's operations or for any other purpose.
In order to meet its working capital needs after the Distribution, NCR
anticipates that it will enter into an unsecured revolving credit facility (the
"Credit Facility") with a syndicate of commercial banks and financial
institutions. The Credit Facility is expected to provide that NCR may borrow
from time to time on a revolving credit basis an aggregate principal amount of
up to $600 million, subject to the terms and conditions thereof. See "Financing"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition, Liquidity and Capital Resources."
NCR believes that cash flows from operations, availability under the Credit
Facility and other short and long-term debt financings, if any, will be
sufficient to satisfy its future working capital, research and development,
capital expenditure, and other financing requirements. NCR further believes that
it will be able to access capital markets on terms and in amounts that will be
satisfactory to it, although there can be no assurance that will be the case.
NCR believes that it will be able to obtain bid and performance bonds, to
arrange or provide customer financing as necessary, and to engage in hedging
transactions on commercially acceptable terms.
However, NCR does not expect to be able to obtain financing with interest
rates or other terms as favorable as those historically experienced by AT&T,
with the result that its cost of capital will likely be higher
9
than that reflected in NCR's historical financial statements. NCR will also
likely be subject to financial, operating, and other covenants restricting its
operations, although historically, as a wholly owned subsidiary of AT&T, it has
not been subject to any such restrictive covenants.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition, Liquidity and Capital Resources"
and the consolidated financial statements and notes thereto included elsewhere
in this Information Statement.
DEPENDENCE ON NEW PRODUCT DEVELOPMENT
The markets for many of NCR's offerings are characterized by rapidly
changing technology, evolving industry standards, and frequent new product
introductions. NCR's operating results will depend to a significant extent on
its ability to design, develop or otherwise obtain and introduce new products,
services, systems, and solutions and to reduce the costs of these offerings. The
success of these and other new offerings is dependent on many factors, including
proper identification of customer needs, cost, timely completion and
introduction, differentiation from offerings of NCR's competitors, and market
acceptance. Often a delay in introducing an offering can cause a company to miss
a market opportunity. There can be no assurance that NCR will successfully
identify new product, service, system or solution opportunities and bring new
offerings to market in a timely manner, or that products, technologies or
services developed by others will not render NCR's current or future offerings
or technology investments obsolete or noncompetitive. In addition, there can be
no assurance that any of the technologies in which NCR is focusing its capital
expenditure and research and development investments will achieve broad
acceptance in the marketplace. Finally, there can be no assurance that NCR will
be able to attract and retain the highly skilled technical personnel necessary
to enable NCR to develop and sell new products, services, systems, and solutions
successfully. Any such factors could have a material adverse effect on NCR's
financial condition and results of operations.
Shortening product life cycles in the information technology industry pose
a challenge for the effective management of the transition from existing
products to new products. Product development or manufacturing delays,
variations in product costs, and delays in customer purchases of existing
products in anticipation of new product introductions are among the factors that
make a smooth transition from current products to new products difficult. The
transition to new products can also result in inventory of old or obsolete
products and components. In addition, competitors' introductions of new
offerings may coincide with periods leading up to NCR's own introduction of new
or enhanced offerings. Furthermore, some of NCR's own new products replace or
compete with other of NCR's current products. The foregoing factors may
materially adversely affect NCR's financial condition and results of operations.
RELIANCE ON SUPPLIERS AND PARTNERS
Due to NCR's focus on providing complex integrated solutions to customers,
NCR frequently relies on third parties to provide significant elements of NCR's
offerings, which must be integrated with the elements provided by NCR. Elements
provided by third parties can include operating software, software tools,
application specific software, hardware, components, services and other
technology. In addition, because NCR's business interacts with areas in which
other companies have greater technological, marketing, and service expertise,
NCR has from time to time formed alliances with third parties that have
complementary products, services, and skills. These business practices often
require NCR to rely on the performance and capabilities of third parties which
are beyond NCR's control. NCR may also compete against many of these third
parties in other parts of their businesses.
NCR's reliance on third parties introduces a number of risks to NCR's
business. In addition to the risk of non-performance by alliance partners or
other third parties, the need to integrate elements provided by NCR with those
of third parties could result in delays in the introduction of new products,
services, systems, or solutions. Further, the failure of any of these third
parties to provide products or services that conform to NCR's specifications or
quality standards could impair the ability of NCR to offer solutions that
include such third-party elements or may impair the quality of such solutions.
Any of these factors could have a material adverse impact on NCR's financial
condition and results of operations.
10
A number of NCR's products and systems rely primarily on specific suppliers
for microprocessors, operating systems and other central components. For
example, the Company's computer systems are based on microprocessors and related
peripheral chip technology designed by Intel Corporation ("Intel"). In addition,
NCR incorporates UNIX and Microsoft Windows NT operating systems into its
products. NCR's High Availability Transaction Processing and Scalable Data
Warehousing solutions may utilize commercial databases from Oracle Corporation
("Oracle") or Informix Corporation ("Informix"). The failure of any of these
technologies to remain competitive, either individually or as part of a system
or solution, or the failure of these providers to continue such technologies,
could have a material adverse effect on NCR's financial condition and results of
operations.
NCR also uses many standard parts and components in its products and
believes there are a number of competent vendors for most parts and components.
However, a number of important components are developed by and purchased from
single sources due to price, quality, technology or other considerations. In
some cases, those components are available only from single sources. The process
of substituting a new producer of such parts could materially adversely affect
NCR's financial condition and results of operations. Some suppliers of certain
components require long lead times making it difficult for NCR to plan inventory
levels of components consistently to meet demand for NCR's products. Certain
other components have from time to time been subject to industry wide shortages.
Future shortages of components could materially adversely affect NCR's financial
condition and results of operations. In addition, if NCR is required to enter
into licensing or similar arrangements with third parties, who may be
competitors of NCR, to obtain intellectual property or other rights necessary
for its offerings, NCR may encounter delays or costs which may adversely affect
its ability to provide these offerings.
NCR must develop and implement effective strategies that anticipate
availability and pricing by suppliers as well as forecast customer demand for
its products. In order to secure components for production and introduction of
new products, NCR may make advance payments to certain suppliers and may enter
into noncancelable purchase commitments with vendors with respect to the
purchase of components. Many of the components used in NCR's products,
particularly microprocessors and memory, experience steep price declines over
their product lives. If NCR is unable to manage its purchases and utilization of
such components efficiently to maintain low inventory levels immediately prior
to major price declines, NCR could be unable to take immediate advantage of such
declines to lower its product costs, which could have a material adverse effect
on NCR's financial condition and results of operations.
COMPETITION
NCR faces significant competition in all geographic areas where it
operates. Its markets are characterized by continuous, rapid technological
change, the need to introduce products in a timely manner in order to take
advantage of market opportunities, short product life cycles, frequent product
performance improvements, and price reductions.
The methods of competition vary, depending on the product, service, system,
or solution being offered, but typically include product and system performance,
quality and reliability, price/performance ratio, global marketing and
distribution capabilities, technology, industry expertise, total cost of
ownership, industry knowledge of the vendor, availability and performance of
software, system expandability and upgrade capability, compatibility,
adaptability in support of new applications and software, availability and
performance of applications, ability to design, develop, introduce and deliver
products, services, systems, or solutions in a timely manner, product features
and functions, service and support, ease of system operation, compliance with
industry standards, and corporate reputation. Customers evaluating purchases
from NCR which contemplate continued performance or service by NCR over a period
of time may consider NCR's financial prospects relative to that of other more
well-capitalized companies as a factor in their purchasing decisions. In
addition, competitors and competitive factors vary by geographic area and by
business unit. See "Business -- Retail Systems Group -- Competition,"
"-- Financial Systems Group -- Competition," "-- Computer Systems
Group -- Competition," "-- Worldwide Services -- Competition" and "-- Systemedia
Group -- Competition."
11
Present and potential competition in the various markets served by NCR
comes from domestic and international companies of various sizes and types, a
number of which have greater financial, technical, marketing and other
resources, larger installed bases of customers or a wider range of available
applications software than NCR. NCR's competitors include both some of the
largest and most well-capitalized domestic and international corporations and
newer, smaller companies which have historically had great success in making
major inroads in the information technology industry. In addition, companies not
currently in direct competition with NCR may introduce competing products in the
future. In the information technology industry, it is possible for companies to
be, at various times, competitors, customers, and collaborators.
The significant competition in the information technology industry has
decreased gross margins for many companies in recent years and could continue to
do so in the future. During the period 1992 through 1994, NCR experienced a
decline in gross margins greater than that of the industry generally. Future
operating results will depend in part on NCR's ability to mitigate such margin
pressure by maintaining a favorable mix of system, solutions, service, and other
revenues and by achieving component cost reductions and operating efficiencies.
SEASONALITY
NCR's sales are historically seasonal, with revenue higher in the fourth
quarter of each year. Consequently, during the three quarters ending in March,
June, and September, NCR has historically experienced less favorable results
than in the quarter ending in December. Such seasonality also causes NCR's
working capital cash flow requirements to vary from quarter to quarter depending
on, among other things, the variability in the volume, timing and mix of product
sales. In addition, in many quarters, a large portion of NCR's revenue is
realized in the third month of the quarter. Operating expenses are relatively
fixed in the short term and often cannot be materially reduced in a particular
quarter if revenue falls below anticipated levels for such quarter. As a result,
even a relatively small revenue shortfall may cause a period's results to be
materially below expectations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of
Operations -- Seasonality."
RELIANCE ON AT&T ENTITIES; INDUSTRY FOCUS
In recent years, NCR's largest customer, measured by total revenue, has
been AT&T and its affiliated companies, including Lucent, although other
customers purchase more of certain systems and product lines. The contribution
of AT&T and its affiliated companies (including Lucent) to NCR's total revenue
and as a percentage of total revenue for the years ended December 31, 1995, 1994
and 1993 was $630 million (8%), $522 million (6%) and $385 million (5%),
respectively. For the six months ended June 30, 1996 and 1995, respectively, the
contribution of these companies to total revenue and as a percentage of total
revenue was $247 million (8%) and $281 million (7%). No other customer of NCR
accounted for more than 3% of consolidated revenue during the year ended
December 31, 1995 or during the six-month period ended June 30, 1996.
Except as set forth in the AT&T Volume Purchase Agreement (as defined
herein) expected to be entered into between NCR and AT&T and the Lucent Volume
Purchase Agreement (as defined herein) entered into between NCR and Lucent,
neither AT&T nor Lucent is obligated to make any minimum level of future
purchases from NCR or to provide NCR with binding forecasts of product purchases
for any future period. Moreover, with the spinoff of Lucent from AT&T on
1996, future decisions as to purchases by each company will be made
independently from the other company. Pursuant to the AT&T Volume Purchase
Agreement, AT&T and its designated affiliates (other than Lucent) expect to
commit to purchase an aggregate of at least $ million of offerings from NCR
during the -year period ending . Pursuant to the Lucent Volume
Purchase Agreement, Lucent has committed to purchase an aggregate of at least
$150 million of offerings from NCR during the three-year period ending December
31, 1998. As of June 30, 1996, approximately $65 million of such commitment had
been purchased by Lucent. See "Arrangements Among AT&T, NCR and
Lucent -- Purchase Agreements."
12
In addition, NCR's focus on three industries -- retail, financial, and
communications -- may increase NCR's vulnerability to economic and business
conditions affecting customers in each such industry and to other events outside
of its control that could reduce technology spending in such industries. See
"Business -- Strategy."
RISK OF FOREIGN OPERATIONS AND FOREIGN EXCHANGE
For the year ended December 31, 1995, approximately $4.6 billion, or 56%,
of NCR's revenue was generated by its foreign operations. NCR's foreign
operations are subject to a number of risks inherent in operating abroad,
including, but not limited to, risks with respect to currency exchange rates,
foreign economic and political conditions or destabilization, other disruption
of capital and trading markets, restrictive actions by foreign governments (such
as restrictions on transfer of funds, trade protection measures including export
duties and quotas, and foreign customs duties and tariffs, and changes in
regulatory environments), import or export licensing requirements, risks
relating to the repatriation of funds from non-United States subsidiaries,
difficulty in obtaining distribution and support, nationalization, the laws and
policies of the United States affecting trade, foreign investment and loans,
natural disasters, and foreign tax laws. There can be no assurance that these
factors will not have a material adverse impact on NCR's ability to increase or
maintain its foreign sales or on its financial condition or results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
A significant change in the value of the dollar or another functional
currency against the currency of one or more countries where NCR recognizes
revenues or earnings or maintains net asset investments may materially adversely
affect NCR's financial condition and results of operations. NCR attempts to
mitigate a portion of such changes through the use of foreign currency
contracts, although there can be no assurances that such attempts will be
successful.
CERTAIN LEGAL MATTERS; POTENTIAL ENVIRONMENTAL LIABILITIES
In the normal course of business, NCR is subject to regulations,
proceedings, lawsuits, claims, and other matters, including actions under laws
and regulations related to the environment, health and safety, among others.
Such matters are subject to the resolution of many uncertainties, and
accordingly, outcomes are not predictable with assurance. Although NCR believes
that amounts provided in its financial statements are currently adequate in
light of the probable and estimable liabilities, there can be no assurances that
the amounts required to discharge alleged liabilities from lawsuits, claims and
other legal proceedings and environmental matters, and to comply with applicable
environmental laws, will not exceed the amounts reflected in NCR's financial
statements or will not have a material adverse effect on the Company's
consolidated financial condition, results of operations or cash flows. Any
amounts of costs that may be incurred in excess of those amounts provided as of
June 30, 1996 cannot be determined.
Among the lawsuits and claims pending against NCR as of June 30, 1996,
there were approximately 100 individual product liability claims alleging that
the Company's products, including personal computers ("PCs"), supermarket
barcode scanners, cash registers and check encoders, caused so-called
"repetitive strain injuries" or "cumulative trauma disorders," such as carpal
tunnel syndrome. In such lawsuits, the plaintiff typically alleges that he or
she suffers from injuries caused by the design of the product at issue or a
failure to warn of alleged hazards. These plaintiffs seek compensatory damages
and, in many cases, punitive damages. Most other manufacturers of these products
have also been sued by plaintiffs on similar theories. Ultimate resolution of
the litigation against the Company may substantially depend on the outcome of
similar matters of this type pending in various state and federal courts. The
Company has denied the merits and basis for the pending claims against it and
intends to continue to contest these cases vigorously.
NCR's facilities and operations are subject to a wide range of
environmental protection laws in the United States and other countries related
to solid and hazardous waste disposal, the control of air emissions and water
discharges, and the mitigation of impacts to the environment from past
operations and practices. NCR has investigatory and remedial activities,
including characterization and cleanup actions, underway at a number of
currently and formerly owned or operated facilities to comply, or to determine
compliance, with
13
applicable environmental protection laws. NCR has been identified, either by a
governmental agency or by a private party seeking contribution to site cleanup
costs, as a potentially responsible party ("PRP") at a number of sites pursuant
to a variety of statutory schemes, both state and federal, including the Federal
Water Pollution Control Act ("FWPCA") and comparable state statutes, and the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended ("CERCLA"), and comparable state statutes.
In February 1996, NCR received notice from the United States Department of
the Interior, Fish & Wildlife Service ("USF&WS") that USF&WS considers NCR a PRP
under the FWPCA and CERCLA with respect to alleged natural resource restoration
and damages to the Fox River and related Green Bay environment ("Fox River
System") due to, among other things, sediment contamination in the Fox River
System allegedly resulting from liability arising out of NCR's former carbonless
paper manufacturing operations at Appleton and Combined Locks, Wisconsin. USF&WS
has also notified a number of other manufacturing companies of their status as
PRPs under the FWPCA and CERCLA for natural resource restoration and damages in
the Fox River System resulting from their ongoing or former paper manufacturing
operations in the Fox River Valley. USF&WS and two Indian Tribes have stated
their intention to conduct a Natural Resource Damage Assessment to determine and
quantify the nature and extent of alleged injury to natural resources. In
addition, NCR has been identified, along with a number of other companies, by
the Wisconsin Department of Natural Resources ("WDNR") with respect to alleged
liability arising out of alleged past discharges that have contaminated
sediments in the Fox River System. NCR is also actively pursuing discussions
with the WDNR regarding the Company's alleged liability. NCR's share, if any, of
such cleanup costs or natural resource restoration and damages liability cannot
be predicted with certainty at this time due to (i) the unknown magnitude,
scope, and source of any alleged contamination, (ii) the absence of identified
remedial objectives and methods, and (iii) the uncertainty of the amount and
scope of any alleged natural resource restoration and damages. At this point,
NCR believes that there are additional PRPs who may be liable for such natural
resource damages and remediation costs. Further, in 1978, NCR sold the business
to which the claims apply and believes the claims described above are the
responsibility of the buyer and its former parent company pursuant to the terms
of the sales agreement. In this connection, NCR has commenced litigation against
the buyer to enforce its position.
It is difficult to estimate the future financial impact of environmental
laws, including potential liabilities. NCR accrues environmental provisions when
it is probable that a liability has been incurred and the amount of the
liability is reasonably estimable. Management expects that the amounts provided
as of December 31, 1995 and June 30, 1996 will be paid out over the period of
investigation, negotiation, remediation, and restoration for the applicable
sites, which may be 30 years or more. Provisions for estimated losses from
environmental remediation are, depending on the site, based primarily on
internal and third-party environmental studies, estimates as to the number and
participation level of any other PRPs, the extent of the contamination, and the
nature of required remedial and restoration actions. Accruals are adjusted as
further information develops or circumstances change. The amounts provided for
environmental matters in NCR's consolidated financial statements are the
estimated gross undiscounted amount of such liabilities, without deductions for
insurance or third-party indemnity claims. In those cases where insurance
carriers or third-party indemnitors have agreed to pay any amounts and
management believes that collectibility of such amounts is probable, the amounts
are reflected as receivables in the consolidated financial statements.
RISK OF INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS
NCR relies on patent, trademark, trade secret, and copyright laws both to
protect its proprietary technology and to protect NCR against claims from
others. NCR believes that it has direct intellectual property rights or rights
under licensing arrangements covering substantially all of its material
technologies and has not received notice of any infringement claims against it
which it believes are valid. However, given the technological complexity of
NCR's systems and products, rapid technological changes in the computer and
technology industries, extensive patent and copyright coverage, and the rapid
establishment of new copyright and patent rights, there can be no assurance that
claims of infringement will not be asserted against NCR or against NCR's
customers in connection with their use of NCR's systems and products. There can
14
also be no assurance as to the outcome of any such claims. In addition, there
can be no assurance that NCR will be able to ensure that component supplies and
the cost of components are not adversely affected by legal proceedings in which
an adverse determination is made with respect to intellectual property rights of
NCR or one of its suppliers.
AT&T, Lucent and NCR have entered into certain defensive protection
agreements under which each company has the ability, subject to specified
restrictions, to assert infringement claims under specified patents against
companies that assert patent infringement claims against them. See "Arrangements
Among AT&T, NCR and Lucent -- Patent Licenses and Related Matters."
LIMITED RELEVANCE OF HISTORICAL FINANCIAL INFORMATION
The historical financial information included herein may not necessarily
reflect the results of operations, financial position and cash flows of NCR in
the future or the results of operations, financial position, and cash flows had
NCR operated as a separate, stand-alone entity during the periods presented. The
financial information included herein does not reflect any changes that may
occur in the funding and operations of NCR as a result of the Distribution. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ABSENCE OF HISTORY AS A STAND-ALONE COMPANY
NCR has not operated as a stand-alone company since its merger with a
wholly owned subsidiary of AT&T in September 1991. After the Distribution, AT&T
will have no obligation to provide assistance to NCR or any of its subsidiaries
except as described in "Arrangements Among AT&T, NCR and Lucent -- Purchase
Agreements." Furthermore, AT&T will have no obligation to enter into new
arrangements with NCR as the existing arrangements expire.
ABSENCE OF A PUBLIC MARKET FOR NCR COMMON STOCK
There is currently no public market for NCR Common Stock. Although NCR
expects to apply to list the NCR Common Stock on the NYSE, there can be no
assurance as to the prices at which trading in NCR Common Stock will occur after
the Distribution. Until the NCR Common Stock is fully distributed and an orderly
trading market develops, the prices at which trading in such stock occurs may
fluctuate significantly. There can be no assurance that an active trading market
in NCR Common Stock will develop or be sustained in the future.
The prices at which NCR Common Stock trades will be determined by the
marketplace and may be influenced by many factors, including, among others,
NCR's performance and prospects, the depth and liquidity of the market for NCR
Common Stock, investor perception of NCR and of the information technology
industry, NCR's dividend policy, general financial and other market conditions,
and domestic and international economic conditions. In addition, financial
markets, including the NYSE, have experienced extreme price and volume
fluctuations that have affected the market price of many information technology
industry stocks and that, at times, could be viewed as unrelated or
disproportionate to the operating performance of such companies. Such
fluctuations have also affected the share prices of many newly public issuers.
Such volatility and other factors may materially adversely affect the market
price of NCR Common Stock.
POSSIBILITY OF SUBSTANTIAL SALES OF NCR COMMON STOCK
The planned Distribution will involve the distribution of an aggregate of
approximately shares of NCR Common Stock to the shareowners of
AT&T on the Distribution Date, representing all of the outstanding shares of NCR
Common Stock. Substantially all of such shares of NCR Common Stock will be
eligible for immediate resale in the public market. Neither AT&T nor NCR is able
to predict whether substantial amounts of NCR Common Stock will be sold in the
open market following the Distribution. Any sales of substantial amounts of NCR
Common Stock in the public market, or the perception that such sales
15
might occur, whether as a result of the Distribution or otherwise, could
materially adversely affect the market price of NCR Common Stock. See "The
Distribution -- Listing and Trading of NCR Common Stock."
CERTAIN ANTITAKEOVER EFFECTS
The Charter and Bylaws, the Rights Plan, and applicable sections of the
Maryland General Corporation Law (the "GCL") contain several provisions that may
make more difficult the acquisition of control of NCR without the approval of
the NCR Board of Directors. Certain provisions of NCR's Charter and the Bylaws,
among other things: (i) classify the NCR Board of Directors into three classes,
each of which serve for staggered three-year terms; (ii) provide that a director
of NCR may be removed by the stockholders only for cause by the vote of 80% of
the stock entitled to vote generally in the election of directors (the "Voting
Stock"); (iii) provide that only the NCR Board of Directors or President or the
holders of at least a majority of the Voting Stock may call special meetings of
the stockholders; (iv) provide that the stockholders may take action without a
meeting of stockholders only by unanimous written consent (which as a practical
matter makes action by written consent impossible in a public corporation such
as NCR after the Distribution); (v) provide that stockholders must comply with
certain advance notice procedures in order to nominate candidates for election
to the NCR Board of Directors or to place stockholders' proposals on the agenda
for consideration at meetings of the stockholders; and (vi) provide that the
stockholders may amend or repeal any of the foregoing provisions of the Charter
or the Bylaws only by a vote of 80% of the Voting Stock. The Rights Plan would
cause substantial dilution to a person or group that attempts to acquire NCR on
terms not approved in advance by the NCR Board of Directors. The GCL generally
imposes certain restrictions on mergers and other business combinations between
NCR and any holder of 10% or more of the NCR Common Stock if the holder's
acquisition of such position was not approved in advance by the NCR Board of
Directors. In addition, under the GCL, the affirmative vote of the holders of
two-thirds of the NCR Common Stock is required to approve any merger or similar
business combination involving NCR, with certain exceptions. See "Description of
NCR Capital Stock" and "Certain Antitakeover Effects." In addition, certain of
the equity-based incentive plans of NCR are expected to contain provisions
providing for the acceleration or modification of benefits upon a Change of
Control (as defined) of NCR. See "Management."
THE DISTRIBUTION
BACKGROUND OF AND REASONS FOR THE DISTRIBUTION
NCR is currently a wholly owned subsidiary of AT&T, engaged in the
information technology business. The Distribution to AT&T shareowners of all the
outstanding shares of NCR Common Stock will complete the restructuring announced
by AT&T on September 20, 1995. Pursuant to the restructuring, AT&T has split
into three separate companies: NCR, Lucent and the continuing AT&T. Earlier this
year, Lucent was separated from AT&T by means of an initial public offering of
approximately 17.6% of the Lucent Common Stock on April 10, 1996, followed by
the Lucent Distribution on , 1996. AT&T also sold its 86% interest
in AT&T Capital as part of the sale of AT&T Capital consummated on ,
1996.
The restructuring of AT&T responds to changes in customer needs and
demands, public policy, and technology in the industries in which AT&T has
operated in the past. In AT&T's view, these changes are creating a new industry
structure in which, increasingly, the advantages of vertical integration are
outweighed by its costs and disadvantages. In particular, these changes have
resulted in, among other things, a situation in which, to varying degrees, many
of the actual and potential customers of Lucent and NCR are or will be
competitors of AT&T's communications services businesses. NCR believes that its
efforts to target the communications industry have been hindered by the
reluctance of AT&T's communications services competitors to make purchases from
an AT&T subsidiary, and that in some cases the unwillingness of these
competitors to share proprietary information, such as customer data and
marketing strategies, with NCR has made it more difficult for NCR to market
information technology solutions to these companies. Finally, the demands
created by this new industry structure have also heightened the need for focused
management time and attention in each of the businesses previously conducted by
AT&T, including the information technology
16
business operated by NCR. For these reasons, AT&T determined to separate its
businesses by means of its restructuring.
MANNER OF EFFECTING THE DISTRIBUTION
It is expected that the Distribution Date will be December 31, 1996. At the
time of the Distribution, share certificates for NCR Common Stock will be
delivered to the Distribution Agent. Commencing on or about the date of the
Distribution, the Distribution Agent will begin mailing such share certificates
or making book-entry credits for shares of NCR Common Stock to holders of AT&T
Common Stock as of the close of business on the Record Date on the basis of one
share of NCR Common Stock for every shares of AT&T Common Stock held on the
Record Date. All such shares of NCR Common Stock will be fully paid,
nonassessable and free of preemptive rights. See "Description of NCR Capital
Stock."
No certificates or scrip representing fractional interests in a share of
NCR Common Stock will be issued to AT&T shareowners who receive certificates for
NCR shares or who would be entitled to less than one whole share of NCR Common
Stock as part of the Distribution. In lieu of receiving fractional interests in
shares, each such holder of AT&T Common Stock who would otherwise be entitled to
receive a fractional interest in a share of NCR Common Stock will receive cash
for such fractional interest. The Distribution Agent will, as soon as
practicable after the Distribution Date, aggregate and sell all such fractional
interests in shares at then prevailing prices and distribute the net proceeds to
stockholders entitled thereto. See "-- Certain Federal Income Tax Consequences
of the Distribution."
NO HOLDER OF AT&T COMMON STOCK WILL BE REQUIRED TO MAKE ANY PAYMENT FOR THE
SHARES OF NCR COMMON STOCK TO BE RECEIVED IN THE DISTRIBUTION OR TO SURRENDER OR
EXCHANGE SHARES OF AT&T COMMON STOCK OR TO TAKE ANY OTHER ACTION IN ORDER TO
RECEIVE NCR COMMON STOCK TO WHICH THEY ARE ENTITLED IN THE DISTRIBUTION.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
The Distribution is intended to qualify as a tax-free distribution under
Section 355 of the Code. The Distribution is conditioned upon receipt by AT&T of
a ruling to that effect from the IRS. Accordingly, so long as the Distribution
qualifies under Section 355 of the Code, neither AT&T nor NCR will recognize any
income, gain or loss with respect to the Distribution, and AT&T shareowners will
not recognize any income, gain or loss upon the receipt of NCR Common Stock
except with respect to cash received in lieu of fractional shares.
An AT&T shareowner's tax basis for the AT&T Common Stock with respect to
which NCR Common Stock is received will be apportioned between such shares of
AT&T Common Stock and such shares of NCR Common Stock (including any fractional
shares) in proportion to the fair market value of each on the Distribution Date.
Such allocation must be calculated separately for each block of shares of AT&T
Common Stock with respect to which NCR Common Stock is received, that is,
separately for each block of shares of AT&T Common Stock that was purchased at
different times or at different costs. The holding period for such NCR Common
Stock received will include the period during which such shares of AT&T Common
Stock were held, provided that such shares of AT&T Common Stock are held as a
capital asset.
Treasury regulations governing Section 355 of the Code require that each
AT&T shareowner who receives NCR Common Stock pursuant to the Distribution
attach a statement to his or her federal income tax return for the taxable year
in which he or she receives such stock, which statement shows the applicability
of Section 355 of the Code to the Distribution. AT&T will provide each AT&T
shareowner with the information necessary to comply with this requirement.
The IRS ruling will be based on certain factual representations and
assumptions by AT&T and NCR. Neither AT&T nor NCR is aware of any present facts
or circumstances which should cause such representations and assumptions to be
untrue. However, certain extraordinary purchases of AT&T Common Stock or NCR
Common Stock, events which are not within the control of AT&T or NCR, could
cause the Distribution not to qualify as tax-free. The NCR Distribution
Agreement provides that, notwithstanding
17
anything to the contrary in the Separation and Distribution Agreement or the Tax
Sharing Agreement (as such terms are defined herein), if as a result of the
acquisition of all or a portion of the capital stock or assets of NCR the
Distribution fails to qualify as a tax-free distribution under Section 355 of
the Code, then NCR will be liable for any and all increases in Tax (as defined
in the Tax Sharing Agreement) attributable thereto. See "Arrangements Among
AT&T, NCR and Lucent -- Tax Agreements."
Should the Distribution ultimately be determined not to qualify under
Section 355 of the Code, AT&T shareowners would be required to recognize
ordinary dividend income upon their receipt of NCR Common Stock (including
fractional shares) in an amount equal to the fair market value of such NCR
Common Stock on the date of the Distribution. AT&T shareowners would have a tax
basis for such NCR Common Stock equal to such fair market value, and their tax
basis for their AT&T Common Stock would not be affected. AT&T would recognize
gain upon the Distribution equal to the excess, if any, of the fair market value
of the NCR Common Stock distributed on the date of the Distribution over AT&T's
tax basis for such NCR Common Stock.
THE FOREGOING SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES OF THE
DISTRIBUTION IS FOR GENERAL INFORMATION ONLY AND MAY NOT APPLY TO AT&T
SHAREOWNERS WHO ACQUIRED THEIR SHARES IN CONNECTION WITH THE GRANT OF A SHARE OF
RESTRICTED STOCK OR OTHERWISE AS COMPENSATION, WHO ARE NOT CITIZENS OR RESIDENTS
OF THE UNITED STATES, OR WHO ARE OTHERWISE SUBJECT TO SPECIAL TREATMENT UNDER
THE CODE. ALL AT&T SHAREOWNERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO THEM, INCLUDING THE
APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS.
LISTING AND TRADING OF NCR COMMON STOCK
There is currently no public market for NCR Common Stock. There can be no
assurance as to the prices at which trading in NCR Common Stock will occur after
the Distribution. Until NCR Common Stock is fully distributed and an orderly
trading market develops, the prices at which trading in such stock occurs may
fluctuate significantly. There can be no assurance that an active trading market
in NCR Common Stock will develop or be sustained in the future.
The prices at which NCR Common Stock trades will be determined by the
marketplace and may be influenced by many factors, including, among others,
NCR's performance and prospects, the depth and liquidity of the market for NCR
Common Stock, investor perception of NCR and of the information technology
industry, NCR's dividend policy, general financial and other market conditions,
and domestic and international economic conditions. In addition, financial
markets, including the NYSE, have experienced extreme price and volume
fluctuations that have affected the market price of many information technology
industry stocks and that, at times, could be viewed as unrelated or
disproportionate to the operating performance of such companies. Such
fluctuations have also affected the share prices of many newly public issuers.
Such volatility and other factors may materially adversely affect the market
price of NCR Common Stock.
NCR initially will have approximately stockholders of record, based
on the number of record holders of AT&T Common Stock on the Record Date. The
Transfer Agent and Registrar for the NCR Common Stock will be
. For certain information regarding options and other
equity-based employee benefit awards involving NCR Common Stock that may become
outstanding after the Distribution, see "Management" and "Arrangements Among
AT&T, NCR and Lucent -- Employee Benefits Agreement."
Shares of NCR Common Stock distributed to AT&T shareowners in the
Distribution will be freely transferable, except for securities received by
persons who may be deemed to be "affiliates" of NCR under the Securities Act of
1933, as amended (the "Securities Act"). Persons who may be deemed to be
affiliates of NCR after the Distribution generally include individuals or
entities that control, are controlled by, or are under common control with, NCR
and may include certain officers and directors of NCR as well as principal
stockholders of NCR, if any. Persons who are affiliates of NCR will be permitted
to sell their shares of NCR Common Stock only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act, such as the exemption afforded
by Section 4(2) of the Securities Act (relating to private sales) or by Rule 144
under the Securities Act.
18
See "Risk Factors -- Absence of a Public Market for NCR Common Stock" and
"-- Possibility of Substantial Sales of NCR Common Stock."
CONDITIONS; TERMINATION
The Distribution is conditioned upon, among other things: (a) the receipt
by AT&T of a ruling from the IRS to the effect that the Distribution qualifies
as a tax-free distribution under Section 355 of the Code; (b) the receipt of any
material governmental approvals and third party consents necessary to consummate
the Distribution; (c) the absence of any order, injunction, decree or other
legal restraint or prohibition preventing the consummation of the Distribution;
(d) the failure to occur of any other event that prevents the consummation of
the Distribution; (e) the acceptance for listing on a mutually agreed stock
exchange or quotations system, which is expected to be the NYSE, subject to
notice of issuance, of the NCR Common Stock (and related Rights); and (f) the
formal approval by the AT&T Board of the Distribution. The AT&T Board may, but
has no obligation to, waive any of these conditions. In addition, regardless of
whether these conditions are satisfied, the AT&T Board has reserved the right to
abandon, defer or modify the Distribution and the related transactions described
herein at any time prior to the Distribution Date. See "Arrangements Among AT&T,
NCR and Lucent -- NCR Distribution Agreement."
DIVIDEND POLICY
NCR does not anticipate the payment of any cash dividends on NCR Common
Stock in the foreseeable future. Payment of dividends on NCR Common Stock is
also expected to be subject to such limitations as may be imposed by NCR's
credit facilities. The declaration of dividends will be subject to the
discretion of the Board of Directors of NCR.
FINANCING
In order to meet its working capital needs, NCR anticipates that it will
enter into the unsecured revolving Credit Facility with a syndicate of
commercial banks and financial institutions. The Credit Facility is expected to
provide that NCR may borrow from time to time on a revolving credit basis an
aggregate principal amount of up to $600 million, subject to the terms and
conditions thereof. NCR expects to be able to use the available funds at any
time for capital expenditure needs, repayment of existing debt obligations,
working capital and general corporate purposes. NCR expects the Credit Facility
will initially mature within five years from the date of closing and contain
certain representations and warranties, conditions, affirmative, negative and
financial covenants, and events of default customary for such facilities.
Interest rates charged on borrowings outstanding under the Credit Facility are
expected to be primarily based on market rates which can vary over time. In
addition, a portion of the Credit Facility is expected to be available for the
issuance of letters of credit as required by NCR. See "Risk Factors -- Future
Capital Requirements; Absence of AT&T Funding" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition, Liquidity and Capital Resources."
BUSINESS
OVERVIEW
NCR designs, develops, markets, and services information technology
products, services, systems, and solutions worldwide. The Company's goal is to
be a world-class provider of commercial, open computing systems for High
Availability Transaction Processing and Scalable Data Warehousing solutions to
customers in all industries. NCR also seeks to take advantage of its expertise
and market presence in the retail, financial, and communications industries to
provide specific information technology solutions to customers in these targeted
industries. NCR's systems and solutions are supported by its Customer Support
Services and Professional Services offerings, and its Systemedia business, which
develops, produces, and markets a
19
complete line of consumable and media products. These products, services,
systems, and solutions are described in greater detail in the product group
descriptions below.
NCR's offerings cover a broad range of its customers' information
technology needs: from consumers' interaction and data collection, with products
including point of sale workstations, barcode scanning equipment, and
self-service devices such as ATMs; through data processing, with NCR's High
Availability Transaction Processing solutions; to data storage, manipulation,
and usage, with NCR's Teradata relational database management system and
Scalable Data Warehousing offerings. The Company's computing platforms and
associated products span midrange servers, massively parallel processing
computer systems, computer network servers and software systems, imaging and
payment systems, workstations and peripherals, business forms, ink ribbons,
customized paper rolls, and other consumable supplies and processing media.
NCR also provides Worldwide Customer Support Services and Professional
Services that include hardware maintenance, software maintenance, data
warehousing service offerings, end-to-end networking service and design, and the
implementation, integration, and support of complex solutions.
RESTRUCTURING AND TURNAROUND
BACKGROUND EVENTS -- SEPTEMBER 1991 TO JUNE 1995
NCR was merged with a wholly owned subsidiary of AT&T in September 1991. In
connection with the merger, NCR assumed operation of portions of AT&T's Computer
Systems division. A key strategic objective behind the merger was to combine
NCR's strengths in the computer business with AT&T's communications expertise,
with the goal of taking advantage of a merging of computing and communications.
In February 1992, Teradata Corporation ("Teradata"), a provider of
massively parallel computers and related proprietary database software, was
merged with a subsidiary of NCR in exchange for AT&T Common Stock. Prior to this
merger, NCR had been involved in a joint research and development project with
Teradata.
In 1993, a series of changes to the Company's business strategy and
management model were initiated. The primary goal of these changes was to
improve NCR's profitability by increasing the rate of revenue growth. NCR's
revenues had not increased materially from 1991 to 1993. These changes included
developing programs designed to increase the breadth and competitiveness of the
Company's offerings, and implementing a revised business management model and
decision-making approach.
In addition to its historical strength in the retail and financial
industries, NCR targeted four additional industries where NCR did not have
significant prior presence. The Company also began to develop plans to become a
leading PC vendor, targeting a top five worldwide market share by 1997. A new
centrally located worldwide marketing organization was created with the goal of
strengthening NCR's marketing activities. As part of the new business management
model, the worldwide marketing organization was given responsibility for making
decisions regarding the Company's overall business direction. It was also
responsible for identifying customer requirements, working with the development
groups to provide industry solutions deployable to the worldwide salesforce, and
determining resource allocations in both the sales and the development
organizations.
A new matrix management organization approach was implemented, through
which industry marketing, product marketing and development, and the geographic
sales organizations collaborated on key business decisions. In addition, in an
effort to expedite decision making, employees at all levels within the Company
were given expanded decision making authority. NCR also took several actions to
balance its business portfolio, selling several non-strategic
businesses -- including the Microelectronics components business and Applied
Digital Data Systems, Inc. ("ADDS").
These changes did not work as planned. As a result of targeting additional
industries, resources dedicated to the financial and retail industries were
diluted and NCR's market position in these two industries declined. Further, NCR
was not successful in meeting its objectives in the other targeted industries.
Revenues in the
20
product businesses other than PCs did not materially increase, and Computer
Products revenue declined 12% from 1993 to 1994, and another 12% from 1994 to
1995.
In the PC business, the level of competition intensified significantly, as
did the margin pressure faced by PC vendors. Given these margin pressures, PC
vendors needed to be low cost producers in order to be economically viable, and
needed particular competence in their supply line management and logistics
processes. NCR was not among the low cost producers and, while the Company was
successful in increasing the PC business revenues, the PC business was not
profitable for the Company.
The new matrix management organization approach also did not produce the
desired accountability. In addition, the interaction of the new matrix
management organization and the AT&T geographic management organization led to
internal conflicts that began to inhibit decision making.
During this period, the Company experienced substantial operating losses,
including an operating loss of $390 million for the first six months of 1995.
TURNAROUND PLAN -- JUNE 1995 TO SEPTEMBER 1996
In June 1995, Lars Nyberg was hired as Chief Executive Officer to assess
the NCR business, to prepare a turnaround plan, and to restore the Company to
competitive levels of profitability. In September of that year, a restructuring
of the Company was announced. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Restructuring." As discussed
below, the plan and related restructuring activities were based on five key
initiatives: focus, accountability, expense level reduction, process
improvements, and a sense of urgency.
NCR believes that this restructuring has significantly improved its results
of operations. Although NCR reported an operating loss of $1,981 million ($332
million before giving effect to restructuring and other charges) for the last
half of 1995, the beneficial impact of the restructuring plan has begun to be
reflected in operating results in the first half of 1996. The operating loss has
decreased from $390 million for the first half of 1995 to $26 million for the
first half of 1996. Selling, general and administrative expenses have declined
by $284 million, gross margins have improved by 4.9 percentage points, and
headcount (employees and contractors) has been reduced by approximately 8,100.
See "Risk Factors -- Risks Relating to Implementation of New Business Strategy."
Focus. A key component of the recovery strategy was to focus the Company
on its areas of strength. Consequently, NCR decided to reduce its focus from six
industries to three (retail, financial, and communications). With efforts
targeted at these three industries, greater attention was placed on NCR's Retail
Products and Financial Products businesses.
NCR decided to exit the PC manufacturing business and to eliminate sales of
PCs through high volume indirect channels. Instead, the Company put in place an
original equipment manufacturer ("OEM") arrangement to source a significantly
reduced volume of PCs, which would primarily be sold by NCR when required as
part of a solution in areas such as financial branch automation or point of sale
systems.
In the computer business, the Company targeted its efforts at midrange to
large systems, specifically focusing on solutions such as Scalable Data
Warehousing and High Availability Transaction Processing that have applicability
across a number of industries. Strategies were developed to take advantage of
the potential for synergies between the Systemedia and Data Services businesses
and the other NCR businesses. See "-- Systemedia Group." Finally, the Customer
Support Services and Professional Services businesses were targeted as areas of
further investment, and strategies were identified to incorporate these
resources in the offerings of the other business units. See "-- Worldwide
Services."
Accountability. As part of NCR's recovery plan, a revised business
management model was implemented. The five business units (Retail Systems Group,
Financial Systems Group, Computer Systems Group, Worldwide Services, and
Systemedia Group) were put in place and given full accountability to determine
the strategy for their offerings and industries, develop the marketing and
product programs required by NCR customers and the Company's salesforce, and
determine overall resource allocations. The three geographic
21
sales regions (Americas, Europe/Middle East/Africa, and Asia/Pacific) were given
responsibility for executing the strategies developed by the business units, and
managing the sales and service activities in their respective territories. In
addition, the pending separation of NCR from AT&T is expected to help eliminate
the conflicts that resulted from attempting to balance broader AT&T priorities
with NCR priorities. Clear financial and operational objectives were established
for all organizations, and a consistent monthly and quarterly business review
process was implemented.
Expense Level Reduction. In order to reduce expenses, a plan for a
significantly reduced expense structure was designed and implemented. As part of
this plan, NCR is consolidating facilities globally and is reducing the
Company's employment (including contractors) by approximately 8,500. NCR has
also significantly reduced selling, general and administrative expenses. The
decision to exit both PC manufacturing and the high volume indirect channel PC
business led to significant expense reductions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Restructuring."
Process Improvements. Process improvement initiatives were implemented to
address structural issues within the Company, including extensive use of
operational, customer satisfaction, employee satisfaction, and financial
metrics. Processes were implemented to drive towards best-in-class quality, and
product cost reductions were targeted through continued supply line management
improvements. The sales process has been revised and is being implemented, with
the goal of improving the suitability of solutions proposed to customer
requirements, increasing sales productivity and improving the focus on
customers. Support services processes have also been revised and are being
implemented. Pricing processes and compensation plans were modified, and product
development processes were standardized to help ensure that new offerings
effectively meet customer requirements and cost targets.
Sense of Urgency. As part of the business turnaround plan, NCR set an
objective of break-even operating results in 1996, as compared to the operating
loss (excluding restructuring and other charges) of $722 million in 1995. While
this presented a significant challenge, it also helped focus the entire
organization on the magnitude of improvement that was required. In order to make
this plan, the entire Company needed clarity on what needed to be done, and a
sense of urgency to execute the business turnaround plan.
Significant effort was spent communicating the business turnaround plan to
the organization, so that all NCR employees would understand the strategy behind
the plan to restore the Company to profitability, the expected contribution of
their organization in the turnaround, and what specific role they needed to play
in their organization.
In addition, in order to develop a broader sense of ownership and
participation in the economic results of executing this plan, the Company
implemented the WorldShares Plan, through which substantially all employees will
receive options for NCR Common Stock, based on certain NCR performance criteria.
See "Management -- NCR Stock Incentive Plans."
STRATEGY
NCR believes that the actions taken from September 1995 through June 1996
were the first steps in NCR's business turnaround plan. However, NCR does not
view these actions in and of themselves as sufficient to bring the Company back
to competitive levels of profitability.
Much of the reduction in the operating loss that was realized in the first
half of 1996 versus the first half of 1995 was attributable to two changes:
gross margin improvements due primarily to product mix changes, and the large
year over year reductions in expense levels. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for further details.
NCR expects future profit improvements to come primarily from revenue growth and
continued improvements in sales and services and rentals gross margins and not
from additional expense reductions. NCR believes this revenue growth will depend
on the success of NCR's business strategy and conditions in the information
technology industry and the markets NCR serves. See "Risk Factors."
There are three basic components to NCR's business plan: the level of
resources to be deployed, the processes through which the Company manages the
business, and the market opportunities to be pursued.
22
From a resource standpoint, NCR expects to target relatively flat headcount
levels and modest expense growth over the next few years. Within this overall
headcount level, the Company's objective is generally to reduce the headcount
dedicated to overhead functions, and increase headcount in those functions that
directly support the development, sale, and delivery of products, services,
systems, and solutions to NCR's customers.
Ongoing investment in research and development is a key requirement for
NCR's future success, and the Company will seek to make investments in research
and development in product and service offerings that will allow the Company to
remain competitive. As such, the Company expects that research and development
spending will grow at a faster rate than selling, general and administrative
spending.
NCR intends to continue to invest in improving the core operational
processes that support the business. Specific activities have been underway and
are in the deployment phase to improve two fundamental company processes -- the
worldwide sales process and the support services process. These activities are
intended to help the Company's efforts to drive continued productivity
improvements over the next several years.
From a market standpoint, NCR is focusing on increasing revenue by taking
advantage of the opportunities created by three interweaving trends: rising
consumer prominence, business globalization, and continuing advances in
information technology.
NCR expects that increasing demands by individuals for information will
require an expanding supply of relevant data for those businesses that serve and
transact with consumers. NCR believes that the retail, financial, and
communications industries are facing unprecedented challenges -- in terms of new
competitors, market convergence, and consolidation. In NCR's view, advances in
information technology are adding to this volatility; however, if this
technology is properly leveraged, it can produce new offers, new means of
servicing consumers, and new points of differentiation in these industries.
NCR believes that globalization presents another opportunity to take
advantage of NCR's strengths. While many businesses have begun the process of
globalization in the past decade, NCR has been a global company for much of its
history. The Company believes that its collective experience and presence in all
regions of the world provides a broad reaching network that gives it market
understanding and organizational knowledge which can be used by customers as
they expand into new geographic areas. NCR believes it can either understand and
address specific customer requirements on an individual, country by country
basis, or provide one common solution that can be replicated on a worldwide
basis.
Finally, NCR is focused on helping its customers apply information
technology to address their critical business issues. The Company's offerings
are targeted both at the point of transaction (such as point of sale, point of
financial exchange, or point of access) and at the point of storage and
retrieval of large volumes of data from transaction systems or other operational
systems.
NCR expects to shift its primary focus from delivering hardware products
towards providing solutions, including systems, software, services, and
supplies. The Company believes that focusing on providing systems and solutions,
versus simply providing hardware, will better enable the Company to protect and
improve gross margins in the future.
NCR does not intend to become a general purpose computing company in all
industry segments or to become a mainframe provider. Similarly, NCR does not
expect to shift to a proprietary platform or to become a broad-based general
information technology consulting firm. Rather, NCR believes that significant
opportunities exist to increase revenues in all its businesses at competitive
rates over the next few years in the three key industry segments targeted, and
in the Company's Scalable Data Warehousing and High Availability Transaction
Processing solutions offered to all industries.
The following NCR business unit descriptions discuss how NCR intends to
implement this strategy in the various NCR businesses.
BUSINESS UNIT OVERVIEW
NCR operates in one industry segment, the information technology industry,
which includes designing, developing, marketing, and servicing information
technology products, services, systems, and solutions
23
worldwide. NCR addresses the information technology industry through five
business units: the Computer Systems Group, focusing on computing systems and
the communications industry; the Retail Systems Group, focusing on the retail
industry; the Financial Systems Group, focusing on the financial industry;
Worldwide Services, focusing on Customer Support Services and Professional
Services; and the Systemedia Group, focusing on consumable and media products
for information systems. Each business unit works closely with the Company's
three regional sales groups -- Americas, Europe/Middle East/Africa, and
Asia/Pacific.
NCR principally sells through the direct sales channel, although the
indirect channel is used for some specific offerings. In addition, NCR has a
contractual arrangement with AT&T Capital through which a broad range of
financing alternatives can be offered to NCR's customers in the United States,
Canada, the United Kingdom, France, and Germany. See "Arrangement Among AT&T,
NCR and Lucent -- Other Agreements."
The business units work with one another in a matrix environment that
balances product and industry responsibilities. Each business unit has direct
responsibility for developing certain products, services, and systems: the
Retail Systems Group develops Retail Products such as point of sale terminals
and barcode scanners; the Financial Systems Group develops Financial Products
such as ATMs and item processing equipment; the Computer Systems Group develops
Client/Entry Level Server Products and Computer Products, which include the
WorldMark family of computers, NCR's Teradata relational database management
systems, as well as supporting software such as LifeKeeper(R) and Top End(R);
the Worldwide Services organization develops and delivers a variety of Support
Services and Professional Services offerings; and the Systemedia Group develops
and delivers a broad range of consumable supplies.
In addition to this direct product responsibility, three business units
have responsibility for coordinating all of NCR's offerings into a particular
industry, where these offerings could include products, services, and systems
provided by other business units. The Retail Systems Group is responsible for
developing the strategies for all NCR products, services, systems and solutions
for the retail industry, including the Retail Products that this Group develops
and manufactures, as well as Computer Products and Client/Entry Level Server
Products from the Computer Systems Group, Support Services and Professional
Services offerings from Worldwide Services, Financial Products from the
Financial Systems Group, and Systemedia Products from the Systemedia Group.
Similarly, the Financial Systems Group has responsibility for coordinating the
strategies behind all of the offerings from the other business units for the
financial industry. The Computer Systems Group has responsibility for
coordinating NCR's strategy for the communications industry.
RETAIL SYSTEMS GROUP
OFFERINGS
The Retail Systems Group (in conjunction with other NCR business units)
designs, develops, markets, and services a full line of products, services,
systems, and solutions for the retail industry. These offerings include point of
sale terminals, barcode scanners and scanner-scales, networking and computer
server technology to link these terminals and scanners on both a local and wide
area basis, and in-store and enterprise-level decision support systems.
NCR point of sale terminals are found in the merchandise checkout area of
supermarkets, department stores, specialty stores, convenience stores, fast food
counters, and at hotel registration desks and restaurants. The sales price for a
typical point of sale system installation would range from as little as $2,500
for a single terminal to around $60,000 for an eight lane networked system in a
supermarket.
NCR barcode scanners complement the point of sale terminal as part of the
merchandise checkout process, and use low-power lasers to capture product and
price information from the Universal Product Code ("UPC") barcode information
printed on product labels. Scanner-scales combine in one product the ability to
weigh produce as well as scan barcodes. A typical barcode scanner installation
would range in price from $3,000 for a single scanner at a drug store to
$100,000 for a networked system in a large mass merchandiser.
These point of sale terminals and barcode scanners are typically linked via
an in-store network, which provides for an interconnection between these devices
as well as other in-store devices such as PCs. NCR
24
provides the networking technology to link these products to NCR servers within
the store, and provides the capability for further linking to enterprise-wide
networks outside the individual store. NCR has alliance relationships with
applications developers who provide specialized retail store and enterprise
solutions as part of NCR's offerings to the retail industry.
The Retail Systems Group also provides in-store and enterprise-level
decision support solutions (such as Scalable Data Warehousing) based on products
and systems developed by NCR's Computer Systems Group. These solutions allow a
retailer to consolidate and analyze the individual transaction data generated by
the point of sale systems in order to determine trends in buyer preferences and
product sales. Analysis of this detailed data allows the retailer to make better
decisions about inventory, purchases, and distribution, which in turn should
help the retailer more accurately meet the needs of its customers.
The Retail Systems Group uses the Professional Services organization to
develop solutions to meet the needs of a variety of retail customers.
Professional Services provides consulting services to help customers design,
integrate, install and support in-store networks of scanners, point of sale
terminals, network servers, in-store and enterprise-level decision support, and
data warehousing systems. Professional Services incorporates third party
products and software as required to create individualized solutions for
specific customer needs.
Within the Retail Systems Group, NCR has two research organizations focused
on human-to-machine interface technology. These groups work closely with
customers to develop solutions designed to enhance customer service and employee
productivity, based on their research on how information technology systems can
be made easier to use. Their services include transaction performance modeling,
ergonomic assessments, checkstand design, training design and evaluation, user
interface design and technology assessment.
TARGET MARKET
The major segments of the retail industry market served by NCR are general
merchandise, food, and hospitality. The general merchandise segment includes
department stores, specialty retailers, mass merchandisers, and catalog stores;
the food segment includes supermarkets, hypermarkets, grocery, drug,
wholesalers, and convenience stores; and the hospitality segment includes
lodging (hotel/motel), fast food/quick service, and restaurants.
NCR believes that retail industry customers base their buying decisions on
a number of criteria including the quality of the solution or product, total
cost of ownership, industry knowledge of the vendor, and the quality of the
vendor's support and professional services.
BUSINESS STRATEGY
NCR believes that, over the past several years, a number of significant
trends have been reshaping the retail industry: major consolidations of
retailers, continuing cost and profit pressure, the increase in price/value
conscious and "time poor" consumers, growth in demand for offerings tailored for
and targeted at individual consumers, and a corresponding growth in the need for
superior customer service. NCR also believes that retailers must focus on four
key success factors: merchandising, brands offered, store location, and customer
intimacy. In NCR's view, the combined implication of these changes and success
factors for information technology providers is that retailers are searching for
products and services that will help them better understand and retain their
customers, reduce costs, increase productivity, and drive revenue growth.
NCR's product, services, systems, and solutions are targeted at addressing
these concerns. NCR believes its customers can improve customer retention and
increase productivity with the capture and analysis of detailed transaction data
using NCR's Scalable Data Warehousing solutions. Through use of Scalable Data
Warehousing technology, retailers can correlate customer purchase trends with
geographic information, time of year/time of day, or other data parameters. NCR
believes that this will allow the retailer to provide improved levels of service
by having the right inventory on hand at the right place, the right time, and
the right price.
In addition, NCR believes that this technology will facilitate retailers
implementing a "neighborhood retailing" approach, where retailers can manage
every location as if it were their only location, each product as
25
if it were their only product, and each customer as if it were their only
customer. The decisions supporting this approach are based on an analysis of the
detailed activity in each location, using the information collected at point of
purchase and provided by the retailer's data warehouse. NCR's Scalable Data
Warehousing solutions allow a retailer to choose the size of a system based on
current requirements, yet readily expand the system as the retailer's business
and information needs grow.
NCR believes retailers are realizing productivity improvements through use
of NCR's point of sale/point of service terminals that are easy to use, readily
reconfigurable through software, and are networked to in-store or
enterprise-level servers for timely data capture and analysis and scanner-based
price verifiers that allow customers to check for themselves prices on
individual products.
NCR believes it is among a small group of vendors who are able to
incorporate all of these components of an information technology solution for
their worldwide retail customers. NCR also believes that the Company's broad
range of offerings and in-depth experience in the retailing industry will create
opportunities for it in the emerging countries in Europe, Latin America, and the
Pacific Rim to take advantage of the growing level of consumerism in those
regions.
DISTRIBUTION CHANNELS
NCR's Retail Products are marketed through a combination of direct and
indirect channels. The majority of the networked solutions and Scalable Data
Warehousing solutions sold into the retail industry are sold through the direct
sales force. In recent years, over 70% of the retail-specific product sales
(primarily barcode scanners and point of sale terminals) are sold by the direct
sales force; the remainder are sold through indirect channels.
In addition to being sold by NCR's direct sales force, NCR Retail Products
are sold to some 20,000 or more retailers through worldwide alliances with over
300 value-added resellers, distributors and dealers. NCR provides supporting
services, including collateral sales materials, sales leads, porting facilities,
and marketing programs, to this sales channel.
MANUFACTURING
The Retail Systems Group designs, develops and manufactures barcode
scanners and point of sale terminals at its headquarters facility in Atlanta,
Georgia. In addition, point of sale terminals are assembled at the NCR facility
in Dublin, Ireland. Receipt printers and low-end point of sale terminals are
sourced via OEM arrangements. Network servers and Scalable Data Warehousing
solutions are supplied by NCR's Computer System Group.
COMPETITION
NCR faces significant competition in the retail industry in all geographic
areas where it operates. The bases of competition can vary by geographic area
but typically include the quality, total cost of ownership, industry knowledge
of the vendor, and quality of the vendor's support and professional services.
Competitors also vary by product line and geographic area. See "Risk
Factors -- Competition."
At the store level, principal competitors include: Siemens Nixdorf
International ("SNI"), Fujitsu Ltd. ("Fujitsu"), ICL plc ("ICL"), and
International Business Machines Corporation ("IBM") for point of sale terminals
and peripherals; Spectra-Physics, Inc., Symbol Technologies, Inc., and
Metrologic Instruments, Inc. for barcode scanners; and IBM and Hewlett-Packard
Company ("Hewlett-Packard") for in-store networking and decision support. At the
enterprise level, scalable decision support and Scalable Data Warehousing
solutions can range from $300,000 for 10 gigabytes of data to over $10 million
for terabytes of data (over 1,000 gigabytes). Principal competitors for decision
support and Scalable Data Warehousing systems include IBM, Hewlett-Packard, and
Tandem Computers Incorporated ("Tandem").
26
FINANCIAL SYSTEMS GROUP
OFFERINGS
The Financial Systems Group (in conjunction with other NCR business units)
designs, develops, markets, and services a broad line of products, services,
systems and solutions for the financial industry, with particular focus on
retail banking. These offerings include self-service devices, image and payment
systems, retail bank branch automation (in "virtual" as well as real bank
branches), and Relationship Management Solutions designed to enable financial
institutions to manage better their interaction with their customers.
NCR's self-service terminals include both traditional ATMs as well as
customer-operated information terminals. NCR offers a broad product family which
is feature rich, modular, and reliable, with ATMs ranging in price from $6,000
to $40,000. NCR believes that the combination of open systems architecture,
strong system management tools, and flexible application development tools
should allow customers to implement proactively new products and
services -- such as check cashing, bill payments, and smart cards -- quickly and
easily. NCR believes that its ATM product line reflects advanced functionality,
reliability, and industry focus, which has helped NCR to maintain its world
leadership position in ATM shipments. For 1995, based on number of units
shipped, NCR was ranked first in worldwide ATM shipments, according to The
Nilson Report published by HSN Consultants Inc., a financial research company.
NCR provides a full line of item/image processing products, services,
systems, and solutions which are designed to allow financial institutions to
provide better service while lowering their costs of processing paper, image,
and electronic transactions. NCR offers a complete set of imaging-based item
processing solutions designed to replace less efficient legacy check processing
systems. These imaging systems electronically capture a "picture" of the item
and, through handwriting recognition software algorithms, captures the amounts
written on the item for use in the settlement process. This offering is intended
to help banks reduce processing costs, while at the same time enhancing the
value of the information captured by the financial institution during the item
processing process.
NCR's Relationship Management Solutions are based on the Company's Scalable
Data Warehousing offerings, combined with the skills and knowledge of NCR's
Professional Services organization. The Relationship Management Solution
includes capabilities that address issues such as Customer Retention Analysis,
Transaction Analysis, and Campaign Management. These solutions help financial
institutions manage their interactions with individual customers, with the goal
of optimizing the level of service provided and increasing the profit
contribution of each customer. The decision support capabilities provided as
part of these solutions are designed to allow banks to transition from having
limited insight into detailed customer data, to being able to use detailed
information to support the management of their business. The benefits of this
transition can include improving risk management processes, implementing
marketing programs tailored for specific customer profiles, or allowing the
pricing of services based on the customer's transaction and balance history.
TARGET MARKET
The financial industry includes commercial banks, retail banks, credit
unions and thrifts, security and brokerage firms, credit card issuers, insurance
providers, and capital providers.
NCR serves a number of segments of the financial industry. These segments
include retail banking, which covers both traditional and new providers of
consumer banking services, financial services, such as the insurance and card
payment industries, and also the non-traditional financial services segment,
covering companies that have diversified into the financial services arena to
complement their core business. NCR's financial customers are located throughout
the world in both established and emerging markets. They range from very large
to very small financial service providers, reflecting, in NCR's view, its
ability to develop solutions suited to the broad spectrum of companies that make
up the world's financial services industry.
NCR believes that financial industry customers base their buying decisions
on a number of criteria, including the industry knowledge of the vendor, the
economic justification behind implementing the solution,
27
the vendor's ability to provide and support a total end-to-end solution, the
vendor's ability to integrate new and existing systems, and the fit of the
vendor's strategic vision with the customer's strategic direction.
BUSINESS STRATEGY
Over the past few years, NCR believes that the financial industry has
experienced significant changes including the following. Consumers of financial
services are demanding better service and more choices, all at a lower cost.
They are much less loyal to their financial service providers, but expect a more
personalized approach to service delivery. In addition, the bank branch is no
longer the most important point of consumer access, as consumers increasingly
demand anytime, anywhere convenience, encouraging the growth of off-premises
service provision. The marketplace is also expanding with the entry of non-bank
providers of financial services, including major retailers and mutual fund
companies.
NCR believes that these changing consumer expectations and increased levels
of competition have led the providers of financial services to seek technology
that will reduce their operating costs, while at the same time increase their
levels of service. In NCR's view, many parallels can be drawn with the
experiences of the retail industry -- the information technology that helps
financial service providers offer more tailored services at lower cost is seen
to be the key to success in this changing and highly competitive industry, just
as it is with retailers.
Information technology provides solutions to many of the challenges faced
by the financial industry. Improvements in operational efficiency can be
achieved through the development of the automated bank branch. Information
technology also supports alternative delivery channels, such as self-service,
telephone, and Internet banking. NCR believes that Scalable Data Warehousing
technology will allow the intelligent and profitable use of customer information
during any financial transaction. Such activities can include marketing related
products and services during an ATM transaction, or providing a personalized
telephone banking service where a customer's financial history is instantly
available to the bank representative that has taken the call. ATM transactions
are becoming more sophisticated with on-line assistance provided from remote
banking representatives linked to the customer by video-conferencing technology.
NCR's strategy in the financial industry is focused on two key
opportunities. First, the Company believes that its range of information
technology offerings can help the world's financial institutions improve their
profits and competitive advantage by helping them better understand and serve
their customers. By continuing to build on NCR's self-service products,
item/image processing solutions, and Relationship Management Solutions, NCR
seeks to help the financial service provider capture and convert a mass of
customer data into a revenue generating asset.
Second, specific focus is being placed on the world's emerging markets such
as Central and Eastern Europe, China, India, and Indonesia, where the provision
of financial services is less developed, particularly in light of the growing
consumerism in these countries. New market opportunities are also being explored
in partnership with NCR's Retail Systems Group as non-financial customers, such
as retail chains, are purchasing ATMs for their stores and renting them to banks
and other financial services providers.
DISTRIBUTION CHANNELS
NCR has historically distributed most of its financial products, services,
systems, and solutions through a direct sales channel which is targeted at
larger customers, although some revenues are generated through distributors. The
Financial Systems Group expects to increase the level of business transacted
through indirect channels and partners, where appropriate, in current and
emerging markets.
MANUFACTURING
The Financial Systems Group designs, develops, and manufactures self
service terminals and image/item processing products in Dundee, Scotland and
Waterloo, Canada. Networked servers, Scalable Data Warehousing solutions, and
peripherals are supplied by NCR's Computer Systems Group. Specialized ATMs
marketed in Japan are sourced through an OEM arrangement.
28
COMPETITION
NCR faces significant competition in the financial industry in all
geographic areas where it operates. The bases of competition can vary but
typically include the industry knowledge of the vendor, the economic
justification behind implementing the solution, the vendor's ability to provide
and support a total end-to-end solution, the vendor's ability to integrate new
and existing systems, and the fit of the vendor's strategic vision with the
customer's strategic direction. Competitors also vary by product line and
geographic area. NCR's primary competitors include Diebold, Incorporated,
Fujitsu, SNI, and Omron Electronics Inc. in ATMs, IBM and BancTec, Inc. in
image/item processing, and SNI, Hewlett-Packard, and Unisys Corporation
("Unisys") in data warehousing. See "Risk Factors -- Competition."
COMPUTER SYSTEMS GROUP
OFFERINGS
The Computer Systems Group (in conjunction with other NCR business units)
designs, develops, markets, and services computing products, services, systems,
and solutions which integrate hardware, operating software, middleware,
professional services, and support services. These solutions include products
and services from NCR as well as from other leading technology vendors. The
Computer Systems Group is also responsible for coordinating the development of
the strategies behind NCR's offerings to the communications industry.
As a part of these computing solutions, the Computer Systems Group designs,
develops, and markets a line of open scalable computers, under the WorldMark
brand, which range from midrange computer systems to very large massively
parallel enterprise-wide systems. These open products are based on
non-proprietary, industry standard components such as Intel microprocessors,
Microsoft Windows NT, and UNIX. The WorldMark servers are the foundation of
NCR's Scalable Data Warehousing and High Availability Transaction Processing
solutions. The Computer Systems Group also offers PCs, disk arrays, and
networking products sourced from other vendors in order to provide fully
integrated solutions to NCR's customers.
NCR's Scalable Data Warehousing solutions are intended to offer businesses
the ability to capture information about their customers, markets, and products
from a myriad of operational systems, and to give decision makers the ability to
access and analyze that information. These solutions incorporate NCR WorldMark
servers as well as NCR's Teradata relational database management system, other
commercial databases such as Oracle or Informix, software tools, and services.
The underlying technology provides customers with the ability to scale broadly
these systems -- from entry level 10 gigabyte systems to large data warehouses
containing terabytes of information -- all within the same hardware and software
platform. The Scalable Data Warehousing solutions also serve as the foundation
for a number of NCR's offerings to the communications industry.
NCR's High Availability Transaction Processing solutions are designed to
maximize computer uptime for critical business environments. These solutions are
based on the WorldMark server platform, combined with software and services
designed to ensure high system availability. NCR LifeKeeper software minimizes
downtime by recognizing and recovering hardware component or application faults
before a total system failure occurs. NCR Top End middleware software reroutes
transactions during a system failure, working in conjunction with LifeKeeper for
additional system protection.
In addition to developing the strategies behind NCR's offerings to the
communications industry, the Computer Systems Group works with the Retail
Systems Group, the Financial Systems Group, and Worldwide Services to bring
industry specific Scalable Data Warehousing and High Availability Transaction
Processing solutions to the retail and financial industries.
TARGET MARKET
The customers of NCR's Computer Systems Group are in a number of
industries. While a primary focus is in the retail, financial, and
communications industries, NCR also markets Scalable Data Warehousing and High
Availability Transaction Processing solutions to a number of other industries. A
number of companies in
29
the communications industry are competitors of AT&T's communications services
business and have been reluctant to make purchases from an AT&T subsidiary. NCR
expects that its separation from AT&T will assist its efforts to market to these
companies.
BUSINESS STRATEGY
The majority of the Computer Systems Group's customers provide products and
services to individual consumers. NCR believes these consumers are becoming more
educated, are placing less focus on brand loyalty, and are expecting service to
be provided anytime, anywhere. NCR believes that information technology
advancements are helping fuel this change in consumer behavior and that, as
information technology becomes more broadly available and affordable, it will
further enable consumers to connect to each other and to the information and
services they want and need. Taken together, these changing consumer
demographics and technology advancements are in turn placing demands on
information technology infrastructures to extend their reach and connect
directly to end consumers.
The end consumer is expected to drive new priorities among the Computer
Systems Group's customers, such as requiring around the clock service to a
global customer base, increasing focus on customer retention, and analyzing
business information at a highly detailed level. As a result, information
technology priorities are expected to be delivery of systems designed for high
application availability, with greater flexibility; technology linkages between
customers, partners, and suppliers; access to decision support through data
warehousing systems; and integrated informational and transactional systems.
NCR's strategy in the Computer Systems business is focused on providing
commercial, open systems for data warehousing and transaction processing to
companies worldwide.
NCR's Scalable Data Warehousing solutions are intended to allow companies
to capture the most critical information about their customers, markets, and
products from a myriad of operational systems, and to give decision makers the
ability to analyze and manage their business at a new level of detail.
According to International Data Corporation ("IDC"), a computer industry
research company, NCR has the highest market share in the strategic business
analysis market segment, which consists of data warehousing. NCR believes it has
more experience in data warehousing (12 years) than any firm in the industry.
NCR has over 500 installed Scalable Data Warehousing customers worldwide,
ranging in size from small data warehouses to the world's largest commercial
enterprise data warehouse. Through its Computer Systems Group, NCR offers
scalable computers, the powerful Teradata relational database, software and
service partnerships, and programs to assist customers in the many aspects of
building a data warehouse. In addition, NCR's Professional Services organization
provides business and technical services needed to implement these solutions.
NCR's High Availability Transaction Processing solutions are designed to
give companies the ability to maximize computer uptime for those critical
business environments where downtime can mean significant loss of revenue and
customers. The rising costs of computer downtime (costing businesses almost $4
billion annually according to Network Computing, a computer industry
publication), combined with today's global business environment, have made
maximizing system uptime a primary concern, especially as businesses continue to
migrate to open systems. NCR is a leader in delivering highly available open
computing solutions, and offers customers in many industries the following
strategic investment in High Availability Transaction Processing: an integrated
hardware platform, commercial database and several business applications, a
comprehensive services portfolio, and partnerships with companies including
Microsoft and Intel.
The Computer Systems Group also develops strategies for using these
offerings in the communications industry. NCR has significant experience
marketing systems and solutions to both AT&T and Lucent. NCR provides solutions
in three areas. Utilizing NCR's Scalable Data Warehousing solutions, NCR
provides its telecommunications customers with solutions targeted at addressing
the areas of customer acquisition and customer retention. In partnership with
Lucent, NCR provides a suite of Operations and Support Systems offerings. NCR
also works with a number of third parties to provide solutions in the areas of
call center, billing, and collection. Based on this experience and experience
with other telecommunications companies,
30
NCR expects to continue to provide Scalable Data Warehousing and High
Availability Transaction Processing solutions to the communications industry.
DISTRIBUTION CHANNELS
The Computer Systems Group's products and solutions are marketed through a
combination of direct and indirect channels. The direct sales force targets
major accounts, and approximately 85% of NCR's revenue for the Computer System
Group's offerings has historically come from the direct sales force. The
remaining revenues have been generated through the indirect channel, through
alliances with value-added resellers, distributors, and OEMs.
MANUFACTURING
The Computer Systems Group develops and manufactures computers in Columbia,
South Carolina, and Dublin, Ireland. The Company also maintains research and
development facilities in Rancho Bernardo and El Segundo, California. Selected
systems and components are sourced through various OEM arrangements.
COMPETITION
The Computer Systems Group faces significant competition in all geographic
areas where it operates. NCR believes that key competitive factors in this
market are experience, customer referrals, database sophistication, support and
professional service capabilities, quality of the solution or product, total
cost of ownership, industry knowledge of the vendor, and platform scalability.
Also the movement towards common industry standards (such as Intel processors
and UNIX and Microsoft operating systems) has accelerated product development,
but has also made differentiation more difficult. Commoditization has extended
beyond PCs into the server business. See "Risk Factors -- Competition."
NCR's competitors include traditional system vendors such as IBM,
Hewlett-Packard, Digital Equipment Corporation ("Digital"), Sun Microsystems,
Inc. ("Sun Microsystems"), Tandem, Sequent Computer Systems, Inc. ("Sequent"),
SNI, Pyramid Technology Corporation ("Pyramid"), Fujitsu, NEC Corporation,
Hitachi Ltd., Groupe Bull, Olivetti SpA, ICL, and Unisys. NCR also competes with
companies such as Compaq Computer Corporation and Dell Computer Corporation, who
have expanded their product lines to include servers. In the data warehousing
market, NCR competes primarily with IBM, Digital, Tandem, Sequent, Pyramid,
Hewlett-Packard, and Sun Microsystems.
In the transaction processing market, customers require robust software,
reliable hardware, and systems integration skills. Many competitors offer one or
two of these components, but NCR believes it is one of few companies that can
provide a complete, open solution. The primary competitors in this market are
Hewlett-Packard, IBM, Tandem, and Sun Microsystems.
WORLDWIDE SERVICES
OFFERINGS
NCR's Worldwide Services organization delivers a wide range of Professional
Services and Customer Support Services to customers in over 130 countries. The
Professional Services business delivers technology services intended to help
customers fully realize the benefits of their information technology solutions,
including consulting, integration, and education services. The Customer Support
Services business provides services required to implement and maintain a
customer's technology environment and provide high system availability,
including implementation services, multivendor services, system support
services, network maintenance and operations, and industry-specific support
services.
Worldwide Services plays a key role in NCR's business, and provides a core
skill set required in order to deliver complete products, services, systems, and
solutions to all of NCR's customers. The value delivered by Worldwide Services
is a key point of differentiation for many of NCR's offerings. The solutions
offered by each of NCR's business units involve the implementation of complex
technology in divergent customer
31
environments and require an effective services organization -- both Professional
and Support Services -- to take this core technology and implement it within the
individual customer situation.
The Worldwide Services organization is comprised of approximately 20,000
service professionals. This organization provides services to customers both in
the Company's target industries and in other industries. Worldwide Services aims
to use its global infrastructure and comprehensive service portfolio to
strengthen NCR's service position in the three targeted industries. The Data
Services business focuses on providing a variety of data processing and
outsourcing solutions, primarily to the financial industry.
NCR has announced its intention to divide the current Worldwide Services
organization into two business units, and to combine NCR's internal information
systems organization with the Professional Services business. This will create a
sixth business unit, Professional Services and Information Systems. The plans
for this business unit are currently being developed, with the goal of
establishing this new business unit in early 1997. For the purposes of this
Information Statement, Professional Services will be considered to be part of
the Worldwide Services organization, as the planned change in organization
structure is not expected to have a significant impact on the core strategic
focus of the business.
TARGET MARKET
The markets for NCR's Worldwide Services offerings are principally in the
industries which are targeted by the other NCR business units. As a result,
Worldwide Service's primary focus is delivering professional and support
services worldwide in the retail, financial, and communications industries.
Worldwide Services also supports NCR's Scalable Data Warehousing and High
Availability Transaction Processing activities in all industries. In addition,
Worldwide Services provides services in geographic areas, outside the targeted
industries, where it can effectively leverage its current resources and
capabilities.
BUSINESS STRATEGY
Companies within NCR's targeted industries are implementing information
technology to address their business problems and become more competitive within
their markets. With the increasing pace of technology change, customers often do
not have sufficient internal resources and skills to implement information
technology solutions by themselves. Instead, they are increasingly relying on
information technology service vendors to provide assistance with the
implementations.
Customer Support Services provides installation and ongoing maintenance
services for both NCR and non-NCR systems. The Company believes that significant
opportunities for growth exist in the areas of network operations, help desk
services, and multivendor service management. NCR is also seeking to expand its
information technology implementation services business (system staging and
installation), while at the same time seeking to minimize declines in the
hardware maintenance business. NCR will continue to work to capitalize on the
remote monitoring and diagnostic capabilities of many of its products in order
to reduce costs and enhance the Company's ability to provide proactive support
to customers.
Key growth opportunities in Professional Services are expected to include
customer information consulting, data warehousing consulting, information
technology architecture consulting, network planning and design, and project
management. NCR believes that each of these services plays a major role in
allowing a customer to analyze its customer information and to link its
information technology architecture with its business strategies. Project
management services are offered to help customers implement solutions on time
and within budget.
Worldwide Services intends to continue to develop integrated service
solutions for key customer segments, such as the ATM business. Worldwide
Services intends to provide a support offering to ATM customers called Managed
Solutions for Self-Service. This offering will provide customers with a single
source approach to managing and maintaining their ATM network, and includes
support services such as first and second line maintenance, cash replenishment,
overall ATM performance management, and consumables management and
replenishment.
32
The value and quality of the offerings from Worldwide Services depend on
the strength of its people and the service delivery business processes.
Accordingly, Worldwide Services targets continued investment in the training and
development of its people and the systems and processes supporting their
activities.
These services are an essential component of NCR's solution offerings. The
services organization works with NCR customers to identify their specific
information management needs and then designs individualized NCR technology
solution and implementation plans for their businesses.
COMPETITION
NCR's Worldwide Services' businesses faces significant competition in all
geographic areas where it operates. NCR believes a key competitive factor in
these businesses is the ability of the service providers to deliver high quality
services, reflecting strong business and technical knowledge, within an agreed
upon cost and time commitment. Worldwide Services' major competitors in its two
main businesses include IBM, Digital, Hewlett-Packard, and Unisys in the
Customer Support Services business, and IBM, Electronic Data Systems Corporation
("EDS"), Andersen Consulting LLP, Hewlett-Packard, Unisys, and Cap Gemini Sogeti
S.A. in the Professional Services business. See "Risk Factors -- Competition."
SYSTEMEDIA GROUP
PRODUCTS
The Systemedia Group develops, produces, and markets a complete line of
consumable and media products for information systems, including transaction
processing media, business forms, and a full line of integrated equipment
solutions. Specific products offered include stock and custom paper rolls,
pressure sensitive labels, label/form combinations, thermal transfer ribbons,
impact inking media, high speed laser forms, encoding products, mailers, and ink
jet media.
Many of these products are offered as complementary parts of broader NCR
systems and solutions, including point of sale systems, ATMs, and item
processing systems. Systemedia products are also integral parts of NCR's overall
support service offerings to customers, such as the Managed Solutions for
Self-Service to be provided to NCR's ATM customers.
The Systemedia Group works closely with its customers to develop specific
solutions in areas such as inking, printer cassette design and manufacture, thin
film coating for thermal transfer ribbons, and labels and label/form
combinations.
TARGET MARKET
The major industry segments targeted by the Systemedia Group include
general merchandise, food and drug, hospitality, financial, and consumer goods
manufacturing.
BUSINESS STRATEGY
In NCR's view, a number of important changes have affected the consumable
products industry, including the growth in technologies such as electronic and
laser printed forms; the demand for high-speed laser printer consumables; the
growth in barcode printing applications (creating additional demand for thermal
transfer ribbons utilizing thin film coating technologies); and continued
recycling pressures driving demand for remanufactured inkjet and laser printer
cartridges.
NCR believes that each of these industry changes presents opportunities for
NCR, given its knowledge of label/form design, high-speed laser printer forms,
the life cycle of printer technology, thin film coating, paper roll
manufacturing, and printer cassette design and manufacture. Other industry
changes, including electronic data interchange, e-mail, and the decrease in
impact printer usage, present challenges for the Company.
Consumable media can have a significant impact on the overall cost of
ownership of many of the systems NCR offers to its customers, including point of
sale systems, ATMs, item processing systems, and high volume printer
applications. As such, a key business strategy is to integrate Systemedia Group
offerings with
33
NCR systems. NCR believes that effective supply line management and alliance
relationships are key points of differentiation.
NCR believes that when consumables are integrated into NCR's Customer
Support Services offerings, these offerings are strengthened by providing
customers one seamless solution and point of accountability. In addition, NCR
also believes that system reliability is increased and the customer's total cost
of ownership is reduced by providing high quality media as part of the Customer
Support Services offering.
DISTRIBUTION CHANNELS
The Systemedia Group has a direct sales force in 19 countries focusing on
providing consumable products to major accounts. In addition, Systemedia Group
products are sold through office products resellers, value added resellers, and
an inbound and outbound telemarketing organization.
MANUFACTURING
The Systemedia Group's global manufacturing organization spans six
continents with 19 manufacturing plants, including six in the United States.
COMPETITION
Competition in the consumable products business is significant and varies
by geographic area and by product group. The primary areas of competitive
differentiation are typically product quality, logistics and supply chain
management expertise, and total cost of ownership. While price is always a
factor, Systemedia Group focuses on total cost of ownership for all its products
and services. Total cost of ownership takes into account not only the per unit
cost of the media, but also service, usage, and support costs over the life of
the system. Key competitors include The Standard Register Company, The Reynolds
and Reynolds Company, Wallace Computer Services, Inc., Sony Corporation, Moore
Corporation Limited, International Imaging Materials, Inc., Nu-Kote Holding,
Inc., Rittenhouse Paper Co., Sopano S.A., Rolltech Ltd., Katsumata, K.K., and
Paper Manufacturers Inc. See "Risk Factors -- Competition."
RESEARCH AND DEVELOPMENT
In the fiscal years ended December 31, 1995, 1994 and 1993, research and
development expenditures were $585 million, $500 million and $571 million,
respectively, which were, as a percent of sales, 7.2%, 5.9% and 7.9%,
respectively. In connection with the formation of Lucent, NCR entered into an
agreement with Lucent (the "Technology Access and Development Project
Agreement") governing the future commercial relationship between NCR and
Lucent's Bell Laboratories ("Bell Labs"). Pursuant to the Technology Access and
Development Project Agreement, NCR will have access to the results of certain
Bell Labs research and development activities, and Bell Labs will perform
specific research and development projects on a contract basis for NCR. NCR will
pay a periodic retainer fee for such access and an additional fee for each
research and development project. Such agreement will terminate on December 31,
1999, but is subject to renewal by mutual consent. See "Arrangements Among AT&T,
NCR and Lucent -- Other Agreements."
BACKLOG
NCR's operating results and the amount and timing of revenue are affected
by numerous factors, including the volume, mix, and timing of orders received
during a period and conditions in the information technology industry and in the
general economy. The Company believes that backlog is not a meaningful indicator
of future business prospects due to the shortening of product delivery
schedules, and the significant portion of revenue related to its Customer
Support Services business, for which order information is not recorded.
Therefore, the Company believes that backlog information is not material to an
understanding of its business.
34
SOURCES AND AVAILABILITY OF RAW MATERIALS
NCR uses many standard parts and components in its products and believes
there are a number of competent vendors for most parts and components. However,
a number of important components are developed by and purchased from single
sources due to price, quality, technology or other considerations. In some
cases, those components are available only from single sources. In order to
secure components for production and introduction of new products, NCR may make
advance payments to certain suppliers and may enter into noncancelable purchase
commitments with vendors with respect to the purchase of components. See "Risk
Factors -- Reliance on Suppliers and Partners."
PATENT AND TRADEMARKS
NCR owns approximately 1,150 patents in the United States and 1,250 in
foreign countries. These foreign patents are counterparts of NCR's United States
patents. Many of the patents owned by the NCR are licensed to others and NCR is
licensed to use certain patents owned by others. In connection with the
Distribution, NCR has entered into an extensive cross-licensing agreement with
AT&T and Lucent. See "Arrangements Among AT&T, NCR and Lucent -- Patent Licenses
and Related Matters." While NCR's portfolio of patents and patent applications
is of significant value to NCR, NCR does not believe that any particular
individual patent is itself of material importance to NCR's business as a whole.
NCR has registered certain trademarks in the United States and in a number
of foreign countries. NCR considers the trademark "NCR" and many other of its
trademarks to be valuable assets. NCR is currently involved in a trademark
dispute with Gartner Group, Inc. pursuant to which NCR is seeking a declaratory
judgment that its corporate logo is valid and does not infringe the corporate
logo of Gartner Group, Inc.
EMPLOYEES
At June 30, 1996, NCR had approximately 38,600 employees and contractors
including approximately 37,000 employees. Approximately 19,000 of NCR's
employees were located in the United States. Of these domestic employees,
approximately 3% are represented by unions. There have been no significant labor
disputes or work stoppages in the past five years. As part of its restructuring
plan, NCR's employment (including contractors) is being reduced by approximately
8,500, of which approximately 8,100 were separated prior to June 30, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Restructuring."
LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS
In the normal course of business, NCR is subject to regulations,
proceedings, lawsuits, claims and other matters, including actions under laws
and regulations related to the environment, health and safety, among others.
Such matters are subject to the resolution of many uncertainties, and
accordingly, outcomes are not predictable with assurance. Although NCR believes
that amounts provided in its financial statements are currently adequate in
light of the probable and estimable liabilities, there can be no assurances that
the amounts required to discharge alleged liabilities from lawsuits, claims and
other legal proceedings and environmental matters, and to comply with applicable
environmental laws, will not exceed the amounts reflected in NCR's financial
statements or will not have a material adverse effect on the Company's
consolidated financial condition, results of operations or cash flows. Any
amounts of costs that may be incurred in excess of those amounts provided as of
June 30, 1996 cannot be determined.
Among the lawsuits and claims pending against NCR as of June 30, 1996,
there were approximately 100 individual product liability claims alleging that
the Company's products, including PCs, supermarket barcode scanners, cash
registers and check encoders, caused so-called "repetitive strain injuries" or
"cumulative trauma disorders," such as carpal tunnel syndrome. In such lawsuits,
the plaintiff typically alleges that he or she suffers from injuries caused by
the design of the product at issue or a failure to warn of alleged hazards.
These plaintiffs seek compensatory damages and, in many cases, punitive damages.
Most other manufacturers of these products have also been sued by plaintiffs on
similar theories. Ultimate resolution of the litigation against the Company may
substantially depend on the outcome of similar matters of this type pending in
35
various state and federal courts. The Company has denied the merits and basis
for the pending claims against it and intends to continue to contest these cases
vigorously.
NCR's facilities and operations are subject to a wide range of
environmental protection laws in the United States and other countries related
to solid and hazardous waste disposal, the control of air emissions and water
discharges, and the mitigation of impacts to the environment from past
operations and practices. NCR has investigatory and remedial activities,
including characterization and cleanup actions, underway at a number of
currently and formerly owned or operated facilities to comply, or to determine
compliance, with applicable environmental protection laws. NCR has been
identified, either by a governmental agency or by a private party seeking
contribution to site cleanup costs, as a PRP at a number of sites pursuant to a
variety of statutory schemes, both state and federal, including the FWPCA and
comparable state statutes, and CERCLA, and comparable state statutes.
In February 1996, NCR received notice from the USF&WS that it considers NCR
a PRP under the FWPCA and CERCLA with respect to alleged natural resource
restoration and damages to the Fox River System due to, among other things,
sediment contamination in the Fox River System allegedly resulting from
liability arising out of NCR's former carbonless paper manufacturing operations
at Appleton and Combined Locks, Wisconsin. USF&WS has also notified a number of
other manufacturing companies of their status as PRPs under the FWPCA and CERCLA
for natural resource restoration and damages in the Fox River System resulting
from their ongoing or former paper manufacturing operations in the Fox River
Valley. USF&WS and two Indian Tribes have stated their intention to conduct a
Natural Resource Damage Assessment to determine and quantify the nature and
extent of alleged injury to natural resources. In addition, NCR has been
identified, along with a number of other companies, by the WDNR with respect to
alleged liability arising out of alleged past discharges that have contaminated
sediments in the Fox River System. NCR is also actively pursuing discussions
with the WDNR regarding the Company's alleged liability. NCR's share, if any, of
such cleanup costs or natural resource restoration and damages liability cannot
be predicted with certainty at this time due to (i) the unknown magnitude,
scope, and source of any alleged contamination, (ii) the absence of identified
remedial objectives and methods, and (iii) the uncertainty of the amount and
scope of any alleged natural resource restoration and damages. At this point,
NCR believes that there are additional PRPs who may be liable for such natural
resource damages and remediation costs. Further, in 1978, NCR sold the business
to which the claims apply and believes the claims described above are the
responsibility of the buyer and its former parent company pursuant to the terms
of the sales agreement. In this connection, the Company has commenced litigation
against the buyer to enforce its position.
It is difficult to estimate the future financial impact of environmental
laws, including potential liabilities. NCR accrues environmental provisions when
it is probable that a liability has been incurred and the amount of the
liability is reasonably estimable. Management expects that the amounts provided
as of December 31, 1995 and June 30, 1996 will be paid out over the period of
investigation, negotiation, remediation, and restoration for the applicable
sites, which may be 30 years or more. Provisions for estimated losses from
environmental remediation are, depending on the site, based primarily on
internal and third-party environmental studies, estimates as to the number and
participation level of any other PRPs, the extent of the contamination, and the
nature of required remedial and restoration actions. Accruals are adjusted as
further information develops or circumstances change. The amounts provided for
environmental matters in NCR's consolidated financial statements are the
estimated gross undiscounted amount of such liabilities, without deductions for
insurance or third-party indemnity claims. In those cases where insurance
carriers or third-party indemnitors have agreed to pay any amounts and
management believes that collectibility of such amounts is probable, the amounts
are reflected as receivables in the consolidated financial statements.
PROPERTIES
NCR operates 1,074 offices and 55 development and manufacturing facilities
in more than 130 countries around the world.
36
The Asia/Pacific Region is headquartered in Tokyo, Japan; the Europe/Middle
East/Africa Region in London, United Kingdom and the Americas Region in Dayton,
Ohio. The sales regions are further divided into 17 international areas,
including the United States.
The five business units have their headquarters in: Dayton, Ohio (Computer
Systems Group, Worldwide Services and Systemedia Group); London, United Kingdom
(Financial Systems Group); and Atlanta, Georgia (Retail Systems Group).
At August 1, 1996, NCR operated 39 manufacturing sites, of which 11 were
located in the United States, occupying in excess of 4.6 million square feet, of
which approximately 1.0 million square feet were leased. These sites were
located in 19 countries.
At August 1, 1996, NCR operated 16 research and development sites, of which
nine were located in the United States, occupying in excess of 1.0 million
square feet, of which approximately .6 million square feet were leased. These
sites were located in three countries.
At August 1, 1996, NCR operated 106 warehouse sites, of which 41 were
located in the United States, occupying in excess of 2.3 million square feet, of
which approximately 1.2 million square feet were leased. These sites were
located in 34 countries.
At August 1, 1996, NCR operated 744 office sites (sales, service,
administration and education), of which 220 were located in the United States,
occupying in excess of 11.5 million square feet, of which approximately 5.4
million square feet were leased. These sites were located in 81 countries.
At August 1, 1996, NCR operated 137 additional sites for miscellaneous
purposes (including land, residences, parking lots, aviation hanger and
recreational facilities), of which 38 were located in the United States,
occupying approximately 1.0 million square feet, of which approximately .5
million square feet were leased. These sites were located in 26 countries.
In addition, NCR has plans to sell or discontinue the lease of certain
facilities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Restructuring."
For a summary of certain leases and subleases entered into in connection
with the Separation, see "Arrangements Among AT&T, NCR and Lucent -- Real Estate
Agreements."
NCR believes its plants and facilities are suitable and adequate, and have
sufficient productive capacity, to meet its current needs.
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CAPITALIZATION
Set forth below is the historical capitalization of NCR as of June 30, 1996
and on an As Adjusted basis to give effect to the Distribution and certain
anticipated capital contributions as if the Distribution and such capital
contributions had occurred on June 30, 1996. The balance sheet data and the As
Adjusted balance sheet data set forth below should be read in conjunction with
the historical consolidated financial statements set forth elsewhere herein.
The As Adjusted capitalization presented herein does not purport to
represent the Company's consolidated financial position had the Distribution and
such capital contributions occurred on June 30, 1996 or to project the Company's
consolidated financial position for any future period. The As Adjusted data is
based upon currently available information and certain assumptions that the
Company believes are reasonable.
· Download Table
AT JUNE 30, 1996
(UNAUDITED)
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN MILLIONS)
DEBT OBLIGATIONS.................................. $139 $ 71(1)
SHAREHOLDER'S EQUITY
Preferred stock (authorized, not issued)........ -- --
Common stock.................................... -- --
Additional paid-in capital...................... -- --
Shareholder's net investment.................... 822 1,309(2)
Foreign currency translation.................... 74 74
Other........................................... (37) (37)
---- ------
Total shareholder's equity.............. 859 1,346
---- ------
TOTAL CAPITALIZATION.............................. $998 $ 1,417
==== ======
NOTES:
(1) Reflects retirement or defeasance of a total of $68 of NCR debt
anticipated to occur on or before the Distribution Date. The effect on
reported interest expense included in the accompanying statements of
operations for the year ended December 31, 1995 and the six months ended
June 30, 1996 resulting from the retirement or defeasance of such debt is
not material.
(2) Reflects capital contribution from AT&T of $419 in cash (a portion of
which will be available to NCR prior to the Distribution Date), and
additional contributions of cash sufficient to retire or defease a total
of $68 of NCR debt (including payment of related expenses), anticipated to
occur on or before the Distribution Date.
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SELECTED FINANCIAL DATA
The following table presents selected historical financial data of NCR. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical consolidated financial statements and notes thereto included
elsewhere in this Information Statement. The consolidated statement of
operations data set forth below for each of the years ended December 31, 1995,
1994, and 1993 and the consolidated balance sheet data at December 31, 1995 and
1994 are derived from, and are qualified by reference to, the audited
consolidated financial statements included elsewhere in this Information
Statement, and should be read in conjunction with those financial statements and
notes thereto. The consolidated balance sheet data at December 31, 1993 are
derived from the audited consolidated balance sheet of NCR at December 31, 1993,
which is not included in this Information Statement. The consolidated statement
of operations data for each of the years ended December 31, 1992 and 1991 and
the consolidated balance sheet data at December 31, 1992 and 1991 are derived
from unaudited consolidated financial statements not included in this
Information Statement. The consolidated statement of operations data for each of
the six month periods ended June 30, 1996 and 1995, and the consolidated balance
sheet data as of June 30, 1996 are derived from, and are qualified by reference
to, the unaudited interim financial statements included elsewhere herein, and
should be read in conjunction with those financial statements and notes thereto.
See "Index to Financial Statements."
The historical financial information may not be indicative of NCR's future
performance and does not necessarily reflect the financial position and results
of operations of NCR had NCR operated as a separate, stand-alone entity during
the periods covered. See "Risk Factors -- Limited Relevance of Historical
Financial Information."
· Enlarge/Download Table
SIX MONTHS
ENDED JUNE 30 YEARS ENDED DECEMBER 31
--------------- -----------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------ ------- ------- ------- ------- -------
(UNAUDITED) (DOLLARS IN MILLIONS) (UNAUDITED)
STATEMENT OF OPERATIONS DATA
Revenues(3)(5)................................................ $3,265 $3,860 $ 8,162 $ 8,461 $ 7,265 $ 7,139 $ 7,246
Operating expenses(1)(6)
Cost of revenues............................................ 2,396 3,024 7,316 5,894 4,839 4,378 4,322
Selling, general and administrative expenses................ 711 995 2,632 2,169 2,136 1,938 2,113
Research and development expenses........................... 184 231 585 500 571 568 709
------ ------ ------- ------- ------- ------- -------
Income (loss) from operations................................. (26) (390) (2,371) (102) (281) 255 102
Interest expense.............................................. 26 46 90 44 41 77 85
Other income, net(2)(4)....................................... (3) (78) (45) (130) (42) (77) (87)
------ ------ ------- ------- ------- ------- -------
Income (loss) before income taxes and cumulative effects of
accounting changes.......................................... (49) (358) (2,416) (16) (280) 255 104
Income tax expense (benefit).................................. 34 31 (136) 187 138 157 387
------ ------ ------- ------- ------- ------- -------
Income (loss) before cumulative effects of accounting
changes..................................................... (83) (389) (2,280) (203) (418) 98 (283)
Cumulative effects of accounting changes(7)................... -- -- -- -- (869) -- --
------ ------ ------- ------- ------- ------- -------
Net income (loss)............................................. $ (83) $ (389) $(2,280) $ (203) $(1,287) $ 98 $ (283)
====== ====== ======= ======= ======= ======= =======
FINANCIAL POSITION AND OTHER DATA
Cash and short-term investments............................... $ 825 $ 638 $ 338 $ 661 $ 343 $ 436 $ 391
Accounts receivable, net...................................... 1,175 1,744 1,908 1,860 1,288 1,228 1,305
Inventories................................................... 561 1,072 621 952 781 620 504
Property, plant and equipment, net............................ 950 1,092 957 1,234 1,143 1,026 1,067
Total assets.................................................. 4,934 5,837 5,256 5,836 4,664 4,565 4,448
Short-term borrowings......................................... 40 70 45 73 40 118 105
Long-term debt................................................ 99 612 330 642 115 142 229
Shareholder's equity.......................................... 859 1,499 358 1,690 1,032 1,831 1,628
Headcount (employees and contractors)......................... 38,600 46,700 41,100 50,000 52,500 53,800 54,000
---------------
(1) 1995 operating expenses include restructuring and other charges of $1,649.
(See Note 5 of Notes to Consolidated Financial Statements.)
(2) 1995 other income, net includes a gain on sale of the Microelectronics
components business of $51.
(3) The decrease in revenues beginning in the fourth quarter of 1995 and in the
six months ended June 30, 1996 is due largely to the Company's decision in
September 1995 to discontinue selling PCs through high volume indirect
channels.
(4) 1994 other income, net includes a gain on sale of certain assets of $110.
(5) The fiscal year-end for locations outside the U.S. was changed from November
to December in 1994 to conform the domestic and international reporting
periods. This change increased reported revenues in 1994 by $223, however
the effect on loss from operations was not significant.
(6) 1993 operating expenses include restructuring and other charges of $219.
(See Note 5 of Notes to Consolidated Financial Statements.)
(7) NCR changed its methods of accounting for postretirement benefits,
postemployment benefits, and income taxes effective in 1993. (See Note 3 of
Notes to Consolidated Financial Statements).
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
NCR designs, develops, markets, and services information technology
products, services, systems, and solutions worldwide. The Company's goal is to
be a world-class provider of commercial, open computing systems for High
Availability Transaction Processing and Scalable Data Warehousing solutions to
customers in all industries. NCR also seeks to take advantage of its expertise
and market presence in the retail, financial, and communications industries to
provide specific information technology solutions to customers in these targeted
industries. NCR's systems and solutions are supported by its Customer Support
Services and Professional Services offerings, and its Systemedia business, which
develops, produces, and markets a complete line of consumable and media
products.
NCR's offerings cover a broad range of its customers' information
technology needs: from consumers' interaction and data collection, with products
including point of sale workstations, barcode scanning equipment, and
self-service devices such as ATMs; through data processing, with NCR's High
Availability Transaction Processing solutions; to data storage, manipulation,
and usage, with NCR's Teradata relational database management system and
Scalable Data Warehousing offerings. The Company's computing platforms and
associated products span midrange servers, massively parallel processing
computer systems, computer network servers and software systems, imaging and
payment systems, workstations and peripherals, business forms, ink ribbons,
customized paper rolls, and other consumable supplies and processing media.
NCR also provides Worldwide Customer Support Services and Professional
Services that include hardware maintenance, software maintenance, data
warehousing service offerings, end-to-end networking service and design, and the
implementation, integration, and support of complex solutions.
NCR is a wholly owned subsidiary of AT&T. The Company was merged with a
wholly owned subsidiary of AT&T effective September 19, 1991. On September 20,
1995, AT&T announced its intention to separate into three independent public
companies: NCR, the continuing AT&T, and Lucent. AT&T also announced its
intention to distribute all of its interest in NCR to its shareowners by
December 31, 1996, subject to certain conditions.
NCR and AT&T and, in certain cases, Lucent and AT&T Capital, have entered
into or will enter into, on or prior to the Distribution Date, certain
agreements providing for the separation of the companies into independent
corporations and governing various interim and ongoing relationships between and
among the four companies, including an agreement between the Company and AT&T
providing for the purchase of products and services from the Company. See
"Arrangements Among AT&T, NCR and Lucent."
The consolidated financial statements of NCR have been carved out from the
financial statements of AT&T using the historical results of operations and
historical basis of the assets and liabilities of the businesses operated by
NCR. Additionally, the consolidated financial statements of the Company include
certain assets, liabilities, revenues and expenses that were not historically
recorded at the level of, but are primarily associated with, such businesses.
Management believes the assumptions underlying the Company's financial
statements are reasonable.
The financial information included herein, however, may not necessarily
reflect the results of operations, financial position and cash flows of NCR in
the future or the results of operations, financial position, and cash flows of
the Company had NCR operated as a separate, stand-alone entity during the
periods presented. This is due to the historical operation of the Company as
part of the larger AT&T enterprise. The financial information included herein
does not reflect any changes that may occur in the funding and operations of NCR
as a result of the Distribution.
The accompanying consolidated financial statements reflect AT&T's net
investment in NCR. Such investment represents capital contributions and
interest-bearing cash advances made by AT&T to NCR, net income (loss) of NCR,
and cost allocations from AT&T. NCR's financial requirements are primarily
provided through capital contributions and interest-bearing cash advances from
AT&T. The Company's historical
40
consolidated statements of operations include interest expense relating to such
interest-bearing cash advances, which were contributed to the Company by AT&T
and included in shareholder's net investment. General corporate overhead costs
related to AT&T's corporate headquarters and certain common support functions
were allocated to NCR to the extent such amounts were applicable to the Company
based on the ratio of the Company's external costs and expenses to AT&T's
external costs and expenses. Those allocations of AT&T's general corporate
overhead expense may not reflect NCR's actual general corporate overhead expense
as a separate entity. In addition, certain expenses incurred by the Company were
for services received from AT&T under direct contracting arrangements. Although
management believes the allocations and the charges for such services to be
reasonable, the costs of these services charged to the Company are not
necessarily indicative of the costs that would have been incurred if the Company
had been an independent entity and had otherwise contracted for or managed these
functions. Subsequent to the Distribution, the Company will be required to
manage these functions using its own resources or contract with third parties to
perform these services and, in addition, will be responsible for the costs and
expenses associated with the management of a public corporation. In addition,
income taxes were calculated as if the Company filed separate income tax
returns. However, AT&T's tax strategies are not necessarily reflective of the
tax strategies that the Company would have followed or will follow as a
stand-alone entity.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used for allowances for
uncollectible accounts receivable, inventory obsolescence, product warranties,
asset depreciation and amortization, employee benefit plan amounts, income
taxes, restructuring charges, and environmental and other contingencies among
others. In addition, there are certain risks and uncertainties inherent in
operating the business, including the matters discussed below under "-- Results
of Operations -- Seasonality" and "-- Legal Proceedings and Environmental
Matters." Other areas where estimates and judgments are required are discussed
in Notes to Consolidated Financial Statements included elsewhere in this
Information Statement.
NCR has been funded principally by AT&T. See "Risk Factors -- Future
Capital Requirements; Absence of AT&T Funding." The Company anticipates that it
will put in place the Credit Facility to fund its domestic working capital
requirements. The consolidated financial statements do not include any debt
amounts relating to domestic working capital requirements since such operations
were historically funded through AT&T's contributions and advances which are
classified as part of its net investment. The outstanding debt at June 30, 1996
includes short-term debt which is used primarily to fund the working capital
needs of operations outside of the United States and long-term external debt,
including $75 million of medium term notes which NCR issued prior to its merger
with a subsidiary of AT&T in 1991. See "-- Financial Condition, Liquidity and
Capital Resources."
RESTRUCTURING
In 1993, a number of changes were implemented with the intent of
strengthening NCR's marketing function, increasing NCR's revenues, and improving
NCR's profitability. As part of these changes, a broader range of industries
(six as compared to two) was targeted, significant growth objectives were
established for the PC business, and a new marketing function and management
model was implemented.
These changes did not work as planned, and NCR was unsuccessful in meeting
its objectives in the targeted industries. NCR was able to increase PC revenue,
but due to margin pressure and cost structure, the PC business was not
profitable for NCR. In addition, the new management model did not produce the
desired accountability.
Lars Nyberg, NCR's Chief Executive Officer, began to implement a
restructuring plan in September 1995. This plan was based on five key
principles: focus, accountability, expense level reductions, process
improvements, and a sense of urgency. A key component of the recovery strategy
was to focus the Company on its areas of strength. Consequently, NCR decided to
reduce its focus from six industries to three (retail,
41
financial, and communications). With efforts targeted at these three industries,
greater attention was placed on NCR's Retail Products and Financial Products
businesses.
The Company's approach to the PC business was also changed. As part of the
restructuring, NCR decided to exit the PC manufacturing business and to
eliminate sales of PCs through high volume indirect channels. Instead, the
Company put in place an OEM arrangement to source a significantly reduced volume
of PCs, which would primarily be sold by NCR when required as part of a solution
in areas such as financial branch automation or retail point of sale systems.
In the computer business, the Company targeted its efforts at midrange to
large systems, specifically focusing on solutions such as Scalable Data
Warehousing and High Availability Transaction Processing that have applicability
across a number of industries.
NCR also implemented a revised business management model, under which
business units and geographic sales regions were given specific responsibilities
and accountabilities. Significant expense reductions were implemented, including
plans to separate approximately 8,500 employees and contractors. Additional
focus was placed on process improvements, and efforts were put in place to
ensure all employees understood the restructuring plan and were actively working
to execute the plan.
The total restructuring and other charges of $1,649 million for 1995 was
reflected in the consolidated statement of operations as $636 million of cost of
sales, $294 million of cost of services, $616 million of selling, general and
administrative expenses, and $103 million of research and development expenses.
These charges included $676 million for employee separation and other related
items, $549 million for asset write-downs, $147 million for closing, selling and
consolidating facilities, $227 million for contract settlements and related
charges, and $50 million for other items. Of the total charges, $145 million
represented cash payments in 1995, $311 million represented cash payments in the
first six months of 1996, and $507 million are expected to result in future cash
payments.
The Company expects to substantially complete its restructuring plan in
1996. The Company's policy is to assess the adequacy of its reserves and to make
adjustments to such reserves when events effecting these reserves occur or can
be reasonably estimated.
42
RESULTS OF OPERATIONS
GENERAL
The following table sets forth, for the periods indicated, the Company's
revenues (in millions) by product line. The Other product line includes
businesses sold and other items not directly associated with an individual
business unit.
· Enlarge/Download Table
SIX MONTHS ENDED YEARS ENDED
JUNE 30 DECEMBER 31
--------------------------- -------------------------------------------------
% INCREASE/ % INCREASE/ % INCREASE/
1996 DECREASE 1995 1995 DECREASE 1994 DECREASE 1993
------ ----------- ------ ------ ----------- ------ ----------- ------
Retail Systems Group
Retail Products............ $ 195 2 $ 192 $ 424 -- $ 422 (12) $ 481
Financial Systems Group
Financial Products......... 441 (7) 473 1,026 (1) 1,037 7 972
Computer Systems Group
Computer Products.......... 602 37 440 1,078 (12) 1,219 (12) 1,392
Client/Entry Level Server
Products................. 271 (68) 845 1,724 5 1,649 62 1,020
Worldwide Services
Customer Support
Services................. 1,084 3 1,055 2,174 5 2,074 15 1,808
Professional Services...... 284 -- 285 638 10 578 33 435
Data Services.............. 64 (25) 85 167 (19) 206 (4) 214
Systemedia Group
Systemedia Products........ 272 (2) 277 577 4 553 14 486
Other........................ 52 (75) 208 354 (51) 723 58 457
----- --- ----- --- ----- ----- --- -----
Total...................... $3,265 (15) $3,860 $8,162 (4) $8,461 16 $7,265
===== === ===== === ===== ===== === =====
The following table sets forth, for the periods indicated, the percentage
relationship to revenue of certain items in the Company's consolidated
statements of operations. The years ended 1995 and 1993, as adjusted, exclude
restructuring and other charges:
· Enlarge/Download Table
SIX MONTHS
ENDED YEARS ENDED
JUNE 30 DECEMBER 31
-------------- ------------------------------------------------------------------
1996 1995 1995 1995 1994 1993 1993
----- ----- ----- ----- ----- ----- -----
(AS ADJUSTED) (AS ADJUSTED)
Sales revenue................ 55.5% 62.4% 63.0% 63.0% 65.3% 61.4% 61.4%
Services and rentals
revenue.................... 44.5 37.6 37.0 37.0 34.7 38.6 38.6
----- ----- ----- ----- ----- ----- -----
Total revenue.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== ===== =====
Sales gross margin........... 28.3% 20.3% 20.9% 8.5% 32.4% 37.7% 37.3%
Services and rentals gross
margin..................... 24.6 24.0 23.2 13.5 26.5 30.3 27.1
----- ----- ----- ----- ----- ----- -----
Total gross margin......... 26.6 21.7 21.8 10.4 30.3 34.8 33.4
Selling, general and
administrative expenses.... 21.8 25.8 24.7 32.2 25.6 28.1 29.4
Research and development
expenses................... 5.6 6.0 5.9 7.2 5.9 7.6 7.9
----- ----- ----- ----- ----- ----- -----
Operating loss............. (0.8)% (10.1)% (8.8)% (29.0)% (1.2)% (0.9)% (3.9)%
===== ===== ===== ===== ===== ===== =====
SEASONALITY
NCR's sales are historically seasonal, with revenue higher in the fourth
quarter of each year. Consequently, during the three quarters ending in March,
June, and September, NCR has historically experienced less favorable results
than in the quarter ending in December. Such seasonality also
43
causes NCR's working capital cash flow requirements to vary from quarter to
quarter depending on, among other things, the variability in the volume, timing
and mix of product sales. In addition, in many quarters, a large portion of
NCR's revenue is realized in the third month of the quarter. Operating expenses
are relatively fixed in the short term and often cannot be materially reduced in
a particular quarter if revenue falls below anticipated levels for such quarter.
As a result, even a relatively small revenue shortfall may cause a period's
results to be materially below expectations. See "Risk Factors -- Seasonality."
The following table sets forth the unaudited total revenues, gross margin
and operating income (loss) of NCR on a quarterly basis for each of the two
years ended December 31, 1995 and for each of the quarterly periods in the six
months ended June 30, 1996. The increase in fourth quarter revenues from third
quarter revenues in 1995 is not as pronounced as in 1994 due to the Company's
decision in September 1995 to discontinue selling PCs through high volume
indirect channels.
· Enlarge/Download Table
SIX MONTHS
FIRST SECOND THIRD FOURTH ENDED
QUARTER QUARTER QUARTER (1) QUARTER (2)(3) JUNE 30
------- ------- ----------- -------------- -------------
(DOLLARS IN MILLIONS)
1996
Total revenues........... $ 1,586 $ 1,679 $ 3,265
Gross margin............. 405 464 869
Operating income
(loss)................. (37) 11 (26)
· Download Table
YEARS ENDED
DECEMBER 31
-------------
1995
Total revenues........... $ 1,818 $ 2,042 $ 2,033 $2,269 $ 8,162
Gross margin............. 420 416 (508) 518 846
Operating income
(loss)................. (172) (218) (1,793) (188) (2,371)
1994
Total revenues........... $ 1,527 $ 2,011 $ 1,979 $2,944 $ 8,461
Gross margin............. 479 610 580 898 2,567
Operating income
(loss)................. (84) (12) (26) 20 (102)
---------------
(1) The third quarter of 1995 includes restructuring and other charges of $1,597
(See Note 5 of Notes to Consolidated Financial Statements).
(2) The fourth quarter of 1995 includes restructuring and other charges of $52
(See Note 5 of Notes to Consolidated Financial Statements).
(3) The fourth quarter of 1994 includes revenue of $223 which represents an
additional month of international sales revenues, resulting from the change
to conform international and domestic reporting periods; the effect on
operating income was not significant.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Reported revenues in all geographic regions declined from the prior period
by $595 million, or 15%. An overall weakening of foreign currencies against the
U.S. dollar (particularly the Japanese yen) unfavorably impacted this year to
year change. Adjusting for the year to year changes in foreign currency exchange
rates, reported revenues declined by 12%.
A key component of the Company's restructuring was to reduce its focus on
the PC business and concentrate on a core set of businesses. As a result of this
decision, PC revenues (which are included as a part of the Client/Entry Level
Server Product line) declined significantly. When Client/Entry Level Server
Products and businesses sold are excluded from both periods, revenues in the
remaining core set of businesses grew by 1%. Adjusting for the year to year
changes in foreign currency exchange rates, these core revenues grew by 4%.
44
Revenues from Retail Products were $195 million, an increase of $3 million
or 2% in 1996 compared with the 1995 period. Revenues from retail scanner
products drove the growth in revenues. Most of this growth was derived from
sales to customers in the United States.
Revenues from Financial Products were $441 million, a decrease of $32
million or 7% in 1996 compared with the 1995 period, primarily due to sales
declines in ATMs principally in the Europe/Middle East/Africa geographic region
due to general softness in the European banking and financial services markets.
Revenues from Computer Products were $602 million, an increase of $162
million or 37% in 1996 compared with the 1995 period. Revenues from WorldMark
enterprise servers drove the sales volume growth. All geographic regions
reported double digit growth in year-to-year comparisons as the Company
continues to achieve success in its plans to focus on opportunities for high-end
computer systems for Scalable Data Warehousing and High Availability Transaction
Processing.
Revenues from Client/Entry Level Server Products were $271 million, a
decrease of $574 million or 68% in 1996 compared with the 1995 period primarily
due to the Company's decision to exit the manufacturing of PCs and their sale
through high volume indirect channels. The Company plans to continue to offer
its customers Client/Entry Level Server Products sourced from third parties
primarily as part of overall solution sales.
Revenues from the services businesses were basically flat year to year.
Growth in revenues from Customer Support Services of 3% primarily due to new
service offerings for enterprise system support servers, managed self-service
financial solutions, and technology services plus continued expansion of
multivendor services was offset by a decline of 25% in Data Services due to the
Company's sale of its Data Services business in Switzerland at the beginning of
1996. Revenues from Professional Services of $284 million were basically flat
compared with the same period in 1995.
Sales of Systemedia Products of $272 million decreased $5 million or 2% in
1996 compared with the 1995 period. The decrease was principally attributable to
the unfavorable impact of the strengthening of the U.S. dollar as sales to
customers on a local currency basis worldwide were basically flat.
Gross margin as a percentage of revenue increased 4.9 percentage points
from 21.7% in 1995 to 26.6% in 1996. Excluding Client/Entry Level Server
Products, gross margin as a percentage of revenue increased 3.7 percentage
points. The overall gross margin improvement consisted of an 8.0 percentage
point improvement in sales gross margin and a 0.6 percentage point improvement
in services and rentals gross margin. The increase in sales gross margin
reflects a change in product mix as Client/Entry Level Server Products have
historically lower margins than other products offered by the Company, and
improved margins in Retail Products, Financial Products, and Computer Products
resulting from product cost reductions. Gross margins on all categories of
services revenue improved in 1996.
Selling, general and administrative expenses of $711 million decreased $284
million, or 29%, and declined by 4.0 percentage points of revenue. This decrease
was primarily attributable to the Company's business restructuring to focus on
industry solutions for the retail, financial, and communications industries, and
from its exit from the sale of PCs through high volume indirect channels. In
addition, the amount of general corporate overhead costs allocated to the
Company by AT&T decreased approximately $39 million from the corresponding
period in 1995. This decrease was due to several factors, including that NCR
began to manage certain additional corporate and administrative functions in
1996 which were previously provided substantially by AT&T, including corporate
public relations activities, certain human resource functions, financial systems
architecture and brand advertising, among others and a general reduction in AT&T
general corporate overhead costs due to its restructuring. The Company expects
to increase funding for expansion into emerging geographic markets.
Research and development expenses of $184 million decreased $47 million, or
20%, and declined by 0.4 percentage points of revenue. This decrease was
primarily attributable to the Company's exit from the PC manufacturing business
and the sale of its Microelectronics components business, as well as from
consolidation and elimination of redundant engineering activities and from a
refocusing of research and development
45
efforts on specific targeted industries using common platforms and technologies.
The Company plans to continue to invest in research and development at levels
that are consistent with its business strategies, taking into account
assessments of the levels of investment into new technologies and markets being
made by competitors throughout the industries in which the Company competes.
Further, the Company believes that a continued commitment to research and
development is required to remain competitive.
Other income, net decreased $75 million primarily due to the gain on sale
of the Company's Microelectronic components business in the prior period.
The provision for income taxes of $34 million increased $3 million. The
fluctuation in the Company's tax provision between years results from a normal
provision for income taxes in those foreign tax jurisdictions where the
Company's subsidiaries are profitable, and an inability on a stand-alone basis
to reflect tax benefits from net operating losses and tax credits in the United
States.
AT&T has been able to utilize substantially all of the United States tax
benefits generated by NCR through the inclusion of the Company in AT&T's
consolidated tax returns. In accordance with existing tax allocation agreements,
AT&T has reimbursed the Company for such losses utilized. The reimbursements
have been reflected as contributions to the Company's capital and recorded in
shareholder's net investment.
The 1996 first half net loss decreased to $83 million, an improvement of
$306 million from the $389 million loss in 1995 primarily due to the factors set
forth above. NCR expects future profit improvements to come primarily from
revenue growth and continued improvements in product and service margins instead
of additional expense reductions.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Reported revenues declined from the prior year by 4%, or $299 million. An
overall strengthening of foreign currencies against the U.S. dollar has slightly
mitigated the decline. Adjusting for the year to year changes in foreign
currency exchange rates, revenues declined by 5%.
In the fourth quarter of 1994, the Company elected to change the fiscal
year end of its international organizations from November 30 to December 31, in
order to align the international organizations with the United States fiscal
calendar. This change resulted in an additional month of international revenues
being included in the 1994 results, in the amount of $223 million. Adjusting for
this extra month of results in 1994, reported revenues in 1995 declined by 1%.
In addition, there was a significant negative impact on growth rates resulting
from the sale of the Microelectronics components business in the first quarter
of 1995, which is included in Other in the above table. When these revenues are
removed from both periods, the 4% decline in revenue in 1995 results in a 3%
increase.
Revenues from Retail Products were $424 million in 1995 which were
basically flat compared with 1994. Increased revenues from retail barcode
scanner products to customers in the Europe/Middle East/Africa and Asia/Pacific
geographic regions offset a decline in the United States.
Revenues from Financial Products were $1,026 million in 1995 which were
basically flat compared with 1994. Declines in ATMs revenues principally in the
United States were offset by increases in sales to customers in international
geographic regions.
Revenues from Computer Products were $1,078 million, a decrease of $141
million or 12% in 1995 compared with 1994. The decrease in revenue was primarily
attributable to a decline in large server revenues in the United States
resulting from a delay in transitioning customers from the 3600 product family
to the new WorldMark product family.
Revenues from Client/Entry Level Server Products were $1,724 million, an
increase of $75 million or 5% in 1995 compared with 1994. This growth rate was
significantly below the prior year as a result of the implementation of the
September 1995 decision to phase out of the sales of these products through high
volume indirect channels.
46
Revenues from the services businesses grew 4% year to year. This growth was
driven by the 10% increase in Professional Services revenues primarily due to
new service offerings, including information technology consulting, networking,
scalable data warehousing, and project management. Prior to 1995, Professional
Services offerings were focused more intensively on software implementation and
support, while in 1995 the focus shifted to information technology consulting
services. Customer Support Services growth of 5% also contributed to the revenue
increase. This growth was primarily due to increased focus on non-traditional
hardware maintenance services including multivendor services, implementation and
installation services, software services, and parts and cabling. These increases
were partially offset by a decline in Data Services revenues principally due to
a shrinking customer base for these offerings.
Sales of Systemedia Products of $577 million increased $24 million or 4% in
1995 compared with 1994 primarily attributable to increases in sales of custom
paper rolls in markets outside of the United States and in stock and fax paper
products and thermal transfer ribbons in the United States.
Gross margin as a percentage of revenue declined 19.9 percentage points
from 30.3% in 1994 to 10.4% in 1995. Business restructuring and other charges
accounted for over half of the reduction or a total of 11.4 points of revenue.
Excluding restructuring and other charges, both sales gross margins and services
and rentals gross margins declined. The reduction in sales gross margins
resulted from a higher mix of Client/Entry Level Server Products which
historically carry lower gross margins than other products offered by the
Company. These lower gross margins are due to competitive pricing pressures and
price erosion in excess of cost reductions. Services gross margins declined
primarily due to required utilization of higher cost external contractors to
assist in the delivery of new service offerings.
Selling, general and administrative expenses of $2,632 million increased
$463 million, or 21% in 1995 compared with 1994. This increase was due to $616
million in business restructuring and other charges principally to realign the
Company's cost structure and to exit certain businesses. Selling, general and
administrative expenses were 32.2% of revenues in 1995, an increase from 25.6%
of revenues in 1994, reflecting the restructuring and other charges. Excluding
the charges, selling, general and administrative expenses were 24.7% of revenues
in 1995. This reflects reduced selling expenses due to the reduction of expenses
from the sales of the Microelectronics components business in 1995, the sale of
the ADDS terminal business during 1994, and the benefits realized in the fourth
quarter of 1995 from the Company's restructuring plans.
Research and development expenses of $585 million increased $85 million, or
17% in 1995 compared with 1994. This increase was due to business restructuring
and other charges of $103 million. Excluding the charges, research and
development expenses decreased $18 million and represented 5.9% of revenues in
both years. This decrease in spending was primarily attributable to the sale of
the Microelectronics components and ADDS terminal businesses which more than
offset the increase in research and development for Computer Products and the
services offerings.
Other income, net decreased $85 million as the 1994 results included gains
on sale of real estate, principally in Hong Kong and Tokyo.
The income tax benefit of $136 million in 1995 reflects a $323 million
decrease from the $187 million expense in 1994. The benefit of $136 million was
primarily attributable to foreign operating losses largely resulting from the
1995 restructuring charges incurred in those foreign subsidiaries that have been
historically profitable, and an inability on a stand-alone basis to reflect tax
benefits from net operating losses and tax credits in the United States. See
Note 6 of Notes to Consolidated Financial Statements included elsewhere herein.
AT&T has been able to utilize substantially all of the United States tax
benefits generated by NCR through the inclusion of the Company in AT&T's
consolidated tax returns. In accordance with existing tax allocation agreements,
AT&T has reimbursed the Company for such utilized losses. The reimbursements
have been reflected as contributions to the Company's capital and recorded in
shareholder's net investment.
47
For 1995, the Company had a net loss of $2,280 million, reflecting $1,415
million of restructuring and other charges after tax ($1,649 pre-tax
restructuring and other charges). Excluding the charges, the net loss was $865
million, an increased loss of $662 million compared to 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Reported revenues increased from the prior year by 16%, or $1,196 million.
The net effect of the movement of foreign currencies against the U.S. dollar had
no material impact to this growth rate. When adjusted for the extra month of
international revenue in the fourth quarter of 1994, the growth rate from 1993
was 13%, or $973 million.
Revenues from Retail Products were $422 million, a decrease of $59 million
or 12% in 1994 compared with 1993. Most of this decrease resulted from a
reduction in sales to customers in the United States.
Revenues from Financial Products were $1,037 million, an increase of $65
million or 7% in 1994 compared with 1993, due mostly to higher demand for ATMs
primarily in the United States.
Revenues from Computer Products were $1,219 million, a decrease of $173
million or 12% in 1994 compared with 1993. The decrease was primarily
attributable to a decline in midrange servers revenues.
Revenues from Client/Entry Level Server Products were $1,649 million, an
increase of $629 million or 62% in 1994 compared with 1993 primarily due to the
increased focus being placed on growing this business.
Revenues from the services businesses grew 16% year to year. This growth
was driven by double digit gains in both Professional Services and Customer
Support Services revenues primarily due to increases in consulting services,
multivendor services, implementation and installation services, and software
services revenues. These increases were partially offset by a decline in Data
Services revenue principally due to a shrinking customer base for these
products.
Sales of Systemedia Products of $553 million increased $67 million or 14%
in 1994 compared with 1993 primarily attributable to increases in sales of
business forms and supplies outside the United States.
Gross margin as a percentage of revenue declined 3.1 percentage points from
33.4% in 1993 to 30.3% in 1994. After excluding the impact of restructuring
charges, the decline in gross margin was 4.5 percentage points. The reduction in
sales gross margins resulted primarily from a higher mix of lower margin
Client/Entry Level Server Products and a lower percentage mix of midrange and
large servers. Services gross margins declined primarily due to competitive
pricing pressures on maintenance support services.
Selling, general and administrative expenses of $2,169 million increased
$33 million or 2% but declined by 3.8 percentage points of revenue. Excluding
the impact of $95 million of business restructuring charges in 1993, selling,
general and administrative expenses increased $128 million or 6%. This increase
was primarily attributable to higher marketing expenses associated with the
expanded marketing organization focusing on a broader range of targeted
industries.
Research and development expenses of $500 million decreased $71 million or
12% and declined by 2.0 percentage points of revenue. Excluding the impact of
$19 million of business restructuring charges in 1993, research and development
expenses decreased $52 million or 9%. This decrease was primarily attributable
to a reduction in research and development for Computer Products.
Other income, net increased $88 million primarily due to the 1994 gains on
the sale of real estate, mainly in Hong Kong and Tokyo.
The provision for income taxes of $187 million increased $49 million. The
fluctuation in the Company's tax provision between years results from a normal
provision for income taxes in those foreign tax jurisdictions where the
Company's subsidiaries are profitable, and an inability on a stand-alone basis
to reflect tax benefits from net operating losses and tax credits in the United
States. See Note 6 of Notes to Consolidated Financial Statements included
elsewhere herein.
48
AT&T has been able to utilize substantially all of the United States tax
benefits generated by NCR through the inclusion of the Company in AT&T's
consolidated tax returns. In accordance with existing tax allocation agreements,
AT&T has reimbursed the Company for such utilized losses. The reimbursements
have been reflected as contributions to the Company's capital and recorded in
shareholder's net investment.
The adoption of Statement of Financial Accounting Standards ("SFAS") No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
SFAS No. 112, "Employers' Accounting for Postretirement Benefits,"and SFAS No.
109, "Accounting for Income Taxes," effective January 1, 1993, resulted in an
after-tax charge of $869 million in 1993, representing the cumulative effect of
these accounting changes.
SFAS No. 106 requires accrual of estimated future retiree benefits, other
than pensions, during the years in which employees are working and accumulating
these benefits. Previously, health care benefits were expensed as claims were
incurred and life insurance benefits were expensed as plans were funded. A
one-time after-tax charge for these liabilities of $220 million was recorded in
1993 as a cumulative effect of accounting change upon adoption of this standard.
SFAS No. 112 requires the Company to accrue for estimated future
postemployment benefits, including separation and related payments, during the
years in which employees are working and accumulating these benefits, and for
disability payments when the disabilities occur. Previously, costs for
separations were recognized when approved and disability benefits were
recognized when paid. The Company recognized a $306 million after-tax charge
upon adoption of this standard.
SFAS No. 109 requires, among other provisions, the computation of deferred
tax amounts arising from temporary differences using the enacted jurisdictional
corporate income tax rates for the years in which the taxes will be paid or
refunds received. A cumulative effect of the accounting change results in a
one-time charge of $343 million which was recognized in 1993 related to adopting
this standard.
The reported net loss decreased to $203 million, an improvement of $1,084
million from the $1,287 million loss in 1993. Excluding the cumulative effect of
accounting changes in 1993, net loss in 1994 was $215 million less than in 1993.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
NCR's cash, cash equivalents, and short-term investments totaled $825
million at June 30, 1996 compared with $338 million at December 31, 1995 and
$661 million at December 31, 1994.
NCR used cash flows from operations of $824 million and $613 million during
the years ended 1995 and 1994, respectively, and generated cash flows from
operations of $42 million during the year ended December 31, 1993. The $824
million of cash flows used in operations in 1995 was due principally to the net
loss in 1995 and $171 million of cash payments relating to restructuring. The
inventory decrease from $952 million at December 31, 1994 to $621 million at
December 31, 1995 was primarily due to $417 million of inventory write downs
relating to the third quarter restructuring in 1995. Other current liabilities
increased from $640 million at year-end 1994 to $1,532 million at December 31,
1995 primarily due to restructuring liabilities of $820 million payable during
1996. The $613 million of cash flows used in operations in 1994 was due in large
part to increases in receivable and inventory balances driven by increased
demand for Client/Entry Level Server Products. Receivables increased $572
million from $1,288 million at December 31, 1993 to $1,860 million at December
31, 1994. Inventories totaled $952 million at December 31, 1994, an increase of
$171 million compared with December 31, 1993. The $42 million of cash flows
generated from operations in 1993 was due to cash generation from results of
operations, after adding back the non-cash impact of the cumulative accounting
changes of $1,171 million. Inventory balances increased $161 million from
December 31, 1992 to December 31, 1993. Other current liabilities increased $279
million, from $576 million at December 31, 1992 to $855 million at December 31,
1993, primarily due to the current restructuring liabilities incurred in 1993.
For the six month period ended June 30, 1996, NCR generated cash flows from
operations of $276 million. For the six month period ended June 30, 1995, NCR
used cash flows from operations of $381 million.
49
This improvement of $657 million was primarily due to a significant decline in
accounts receivable offset by cash payments for restructuring of $311 million.
Receivable balances decreased $569 million from June 30, 1995 to June 30, 1996
due to lower revenues associated with the Company's decision to no longer sell
PCs through high volume indirect channels and a reduction in receivable balances
due to the sale of the Switzerland Data Services business. Inventory balances
decreased $511 million from $1,072 million at June 30, 1995 to $561 million at
June 30, 1996 due to reduced inventories as a result of exiting the PC
manufacturing business and overall improved supply line management. Other
current liabilities were $373 million higher at June 30, 1996 than at June 30,
1995 primarily as a result of the 1996 restructuring liabilities that had not
yet been paid.
Cash flows used in investing activities were $11 million, $477 million and
$426 million in 1995, 1994 and 1993, respectively. The $11 million of net
investing activities in 1995 included proceeds of $338 million from the sale of
the Microelectronics components business. The $477 million of net investing
activities in 1994 included proceeds of $260 million from real estate sales in
Tokyo and Hong Kong and the sale of various non-core businesses, principally
ADDS. Capital expenditures, the largest component of investing activities, were
$498 million, $624 million and $596 million for the years ended 1995, 1994, and
1993, respectively. Capital expenditures generally relate to expenditures for
equipment and facilities used in manufacturing and research and development,
including expansion of manufacturing capacity, and expenditures for cost
reduction efforts and international growth.
For the six month period ended June 30, 1996, NCR used cash flows from
investing activities of $157 million. For the six month period ended June 30,
1995, NCR generated $167 million from investing activities. This change of $324
million was primarily due to the proceeds collected in 1995 from the sale of the
Microelectronics components business.
Net cash provided by financing activities was $696 million, $1,330 million,
and $320 million for the years ended 1995, 1994, and 1993, respectively. The
Company historically has relied on AT&T to provide financing for its operations.
The cash flows reflected as transfers from AT&T in the consolidated statements
of cash flows represent capital infusions that were used to fund the ongoing
operations and have been recorded in the consolidated financial statements as an
adjustment to shareholder's net investment. These cash flows are not necessarily
indicative of the cash flows that would have resulted if the Company was a
stand-alone entity. Net cash transfers from AT&T were $1,034 million, $770
million, and $425 million in 1995, 1994 and 1993, respectively. In addition,
$537 million of third-party debt was issued in 1994, of which $312 million was
repaid in 1995 and the remainder was assumed by AT&T in 1996 and is included in
shareholder's net investment.
For the six month period ended June 30, NCR generated cash flow from
financing activities of $358 million and $312 million in 1996 and 1995,
respectively. Cash flows generated were a result of transfers from AT&T and a
repayment of long-term debt of $231 million in the first six months of 1996.
The Company leases land, buildings and equipment through long-term lease
contracts that expire in various years. Rental expense under operating leases
was $96 million in 1995, $81 million in 1994 and $109 million in 1993. Future
minimum lease payments due under noncancelable operating leases at December 31,
1995 total $265 million. The Company expects to fund such commitments through
its working capital and funds generated from operations.
The Company operates in various markets, including international and
domestic locations. The most significant of the international operations of the
Company include France, Germany, Japan, Switzerland, and the United Kingdom.
Given that international transactions in these markets are customarily
denominated in the respective countries' currencies, the Company is subject to
foreign currency risk and other risks associated with foreign operations such as
the risks relating to foreign economic and political conditions, the potential
for restrictive actions by foreign governments, and risks relating to
repatriation of funds from non-U.S. subsidiaries. The Company uses foreign
exchange contracts to manage its exposures to changes in currency exchange
rates. The use of foreign exchange contracts allows NCR to reduce its exposures
to the risk that the ultimate net cash inflows and outflows will be adversely
affected by changes in currency exchange rates.
In the normal course of business the Company uses various financial
instruments, including derivative financial instruments, for purposes other than
trading. The Company does not use derivative financial
50
instruments for speculative purposes. In addition to foreign currency exchange
contracts, these instruments include letters of credit and guarantees of debt.
By their nature all such instruments involve risk including the credit risk
of nonperformance by counterparties, and the Company's maximum potential loss
may exceed the amount recognized in the Company's balance sheet. However, as of
June 30, 1996 and December 31, 1995, in management's opinion, there was no
significant risk of loss in the event of nonperformance of the counterparties to
these financial instruments. The Company controls its exposure to credit risk
through credit approvals, credit limits, and monitoring procedures. There were
no past due amounts related to the Company's outstanding derivative contracts at
December 31, 1995, nor have there been any charge-offs during the three years
ended December 31, 1995. The Company does not have any significant exposure to
any individual customer or counterparty nor any major concentration of credit
risk related to any financial instruments.
For the reasons described under "-- Results of Operations -- Seasonality,"
the Company's working capital requirements and cash flows provided by operating
activities can vary greatly from quarter to quarter, depending on the volume of
production, the timing of deliveries, and the payment terms offered to
customers.
The Company estimates that the cash expenditures necessary after December
31, 1995 to implement the restructuring programs will be $818 million, including
$507 million after June 30, 1996. Such expenditures in 1996 are expected to be
funded through cash flows generated from operations, working capital
improvements and through capital contributions provided by AT&T.
In order to meet its working capital needs, the Company anticipates that it
will enter into the unsecured revolving Credit Facility with a syndicate of
commercial banks and financial institutions. The Credit Facility is expected to
provide that the Company may borrow from time to time on a revolving credit
basis an aggregate principal amount of up to $600 million, subject to the terms
and conditions thereof. The Company expects to be able to use the available
funds at any time for capital expenditure needs, repayment of existing debt
obligations, working capital, and general corporate purposes. The Company
expects the Credit Facility will initially mature within five years from the
date of closing and contain certain representations and warranties, conditions,
affirmative, negative and financial covenants, and events of default customary
for such facilities. Interest rates charged on borrowings outstanding under the
Credit Facility are expected to be primarily based on market rates which can
vary over time. In addition, a portion of the Credit Facility is expected to be
available for the issuance of letters of credit as required by the Company.
Historically, the Company's working capital and cash flow requirements have
been substantial. The aggregate net cash provided by financing activities as
reflected in the accompanying statements of cash flows, principally provided
through net cash contributions from AT&T, was $2,824 million from January 1,
1993 through June 30, 1996. After the Distribution, AT&T will no longer provide
such funds to NCR. See "Risk Factors -- Future Capital Requirements; Absence of
AT&T Funding." However, it is expected that, pursuant to the NCR Distribution
Agreement, AT&T will (i) make additional contributions of capital to NCR prior
to the Distribution Date and (ii) contribute intercompany advances outstanding
from AT&T to NCR as of June 30, 1996. The consolidated financial statements
included elsewhere herein reflect these advances in shareholder's equity as
having been contributed. The additional capital contributions are expected to
consist of $419 million in cash and the contribution of additional cash in an
amount sufficient to retire or defease a total of $68 million of NCR debt
(including payment of related expenses). A portion of the $419 million in cash
may be provided by means of additional intercompany advances from AT&T to NCR
after June 30, 1996 that will be contributed at the Distribution Date. See
"Capitalization."
NCR believes that cash flows from operations, availability under the Credit
Facility and other short and long-term debt financings, if any, will be
sufficient to satisfy its future working capital, capital expenditure, research
and development, and other financing requirements. However, NCR does not expect
to be able to obtain financing with interest rates or terms as favorable as
those historically experienced by AT&T, with the result that its cost of capital
will likely be higher than that reflected in NCR's historical financial
statements. NCR will also likely be subject to financial, operating, and other
covenants restricting its operations, although historically, as a wholly owned
subsidiary of AT&T, it has not been subject to any such restrictive covenants.
The Company further believes that it will be able to access capital markets on
terms and in amounts that will
51
be satisfactory to it, although there can be no assurance that will be the case.
The Company believes that it will be able to obtain bid and performance bonds,
to arrange or provide customer financing as necessary, and to engage in hedging
transactions on commercially acceptable terms.
The Company believes that the business restructuring and turnaround
strategy implemented in 1995 has significantly contributed to its improved
results during the first six months of 1996. The loss from operations has
decreased from $390 million in the first half of 1995 to $26 million in the
first half of 1996. Selling, general and administrative expenses have declined
$284 million, gross margins have improved by 4.9 percentage points, and
headcount, consisting of both employees and contractors, was reduced by
approximately 8,100. The strategy to focus the Company on its core areas of
strength, implement a revised business management model, and initiate several
key business process improvements has resulted in, among other things,
significant expense level reductions and improvements in working capital
management. This in turn has caused significant improvement in the Company's
reported results of operations and increases in cash flows from operations, as
evidenced by the change from net cash used in operating activities of $381
million in the first half of 1995 compared to net cash provided by operating
activities of $276 million in the same period of 1996. The Company believes
these strategic initiatives will continue to favorably impact operating results
and cash flows, and does not foresee at this time a need to initiate additional
business restructurings.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
IMPAIRMENT OF LONG-LIVED ASSETS
Effective October 1, 1995, NCR adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
This standard requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The adoption of the standard did not materially impact
NCR's consolidated results of operations, financial condition or cash flows
because this was essentially the method NCR used in the past to measure and
record asset impairments.
STOCK-BASED COMPENSATION
In its Consolidated Financial Statements for the year ending December 31,
1996, NCR is required to adopt SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard establishes a fair value method of accounting for,
or disclosing, stock-based compensation plans. NCR intends to adopt the
disclosure provisions of this standard which require disclosing the pro forma
consolidated net income and earnings per share amounts assuming the fair value
method was effective on January 1, 1995. The adoption of the disclosure
provisions will not affect consolidated financial condition, results of
operations, or cash flows.
PRODUCTS AND TECHNOLOGY
The markets for many of NCR's products are characterized by rapidly
changing technology, evolving industry standards, and frequent new product
introductions. Shortening product life cycles in the information technology
industry pose a challenge for the effective management of the transition from
existing products to new products. The transition to new products can also
result in inventories of old or obsolete products and components.
NCR uses many standard parts and components in its products and believes
there are a number of competent vendors for most parts and components. However,
a number of important components are developed by and purchased from single
sources due to price, quality, technology or other considerations. In some
cases, those components are available only from single sources. In order to
secure components for production and introduction of new products, NCR may make
advance payments to certain suppliers and may enter into noncancelable purchase
commitments with vendors with respect to the purchase of components. See "Risk
Factors -- Reliance on Suppliers and Partners."
52
LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS
In the normal course of business, NCR is subject to regulations,
proceedings, lawsuits, claims, and other matters, including actions under laws
and regulations related to the environment, health and safety, among others.
Such matters are subject to the resolution of many uncertainties, and
accordingly, outcomes are not predictable with assurance. Although NCR believes
that amounts provided in its financial statements are currently adequate in
light of the probable and estimable liabilities, there can be no assurances that
the amounts required to discharge alleged liabilities from lawsuits, claims and
other legal proceedings and environmental matters, and to comply with applicable
environmental laws, will not exceed the amounts reflected in NCR's financial
statements or will not have a material adverse effect on the Company's
consolidated financial condition, results of operations or cash flows. Any
amounts of costs that may be incurred in excess of those amounts provided as of
June 30, 1996 cannot be determined.
Among the lawsuits and claims pending against NCR as of December 31, 1995
and June 30, 1996, there were approximately 100 individual product liability
claims alleging that the Company's products, including PCs, supermarket barcode
scanners, cash registers and check encoders, caused so-called "repetitive strain
injuries" or "cumulative trauma disorders," such as carpal tunnel syndrome. In
such lawsuits, the plaintiff typically alleges that he or she suffers from
injuries caused by the design of the product at issue or a failure to warn of
alleged hazards. These plaintiffs seek compensatory damages and, in many cases,
punitive damages. Most other manufacturers of these products have also been sued
by plaintiffs on similar theories. Ultimate resolution of the litigation against
the Company may substantially depend on the outcome of similar matters of this
type pending in various state and federal courts. The Company has denied the
merits and basis for the pending claims against it and intends to continue to
contest these cases vigorously.
NCR's facilities and operations are subject to a wide range of
environmental protection laws in the United States and other countries related
to solid and hazardous waste disposal, the control of air emissions and water
discharges, and the mitigation of impacts to the environment from past
operations and practices. NCR has investigatory and remedial activities,
including characterization and cleanup actions, underway at a number of
currently and formerly owned or operated facilities to comply, or to determine
compliance, with applicable environmental protection laws. NCR has been
identified, either by a governmental agency or by a private party seeking
contribution to site cleanup costs, as a PRP at a number of sites pursuant to a
variety of statutory schemes, both state and federal, including the FWPCA and
comparable state statutes, and CERCLA, and comparable state statutes.
In February 1996, NCR received notice from the USF&WS that it considers NCR
a PRP under the FWPCA and CERCLA with respect to alleged natural resource
restoration and damages to the Fox River System due to, among other things,
sediment contamination in the Fox River System allegedly resulting from
liability arising out of NCR's former carbonless paper manufacturing operations
at Appleton and Combined Locks, Wisconsin. USF&WS has also notified a number of
other manufacturing companies of their status as PRPs under the FWPCA and CERCLA
for natural resource restoration and damages in the Fox River System resulting
from their ongoing or former paper manufacturing operations in the Fox River
Valley. USF&WS and two Indian Tribes have stated their intention to conduct a
Natural Resource Damage Assessment to determine and quantify the nature and
extent of alleged injury to natural resources. In addition, NCR has been
identified, along with a number of other companies, by the WDNR with respect to
alleged liability arising out of alleged past discharges that have contaminated
sediments in the Fox River System. NCR is also actively pursuing discussions
with the WDNR regarding the Company's alleged liability. NCR's share, if any, of
such cleanup costs or natural resource restoration and damages liability cannot
be predicted with certainty at this time due to (i) the unknown magnitude,
scope, and source of any alleged contamination, (ii) the absence of identified
remedial objectives and methods, and (iii) the uncertainty of the amount and
scope of any alleged natural resource restoration and damages. At this point,
NCR believes that there are additional PRPs who may be liable for such natural
resource damages and remediation costs. Further, in 1978, NCR sold the business
to which the claims apply and believes the claims described above are the
responsibility of the buyer and its former parent company pursuant to the terms
of the sales agreement. In this connection, the Company has commenced litigation
against the buyer to enforce its position.
53
It is difficult to estimate the future financial impact of environmental
laws, including potential liabilities. NCR accrues environmental provisions when
it is probable that a liability has been incurred and the amount of the
liability is reasonably estimable. Management expects that the amounts provided
as of December 31, 1995 and June 30, 1996 will be paid out over the period of
investigation, negotiation, remediation, and restoration for the applicable
sites, which may be 30 years or more. Provisions for estimated losses from
environmental remediation are, depending on the site, based primarily on
internal and third-party environmental studies, estimates as to the number, and
participation level of any other PRPs, the extent of the contamination, and the
nature of required remedial and restoration actions. Accruals are adjusted as
further information develops or circumstances change. The amounts provided for
environmental matters in NCR's consolidated financial statements are the
estimated gross undiscounted amount of such liabilities, without deductions for
insurance or third-party indemnity claims. In those cases where insurance
carriers or third-party indemnitors have agreed to pay any amounts and
management believes that collectibility of such amounts is probable, the amounts
are reflected as receivables in the consolidated financial statements.
FORWARD LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains information regarding management's planned revenue growth
and expenditure levels, its financing plans, and plans for information
technology development. These statements are forward looking statements that
involve a number of risks and uncertainties. The following is a list of factors,
among others, that could cause actual results to differ materially from the
forward looking statements: business conditions and growth in certain market
segments and industries; and the general economy; competitive factors including
increased competition and price pressures; availability of third party component
products at reasonable prices; technological obsolescence; foreign currency
exposure; financial condition of business partners; changes in product mix
between and among product lines; lower than expected customer orders and
quarterly seasonal fluctuation of those orders; and product shipment
interruptions. See "Risk Factors."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF NCR
Set forth below is certain information concerning the directors and
executive officers of NCR. Of the current directors, only Mr. Nyberg will
continue to serve as a director after the Distribution. In addition to Mr.
Nyberg, NCR's new board is expected to consist of directors, who are not
officers or employees of NCR. NCR's Board of Directors is divided into three
classes. Commencing with the annual meeting of stockholders to be held in 1997,
directors for each class will be elected at the annual meeting of stockholders
held in the year in which the term for such class expires and will serve
thereafter for three years. See "Certain Antitakeover Effects -- Board of
Directors."
· Enlarge/Download Table
NAME AGE POSITION AND OFFICES HELD
----------------------------------- --- --------------------------------------------
Lars Nyberg........................ 45 Chairman of the Board, Chief Executive
Officer and President
Raymond G. Carlin.................. 41 Senior Vice President, Americas Region
Robert R. Carpenter................ 41 Senior Vice President, Worldwide Customer
Support Services
Robert A. Davis.................... 46 Senior Vice President and Chief Quality
Officer
William J. Eisenman................ 50 Senior Vice President, Computer Systems
Group
Daniel J. Enneking................. 49 Senior Vice President, Systemedia Group
Richard H. Evans................... 50 Senior Vice President, Global Human
Resources and Chief Strategy Officer
Anthony Fano....................... 53 Senior Vice President, Retail Systems Group
John L. Giering.................... 52 Senior Vice President and Chief Financial
Officer, and a Director
Jonathan S. Hoak................... 47 Senior Vice President and General Counsel,
and a Director
Per-Olof Loof...................... 46 Senior Vice President, Financial Systems
Group
Alice H. Lusk...................... 48 Senior Vice President, Worldwide
Professional Services and Information
Systems Operations
Dennis Roberson.................... 47 Senior Vice President and Chief Technical
Officer
Jose Luis Solla.................... 48 Senior Vice President, Europe/Middle
East/Africa Region
Hideaki Takahashi.................. 48 Senior Vice President, Asia/Pacific Region
Michael P. Tarpey.................. 51 Senior Vice President, Public Relations
Lars Nyberg. Mr. Nyberg was named Chairman of the Board, Chief Executive
Officer and President of NCR effective June 1, 1995. From June 1995 to December
1995, Mr. Nyberg also served as Executive Vice President, AT&T. From 1993 to
1995, Mr. Nyberg held the position of Chairman and Chief Executive Officer of
the Communication Division of Philips Electronics NV ("Philips"), an electronics
and electrical products company. At that time, Mr. Nyberg was a member of the
Philips Group Management Committee. In 1992, Mr. Nyberg was appointed Managing
Director, Philips Consumer Electronics Division. From 1990 to 1992, he was the
Chairman and Chief Executive Officer of Philips Computer Division.
Raymond G. Carlin. Mr. Carlin became Senior Vice President of NCR in
January 1995, responsible for all sales and services activities in the Americas
Region. From 1994 to 1995, Mr. Carlin was Vice President, U.S. Area, and from
1993 to 1994, Mr. Carlin was Vice President, NCR Worldwide Industry Marketing.
In 1992, Mr. Carlin was appointed an officer by the Board of Directors of NCR
and served as Vice President, U.S. Retail Systems Division. Prior to that, he
was Vice President of the Northeast Division, NCR U.S. Group.
Robert R. Carpenter. Mr. Carpenter became Senior Vice President, Worldwide
Customer Support Services for NCR in September 1996. From 1994 to 1996, he was
Senior Vice President, Worldwide Services for NCR. Mr. Carpenter joined AT&T in
1992 as Vice President, Marketing and Sales Operations for AT&T
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Network Systems. From 1988 to 1992, Mr. Carpenter held the position of Corporate
Vice President, Support Operations, for Square D Corporation, a maker of
electrical distribution, automation and industrial control products, systems and
services.
Robert A. Davis. Mr. Davis became Senior Vice President and Chief Quality
Officer in 1995. From 1994 to 1995, Mr. Davis was with Ideon Group, Inc., a
provider of credit card registry services, as Senior Vice President and Chief
Quality Officer. From 1990 to 1994, Mr. Davis was Vice President and Chief
Quality Officer with AT&T Universal Card Services.
William J. Eisenman. Mr. Eisenman became Senior Vice President, Computer
Systems Group in 1995. In 1994, he was appointed Vice President, NCR Worldwide
Services, Global Remote Services. From 1991 to 1994, he was Vice President, NCR
Large Computer Products Division.
Daniel J. Enneking. Mr. Enneking became Senior Vice President, Systemedia
Group in 1993. Mr. Enneking was appointed an officer by the Board of Directors
of NCR in 1991, and from 1991 to 1993, Mr. Enneking held the position of Vice
President, Finance & Administration, NCR U.S. Group.
Richard H. Evans. Mr. Evans became Senior Vice President, Global Human
Resources and Chief Strategy Officer for NCR in November 1995. Prior to his
appointment with NCR, Mr. Evans was Global Human Resources Vice President for
AT&T. From 1991 to 1993, Mr. Evans was President and Regional Managing Director
for AT&T's International Operations Division Asia/Pacific in Hong Kong.
Anthony Fano. Mr. Fano became Senior Vice President, Retail Systems Group
in 1995. From 1994 to 1995, Mr. Fano was Senior Vice President, NCR Europe and
Middle East/Africa, responsible for all NCR sales and services activity in that
geographic region. From 1993 to 1994, he was Senior Vice President, Quality and
Re-engineering. From 1991 to 1993, he was Vice President, NCR Latin
America/Middle East/Africa Group.
John L. Giering. Mr. Giering has held the position of Senior Vice
President and Chief Financial Officer of NCR since 1990. He has been a director
of the Company since January 1994.
Jonathan S. Hoak. Mr. Hoak became Senior Vice President and General
Counsel in December 1993 and a director of the Company effective September 3,
1996. From 1990 to 1993, Mr. Hoak was with AT&T Federal Systems as a General
Attorney.
Per-Olof Loof. Mr. Loof became Senior Vice President, Financial Systems
Group in November 1995. From 1994 to 1995, Mr. Loof was President and Chief
Executive Officer, AT&T Istel Co. Mr. Loof served as Vice President, Sales and
Marketing for Europe with Digital, a computer and related equipment and software
company, in 1994, and from 1990 to 1993 was Vice President, Financial Industry,
with Digital Europe.
Alice H. Lusk. Ms. Lusk became Senior Vice President, Worldwide
Professional Services and Information Systems Operations effective September 23,
1996. From 1992 to 1995, she was Corporate Vice President and Group Executive
for Healthcare and Life, Property, Casualty and Workers Compensation Insurance
Business Units at EDS, an information technology services company. Ms. Lusk
served as President, Healthcare Strategic Business Unit at EDS from 1991 to
1992. Ms. Lusk is a director of Access Health, Inc.
Dennis Roberson. Mr. Roberson became Senior Vice President and Chief
Technical Officer in September 1995. Mr. Roberson joined NCR as Vice President,
NCR Computer Products and Systems in May 1994. From 1988 to 1994, Mr. Roberson
was Vice President, Software, with Digital.
Jose Luis Solla. Mr. Solla became Senior Vice President in November 1995,
responsible for all sales and services activities in the Europe/Middle
East/Africa Region. Mr. Solla joined AT&T Iberia as a Country Leader in 1995.
During 1995, Mr. Solla also held the position of Area Manager, Iberia with
Olivetti, an office and computer equipment company. Mr. Solla joined Olivetti
Spain in 1992 and held the position of Managing Director until 1995. Prior to
1992, Mr. Solla was Area Director, ICL Spain, a computer and telecommunications
systems company.
Hideaki Takahashi. Mr. Takahashi became Senior Vice President in January
1996, responsible for all sales and services activities in the Asia/Pacific
Region. In July 1994, Mr. Takahashi was appointed Vice
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President Asia/Pacific Region. From 1992 to 1994, Mr. Takahashi was Vice
President, Operations, Japan. In 1992 he became Director, NCR Japan, Ltd. From
1987 to 1992, he was General Manager of NCR's engineering and manufacturing
facility in Oiso, Japan.
Michael P. Tarpey. Mr. Tarpey was appointed Senior Vice President of
Public Relations in January 1996. From 1994 to 1995, Mr. Tarpey was Public
Relations Vice President for AT&T's Consumer Communications Services business.
From 1990 to 1993, he was Vice President, Public Relations for AT&T's Business
Long Distance Unit.
COMMITTEES OF THE NCR BOARD OF DIRECTORS
Shortly after the Distribution Date, the NCR Board of Directors is expected
to establish the following committees: the Audit and Finance Committee, the
Compensation Committee, and the Committee on Directors. The NCR Board of
Directors may also establish other committees to facilitate its work.
The Audit and Finance Committee, which is expected to be comprised of at
least three non-employee directors, will be primarily responsible for providing
a means of direct contact and communication between NCR's independent
accountants and the NCR Board of Directors. The Audit and Finance Committee will
review (a) NCR's accounting principles and policies; (b) NCR's internal and
independent auditors' reports; (c) the adequacy of NCR's internal controls; (d)
NCR's annual audited financial statements; and (e) compliance with NCR's Code of
Conduct and key regulatory issues. The Audit and Finance Committee will also be
responsible for recommending to the Board of Directors the appointment of NCR's
independent accountants, reviewing, approving and recommending to the Board of
Directors NCR's financial policies and strategies, and reviewing significant
capital or other expenditures.
The Compensation Committee will consist of at least three non-employee
directors. Its primary functions will be to review the performance of NCR's
executive officers and make recommendations to the Board of Directors with
respect to the compensation of NCR's directors and executive officers. In
addition, the Compensation Committee will review NCR's executive compensation
plans in relation to its corporate strategies, NCR's stock option and other
incentive plans, and NCR's plans for management succession and development.
The Committee on Directors will establish procedures for the selection and
retention of directors, review the composition of the NCR Board of Directors and
the qualifications of persons identified as prospective directors, and recommend
for approval by the Board of Directors the candidates to be nominated for
election as directors. The Committee on Directors will consist of Mr. Nyberg and
at least two non-employee directors.
COMPENSATION OF DIRECTORS
NCR expects that each non-employee director will receive an annual retainer
of approximately $30,000, consisting of cash, deferred equity compensation, or a
combination thereof. The equity portion of the retainer is expected to be
granted on the date of each annual stockholders meeting and to vest pro rata
over the year that service is rendered. Cash payments would be made pro rata on
a quarterly basis.
The deferred equity component of the retainer will be in the form of
deferred shares credited to an NCR Common Stock equivalent account. Dividend
payments on NCR Common Stock, if any, will be reinvested in additional deferred
shares. It is further contemplated that, at the time of the grant, NCR's
non-employee directors will be entitled to elect either (a) to defer until
retirement the receipt of shares of NCR Common Stock with a value equivalent to
that of their respective vested deferred shares, or (b) to receive such shares
annually over a predetermined period of time.
NCR also plans to offer its new non-employee directors a one-time stock
option or deferred share grant upon their election to the Board of Directors. It
is contemplated that the amount of this grant will be one to two times the
annual retainer.
In addition to an annual retainer, NCR's non-employee directors will
receive stock option grants at each annual stockholders meeting with a value,
based on a specified formula, of approximately $30,000. Such stock
57
option grants will vest pro rata during the subsequent year of service and will
be fully exercisable one year from the date of the grant. The options will have
an exercise price equal to the fair market value of the underlying shares of NCR
Common Stock on the date of the grant.
ANNUAL MEETING
The NCR Bylaws provide that the Company's annual meetings of stockholders
will be held during the 31 day period commencing the third Thursday of April of
each year at NCR's principal office or on such other date and at such other
place and time as may be fixed by resolution of the NCR Board of Directors. The
first annual meeting for which proxies will be solicited from stockholders will
be held in 1997.
STOCK OWNERSHIP OF EXECUTIVE OFFICERS AND DIRECTORS
No present or future executive officer or director currently owns any
shares of NCR Common Stock, all of which are currently owned by AT&T. Such
executive officers and directors will receive shares of NCR Common Stock in the
Distribution in respect of shares of AT&T Common Stock held by them on the
Record Date. In addition, with certain exceptions, existing benefit plan awards
under NCR and AT&T benefit plans based on AT&T Common Stock will be converted
into comparable awards based on NCR Common Stock under the NCR Management Stock
Plan (the "NCR Stock Plan") as described below. See "-- NCR Stock Incentive
Plans" and "Arrangements Among AT&T, NCR and Lucent -- Employee Benefits
Agreement." The following table sets forth the number of shares of AT&T Common
Stock beneficially owned on , 1996 by each of NCR's directors, the
executive officers named in the Summary Compensation Table below, and all
directors and executive officers of NCR as a group. Except as otherwise noted,
the individual director or executive officer or his or her family members had
sole voting and investment power with respect to such securities.
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BENEFICIALLY
NAME OWNED(1)(2)
------------------------------------------------------------------------------ -----------
Lars Nyberg...................................................................
Raymond G. Carlin.............................................................
Robert R. Carpenter(3)........................................................
Anthony Fano..................................................................
John L. Giering...............................................................
Directors and Executive Officers as a Group (16 persons)......................
---------------
(1) No individual director, director nominee or named executive officer
beneficially owns 1% or more of the outstanding AT&T Common Stock, nor do
the directors and executive officers as a group.
(2) Includes beneficial ownership of the following number of shares of AT&T
Common Stock which may be acquired within 60 days of , 1996
pursuant to stock options awarded under employee incentive compensation
plans of AT&T. Mr. Nyberg - ; Mr. Carlin - ; Mr.
Carpenter - ; Mr. Fano - ; Mr. Giering - ; and
all other executive officers as a group - .
(3) Does not include share units representing shares of AT&T Common Stock
held in elective deferred compensation accounts.
To the knowledge of AT&T and NCR, no person or entity beneficially owns
more than 5% of the outstanding AT&T Common Stock. Options to purchase NCR
Common Stock and other awards based on NCR Common Stock are expected to be
granted in the future to NCR directors, officers and employees under NCR's
benefit plans. See "-- NCR Stock Incentive Plans" and "Arrangements Among AT&T,
NCR and Lucent -- Employee Benefits Agreement."
58
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for Lars
Nyberg, the Chairman of the Board, Chief Executive Officer and President of NCR,
and the four other executive officers of NCR as of December 31, 1995 who, based
on employment with NCR, AT&T or their respective subsidiaries, were the most
highly compensated executive officers for the year ended December 31, 1995.
Information set forth in the table reflects compensation earned by such
individuals for services with NCR, AT&T or their respective subsidiaries.
SUMMARY COMPENSATION TABLE
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LONG TERM COMPENSATION(2)
----------------------------------
ANNUAL COMPENSATION(2) AWARDS PAYOUTS
-------------------------------------- ------------------------ -------
OTHER AT&T AT&T ALL
ANNUAL RESTRICTED AT&T LTIP OTHER
SALARY BONUS COMPENSA- STOCK OPTIONS PAYOUTS COMPENSA-
NAME AND POSITION(1) YEAR ($) ($) TION($)(3) AWARD($)(4E) (#) ($)(5) TION($)(6)
--------------------------- ---- ------- ------- ------------ ------------ ------- ------- ----------
Lars Nyberg(7)............. 1995 295,384 760,506 122,198 990,942(4a) 438,484 0 0
Chairman of the Board, 45,036(4b)
Chief Executive Officer 2,222,500(4c)
and President 1994 0 0 0 0 0 0
1993 0 0 0 0 0 0
Raymond G. Carlin.......... 1995 265,000 64,382 9,080 178,054(4a) 13,200 50,000 5,625
Senior Vice President 39,774(4b)
Americas Region 1994 215,771 115,700 9,859 27,049(4b) 8,760 49,140 5,625
1993 156,780 58,821 11,481 23,520(4b) 4,500 63,000 5,635
Robert R. Carpenter........ 1995 305,000 167,900 62,451 171,806(4a) 6,219 92,598 25,904
Senior Vice President 1994 283,333 220,400 39,671 0 5,278 88,856 20,374
Worldwide Customer 1993 235,000 110,900 29,261 0 5,278 51,549 21,371
Support Services
Anthony Fano............... 1995 286,000 45,383 94,772 204,452(4a) 15,380 80,900 5,625
Senior Vice President 1994 225,000 120,998 9,785 501,165(4d) 9,220 79,560 5,625
Retail Systems Group 1993 196,000 93,379 9,510 0 9,140 102,000 11,230
John L. Giering............ 1995 310,000 84,476 15,523 303,832(4a) 21,280 144,000 399,149
Senior Vice President 1994 297,570 167,364 14,143 0 20,120 141,570 281,495
& Chief Financial Officer 1993 273,000 122,276 25,808 0 20,420 181,500 252,784
---------------
(1) Includes the Chief Executive Officer and the four other most highly
compensated executive officers as measured by salary and bonus.
(2) Compensation deferred at the election of named executive officers is
included in the category (e.g., salary, bonus, long term incentive plan
payouts, etc.) and year it would have otherwise been reported had it not
been deferred.
(3) Includes (a) dividend equivalents paid with respect to long-term performance
shares prior to the end of the three-year performance period, (b) tax
payment reimbursements, (c) the value of certain personal benefits and
perquisites, (d) relocation reimbursements, and (e) payments of above-market
interest on deferred compensation.
(4) (a) During 1995, awards classified as performance share awards were granted
to Messrs. Nyberg, Carlin, Carpenter, Fano, and Giering. At the time of such
grant, the payout of such awards was tied to achieving specified levels of
performance, customer satisfaction, or employee satisfaction. The target
amount would be earned if 100% of each participant's specific objectives was
achieved over a three-year period. At its December 1995 meeting, the
Compensation Committee of the AT&T Board recommended and approved that the
performance amounts for the 1995-1997 performance cycle be deemed to have
been met at the target level. This action was taken in acknowledgment that
AT&T's restructuring had rendered the original performance criteria
inapplicable and of the difficulty of establishing revised criteria while
the restructuring was in process. Awards will be distributed as common
stock, or as cash in such an amount equal to the value of these shares, or
partly in common stock and partly in cash. As a result of such action, this
award will vest in one installment and be payable in the first quarter of
1998 if the participant remains in the employ of NCR for the three full
years ending December 31, 1997, with certain exceptions
59
in the case of death, disability, or retirement. Dividend equivalents on
such awards are paid in cash. The number of shares of AT&T Common Stock
represented by the awards made for the 1995-1997 performance cycle for
Messrs. Nyberg, Carlin, Carpenter, Fano, and Giering, respectively, were
10,555, 2,123, 1,798, 2,291, and 3,104. The value of such awards at the date
of grant is reflected in the table above.
A similar determination was made by such Compensation Committee with respect
to the 1994-1996 cycle for similar awards. Accordingly, such awards will
vest in one installment and be payable in the first quarter of 1997 if the
participant remains in the employ of NCR through December 31, 1996, subject
to the same exceptions described above. The number of shares of AT&T Common
Stock represented by the 1994-96 awards for Messrs. Nyberg, Carlin,
Carpenter, Fano, and Giering, respectively, were 8,783, 1,364, 1,553, 1,705,
and 2,818. The value of such awards at the date of grant is reflected in the
table above.
(b) Messrs. Nyberg and Carlin received 834 and 754 restricted shares of AT&T
Common Stock, respectively, in 1995, and Mr. Carlin received 514 and 448
restricted shares of AT&T Common Stock in 1994 and 1993, respectively, in
each case pursuant to the Officer Plan (as defined below). Dividends on
these shares are reinvested in additional shares of restricted stock. The
value of such awards at the date of grant is reflected in the table above.
(c) During 1995, Mr. Nyberg received a special restricted stock unit grant
of 35,000 shares of AT&T Common Stock. The grant to Mr. Nyberg is part of an
AT&T special equity incentive/retention program. The grant vests four years
after the date of grant and carries stringent penalties for competition and
other specified adverse activities. Dividends on such units are paid in
cash. The grant to Mr. Nyberg will not be converted into awards based on NCR
Common Stock on the Distribution Date but will remain restricted stock units
based on AT&T Common Stock. The value of this award at the date of grant is
reflected in the table above.
(d) In March 1994, Mr. Fano received a phantom stock grant equivalent to
9,546 shares of AT&T Common Stock. The phantom stock vests after four years,
except in the event of death or disability, in which event the grant vests
ratably over the four-year period. The phantom stock is payable in cash, and
dividends are reinvested in additional shares of phantom stock. The value of
this award at the date of grant is reflected in the table above.
(e) The aggregate value at December 31, 1995 (based on an AT&T Common Stock
price of $64 1/2 per share) for the 1995-1997 and 1994-1996 performance
share awards for Messrs. Nyberg, Carlin, Carpenter, Fano, and Giering,
respectively, was $1,252,135, $225,783, $216,977, $258,741, and $383,450.
The aggregate value at December 31, 1995 (based on an AT&T Common Stock
price of $64 1/2 per share) for awards of restricted shares of AT&T Common
Stock, restricted stock units, or phantom share units for Messrs. Nyberg,
Carlin, and Fano, respectively, was $2,311,293, $110,682, and $615,717.
(5) Includes distribution in 1995 to Messrs. Carlin, Carpenter, Fano, and
Giering of performance units for the three-year performance period ended
December 31, 1994.
(6) Includes in 1995 for Mr. Carpenter, AT&T contributions to the AT&T Savings
Plan of $6,000, AT&T contributions under a non-qualified savings plan of
$5,201, and premiums for split-dollar life insurance policies of $14,885.
Also, includes in 1995 for each of Mr. Fano and Mr. Carlin, NCR
contributions to the Savings Plan of $5,625. For Mr. Giering, includes in
1995, NCR contributions to the Savings Plan of $5,625 and accrued interest
of $393,524 on a lump-sum amount payable in 1997 pursuant to an employment
agreement. See "-- Employment Agreements."
(7) Mr. Nyberg became Chairman of the Board, Chief Executive Officer and
President of NCR effective June 1995. For a summary of his employment
agreements, see "-- Employment Agreements" below.
60
OPTION AND SAR GRANTS OF AT&T COMMON STOCK TO EXECUTIVE OFFICERS
The following tables disclose information regarding stock options and stock
appreciation rights granted to the executive officers named in the Summary
Compensation Table above in respect of shares of AT&T Common Stock under the
AT&T 1987 Long Term Incentive Plan (the "AT&T Stock Plan").
OPTION GRANTS IN LAST FISCAL YEAR
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INDIVIDUAL GRANTS
------------------------------------------------------------------------
NUMBER OF PERCENT OF GRANT
SHARES TOTAL DATE
UNDERLYING OPTIONS EXERCISE PRESENT
OPTIONS GRANTED TO PRICE EXPIRATION VALUE
NAME(1) GRANTED(#)(2) EMPLOYEES(3) ($/Sh) DATE ($)(4)
------------------------------- ------------- ------------ -------- ---------- ---------
Lars Nyberg.................... 38,484 54.0000 7/5/05 451,032
400,000 3.29% 63.5000 9/25/05 5,384,000
Raymond G. Carlin.............. 13,200 0.10% 49.9375 1/3/05 175,428
Robert R. Carpenter............ 6,219 0.05% 49.9375 1/3/05 83,894
Anthony Fano................... 15,380 0.12% 49.9375 1/3/05 204,400
John L. Giering................ 21,280 0.16% 49.9375 1/3/05 282,811
---------------
(1) Includes the Chief Executive Officer and the four other most highly
compensated executive officers as measured by salary and bonus.
(2) Includes the regular annual January 1995 grant of options to Messrs. Carlin,
Carpenter, Fano, and Giering. For Mr. Nyberg, includes a July 1995 grant in
connection with his initial employment and a special AT&T September 1995
equity incentive/retention grant following the announcement of AT&T's
restructuring. The options granted in January 1995 to Messrs. Fano, and
Giering vest in equal annual installments over four years. Grants to Messrs.
Carlin and Carpenter, and to Mr. Nyberg in January and July, respectively,
vest in equal annual installments over three years. Options granted in
September 1995 to Mr. Nyberg become exercisable four years after the date of
grant provided that applicable price performance criteria have been
satisfied. Regardless of price performance, all options granted in September
1995 will vest six years after the date of grant. All options expire on the
tenth anniversary of the date of grant.
(3) Percent of total options granted based on total options granted to AT&T
employees.
(4) In accordance with Commission rules, the Black-Scholes option pricing model
was chosen to estimate the grant date present value of the options set forth
in this table. NCR's use of this model should not be construed as an
endorsement of its accuracy at valuing options. All stock option valuation
models, including the Black-Scholes model, require certain assumptions to be
made. The following assumptions were made for purposes of calculating the
Grant Date Present Value: for the January grant, an option term of 7 years,
a standard deviation of 17.69%, a dividend yield of 2.77%, an interest rate
of 7.83%, and a 3% per year discount for each year in the vesting period for
risk of forfeiture over the three or four-year vesting schedule, as
appropriate; for the July grant, an option term of 7 years, a standard
deviation of 15.72%, a dividend yield of 2.66%, an interest rate of 6.10%,
and a 3% per year discount for each year in the vesting period for risk of
forfeiture over a three-year vesting schedule; and for the September grant,
an option term of 7 years, a standard deviation of 15.72%, a dividend yield
of 2.66%, an interest rate of 6.40%, and a 3% per year discount for each
year in the vesting period for risk of forfeiture over the four-year cliff
vesting period. The real value of the options in this table depends upon the
actual performance of the stock underlying the options during the applicable
period.
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AGGREGATED OPTION/STOCK APPRECIATION RIGHTS
EXERCISES IN 1995 AND YEAR-END VALUES
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VALUE OF
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
YEAR END(#)(2) YEAR END($)(2)
SHARES --------------- ---------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME(1) EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
------------------------------------- ----------- ----------- --------------- ---------------
Lars Nyberg.......................... 0 0 0 0
438,484 913,703
Raymond G. Carlin.................... 8,095 205,458 4,440 57,503
23,385 340,804
Robert R. Carpenter.................. 5,278 156,031 21,556 425,318
6,219 92,119
Anthony Fano......................... 7,974 228,758 15,155 306,490
29,625 445,818
John L. Giering...................... 0 0 34,050 691,408
52,850 800,669
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(1) Includes the Chief Executive Officer and the four other most highly
compensated executive officers as measured by salary and bonus. Sets forth
information regarding options regardless of year of grant.
(2) None of the individuals set forth in the table above have stock appreciation
rights.
EMPLOYMENT AGREEMENTS
AT&T entered into letter employment agreements with Lars Nyberg on April
18, 1995 (the "1995 Agreement") and June 7, 1996 (the "1996 Agreement")
providing for Mr. Nyberg's employment with NCR. The 1995 Agreement provides for
an initial base salary of $600,000 per year, a guaranteed 1995 annual incentive
award of $590,000, and awards under the AT&T Stock Plan of 10,555 performance
units and options to purchase 38,484 shares of AT&T Common Stock. The 1995
Agreement also provides for an award to Mr. Nyberg of 7,397 performance units
that were payable in the first quarter of 1996 and 8,783 performance units that
are payable in the first quarter of 1997. At the time of the Distribution, such
performance units will be converted into comparable awards based on NCR Common
Stock under the NCR Stock Plan, as more fully set forth below under
"Arrangements Among AT&T, NCR and Lucent -- Employee Benefits Agreement."
The 1996 Agreement supplements the 1995 Agreement and provides for an
annual bonus of $375,000, payable by NCR to Mr. Nyberg on June 1 of each of the
years 1996 through 1998, and a bonus of $3,875,000, payable by NCR to Mr. Nyberg
on June 1, 1999, provided in each case that Mr. Nyberg is employed by NCR on
such dates. In the event his employment is terminated as a result of death,
Disability, involuntary termination other than for Cause, or Termination for
Good Reason (as such terms are defined in the 1996 Agreement), Mr. Nyberg (or
his estate) will receive a one-time payment of $5,000,000, less any bonus
payments already received. The 1996 Agreement also provides for a bonus of
$2,000,000 to be paid to Mr. Nyberg on or after June 1, 1999 upon execution of
an employment contract with NCR for an additional two-year period beyond June 1,
1999.
The 1996 Agreement provides that, after the Distribution, 400,000 stock
options for AT&T Common Stock and 35,000 AT&T restricted stock units that were
granted to Mr. Nyberg in September 1995 will continue to become exercisable or
vest, as applicable, in accordance with the terms under which such awards were
granted, and that such restricted stock units will not be converted into
comparable awards based on NCR Common Stock but will remain outstanding. The
1996 Agreement also provides that, after the Distribution, NCR will provide Mr.
Nyberg with (i) a grant of options to purchase a number of shares of NCR Common
Stock such that the market price per share of NCR Common Stock at the date of
grant multiplied by such number of shares equals $5,000,000, and (ii) a grant of
a number of restricted shares of NCR Common Stock such that the market price per
share of NCR Common Stock at the date of grant multiplied by such number
62
of restricted shares equals $5,000,000. Such options and restricted shares will
become exercisable or vest, as applicable, in September 1999. Finally, the 1996
Agreement also provides for a lump-sum cash payment by AT&T to Mr. Nyberg of
$1,900,000 upon consummation of the Distribution in lieu of benefits and
entitlements payable to Mr. Nyberg under a special pension arrangement
established for him by AT&T.
AT&T and NCR entered into an employment agreement with John L. Giering on
September 23, 1991, which provides for Mr. Giering's employment as Senior Vice
President, Finance and Administration of NCR, commencing on the date of the
agreement and ending on December 31, 1996. Thereafter, Mr. Giering's employment
with NCR will be "at will" and upon such terms and conditions as NCR and Mr.
Giering may agree. Pursuant to the terms of the employment agreement, Mr.
Giering is entitled to receive a lump sum payment of $2,275,000 plus interest,
within 45 business days following December 31, 1996.
AT&T entered into an employment agreement with Robert R. Carpenter on March
2, 1992, which provides for Mr. Carpenter's employment with AT&T through March
2, 1997. Pursuant to the terms of the employment agreement, if Mr. Carpenter is
terminated by AT&T other than for cause (as defined in the agreement) during the
term of the agreement, Mr. Carpenter will be entitled to the greater of $225,000
or 100% of his annual base salary in effect on the date of termination. NCR
entered into a letter agreement with Mr. Carpenter on February 18, 1994, which
provides for Mr. Carpenter's assignment to NCR as Senior Vice
President -- Worldwide Services, but which does not negate any rights under the
1992 agreement.
SAVINGS PLAN
All eligible NCR employees in the United States may elect to participate in
the NCR Savings Plan (the "Savings Plan"). The Savings Plan is a qualified plan
under the Code. A participant in the Savings Plan may elect to contribute, on a
"pre-tax" basis, up to a fixed percentage (ranging from 7% to 16% depending on a
participant's pay) of his or her pay, collected through payroll deductions. A
participant also can contribute, on an "after-tax" basis, provided, however,
that a participant's total contribution (both pre-tax and after-tax) cannot
exceed a fixed percentage (ranging from 11% to 20% depending on a participant's
pay) of his or her pay. By law, no participant can contribute more than $9,500
on a pre-tax basis in 1996. NCR makes matching contributions equal to 75% of the
amount contributed by the participating employee up to 3% of pay and matching
contributions equal to 50% of the amount contributed by the participating
employee from 4% to 6% of pay.
Participants may invest both their own contributions and NCR's matching
contributions to the Savings Plan in one or more of several funds, including a
company stock fund consisting of shares of AT&T Common Stock. At the
Distribution Date, an investment fund consisting solely of shares of NCR Common
Stock will be added to the Savings Plan. During the one-year period following
the Distribution Date, participants will not be able to direct investments into
the AT&T Common Stock fund, but will be able to transfer investments out of such
fund. At the end of such one-year period, all remaining investments in the AT&T
Common Stock fund will be automatically transferred to the Saving Plan's money
market fund and the AT&T Common Stock fund will be terminated.
A participant's contributions to the Savings Plan are always fully vested;
matching contributions by NCR vest in one-fifth increments over a five-year
period which begins on the first day of the employee's employment and vest no
later than the employee's attainment of age 65. Also, in the event of death,
disability or termination of employment due to a reduction-in-force, a
participant becomes fully vested in all matching contributions made by NCR and
is entitled to full distribution of all amounts held for his or her account
under the Savings Plan. If a participant's employment is terminated for any
other reason, all non-vested NCR matching contributions will be forfeited.
Subject to a tax penalty, withdrawals may be made from the Savings Plan during a
participant's employment in the case of a "hardship" (as defined in the Savings
Plan). A participant may receive a loan from his or her vested account balances
of up to the lesser of $50,000 or 50% of the vested account balances.
63
RETIREMENT BENEFITS
Employees of NCR are covered by a variety of retirement plans. The NCR
Pension Plan (the "Pension Plan") is a qualified, non-contributory defined
benefit plan which provides retirement benefits to most employees based in the
United States who are not covered by a collective bargaining agreement,
including executive officers of NCR, who have completed one year of service and
meet certain age requirements. Benefits payable under the Pension Plan are
funded solely by contributions made by NCR on an actuarial basis to a trust.
Generally, benefits are based on a participant's years of credited service with
NCR and its subsidiaries and the participant's Modified Average Pay (as defined
in the Pension Plan). For each year of credited service, a participant receives
between 1.3% and 1.7% of his or her Modified Average Pay. Benefits payable under
the Pension Plan will vest after a participant has completed five years of
service with NCR or its subsidiaries. In addition, all benefits vest at age 65.
The Pension Plan also provides an additional benefit (the "PensionPlus
benefits") equivalent to 1.5% of a participant's Compensation (as defined in the
Pension Plan) paid in each month since January 1, 1992 and 2% of Compensation
paid in 1991.
NCR also sponsors several qualified, non-contributory defined benefit plans
for non-exempt employees at certain manufacturing locations and for certain
employees represented by collective bargaining units. Benefits under these plans
are generally based upon a specific dollar amount and years of service.
The NCR Nonqualified Excess Plan (the "Excess Plan") provides supplemental
retirement benefits to the employees of NCR whose retirement benefits under the
Pension Plan are affected by Code limits. The supplemental pension benefits
provided by the Excess Plan equal the difference between the benefits under the
Pension Plan without regard to Code limits and the actual pension benefits
payable under the Pension Plan. The supplemental benefits under the Excess Plan
will be paid at the same time and in the same form as the benefits under the
Pension Plan. The Excess Plan is a nonqualified plan, funded from general
corporate assets.
NCR also maintains two nonqualified, unfunded supplemental retirement plans
for executive officers designated as participants thereunder by NCR's Board of
Directors (the "Plan Committee"). The NCR Senior Executive Retirement, Death &
Disability Plan (the "Senior Plan") covers three active executive officers. The
Retirement Plan for Officers of NCR (the "Officer Plan") is generally designed
to replace the Senior Plan for executive officers appointed after November 30,
1988 and covers 12 active executive officers.
The Senior Plan provides monthly benefits upon termination of employment
based upon 4% of a final average monthly pay per year of service. Final average
monthly pay is determined by taking into account the participant's highest
consecutive 36 months of compensation (i.e., salary, any Management Incentive
Plan (the "MIP") award and 50% of certain long-term incentive plan awards)
during the last 6 years of employment. The benefit is actuarially reduced to the
extent that the participant is under age 62 at the time of termination. The
benefit is offset by the participant's Social Security primary insurance amount,
by the benefit under the Pension Plan, the Excess Plan or under any other
pension, profit sharing, savings or other retirement plan of NCR, an NCR
affiliate or a prior employer, and any disability income benefits received
pursuant to a disability income plan sponsored by NCR. The Senior Plan also
provides for disability benefits in the event that a participant's employment is
terminated due to total disability and for death benefits in a reduced amount.
No benefits are payable under the Senior Plan if a participant voluntarily
terminates employment with NCR before attaining age 55, or is involuntarily
terminated by the Company before attaining age 52. The Plan Committee has
discretion to disallow benefits in the event that a participant engages in
certain competition with NCR during the three-year period following termination
of employment with NCR.
The Senior Plan contains a change in control provision that, upon the
occurrence of any of certain enumerated events, enhances the benefits of an
officer who has been a participant for at least one year prior to a change in
control. Upon termination of employment for any reason, certain executive
officers identified by NCR's Board of Directors ("Designated Officer") are
entitled to an additional five years of service and a guaranteed minimum
compensation amount for purposes of calculating the pension benefit under the
Senior Plan, and may commence receiving benefits at any time after attaining age
50, subject to more favorable early retirement reduction factors. Other NCR
officers who are not Designated Officers become entitled to these enhanced
benefits if involuntarily terminated within three years after a change in
control, or if terminated for
64
any reason thereafter. The change in control provision was triggered when NCR's
stockholders approved the merger of NCR with a wholly owned subsidiary of AT&T.
Messrs. Giering and Fano are entitled to benefits under the Senior Plan
that are enhanced by the change in control provision.
The Officer Plan provides for monthly benefits upon termination of
employment based upon 2.5% of career average monthly salary for service as an
executive officer, including salary, the MIP award and certain long-term
incentive plan awards. The monthly benefit is actuarially reduced to the extent
that the participant is under age 62 at the time of termination. The monthly
benefit is offset by the participant's benefit under the Pension Plan (other
than the PensionPlus benefits) and any employer-provided benefit under any other
retirement plan of NCR, an NCR affiliate or a prior employer, and any disability
income benefits received pursuant to a disability income plan sponsored by NCR.
The Officer Plan permits participants to elect a joint and survivor form of
annuity providing for reduced lifetime benefits and an annuity for the life of
the participant's surviving spouse. Under the Officer Plan, no benefit is
payable if the officer terminates employment prior to one year from the
effective date of participation in the plan. In addition, a participant whose
employment is terminated prior to age 55 for any reason other than death
receives no benefits, unless he or she has been employed by NCR for at least ten
years prior to termination of employment. The Officer Plan also provides death
benefits in reduced amount. The Plan Committee has discretion to disallow
benefits in the event that a participant engages in certain competition with NCR
during the three-year period following termination of employment with NCR.
Officers participating in the Officer Plan also have received annual grants of
restricted AT&T Common Stock ("Restricted Stock") equal to 15% of annual base
pay. The Restricted Stock vests when the officer reaches age 55 while still
employed by AT&T, or upon death, retirement or total and permanent disability,
and the restrictions on transferability lapse at age 62. After the Distribution,
this program will be discontinued and outstanding awards will be converted into
awards based on NCR Common Stock.
The Officer Plan contained a change of control provision that became
effective when NCR's stockholders approved the merger of NCR with a wholly owned
subsidiary of AT&T. Officers who had been participants in the Officer Plan for
at least one year prior to the effective date of the merger became eligible for
certain enhanced pension benefits. Upon termination of employment for any
reason, executive officers were entitled to an additional five years of service
and a guaranteed minimum compensation amount for purposes of calculating the
pension benefit under the Officer Plan, and could commence receiving benefits at
any time after attaining age 50, subject to more favorable early retirement
reduction factors. Officers who were not executive officers became entitled to
these enhanced benefits if involuntarily terminated within three years after the
merger, or if terminated for any reason thereafter.
In 1995, Mr. Nyberg entered into an individual pension arrangement with
AT&T that required certain minimum service requirements. Since this arrangement
terminates upon the Distribution, pursuant to the 1996 Agreement, Mr. Nyberg
will not attain the minimum service requirements. Upon the Distribution, AT&T
has agreed to pay $1.9 million to Mr. Nyberg in lieu of all potential benefits
and entitlements under his individual pension arrangements.
NCR also maintains two nonqualified, unfunded supplemental retirement plans
for officers meeting specified requirements. The Supplemental Pension Plan for
Transfers Between AT&T and NCR (the "Transfer Plan") pays a benefit to an
individual who transfers employment directly from AT&T to NCR at a level of
"D-Band" (middle management) or above, who serves a total of at least five years
at the "E-Band" level or above at NCR (officer/key employee), and who is
eligible for an immediate pension from both AT&T and NCR at the time of
termination of employment with NCR. The benefit equals the difference, if any,
between the total retirement benefits that the participant would have received
if he or she had remained with AT&T, and the total retirement benefits actually
received from AT&T and NCR. NCR intends to amend the Transfer Plan effective as
of the Distribution Date to allow no further participants in the plan. Current
participants as of the Distribution Date will continue to be entitled to a
benefit, provided the eligibility requirements are satisfied at termination of
employment. The Transfer Plan covers three active executive officers.
65
The NCR Mid-Career Hire Supplemental Pension Plan (the "Mid-Career Plan")
pays a benefit to an employee hired by NCR for the first time at age 35 or over,
at a level of D-Band or higher, who is working at a level of E-Band or higher at
termination of employment from NCR, and whose total service with NCR and its
affiliates at the E-Band level is five or more years. An employee is also
eligible if he or she transfers to NCR from AT&T and was covered by the AT&T
Mid-Career Pension Plan. The benefit equals 1% of annual pay for each "Pension
Credit Year," which is each year worked for NCR, up to a maximum equal to the
number of years between age 30 and the age on the date of hire with NCR. NCR
intends to amend the Mid-Career Plan effective as of the Distribution Date to
cease recognition of service with AT&T after the Distribution Date. The
Mid-Career Plan covers five active executive officers.
Certain of NCR's non-qualified executive pension plan benefits are
supported by a benefits trust, the assets of which are subject to the claims of
NCR's creditors.
If Messrs. Nyberg, Carlin, Fano, and Giering continue in their current
positions, at current salaries and at target bonus levels and retire at age 62
from NCR, the estimated annual pension amounts payable from NCR's qualified and
non-qualified defined benefit pension plans, including supplemental pension
plans, would be $823,685, $423,512, $301,880, and $391,200, respectively. For
Mr. Carpenter, the estimated annual pension amount so payable under AT&T's
qualified and non-qualified defined benefit pension plans, including
supplemental pension plans, would be $ .
NCR STOCK INCENTIVE PLANS
Substitute Awards. Prior to the Distribution, eligible employees of NCR
participated in the AT&T Stock Plan under which they were granted stock option
awards and other equity-based awards. On the Distribution Date, with certain
exceptions, such awards will be converted into comparable awards based on NCR
Common Stock under the NCR Stock Plan as described under "Arrangements Among
AT&T, NCR and Lucent -- Employee Benefits Agreement."
NCR Stock Plan. NCR intends to adopt, with the approval of AT&T in its
capacity as the sole stockholder of NCR, the NCR Stock Plan. The NCR Stock Plan
will be administered by the Compensation Committee of the NCR Board of
Directors. In order to assure that compensation paid pursuant to the NCR Stock
Plan can qualify as "performance-based compensation" not subject to the
limitations on deductibility of certain executive compensation in excess of $1
million, NCR intends to seek stockholder approval of the material terms of the
performance goals under the NCR Stock Plan at either its 1997 or 1998 annual
meeting of stockholders. Such stockholder approval is not required for any other
purpose.
The NCR Stock Plan provides for the grant of incentive stock options that
qualify under Section 422 of the Code ("ISOs"), nonstatutory stock options,
stock appreciation rights, restricted stock awards, performance awards, other
stock unit awards and other rights, interests or options relating to shares of
NCR Common Stock or other securities of NCR (collectively, "Awards"). No
determination has been made as to the number of employees of NCR who will
participate in the NCR Stock Plan. However, as described under "Arrangements
Among AT&T, NCR and Lucent -- Employee Benefits Agreement," employees of NCR who
hold awards under the AT&T Stock Plan ("AT&T Stock Awards") (approximately 850
individuals as of August 31, 1996) are expected to receive Awards under the NCR
Stock Plan (the "Substitute Awards") in substitution therefor, following the
consummation of the Distribution. NCR expects that additional awards under the
NCR Stock Plan will be made.
The NCR Stock Plan contains a formula for establishing an annual limit on
the number of shares of NCR Common Stock that may be awarded (or with respect to
which non-stock Awards may be made) in any given year, except that Substitute
Awards will not be counted against such limit. Subject to customary anti-
dilution adjustments, the total number of shares of NCR Common Stock available
for grant under the NCR Stock Plan is % for 1997 and % in each calendar
year thereafter of the total outstanding shares of NCR Common Stock as of the
first day of such year for which the NCR Stock Plan is in effect; provided that
such number will be increased in any year by the number of shares of NCR Common
Stock available for grant under the NCR Stock Plan in previous years but not
covered by Awards granted thereunder in such years; provided, further, that no
more than million shares of NCR Common Stock will be cumulatively available
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for the grant of ISOs. Any shares of NCR Common Stock issued by NCR throughout
the assumption or substitution of outstanding grants from an acquired company
("Rollover Awards") will not reduce the number of shares of NCR Common Stock
available for grants thereunder. In addition, no one individual may be granted
Awards with respect to more than shares of NCR Common Stock in any one
year (not including Substitute Awards or Rollover Awards).
The Compensation Committee, which will be comprised of at least three
non-employee directors, none of whom may receive any Awards under the NCR Stock
Plan, will administer the NCR Stock Plan after the Distribution. Except in the
case of Substitute Awards and Rollover Awards, the purchase price per share of
NCR Common Stock purchasable under stock options granted pursuant to the NCR
Stock Plan will be determined by the Compensation Committee, in its sole
discretion, provided that such purchase price will not be less than the Fair
Market Value (as defined in the NCR Stock Plan) of a share of NCR Common Stock
on the date of grant of the stock options. The NCR Stock Plan also provides
that, unless the Compensation Committee determines otherwise at the time of
grant with respect to a particular award, in the event of a Change in Control
(as defined in the NCR Stock Plan), with certain exceptions, Awards will, among
other things, become fully exercisable and vested, earned and payable in full,
or otherwise free of all restrictions, limitations and other conditions, as
applicable to the particular type of Award.
NCR intends to adopt a new NCR Long Term Incentive Program, offered under
the NCR Stock Plan, after the Distribution Date. Awards for the 1996-1998
performance cycle will be offered under the NCR Stock Plan, with performance
targets to be established by NCR's Compensation Committee.
NCR also expects to grant certain executive officers and key employees (62
individuals) options to acquire shares of NCR Common Stock, which shares have an
aggregate fair market value at time of grant of $27 million, including grants
for shares of NCR Common Stock, which shares have a fair market value of $1
million to each of Messrs. Carlin, Carpenter, Fano, and Giering. Such options
will have an exercise price equal to the fair market value of the NCR Common
Stock on the Distribution Date, will vest at the end of two years, and will
expire five years after the date of grant. See "-- Employment Agreements."
NCR WorldShares Plan. NCR intends to adopt, with the approval of AT&T in
its capacity as the sole stockholder of NCR, the NCR WorldShares Plan
("WorldShares Plan") effective as of the Distribution Date.
The WorldShares Plan provides for the grant of nonstatutory stock options
to substantially all NCR's employees in the United States and abroad. The
WorldShares Plan will be administered by the Compensation Committee of the NCR
Board of Directors (the "Administrator"). The Administrator will have the
discretion to modify the terms and conditions of the options, substitute
alternative benefits (including phantom stock grants), or establish subplans,
for foreign jurisdictions where it deems necessary to accomplish the purposes of
the WorldShares Plan.
NCR intends to grant nonstatutory stock options, or substitute benefits
where deemed necessary by the Administrator in foreign jurisdictions, to
substantially all NCR's employees following the Distribution Date for a number
of shares of NCR Common Stock with a value as of the Distribution Date of
$3,000, or of $4,500 if certain performance goals for NCR are met in 1996. Such
options will have an exercise price of the market value of the NCR Common Stock
on the Distribution Date and will have a five year expiration period.
Participants will be fully vested and able to exercise their options one year
after the date of grant.
Copies of the NCR Stock Plan and the WorldShares Plan will be filed as
Exhibits to the Registration Statement, and the foregoing summaries are
qualified in their entirety by reference thereto. See "Available Information."
OTHER BENEFIT PLANS
Prior to the Distribution Date, eligible employees of NCR participated in
the 1994 Employee Stock Purchase Plan for NCR (the "1994 Stock Purchase Plan"),
which provided full-time employees of NCR and of designated participating
subsidiaries who completed six months of eligible service with an opportunity to
purchase AT&T Common Stock through payroll deductions. Effective at the
Distribution Date, the 1994
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Stock Purchase Plan will terminate. NCR intends to adopt, with the approval of
AT&T in its capacity as the sole shareholder of NCR, the 1997 NCR Employee Stock
Purchase Plan (the "New Stock Purchase Plan") that will provide eligible
employees with an opportunity to purchase NCR Common Stock through payroll
deductions. The New Stock Purchase Plan will allow participants to purchase NCR
Common Stock through payroll deductions during monthly purchase periods.
Eligible employees on each offering date will each be allowed to purchase shares
of NCR Common Stock through payroll deductions of up to 10% of compensation. The
purchase price will be 85% of the fair market value of a share of NCR Common
Stock on the last day of the applicable purchase period. The New Stock Purchase
Plan is expected to remain in effect until December 31, 2006, unless terminated
prior thereto in accordance with its terms.
Prior to the Distribution Date, eligible management and key employees
participated in the NCR MIP, which paid an annual cash bonus if certain
specified objectives were met. In 1996, the objectives were based on NCR's
worldwide profits and asset turnover, levels of customer satisfaction and
employee satisfaction, and discretionary objectives that varied by work groups.
MIP bonuses for a particular year are paid in the first quarter of the following
year. To receive a MIP bonus, an employee must be employed throughout the
applicable year, or terminate employment during the year on account of
retirement, death, disability or transfer of employment, in which cases a
prorated bonus is awarded. NCR intends to continue the MIP after the
Distribution Date.
NCR also maintains a number of benefit plans that provide certain welfare
benefits to both active and retired employees of NCR, including medical, dental,
vision, prescription drug, short- and long-term disability, life insurance,
severance and other benefits.
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ARRANGEMENTS AMONG AT&T, NCR AND LUCENT
For the purposes of governing certain of the relationships among AT&T,
Lucent and NCR following the Distribution, AT&T, NCR and, in certain cases,
Lucent have entered into, or expect to enter into, a series of agreements. These
agreements include (a) the Separation and Distribution Agreement, dated as of
February 1, 1996, as amended and restated as of March 29, 1996, by and among
AT&T, Lucent and NCR (the "Separation and Distribution Agreement") and certain
ancillary agreements related thereto (collectively, the "Ancillary Agreements,"
and, collectively with the Separation and Distribution Agreement, the "Initial
Transaction Agreements") executed prior to the initial public offering of Lucent
Common Stock and (b) the Distribution Agreement, dated as of , 1996,
by and between AT&T and NCR (the "NCR Distribution Agreement") and certain
ancillary agreements related thereto (collectively, the "NCR Ancillary
Agreements," and, collectively with the NCR Distribution Agreement, the "NCR
Transaction Agreements," and, collectively with the NCR Distribution Agreement
and the Initial Transaction Agreements, the "Transaction Agreements"). The
Initial Transaction Agreements include the Interim Services and Systems
Replication Agreement; the Patent License Agreement and other patent-related
agreements; the Technology License Agreement and other technology-related
agreements; the Tax Sharing Agreement (as such terms are defined in the Initial
Transaction Agreements) and other tax-related agreements; certain agreements
providing for the assignment of, and the establishment of transitional
arrangements with respect to, real property; the Technology Access and
Development Project Agreement governing the future commercial relationship
between NCR and Bell Labs; and agreements pursuant to which NCR will sell
certain products to Lucent. The NCR Transaction Agreements include the NCR
Employee Benefits Agreement and the AT&T Volume Purchase Agreement (as such
terms are defined in the NCR Distribution Agreement.)
Certain of the Transaction Agreements summarized below have been filed (or
incorporated by reference) as exhibits to the Registration Statement and the
summaries of such agreements are qualified in their entirety by reference to the
full text of such agreements. See "Available Information." Certain capitalized
terms used in this Section without definition have the respective meanings
assigned to them in the Transaction Agreements.
NCR DISTRIBUTION AGREEMENT
The NCR Distribution Agreement provides that, subject to the terms and
conditions thereof, AT&T will effect the Distribution.
CONDITIONS; TERMINATION
Pursuant to the NCR Distribution Agreement, the AT&T Board has the sole
discretion to determine the Record Date and the Distribution Date and all
appropriate procedures in connection with the Distribution, provided that the
Distribution will not occur prior to such time as each of the following
conditions have been satisfied or waived by the AT&T Board in its sole
discretion:
(i) a private letter ruling from the IRS shall have been obtained, and
shall continue in effect, to the effect that, among other things, the
Distribution will qualify as a tax-free distribution for federal income tax
purposes under Section 355 of the Code, and such ruling shall be in form
and substance satisfactory to AT&T in its sole discretion;
(ii) any material Governmental Approvals and Consents necessary to
consummate the Distribution shall have been obtained and be in full force
and effect;
(iii) no order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Distribution shall be in effect and no other event
shall have occurred or failed to occur that prevents the consummation of
the Distribution;
(iv) the Registration Statement on Form 10 of which this Information
Statement forms a part shall have been declared effective by the
Commission;
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(v) AT&T shall have received a favorable response from the Staff of
the Commission to a request for a no-action letter concerning, among other
matters, whether the Distribution and related transactions may be effected
without registration of the NCR Common Stock (and related Preferred Share
Purchase Rights) under the Securities Act;
(vi) the NCR Common Stock (and related Preferred Share Purchase
Rights) shall have been accepted for listing on a mutually agreed stock
exchange or quotations system, which is expected to be the NYSE; and
(vii) the AT&T Board shall have formally approved the Distribution;
provided that the satisfaction of such conditions will not create any obligation
on the part of AT&T, NCR or any other Person to effect or to seek to effect the
Distribution or in any way limit AT&T's right to terminate the NCR Distribution
Agreement or alter the consequences of any such termination from those specified
therein.
The NCR Distribution Agreement may be terminated at any time prior to the
Distribution Date by AT&T. In the event of any such termination, no party
thereto (or any of its directors or officers) will have any Liability or further
obligation to any other party.
RELEASES AND INDEMNIFICATION
The NCR Distribution Agreement provides for a full and complete discharge
effective as of the Distribution Date of all Liabilities whatsoever existing or
arising from all acts and events occurring or failing to occur or alleged to
have occurred or to have failed to occur and all conditions existing or alleged
to have existed on or before the Distribution Date, between or among NCR or any
member of the NCR Group, on the one hand, and AT&T or any member of the AT&T
Services Group, on the other hand (including any contractual agreements or
arrangements existing or alleged to exist between or among any such members on
or before the Distribution Date), except as expressly set forth in the NCR
Distribution Agreement.
Pursuant to the NCR Distribution Agreement, NCR has agreed to indemnify,
defend and hold harmless AT&T and each other AT&T Indemnitee from and against
any and all Liabilities of the AT&T Indemnitees relating to, arising out of or
resulting from any of the following, in each case whether arising before, on or
after the Distribution Date: (i) the failure of NCR or any other member of the
NCR Group or any other Person to pay, perform or otherwise promptly discharge
any Liabilities of any member of the NCR Group in accordance with their
respective terms, whether prior to or after the Distribution Date or the date
thereof; (ii) the NCR Business, any Liability of any member of the NCR Group or
any NCR Covered Liability; (iii) any Asset (including contracts, agreements,
real property and leasehold interests) of any member of the NCR Group at any
time (other than Assets transferred to any member of the AT&T Services Group
prior to the Distribution Date), and contracts, agreements, letters of credit or
other commitments or obligations for which NCR has primary responsibility; (iv)
the operation of the NCR Business, as conducted at any time prior to, on or
after the Distribution Date (including any Liability relating to, arising out of
or resulting from any act or failure to act by any director, officer, employee,
agent or representative (whether or not such act or failure to act is or was
within such Person's authority)); (v) any guarantee, indemnity, representation,
warranty or other Liability of or made by any member of the AT&T Services Group
in respect of any Liability or alleged Liability of any member of the NCR Group;
(vi) any breach by NCR or any member of the NCR Group of the NCR Distribution
Agreement, the Separation and Distribution Agreement, any Ancillary Agreement or
any of the NCR Ancillary Agreements; (vii) any Liabilities relating to, arising
out of or resulting from the NCR Business (including any NCR Covered
Liabilities) for which AT&T has agreed to indemnify and hold harmless the Lucent
Indemnitees pursuant to the Separation and Distribution Agreement; (viii)
actions taken by any member of the AT&T Group on behalf of any member of the NCR
Group pursuant to the Separation and Distribution Agreement or any Ancillary
Agreement; (ix) any untrue statement or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, with
respect to all information contained in this Information Statement or the Form
10; and (x) any Liability relating to, arising out of or resulting from any
actual or threatened Action or other claim alleging that any Liability was
improperly allocated to the
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NCR Group or that any Asset was improperly withheld from the NCR Group, in each
case pursuant to any of the Transaction Agreements.
Pursuant to the NCR Distribution Agreement, AT&T has agreed to indemnify,
defend and hold harmless NCR and each other NCR Indemnitee from and against any
and all Liabilities of the NCR Indemnitees relating to, arising out of or
resulting from any of the following, in each case whether arising before, on or
after the Distribution Date: (i) the failure of AT&T or any other member of the
AT&T Group or any other Person to pay, perform or otherwise promptly discharge
any Liabilities of the AT&T Services Group whether prior to or after the
Distribution Date or the date thereof; (ii) the AT&T Services Business or any
Liability of the AT&T Services Group; and (iii) any breach by AT&T or any member
of the AT&T Services Group of any Transaction Agreement; provided however that
such provision will not apply to any Liability relating to the NCR Business.
The NCR Distribution Agreement also specifies certain procedures with
respect to claims subject to indemnification and related matters. The dispute
resolution procedures (including the arbitration provisions) of the Separation
and Distribution Agreement apply to disputes under the NCR Transaction
Agreements, unless otherwise expressly provided therein. See "--Separation and
Distribution Agreement -- Dispute Resolution" below.
NO REPRESENTATIONS OR WARRANTIES
Except as expressly set forth in any Transaction Agreement, no party to any
Transaction Agreement or any other agreement or document contemplated by any
Transaction Agreement either has or is representing or warranting in any way as
to the Assets, businesses or Liabilities retained, transferred or assumed as
contemplated thereby, as to any consents or approvals required in connection
therewith, as to the value or freedom from any Security Interests of, or any
other matter concerning, any Assets of such party, or as to the absence of any
defenses or right of setoff or freedom from counterclaim with respect to any
claim or other Asset, including any accounts receivable, of any party, or as to
the legal sufficiency of any assignment, document or instrument delivered
thereunder to convey title to any Asset or thing of value upon the execution,
delivery and filing thereof. Except as may expressly be set forth in any
Transaction Agreement, all such Assets were, or are being, transferred, or are
being retained, on an "as is," "where is" basis (and, in the case of any real
property, by means of a quitclaim or similar form deed or conveyance) and the
respective transferees will bear the economic and legal risks that any
conveyance will prove to be insufficient to vest in the transferee good and
marketable title, free and clear of any Security Interest.
QUALIFICATION AS TAX-FREE DISTRIBUTION
Pursuant to the NCR Distribution Agreement, each of AT&T and NCR has agreed
that it will not take, or permit any member of its respective Group to take, any
action after the Distribution Date which could reasonably be expected to prevent
the Distribution from qualifying as a tax-free distribution within the meaning
of Section 355 of the Code or any other transaction contemplated by the NCR
Distribution Agreement or any other Transaction Agreement which is intended by
the parties to be tax-free from failing so to qualify. In addition, each of AT&T
and NCR has agreed that it will not take, or permit any member of its respective
group to take, any action after the Distribution Date which could reasonably be
expected to have a material adverse impact on the known tax consequences to the
other party (except that each party may take any actions in the ordinary course
or in connection with any tax audit or filing).
The NCR Distribution Agreement provides that, notwithstanding anything to
the contrary in any Transaction Agreement, if as a result of the acquisition of
all or a portion of the capital stock or assets of NCR, the Distribution fails
to qualify as a tax-free distribution under Section 355 of the Code, then NCR
will be liable for any and all increases in Tax attributable thereto.
AMENDMENTS; FURTHER ASSURANCES
No provision of the NCR Distribution Agreement or any NCR Ancillary
Agreement will be deemed waived, amended, supplemented or modified by any party,
unless such waiver, amendment, supplement or modification is in writing and
signed by the authorized representative of the party against whom it is sought
to enforce such waiver, amendment, supplement or modification.
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In addition to the actions specifically provided for elsewhere in the NCR
Distribution Agreement, each of the parties thereto has agreed to use its
reasonable best efforts, prior to, on and after the Distribution Date, to take,
or cause to be taken, all actions, and to do, or cause to be done, all things,
reasonably necessary, proper or advisable under applicable laws, regulations and
agreements to consummate and make effective the transactions contemplated by the
NCR Distribution Agreement and the NCR Ancillary Agreements.
FRACTIONAL SHARES
The NCR Distribution Agreement provides that as soon as practicable after
the Distribution Date, AT&T will direct the Distribution Agent to determine the
number of fractional shares of NCR Common Stock allocable to each holder of
record or beneficial owner of AT&T Common Stock as of the Record Date who
receives certificates for shares of NCR Common Stock or who would be entitled to
less than one whole share of NCR Common Stock, to aggregate all such fractional
shares and sell the whole shares obtained by aggregating such fractional shares
either in open market transactions or otherwise, in each case at then prevailing
trading prices, and to cause to be distributed to each such holder or for the
benefit of each such beneficial owner, in lieu of a fractional share, such
holder's or owner's ratable share of the proceeds of such sale, after making
appropriate deductions of the amount required to be withheld for federal income
tax purposes and after deducting an amount equal to all brokerage charges,
commissions and transfer taxes attributed to such sale.
ADDITIONAL CAPITAL CONTRIBUTIONS
It is expected that, pursuant to the NCR Distribution Agreement, AT&T will
(i) make additional contributions of capital to NCR prior to the Distribution
Date and (ii) contribute intercompany advances outstanding from AT&T to NCR as
of June 30, 1996. The consolidated financial statements included elsewhere
herein reflect these advances in shareholder's equity as having been
contributed. The additional capital contributions are expected to consist of
$419 million in cash and the contribution of additional cash in an amount
sufficient to retire or defease a total of $68 million of NCR debt (including
payment of related expenses). A portion of the $419 million in cash may be
provided by means of additional intercompany advances from AT&T to NCR after
June 30, 1996 that will be contributed at the Distribution Date. See
"Capitalization."
SEPARATION AND DISTRIBUTION AGREEMENT
The Separation and Distribution Agreement sets forth the agreements among
AT&T, NCR and Lucent with respect to the principal corporate transactions
required to effect the separation of the Lucent business from AT&T and NCR and
to effect the transactions relating to the Lucent initial public offering and
distribution of shares of Lucent Common Stock. In addition, the Separation and
Distribution Agreement sets forth certain on-going agreements governing the
relationship among AT&T, NCR and Lucent.
RELEASES AND INDEMNIFICATION
The Separation and Distribution Agreement provides for a full and complete
release and discharge as of the closing date of the Lucent initial public
offering (April 10, 1996) (the "Closing Date") of all Liabilities existing or
arising from all acts and events occurring or failing to occur or alleged to
have occurred or to have failed to occur and all conditions existing or alleged
to have existed on or before the Closing Date, between or among Lucent or any
member of the Lucent Group, on the one hand, and AT&T, NCR or any member of the
AT&T Services Group or the NCR Group, on the other hand (including any
contractual agreements or arrangements existing or alleged to exist between or
among any such members on or before the Closing Date), except as expressly set
forth in the Separation and Distribution Agreement.
Except as provided in the Separation and Distribution Agreement, Lucent has
agreed to indemnify, defend and hold harmless each of AT&T and NCR, each member
of the AT&T Group and the NCR Group, and each of their respective directors,
officers and employees, from and against all Liabilities relating to, arising
out of or resulting from (i) the failure of Lucent or any member of the Lucent
Group or any other
72
Person to pay, perform or otherwise promptly discharge any Lucent Liabilities,
any Environmental Liabilities of a Subsidiary of Lucent not directly assumed by
Lucent, or any Lucent Contract, in accordance with their respective terms, (ii)
the Lucent Business, any Lucent Liability, the Environmental Liabilities
referred to above or any Lucent Contract, (iii) any breach by Lucent or any
member of the Lucent Group of the Separation and Distribution Agreement or any
of the Ancillary Agreements, and (iv) any untrue statement or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, with respect to all information contained in the Prospectus or
the registration statement of which it forms a part relating to the initial
public offering of the Lucent Common Stock. Also, in the Separation and
Distribution Agreement, Lucent has indemnified the members of the AT&T Group,
subject to limited exceptions, against any claims of patent, copyright or
trademark infringement or trade secret misappropriation with respect to any
product, software or other material provided by or ordered from Lucent Business
(whether alone or in combination with other items provided by Lucent Business or
third parties) prior to the Closing Date.
AT&T has agreed to indemnify, defend and hold harmless Lucent, each member
of the Lucent Group and each of their respective directors, officers and
employees from and against all Liabilities relating to, arising out of or
resulting from (i) the failure of AT&T or any member of the AT&T Group or any
other Person to pay, perform or otherwise promptly discharge any Liabilities of
the AT&T Group other than Lucent Liabilities or the NCR Covered Liabilities,
(ii) the AT&T Services Business or any Liability of the AT&T Group other than
Lucent Liabilities and the NCR Covered Liabilities, and (iii) any breach by AT&T
or any member of the AT&T Services Group of the Separation and Distribution
Agreement or any of the Ancillary Agreements.
NCR has agreed to indemnify, defend and hold harmless Lucent, each member
of the Lucent Group and each of their respective directors, officers and
employees from and against all liabilities relating to, arising out of or
resulting from (i) the failure of NCR or any member of the NCR Group or any
other Person to pay, perform or otherwise promptly discharge any Exclusive NCR
Contingent Liability or any Shared NCR Percentage of any Shared Contingent
Liability, and (ii) any breach by NCR or any member of the NCR Group of the
Separation and Distribution Agreement or any of the Ancillary Agreements, or any
other agreement that is not contemplated to be terminated as of the Closing Date
pursuant to the Separation and Distribution Agreement. NCR has also agreed to
indemnify, defend and hold harmless each AT&T Indemnitee from and against any
and all Liabilities of the AT&T Indemnitees relating to, arising out of or
resulting from any NCR Covered Liability.
The Separation and Distribution Agreement also specifies certain procedures
with respect to claims subject to indemnification and related matters.
CONTINGENT LIABILITIES AND CONTINGENT GAINS
The Separation and Distribution Agreement provides for indemnification by
Lucent, AT&T and NCR with respect to Contingent Liabilities primarily relating
to their respective businesses or otherwise assigned to them ("Exclusive
Contingent Liabilities"), subject to the sharing provisions described below. In
the event the aggregate Value (as defined herein) of all amounts paid by Lucent,
AT&T or NCR (in each case, together with any members of its respective Group) in
respect of any single Exclusive Contingent Liability of such Group or any set or
group of Related Exclusive Contingent Liabilities of such Group is in excess of
$100 million, NCR, AT&T and Lucent will share such portion in excess of $100
million (the "Excess Portion") in accordance with the following percentages:
(i) if the Exclusive Contingent Liability primarily relates to the
business of AT&T, AT&T will bear 75% of such Excess Portion, Lucent will
bear 22% of such Excess Portion, and NCR will bear 3% of such Excess
Portion;
(ii) if the Exclusive Contingent Liability primarily relates to the
business of Lucent, Lucent will bear 50% of such Excess Portion, AT&T will
bear 47% of such Excess Portion, and NCR will bear 3% of such Excess
Portion; and
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(iii) if the Exclusive Contingent Liability primarily relates to the
business of NCR, NCR will bear 50% of such Excess Portion, AT&T will bear
37% of such Excess Portion, and Lucent will bear 13% of such Excess
Portion.
For purposes of the foregoing, the term "Value" is defined as the aggregate
amount of all cash payments, the fair market value of all non-cash payments and
the incremental cost of providing any goods or services made or provided in
respect of any Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities, net of: (a) any Insurance Proceeds received or realized in respect
of the applicable Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities, (b) any Tax benefits associated with such payments or the provision
of such goods or services (calculated in the manner specified in the Separation
and Distribution Agreement), (c) any amounts received pursuant to certain
specified third party agreements in respect of the Exclusive Contingent
Liability or Related Exclusive Contingent Liabilities, (d) any other amounts
recovered (including by way of set off) from a third party in connection with
any such Action or threatened Action and (e) the amount of any reserve, account
payable or similar accrual in respect of the Exclusive Contingent Liability or
Related Exclusive Contingent Liabilities (net of any offsetting receivables in
respect of such Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities), in each case as reflected on the Lucent Balance Sheet or the
audited consolidated balance sheet of AT&T, including the notes thereto, as of
December 31, 1995 (and without giving effect to any subsequent adjustment of any
such reserve, account payable, accrual or offsetting receivable).
As a result of the foregoing provisions, if the Value of amounts paid in
respect of any Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities of AT&T or Lucent exceeds $100 million, NCR will be required to pay
3% of the Excess Portion, notwithstanding the fact that the Exclusive Contingent
Liability or Related Exclusive Contingent Liabilities do not relate to the
business and operations of NCR or any other member of the NCR Group. Conversely,
if the Value of amounts paid in respect of any NCR Exclusive Contingent
Liability or Related Exclusive Contingent Liabilities exceeds $100 million, NCR
will be entitled to reimbursement from AT&T and Lucent of 50%, in the aggregate,
of the Excess Portion, notwithstanding the fact that the Exclusive Contingent
Liability or Related Exclusive Contingent Liabilities do not relate to the
business and operations of AT&T or Lucent or the members of their Groups.
The Separation and Distribution Agreement also provides for the sharing of
Shared Contingent Liabilities, which are defined as (a) any Contingent
Liabilities that are not Exclusive AT&T Contingent Liabilities, Exclusive Lucent
Contingent Liabilities or Exclusive NCR Contingent Liabilities, (b) any RBOC
Liability, and (c) certain specifically identified Liabilities, including
certain Liabilities relating to terminated, divested or discontinued businesses
or operations of AT&T or its current or former Affiliates. With respect to any
Shared Contingent Liability, the parties have agreed that AT&T will be
responsible for 75%, Lucent for 22% and NCR for 3% of such Shared Contingent
Liability. AT&T will assume the defense of, and may seek to settle or
compromise, any Third Party Claim that is a Shared Contingent Liability, and the
costs and expenses thereof will be included in the amount to be shared by the
parties.
The Separation and Distribution Agreement provides that Lucent, AT&T and
NCR will have the exclusive right to any benefit received with respect to any
Contingent Gain that primarily relates to the business of, or that is expressly
assigned to, Lucent, AT&T or NCR, respectively (an "Exclusive Contingent Gain").
Each of Lucent, AT&T and NCR will have sole and exclusive authority to manage,
control and otherwise determine all matters whatsoever with respect to an
Exclusive Contingent Gain that primarily relates to its respective business. The
parties have agreed to share any benefit that may be received from any
Contingent Gain that is not an Exclusive Contingent Gain (a "Shared Contingent
Gain"), with AT&T receiving 75%, Lucent receiving 22% and NCR receiving 3% of
any such benefit. The parties have agreed that AT&T will have the sole and
exclusive authority to manage, control and otherwise determine all matters
whatsoever with respect to any Shared Contingent Gain. Pursuant to the
Separation and Distribution Agreement, each of Lucent and NCR acknowledges that
AT&T may elect not to pursue any Shared Contingent Gain for any reason
whatsoever (including a different assessment of the merits of any Action, claim
or right than Lucent or NCR or any business reasons that are in the best
interests of AT&T or a member of the AT&T Services Group, without regard to the
best interests of any member of Lucent Group or
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the NCR Group) and that no member of the AT&T Group will have any liability to
any Person (including any member of Lucent Group or the NCR Group) as a result
of any such determination.
The Separation and Distribution Agreement provides for the establishment of
a Contingent Claims Committee comprised of one representative designated from
time to time by each of AT&T, Lucent and NCR and sets forth procedures for the
purpose of resolving disagreements among the parties as to Contingent Gains and
Contingent Liabilities.
DISPUTE RESOLUTION
The Separation and Distribution Agreement contains provisions that govern,
except as otherwise provided in any Ancillary Agreement, the resolution of
disputes, controversies or claims ("disputes") that may arise between or among
the parties. These provisions contemplate that efforts will be made to resolve
disputes by escalation of the matter to senior management (or other mutually
agreed) representatives of the parties. If such efforts are not successful, any
party may submit the dispute to mandatory, binding arbitration, subject to the
provisions of the