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As filed electronically with the SEC on 12/22/97.
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended September 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-11639
LUCENT TECHNOLOGIES INC.
A DELAWARE I.R.S. EMPLOYER
CORPORATION NO. 22-3408857
600 Mountain Avenue, Murray Hill, New Jersey 07974
Telephone Number 908-582-8500
Securities registered pursuant to Section 12(b) of the Act: See attached
SCHEDULE A.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes....x.... No........
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
At November 30, 1997, the aggregate market value of the voting stock held by
non-affiliates was approximately $51,500,000,000.
At November 30, 1997, 642,823,185 common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's annual report to security holders for the
fiscal year ended September 30, 1997 (Part II)
(2) Portions of the registrant's definitive proxy statement dated December 22,
1997, issued in connection with the annual meeting of shareholders (Part III)
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SCHEDULE A
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock New York Stock Exchange
(Par Value $.01 Per Share)
6.90% Notes due July 15, 2001 New York Stock Exchange
7.25% Notes due July 15, 2006 New York Stock Exchange
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TABLE OF CONTENTS
PART I
Item Description Page
1. Business ........................................................ 1
2. Properties ...................................................... 17
3. Legal Proceedings ............................................... 18
4. Submission of Matters to a Vote of Security-Holders ............. 18
PART II
Description
5. Market for Registrant's Common Equity and Related Stockholder
Matters ....................................................... 19
6. Selected Financial Data ......................................... 19
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................... 19
8. Financial Statements and Supplementary Data ..................... 19
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ...................................... 19
PART III
Description
10. Directors and Executive Officers of the Registrant .............. 19
11. Executive Compensation .......................................... 19
12. Security Ownership of Certain Beneficial Owners and Management .. 19
13. Certain Relationships and Related Transactions .................. 19
PART IV
Description
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 19
See page 18 for "Executive Officers of the Registrant."
This Report contains trademarks, service marks and registered marks of the
Company and its subsidiaries, and other companies, as indicated.
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PART I
ITEM 1. BUSINESS.
GENERAL
Lucent Technologies Inc. ("Lucent" or the "Company") was incorporated in
Delaware in November 1995. The Company has its principal executive offices at
600 Mountain Avenue, Murray Hill, New Jersey 07974 (telephone number
908-582-8500). Prior to February 1, 1996, AT&T Corp. ("AT&T") conducted the
Company's business through various divisions and subsidiaries.
On February 1, 1996, AT&T began executing its decision to separate the
Company into a stand-alone company (the "Separation") by transferring to the
Company the assets and liabilities relating to the Company's business. On April
10, 1996 the Company issued 112,037,037 shares of its Common Stock in an Initial
Public Offering ("IPO"), and on September 30, 1996, the Company became
independent of AT&T when AT&T distributed to its shareowners all of its shares
in the Company. As used herein, references to the "Company" or "Lucent" include
the historical operating results and activities of the business and operations
transferred to the Company in the Separation.
In 1996, the Company changed its fiscal year to begin October 1st and end
September 30th, and reported audited financial results for a short fiscal period
beginning January 1, 1996 and ending September 30, 1996. Accordingly, unless the
context otherwise requires, references herein to "fiscal 1996" or similar terms
mean the nine-month period January 1, 1996 through September 30, 1996.
The Company is one of the world's leading designers, developers and
manufacturers of communications systems, software and products. The Company is a
global leader in the sale of public communications systems, and is a supplier of
systems or software to most of the world's largest network operators. The
Company is also a global leader in the sale of business communications systems
and in the sale of microelectronic components for communications applications to
manufacturers of communications systems and computers. The Company's research
and development activities are conducted through Bell Laboratories ("Bell
Labs"), one of the world's foremost industrial research and development
organizations.
SYSTEMS FOR NETWORK OPERATORS
The Company designs, develops, manufactures and services systems and software
which enable network operators to provide wireline and wireless access, local,
long distance and international voice, data and video services and cable
television service. The Company's networks, which include switching,
transmission and cable systems, are packaged and customized with application
software, operations support systems and associated professional services.
Systems and Services
Communications Networking Systems. The Company designs, develops,
manufactures and services advanced communications networking systems, which
include equipment, software and associated professional services. These systems
connect, route, manage and store voice, data and video in any combination, and
are used for: wireline access; local and long distance switching; intelligent
network services and signaling; wireless communications, including both cellular
and personal communications services ("PCS"); and high-speed, broadband
multifunctional communications.
The Company supplies each of the five broad elements that comprise
communications networks: switching systems, which route information through the
network; transmission systems, which provide the communications path through the
network that carries information between points in the network; operation
support systems, which enable service providers to manage the work flow,
planning, surveillance, management, provisioning and continuous testing of their
networks; intelligent network/application software, which enables service
providers to offer a broad array of enhanced and differentiated services; and
cable systems, which provide the transport media between points in a network.
These systems collectively comprise the infrastructure that enables
telecommunications network operators to provide traditional narrowband voice
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and data services and that enables both new and traditional network operators to
offer broadband multimedia services.
The Company has a wireline local access installed base (the number of access
lines serviced by switches manufactured by the Company) of approximately 120
million lines. The Company's primary switching products are the 5ESS(R) switch
for local and long distance switching and international gateways, and the
4ESS(TM) Digital Switch (the "4ESS switch") for long distance and international
switching.
The 5ESS switch is used throughout the world to provide a combination of
network applications, including local and long distance switching and
international gateways, operator services, network signaling, intelligent
networking and wireless switching. The 5ESS switch, with the Company's 5E12
AnyMedia(TM) software, enables network operators to offer a large number of new
data services and local number portability, as well as simultaneous wireline and
wireless, local, long distance and international services.
The 4ESS switch, which was developed for and is primarily deployed in AT&T's
network, is used to provide domestic and international long distance switching.
The 4ESS switch can handle over 1,000,000 peak hour calls.
The Company designs, develops, manufactures and services a broad range of
transmission access and transport systems. Network operators use these systems
to transport any combination of voice, data and video between subscribers and
the central office or between points within a network engaged in local, national
or international communications.
World standards for transmission systems have undergone rapid technological
change in recent years. One new standard, known as Synchronous Optical Network
("SONET") in North America and SDH in other markets, maximizes transmission
capability and simplifies network management for network operators. The Company
markets systems supporting both standards.
The Company offers a broad line of transmission access systems for the
provision of a wide range of services, including traditional telecommunications
service and broadband multifunctional services. Transmission access systems
transport information between the subscriber and the central office. The
Company's products include SLC(R)-2000, which extends fiber-based optical
transmission into the local loop. The Company's products also include the
SDV-2000, a switched digital video system which extends fiber to the curb, and
ASOS, which enables network operators to manage the work flow, planning,
surveillance, provisioning and continuous testing of their multifunctional
networks.
The Company's transmission transport systems are utilized for high capacity
communications between points within a communications network. Many of these
products are primarily digital and provide for the movement of any combination
of voice, data, and video across fiber, coaxial and microwave based media. The
Company's products include fiber transport systems (FT 2000), digital
multiplexer systems (DDM 2000) and the digital access and cross connect systems
(DACS family of products).
The Company has announced enhancements to its high-capacity Dense Wavelength
Division Multiplexing (DWDM) product line including a solution that directly
supports a wide range of SONET and high-speed data rates used in metropolitan
areas -- Metro Optical Line Solution (OLS) allows service providers to
economically transport a wide range of services, such as voice, video and data,
with the same circuit pack over the same fiber.
The Company's operation support systems enhance a network operator's ability
to activate, manage and maintain its networks. These systems continuously
monitor network performance and activity level, and allow for rapid trouble
identification, load balancing and planning for network utilization. The
Company's systems support the efforts of network operators to reduce operating
costs and minimize labor by automating labor intensive tasks.
The Company's network management systems offer a broad array of modular
software, including element managers designed for traditional telephony, video
and wireless; network managers that monitor, test and optimize the utilization
of a network; service managers that manage work flow; and business managers that
include customer service
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systems. For example, the Company's NetMinder system is an advanced network
management routing system that mitigates network congestion through efficient
call routing and completion.
The Company's A-I-NET(R) intelligent network products enable network
operators to offer new services that can be created, deployed or managed by
themselves, the Company, or third parties. Services created with A-I-NET
products include toll free calling (800 and 888 service in the United States),
call forwarding, call waiting, voice dialing and messaging.
The Company has introduced products to address the growing demand for
emerging broadband multifunctional services which permit the simultaneous
transmission of any combination of voice, data and video, such as its high
capacity Asynchronous Transfer Mode ("ATM") switching product, the
GLOBEVIEW(R)-2000 Broadband System.
In addition, the Company designs, develops, manufactures and services cable
systems, which include optical fiber, fiber optic cable, and apparatus for both
fiber and copper cable systems. The Company's cable systems are used to connect
various devices in a network and terminal devices to public and private
networks. These cable systems are deployed for outside plant and central office
wiring, and for traditional telephony, cable television, wireless networks and
broadband applications.
The Company also supplies fiber optic cable systems, high strength, high
performance fiber for underseas cablers and outside plant turnkey systems, which
are generally large capital projects in emerging markets for the engineering and
construction of telecommunications infrastructure. The Company's TRUEWAVE(R)
optical fiber enables network operators to reduce their costs by increasing the
distance between optical amplifiers.
Wireless Network Systems. The Company designs, develops, manufactures and
services wireless network infrastructure systems, which include the 5ESS switch,
base stations, wireless network software and operation support systems. These
systems provide network operators with the capability to offer a wide range of
cellular and other wireless communications services, including PCS, wireless
data and fixed wireless access.
The Company's wireless cellular or PCS systems are in operation in 49 of the
top 50 United States Metropolitan Statistical Areas. The Company's primary
wireless system is the AUTOPLEX(R) System 1000 product family, which includes
the high capacity Series II base station. The base station contains the radio
transceiver that establishes wireless communications with a mobile telephone.
Base stations are arranged geographically so that mobile customers can be
"handed off" seamlessly from one base station to the next as they travel. The
network intelligence to accomplish this is housed in the Company's Mobile
Switching Center, which includes the 5ESS switch and which connects the base
stations to the public telephone network. The Company also offers base stations
for start-up applications and smaller markets, a minicell product for rural and
international markets and a microcell for congested, high traffic areas.
Wireless technology is evolving from analog to digital. The Company provides
networks based on a variety of the leading air interface standards: AMPS, CDMA,
TDMA and GSM.
In addition, the Company designs, develops, manufactures and services fixed
wireless access systems. The Company offers Wireless Subscriber Systems, which
support the AMPS standard, and the new AIRLOOPTM Wireless Local Loop system,
which utilizes CDMA technology. Also, the Company offers systems, based on the
DECT (digital enhanced cordless telephone) standard. All three systems enable
network operators to expand their networks in markets where traditional wireline
systems are not cost justified, and to provide telephone services as an
alternative to traditional network operators.
The Company designs, develops, manufactures, and services CDPD-based wireless
data systems which enable wireless network operators to offer data services as
an overlay to their existing analog voice infrastructure without acquiring
additional spectrum or upgrading to a digital network. These systems offer the
increased reliability and efficiency of switched digital packet data systems.
Due to the complexity of wireless systems, the Company also offers a broad
range of professional services, which include project management, site
acquisition, radio
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frequency engineering, microwave relocation, construction management, cellular
optimization and wireless data support.
Markets
The principal customers for the Company's systems are network operators that
provide wireline and wireless local, long distance and international
telecommunications services, including local, long distance and international
telecommunications companies and cable television companies. The Company's
systems for network operators are installed to expand the capacity and features
offered by existing networks, to replace older technology in existing networks
and to establish new networks for entrants into deregulated or previously
unserved markets. See "Outlook -- Reliance on Major Customers."
As a result of structural, public policy and technological changes, since the
mid-1980's the telecommunications industry has undergone a period of significant
growth in the number of lines in service and applications offered. In developed
markets, deregulation has permitted new market entrants to construct networks in
previously monopolistic markets. In response, existing network operators have
expanded beyond traditional franchises and are offering new services. In
emerging markets, privatization, competition and economic expansion have
increased demand for networking systems. At the same time, technological
advances also have increased demand by reducing operating costs and facilitating
new applications, including multifunctional services.
The Company markets and sells its products worldwide primarily through a
direct sales force due to the complexity of these systems. Most of the Company's
sales of systems for network operators are made pursuant to general purchase
agreements, which establish the terms and conditions and provide for price
determination to be made on a contract bid basis. In addition, certain of the
large infrastructure projects are conducted under long-term, fixed-price
contracts. See "Outlook -- Multi-Year Contracts" and "-- Seasonality."
As a result of the increased complexity of systems for network operators and
the high cost of developing and maintaining in-house expertise, network
operators demand complete, integrated and turn-key projects. Network operators
increasingly are seeking overall network or systems solutions that require an
increased software content which would enable them to deploy rapidly new and
differentiable services. In response, the Company has formed an organization
focused on turn-key network engineering projects for both public and private
sector customers. The Company markets integrated solutions whereby the Company
assumes full responsibility for the project, and engineers, designs and installs
the network, including equipment and software manufactured by both the Company
and third parties.
Increasingly, as a result of the financial demands of major network
deployments, network operators are looking to their suppliers to arrange for
financing. The ability to provide financing is a requirement to conduct business
in certain emerging U.S. and foreign markets, and in some cases the Company
furnishes or guarantees financing for customers. As a result, the Company works
with its customers to structure and place financing packages. See "Outlook --
Future Capital Requirements."
In order to market its product line worldwide, the Company has established
wholly owned subsidiaries and joint ventures with local companies in many
countries.
Competition
The Company believes that its key competitive factors are its broad product
line, large installed base, relationship with key customers, technological
expertise and new product development capabilities. The Company's primary
competitors in the market for telecommunications systems are four very large
European and North American companies which have substantial technological and
financial resources and which offer similar broad product catalogs. These
competitors are Alcatel Alsthom, Northern Telecom Limited, Siemens AG and
Telefonaktiebolaget LM Ericsson. In 1996, the Company and these four competitors
collectively accounted for about 40% of the world's public network systems
sales, with the Company's sales accounting for about 10% of world sales.
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In addition, in all of the Company's product areas other than switching, the
Company faces significant competition from other companies which do business in
one or a number of such product areas. For example, in wireless systems,
Northern Telecom Ltd., Telefonaktiebolaget LM Ericsson, Motorola, Inc. and Nokia
Corporation, which are very large companies with substantial technological and
financial resources, are significant competitors. In transmission and cable
systems, competition in the markets includes hundreds of smaller competitors.
The Company expects that it also may encounter competition from companies that
design and manufacture data network equipment.
BUSINESS COMMUNICATIONS SYSTEMS
The Company designs, develops, manufactures and services communications
systems and products for large and small business customers, home offices and
government agencies. The Company's business communications systems can be
upgraded regularly with new software releases, can support local and wide area
voice and data networking and are often integral components of global enterprise
networks. The Company's systems primarily are customer premises-based private
switching systems and products, call center systems, voice processing systems,
which include voice messaging and voice response systems, and the associated
application software and professional support services. In addition, the Company
has begun to participate in the emerging multi-media products business. The
Company serves over 1.4 million business locations in the United States and
approximately 100,000 business locations in over 90 other countries.
Systems and Services
The Company's core business communications system products are private
switching systems, generally PBXs and key systems, usually located at the
customer's premises, that permit a number of local telephones or terminals to
communicate with one another, with or without use of the public telephone
network. The Company offers wired and wireless communications systems, including
the DEFINITY(R) family of products for large customers and the MERLIN LEGEND(R)
and PARTNER(R) systems for smaller businesses and home offices. The DEFINITY
Enterprise Communication Server provides real-time voice and mixed-media call
processing. The FREEWORKS(TM) family of business mobility solutions enables
communication throughout the workplace with full freedom of movement.
The Company's messaging and response systems store and forward voice, data
and images and conduct initial call processing, which integrates PBX and
computer functions. In addition, the Company is a technological leader in the
development of speech recognition algorithms, which have been incorporated into
both public and private call processing applications, such as operator services.
The Company's principal systems include the INTUITY(TM) AUDIX(R), DEFINITY(R)
AUDIX(R) voice messaging systems and Octel Messaging Division systems, for use
with the Company's or a competitor's PBX; INTUITY(TM) CONVERSANT(R), a
multi-lingual interactive voice response system which can recognize speech in
nine languages/dialects; and the INTUITY Multimedia Messaging System, a system
that combines voice messaging and voice-response technology into a single
desktop application.
In September 1997, the Company acquired Octel Communications Corporation, a
provider of voice, fax and electronic messaging technologies that complement
those offered by the Company. Octel's enterprise voice mail products, including
unified messaging, work behind almost all types and models of PBX, central
office and wireless switches and can be networked together.
The Company's call center systems integrate the hardware and software
associated with computing, telephony, and multimedia messaging and response
applications. Call centers are the initial entry point for customers to access a
business' telephone sales and support operation. The Company's systems permit
the routing and administration of a large volume of incoming calls, and the
integration with business databases of customer and product information. The
Company's call center systems are used by companies in diverse industries such
as financial services, retailing and transportation. The call center environment
in which these companies operate is characterized by hundreds of telephone
service agents located in geographically dispersed networked sites, processing
tens of thousands of calls per hour. For example, using these systems,
businesses can provide their customers with the ability to check balances or
order status, to place orders, and to receive additional information and
support.
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In September 1997, the Company introduced an enhanced portfolio of
intelligent switching, access and network management products to improve data
network performance. In addition, the Company introduced DEFINITY(R)ATM to meet
customer demand for voice-over-ATM solutions. On December 16, 1997, the Company
acquired Livingston Enterprises, Inc. ("Livingston"), a global provider of
equipment used by Internet service producers to connect their subscribers to the
Internet. In 1996 the Company acquired Agile Networks ("Agile"), a provider of
intelligent data switching products. On December 10, 1997, the Company announced
that it will acquire Prominet Corporation, a start-up developer of
high-performance local area network (LAN) switching equipment. The transaction
is expected to be completed by the end of the quarter ending March 31, 1998,
subject to satisfaction of certain conditions.
In addition, the Company's SYSTIMAX(R) structured wiring system for business
customers provides broadband multifunctional LAN interconnections within a
building or campus. These systems are comprised of fiber optic and copper cable
and associated apparatus.
The Company offers NetCare(R) Services, a wide range of professional service
options, including call center design, voice and data network engineering,
training, remote diagnostics and dedicated on-site technicians. Their on-demand
services involve routine testing and diagnostics, maintenance and repair, moves
and rearrangements, and software and hardware upgrade installations.
The Company's remote diagnostics and repair capability permits the Company to
monitor, test, maintain and resolve problems from its regional service centers.
Many of the Company's systems are designed with intelligent software which
establishes a real-time link between the customer premises and a regional
service center's expert system. This permits the customer to reduce its system
down-time and enables the Company to automate many maintenance and repair tasks.
Markets
The Company markets its systems and services to large and small businesses
and government agencies through a large, direct sales force and through a
network of agents, dealers and distributors. In the United States, the Company
effects these sales primarily through the direct sales force, while sales
elsewhere occur through the efforts of dealers and distributors as well as the
direct sales force. The Company's systems are deployed in applications for
customer sales and service, conferencing and collaboration, mobility and
distributed work force, messaging and enterprise networking. The Company fields
a large group of application specialists to design call center, distance
learning and other customized applications.
The Company believes that premises-based communications is transforming from
distinct voice and data networks to multimedia networks that will be able to
support any combination of voice, video and data communications simultaneously.
The Company is designing certain business communications systems to enable its
customers to simplify their premises networks by combining separate voice, video
and data networks into a single architecture.
Competition
The Company considers its working relationships with its customers and
knowledge of their individual business needs to be important competitive
factors. The Company competes principally with three other large companies with
substantial technological and financial resources in the sale of business
communication systems. These competitors are Northern Telecom Limited, Siemens
AG (through its subsidiary Siemens Rolm Communications, Inc.) and Alcatel
Alsthom. Together with the Company, in 1996 these competitors accounted for
approximately 46% of the sales of business communications systems globally, with
the Company accounting for approximately 10%. In addition, as the market
transforms to multimedia systems, the Company expects that it also may encounter
competition from companies that design and manufacture data network equipment.
The Company believes that key competitive factors in this market are service
support, the ability to upgrade existing systems for new applications, price and
reliability.
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MICROELECTRONICS PRODUCTS
The Company designs, manufactures and sells integrated circuits ("ICs"),
electronic power systems and optoelectronic components for communications
applications. These microelectronic products are important components of many of
the Company's own systems and products. The Company also supplies these
components to other manufacturers of communications systems and computers. The
Company offers products in several IC product areas critical to communications
applications, including digital signal processors ("DSPs") for digital cellular
phones and standard-cell application specific integrated circuits ("ASICs").
Products
The Company's ICs are designed to provide advanced communications and control
functions for a wide variety of electronic products and systems. The Company
focuses on IC products that are used in communications and computing and that
require high-performance and low power chip architectures; complex large-scale
chip design in digital, analog and mixed-signal technologies; DSP architectures
and algorithms; high-frequency and high-voltage technologies; and high speed
data and signal processing. The Company offers a wide variety of standard,
semi-custom and custom products for cellular equipment, communications networks,
computers and computer peripherals, modems and consumer communications products.
Products include DSPs, ASICs, field programmable gate arrays and communications
ICs. The Company's products are manufactured using a variety of technologies,
from low-power, low-voltage submicron CMOS (complementary metal oxide
semiconductors) to high-frequency and high-voltage bipolar processes.
The Company designs, develops and manufactures energy systems, electronic
power supplies and associated magnetic components for the telecommunications and
electronic data processing industries. These products serve applications ranging
from modems for personal computers to large telephone central offices. Products
include DC/DC converters, AC/DC switching power supplies, transformers,
inductors and energy systems that provide alarm, control, and backup power
management.
The Company designs, develops and manufactures optoelectronic products which
convert electricity to light (emitters) and light to electricity (detectors),
thereby facilitating optical transmission of information. These products include
semiconductor lasers, photodetectors, integrated transmitters and receivers, and
advanced-technology erbium-doped fiber amplifiers. The Company provides these
products worldwide to manufacturers serving the telecommunications, cable
television and network computing markets. Optoelectronic products extend the
transmission capacity of fiber to meet the requirements of such applications as
video-on-demand, interactive video, teleconferencing, image transmission and
remote database searching. The Company markets a number of advanced products,
including critical optoelectronic components that support telecommunication
transmission; long-wavelength optical data modules for data networking; and
analog lasers for use in cable television fiber optic transmission. The Company
believes that its optoelectronic products have higher photonics reliability than
those of its competitors due to their low field failure rate and the Company's
evaluation methodologies in manufacturing that allow the detection and
elimination of early failures.
The Company has jointly with Rockwell International Corporation developed an
interoperability specification enabling their K56 Flex(TM) modem chip sets to
interoperate. In addition, the Company and Furukawa Electric Co. Ltd. have
formed a partnership between two of their subsidiaries to manufacture
optoelectronic components. The Company also is part of the DTV team currently
consisting of the Company, Microsoft Corporation, Intel Corporation and Compaq
Computer Corporation, which is an informal arrangement with the objective of
accelerating the development of digital broadcast technology.
In December 1996, the Company sold its operations for the design and
manufacture of printed circuit boards and backplanes.
Markets
The Company's microelectronic products are sold globally to manufacturers of
communications systems and computers. In addition, the Company's energy power
systems are sold directly to U.S. and foreign telephone companies. The Company's
customers are competing in markets characterized by rapid technological changes,
decreasing product
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life cycles, price competition and increased user applications. These markets
have experienced significant expansion in the number and types of products they
offer to end-users, particularly in personal computing and portable access
communication devices. As a result, the Company's customers continue to demand
components which are smaller, require less power, are more complex, provide
greater functionality, and are produced with shorter design cycles and less
manufacturing lead time.
In 1995, the Company also introduced a GSM hardware platform based upon a
highly integrated multiple-chip design for digital cellular phones that performs
all the key handset functions between the microphone and the antenna in both
voice and data services. The Company also sells the associated software product
elements necessary to support the GSM standard.
In addition to the revenues from sales to third parties included in the
Company's consolidated financial results, the Company's microelectronics
products are also key components of its systems for network operators and
business communications systems. The Company's microelectronics products compete
with products of third-party manufacturers for inclusion in the Company's
systems and products.
Competition
The Company considers its technological leadership, product leadership, and
relationships with key customers to be important competitive factors. The market
for microelectronic products is global and generally highly fragmented. The
Company's competitors differ widely among product categories. The Company's
competitors in certain IC product categories include Texas Instruments
Incorporated, Rockwell International Corporation and LSI Logic Corp.; in
electronic power systems include Astec Industries, Inc. and Unitech plc (through
its subsidiary, NEMEC-Lambda); and in optoelectronics include Fujitsu Limited
and Northern Telecom Limited.
The Company believes that key competitive factors in the microelectronics
marketplace are the early involvement in customers' future applications
requirements, the speed of product and technological innovation, price, customer
service, and manufacturing capacity. Other important competitive factors include
quality, reliability and local manufacturing presence.
CONSUMER PRODUCTS
During fiscal 1997, the Company continued to design, manufacture, service and
lease communications products for consumer, small office and home office use
through its Consumer Products business.
The Consumer Products business offered a broad selection of telephone
products for the consumer market, including corded telephones, cordless
telephones and a broad line of analog, digital, stand-alone and integrated
telephone answering systems, offered in corded and cordless versions. In 1997,
Consumer Products introduced 22 new or redesigned products through September 30.
On October 1, 1997, the Company contributed its Consumer Products business to
a new venture, Philips Consumer Communications L.P., formed by the Company and
Philips Electronics N.V. ("Philips"). The venture, which is 40% owned by the
Company, is a worldwide provider of a complete range of personal communications
products, including digital and analog wireless phones, corded and cordless
phones, digital cellular and PCS phones developed by the Company's Consumer
Products group, answering machines, and pagers.
OTHER SYSTEMS AND PRODUCTS
The Company designs, develops and manufactures systems which support the
United States federal government's need for specially designed integrated
solutions for military and civilian use.
In October 1997, the Company sold its Advanced Technology Systems ("ATS")
unit. ATS designed and manufactured custom defense systems for the United States
government. The Company sold its subsidiary, Paradyne, which designed and
manufactured modems and other data communications equipment, in July 1996, and
in December 1996 sold its Custom Manufacturing Services business.
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BELL LABORATORIES
The Company has been and will continue to be supported by the technological
expertise provided by Bell Labs, one of the world's foremost industrial research
and development organizations. Bell Labs provides support for the businesses of
the Company and conducts basic research. Bell Labs has made significant
discoveries and advances in communications science and technology, software
design and engineering, and networking. These contributions include the
invention of the transistor and the design and development of ICs and many types
of lasers. Areas of Bell Labs research and development work in recent years
include: networking software; lightwave transmission, which offers greater
transmission capacity than other transmission systems; electronic switching
technology, which enables rapid call processing, increased reliability and
reduced network costs; and microelectronics components, which bring the latest
advantages of very large scale integration to the full range of products offered
by the Company.
Bell Labs' research and development activities continue to focus on the core
technologies critical to the Company's success, which are software, network
design and engineering, microelectronics, photonics, data networking and
wireless/cellular.
Bell Labs is a leader in software research, development and engineering for
communications applications. For example, its innovations in fault-tolerant
software have enabled the Company to achieve a level of system reliability with
off-the-shelf commercial processors that allows the Company to reduce its
reliance on custom microprocessors. Its recently introduced Inferno(TM) software
provides for secure networking in a distributed computing environment.
Bell Labs has contributed many innovations in voice quality, is a leader in
the development of digital signal processing, and has developed a number of
innovative algorithms for high-quality speech and audio. These innovations have
contributed to the Company's implementation of speech processing applications
which include text-to-speech synthesis, speech recognition and automatic
translation of speech from one language to another. They are used in many of the
Company's products, including the elemedia(TM) products for Internet
applications.
Bell Labs also has led in the development of software-based networking
technologies that support the Company's systems and products. Recently, it has
developed systems for digital cellular, PCS, mobile computing and wireless LANs,
and its research in ATM led to the Company's offering of the first large ATM
switch in 1993. Bell Lab's technology has allowed the recent introduction of
data networking products such as the Internet Telephony Server SP.
Similarly, Bell Labs' advances extend to the microlasers used in today's
broadband multifunctional transmission systems, and to today's optical
amplifiers and TRUEWAVE(R) fiber. Current photonic research includes work on
passive optical networks, photonic switching and quantum wire lasers.
NEW ORGANIZATION
Effective November 1, 1997, the Company moved to the following organization.
Microelectronics: integrated circuits and optoelectronics products and the
sales and service force serving this customer group.
Intellectual Property: acquiring, managing and creating value from the
Company's portfolio of intellectual property.
Business Communications Systems: all voice-related products currently part of
the previous Business Communications Systems portfolio including the Octel
Messaging Division and the sales and service force serving enterprise customers.
Includes the Company's Government Solutions.
Data Networking Systems: data networking offerings targeted at enterprise and
Internet Service Provider (ISP) customers and the Internet Protocol and ATM core
switching data offers to service provider customers. Includes the Agile and
Livingston acquisitions. Its dedicated sales force works through the existing
global service provider and enterprise sales forces and sells directly to ISPs
and indirect channels.
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Wireless Networks: wireless products, software and support for the service
provider market. It sells its products through the Global Service Provider sales
group.
Switching and Access Systems: switching and access products and software for
the carrier market. It sells its products through the Global Service Provider
sales group.
Optical Networking: sonet-SDH, wave division multiplexing and access offers.
Its products are sold through the Global Service Provider sales group.
Network Products: fiber products, including SYSTIMAX(R) and Power Systems
products. Its products are sold through the Global Service Provider sales group,
indirect channels and the Microelectronics sales force.
Communications Software: software products focused in application areas such
as intelligent network applications, network management and operations and
Internet software. Its products are sold through the Global Service Provider and
enterprise sales forces as well as indirect channels.
New Ventures: creates new ventures to get technology to market faster and the
Company's existing internal ventures, including Inferno and elemedia.
Global Service Provider Business: marketing and sales, service and support
and program management for network operator and service provider customers
around the world, including local, long-distance, Internet and wireless service
providers.
Bell Labs: provides research and development to support the Company's
products and services, and conducts basic research.
BACKLOG
The Company's backlog, calculated as the aggregate of the sales price of
orders received from customers less revenue recognized, was approximately
$12,141 million and $12,100 million on September 30, 1997 and 1996,
respectively. Approximately $6,800 million of orders included in the September
30, 1997 backlog are scheduled for delivery after September 30, 1998. However,
all orders are subject to possible rescheduling by customers. Although the
Company believes that the orders included in the backlog are firm, some orders
may be canceled by the customer without penalty, and the Company may elect to
permit cancellation of orders without penalty where management believes that it
is in the Company's best interest to do so. About $4,500 million of the amount
at September 30, 1997 is under large, multi-year contracts of which about $3,000
million is scheduled for delivery after September 30, 1998 and is included in
the $6,800 million referred to above. Approximately $3,600 million at September
30, 1997 and $4,000 million at September 30, 1996 are under large, long-term
contracts with the Ministry of Post and Telecommunications of Saudi Arabia which
require annual appropriations of the Saudi Arabian government.
SOURCES AND AVAILABILITY OF MATERIALS
The Company makes significant purchases of electronic components, copper,
glass, silicon, and other materials and components from many domestic and
foreign sources. The Company has been able to obtain sufficient materials and
components from sources around the world to meet its needs. The Company also
develops and maintains alternative sources for essential materials and
components. Occasionally, additional inventories of specific components are
maintained to minimize the effects of potential shortages. The Company does not
have a concentration of sources of supply of materials, labor or services that,
if suddenly eliminated, could severely impact its operations.
PATENTS AND TRADEMARKS
From October 1, 1996 to September 30, 1997, the Company was issued 811
patents in the United States and 1,947 in foreign countries. The Company owns
approximately 8,700 patents in the United States and 15,000 in foreign
countries. These foreign patents are counterparts of the Company's United States
patents. Many of the patents owned by the Company are licensed to others and the
Company is licensed to use certain patents owned by others. In connection with
the Separation, the Company has entered into an extensive cross-licensing
agreement with AT&T and NCR Corporation ("NCR"). See "Separation Agreements
- -- Patent Licenses and Related Matters."
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The Company markets its products primarily under its own name and mark. The
Company considers its many trademarks to be valuable assets. Most of its
trademarks are registered throughout the world.
OUTLOOK
Forward Looking Statements
This Outlook section and other sections of this Form 10-K report contain
forward-looking statements, including prospective financial and non-financial
information, that are based on current expectations, estimates, forecasts and
projections about the industries in which the Company operates, management's
beliefs and assumptions made by management. Any Annual Report to Shareowners,
Quarterly Report to Shareowners, Form 10-Q or Form 8-K of the Company may
include forward-looking statements. In addition, other written or oral
statements which constitute forward-looking statements may be made by or on
behalf of the Company. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions ("Future Factors") which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
Future Factors include increasing price and product/services competition by
foreign and domestic competitors, including new entrants; rapid technological
developments and changes and the Company's ability to continue to introduce
competitive new products and services on a timely, cost effective basis; the mix
of products/services; the achievement of lower costs and expenses; domestic and
foreign governmental and public policy changes which may affect the level of new
investments and purchases made by customers; changes in environmental and other
domestic and foreign governmental regulations; protection and validity of patent
and other intellectual property rights; reliance on large customers;
technological, implementation and cost/financial risks in increasing use of
large, multi-year contracts; the cyclical nature of the Company's business; the
outcome of pending and future litigation and governmental proceedings and
continued availability of financing, financial instruments and financial
resources in the amounts, at the times and on the terms required to support the
Company's future business. These are representative of the Future Factors that
could affect the outcome of the forward-looking statements. In addition, such
statements could be affected by general industry and market conditions and
growth rates, general domestic and international economic conditions including
interest rate and currency exchange rate fluctuations and other Future Factors.
For a further description of Future Factors that could cause actual results
to differ materially from such forward-looking statements, see the remainder of
this OUTLOOK section including the other sections referred to in this section.
Competition
The Company continues to face significant competition and expects that the
level of competition on pricing and product offerings will increase. The Company
expects that new and different competitors will enter its markets as a result of
both the trend toward global expansion by foreign and domestic competitors as
well as continued changes in technology and public policy. These competitors may
include entrants from the telecommunications, software, data networking and
semiconductor industries. Existing competitors have, and new competitors may
have, strong financial capability, technological expertise and well-recognized
brand names.
Dependence On New Product Development
The markets for the Company's principal products are characterized by rapidly
changing technology, evolving industry standards, frequent new product
introductions and evolving methods of building and operating communications
systems for network operators and business customers. The Company's operating
results will depend to a significant extent on its ability to continue to
introduce new systems, products, software and services successfully on a timely
basis and to reduce costs of existing
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systems, products, software and services. The success of these and other new
offerings is dependent on several factors, including proper identification of
customer needs, cost, timely completion and introduction, differentiation from
offerings of the Company's competitors and market acceptance. In addition, new
technological innovations generally require a substantial investment before any
assurance is available as to their commercial viability, including, in some
cases, certification by international and domestic standards-setting bodies.
Reliance On Major Customers
Historically, the Company has relied on a limited number of customers for a
substantial portion of its total revenues, including AT&T which continues to be
a significant customer. In terms of total revenues, the Company's largest
customer has been AT&T, although other large customers may purchase more of any
particular system or product line. The contribution of AT&T to the Company's
total revenues and percentage of total revenues for the year and nine months
ended September 30, 1997 and 1996 and the year ended December 31, 1995 were
$3,731 million (14.2%), $1,970 million (12.4%) and $2,119 million (9.9%),
respectively.
In addition, sales to eight network operators including AT&T (reduced from 10
in 1996 due to mergers), some of which may vary from year to year, constituted
approximately 41%, 39% and 38% of total revenues in the twelve months ended
September 30, 1997 and 1996 and calendar year ended December 31, 1995,
respectively. The Company is continuing to diversify its customer base;
nevertheless, the Company expects that a significant portion of its future
revenues will continue to be generated by a limited number of customers. See
"Business." The loss of any of these customers or any substantial reduction in
orders by any of these customers could materially adversely affect the Company's
operating results.
Readiness For Year 2000
The Company has taken actions to understand the nature and extent of the work
required to make its systems, products and infrastructure Year 2000 compliant.
The Company began work several years ago to prepare its products and its
financial, information and other computer-based systems for the Year 2000,
including replacing and/or updating existing legacy systems. The Company
continues to evaluate the estimated costs associated with these efforts based on
actual experience. While these efforts will involve additional costs, the
Company believes, based on available information, that it will be able to manage
its total Year 2000 transition without any material adverse effect on its
business operations, products or financial prospects.
Multi-Year Contracts
The purchasing behavior of the Company's large customers has increasingly
been characterized by the use of fewer, but larger contracts, which contributes
to the variability of the Company's results. These contracts typically involve
longer negotiating cycles, require the dedication of substantial amounts of
working capital and other resources, and in general require costs which may
substantially precede recognition of associated revenues. Moreover, in return
for larger, longer-term purchase commitments, customers often demand more
stringent acceptance criteria which can also cause revenue recognition delays.
The Company has significant contracts for the sale of infrastructure systems to
network operators which extend over a multi-year period, and expects to enter
into similar contracts in the future, with the uncertainties discussed above.
The Company has increasingly provided or arranged long-term financing for
customers as a condition to obtain or bid on infrastructure projects. Certain
multi-year contracts involve new technologies which may not have been previously
deployed on a large-scale commercial basis. Related to these contracts, the
Company may incur significant initial cost overruns and losses which would be
recognized in the quarter in which they became ascertainable. Further, profit
estimates on such contracts are revised periodically over the lives of the
contracts, and such revisions can have a significant impact on reported earnings
in any one quarter.
Seasonality
The Company's sales continue to be highly seasonal. Many of the Company's
large customers have historically delayed a disproportionate percentage of their
capital expenditures until the fourth quarter of the calendar year.
Consequently, the
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Company's results of operations for the first three quarters of each calendar
year historically have, in the aggregate, been significantly less profitable
than the fourth calendar quarter.
Future Capital Requirements
The Company's working capital requirements and cash flow provided by (or used
in) operating activities can vary greatly from quarter to quarter, depending on
the volume of production, the timing of deliveries, the build-up of inventories,
the payment terms offered to customers, and the extension of credit to
customers.
Network operators, domestically and internationally, increasingly have
required their suppliers to arrange or provide long-term financing for them as a
condition to obtaining or bidding on infrastructure projects. These projects may
require financing in amounts ranging from modest sums to over a billion dollars.
In this regard, the Company entered into a credit agreement in October 1996 to
provide Sprint Spectrum* LP ("Sprint PCS") long-term financing of $1,800 million
for purchasing equipment and services for its PCS network. In May 1997, under
the $1,800 million credit facility provided by the Company to Sprint PCS, the
Company closed transactions to lay off $500 million of loans and undrawn
commitments and $300 million of undrawn commitments to a group of institutional
investors and Sprint Corporation (a partner in Sprint PCS), respectively. As of
September 30, 1997, $146 million of these commitments were not yet drawn down by
Sprint PCS. As of November 30, 1997, the Company had also entered into
agreements to extend credit of up to an aggregate of approximately $550 million
to two other PCS operators for possible future sales. The Company has committed
to, and is continuing to propose, to provide financing where appropriate for its
business. The ability of the Company to arrange or provide financing for network
operators will depend on a number of factors, including the Company's capital
structure and general market conditions.
The Company believes that its credit facilities, cash flow from operations
and long- and short-term debt financings, will be sufficient to satisfy its
future working capital, capital expenditure, research and development and debt
service requirements. The Company has a shelf registration statement to register
the possible offering from time to time of long-term debt of which $1,960
million remains available at September 30, 1997. The Company believes that it
will be able to access the capital markets on terms and in amounts that will be
satisfactory to it, and 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, although there can be no
assurance that the Company will be successful in this regard.
International Growth, Foreign Exchange and Interest Rates
The Company intends to continue to pursue growth opportunities in
international markets. In many international markets, long-standing
relationships between potential customers of the Company and their local
providers, and protective regulations, including local content requirements and
type approvals, create barriers to entry. In addition, pursuit of such
international growth opportunities may require significant investments for an
extended period before returns on such investments, if any, are realized. Such
projects and investments could be adversely affected by reversals or delays in
the opening of foreign markets to new competitors, exchange controls, currency
fluctuations, investment policies, repatriation of cash, nationalization, social
and political risks, taxation, and other factors, depending on the country in
which such opportunity arises. Difficulties in foreign financial markets and
economies, and of foreign financial institutions, could adversely affect demand
from customers in the affected countries.
The Company is exposed to market risk from changes in foreign currency
exchange rates and interest rates, which could impact its results of operations
and financial condition. The Company manages its exposure to these market risks
through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments. A significant
change in the value of the dollar against the currency of one or more countries
where the Company sells products to local customers or makes purchases from
local suppliers may materially adversely affect the
- ----------
* SPRINT SPECTRUM is a service mark of Sprint Communications Company, L.P.
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Company's results. The Company attempts to mitigate any such effects through the
use of foreign currency contracts, although there can be no assurances that such
attempts will be successful.
While the Company hedges transactions with non-U.S. customers, the decline in
value of the Asia/Pacific currencies, or declines in currency values in other
regions, may, if not reversed, adversely affect future product sales because the
Company's products may become more expensive to purchase for local customers
doing business in the countries of the affected currencies.
Legal Proceedings and Environment
See discussion below under ENVIRONMENTAL MATTERS and ITEM 3. LEGAL
PROCEEDINGS.
Employee Relations
See discussion below under EMPLOYEE RELATIONS.
Intellectual Property
The Company relies on patent, trademark, trade secret and copyright laws both
to protect its proprietary technology and to protect the Company against claims
from others. The Company believes that it has direct intellectual property
rights or rights under cross-licensing arrangements covering substantially all
of its material technologies. Given the technological complexity of the
Company's systems and products, however, there can be no assurance that claims
of infringement will not be asserted against the Company or against the
Company's customers in connection with their use of the Company's systems and
products, nor can there be any assurance as to the outcome of any such claims.
The Company was assigned ownership of the substantial majority of AT&T's patents
in connection with the Separation. Pursuant to the patent license agreement
entered into among the Company, AT&T and NCR, the Company has been given rights,
subject to specified limitations, to pass through to its customers certain
rights under approximately 400 patents retained by AT&T. There can be no
assurance that the Company's customers and potential customers will be satisfied
with the pass-through rights available to them under the patents retained by
AT&T or with any indemnification commitments the Company may be willing to
provide in connection therewith. See "Separation Agreements -- Patent Licenses
and Related Matters" and "-- Technology Licenses and Related Matters."
OPERATING REVENUE, RESEARCH AND DEVELOPMENT EXPENSE AND FOREIGN AND DOMESTIC
OPERATIONS
For information about the consolidated operating revenues contributed by the
Company's major classes of products and services, consolidated research and
development expenses, and foreign and domestic operations, see revenue tables
and discussion on pages 37 through 40, Consolidated Statements of Income on page
46 and Note 10 thereto on page 59 of the Company's annual report to security
holders for the fiscal year ended September 30, 1997. Such information is
incorporated herein by reference pursuant to General Instruction G(2).
EMPLOYEE RELATIONS
At September 30, 1997, the Company employed approximately 134,000 persons, of
whom 75% were located in the United States. Of these domestic employees, 42% are
represented by unions, primarily the Communications Workers of America and the
International Brotherhood of Electrical Workers ("IBEW"). The Company's labor
agreements with these unions expire on May 30, 1998.
ENVIRONMENTAL MATTERS
The Company's current and historical manufacturing and research operations
are subject to a wide range of environmental protection laws in the United
States and other countries. In the United States, these laws often require
parties to fund remedial action regardless of fault. The Company has remedial
and investigatory activities underway at about 40 current and former facilities.
In addition, the Company was named a successor to AT&T as a potentially
responsible party ("PRP") at numerous "Superfund" sites pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA") or comparable state statutes. Under the terms of the Separation and
Distribution Agreement, the Company is responsible for all liabilities primarily
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resulting from or related to the operation of the Company's Business as
conducted at any time prior to, on or after the Separation including related
businesses discontinued or disposed of prior to the Separation, and the
Company's assets including, without limitation, those associated with these
sites. In addition, under the Separation and Distribution Agreement, the Company
is required to pay a portion of contingent liabilities paid out in excess of
certain amounts by AT&T and NCR, including environmental liabilities.
It is often difficult to estimate the future impact of environmental matters,
including potential liabilities. The Company records an environmental reserve
when it is probable that a liability has been incurred and the amount of the
liability is reasonably estimable. This practice is followed whether the claims
are asserted or unasserted. Management expects that the amounts reserved for
will be paid out over the period of remediation for the applicable site which
ranges from 5 to 30 years. Reserves for estimated losses from environmental
remediation are, depending on the site, based primarily upon internal or third
party environmental studies, and estimates as to the number, participation level
and financial viability of any other PRPs, the extent of the contamination and
the nature of required remedial actions. Accruals are adjusted as further
information develops or circumstances change. The amounts provided for in the
Company's consolidated financial statements in respect of environmental reserves
are the gross undiscounted amount of such reserves, 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 financial statements. Although the Company
believes that its reserves are adequate, there can be no assurance that the
amount of capital expenditures and other expenses which will be required
relating to remedial actions and compliance with applicable environmental laws,
will not exceed the amounts reflected in the Company's reserves or will not have
a material adverse effect on the financial condition of the Company or the
Company's results of operations or cash flows. Any amounts of environmental
costs that may be incurred in excess of those provided for at September 30, 1997
cannot be determined.
On July 31, 1991, the United States Environmental Protection Agency filed a
civil complaint in the U.S. District Court for the Southern District of Illinois
against AT&T (with respect to the Company's businesses) and nine other parties
seeking enforcement of its CERCLA Section 106 cleanup order, issued in November
1990 for the NL Granite City Superfund site in Granite, Illinois. This complaint
seeks past costs, civil penalties of $25,000 per day and treble damages related
to certain United States costs. The Company is contesting liability.
A complaint issued by the United States Environmental Protection Agency
Region III on July 31, 1991 pursuant to Section 3008a of the Resource
Conservation and Recovery Act of 1976 alleging violations of various waste
management regulations at the Company's Richmond Works in Richmond, Virginia,
and negotiations between AT&T Nassau Metals Corporation ("Nassau"), a wholly
owned subsidiary of the Company, and the New York State Department of
Environmental Conservation over waste management practices of a Nassau plant in
Staten Island, New York, were reported in Item 1 and Item 3 of the Company's
Form 10-K for the transition period ended September 30, 1996. Both matters have
been settled with the Company paying penalties and a payment to an environmental
fund of about $1.1 million in the aggregate and agreeing to do an environmental
assessment of one of the sites.
SEPARATION AGREEMENTS
For the purposes of governing certain of the relationships between the
Company and AT&T (including NCR) following the Separation, the Company, AT&T and
NCR entered into the Separation and Distribution Agreement and the Ancillary
Agreements to which they are parties (collectively, the "Separation
Agreements"). The Ancillary Agreements include the Interim Services and Systems
Replication Agreement; the General Purchase Agreement and the supplemental
agreements related thereto; the Employee Benefits Agreement; the Brand License
Agreement; the Patent License Agreement and other patent-related agreements; the
Technology License Agreement and other technology-related agreements; the Tax
Sharing Agreement and other tax-related agreements; and certain agreements
providing for the assignment of, and the establishment of transitional
arrangements with respect to, real property. Certain of the Separation
Agreements, including certain of the Agreements summarized below, are exhibits
to this Form 10-K.
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Reference is made to such exhibits for the full text of the provisions of those
Agreements, and the agreement summaries below are qualified in their entirety by
reference to the full text of such Agreements. Capitalized terms used in this
section and not otherwise defined in this Form 10-K shall have their respective
meanings set forth in the Separation and Distribution Agreement (except that the
term "Company" is used in lieu of the term "Lucent") or other Separation
Agreement.
Separation And Distribution Agreement
Under the Separation and Distribution Agreement, the Company assumed or
agreed to assume, and agreed to perform and fulfill, all the "Lucent
Liabilities" (as defined in such Agreement) in accordance with their respective
terms. Without limitation, the Lucent Liabilities generally include all
liabilities and contingent liabilities relating to Lucent's present and former
business and operations, and contingent liabilities otherwise assigned to
Lucent; contingent liabilities related to AT&T's discontinued computer
operations (other than those of NCR) were assigned to the Company. The
Separation and Distribution Agreement provides for the sharing of contingent
liabilities not allocated to one of the parties in specified proportions, and
also provides that each party will share specified portions of contingent
liabilities related to the business of any of the other parties that exceed
specified levels.
Ability to Terminate Certain Rights. The Separation and Distribution
Agreement provides that certain rights granted to the Company and the members of
the Company Group will be subject to the following provisions. Except as
otherwise expressly provided, in the event that, at any time prior to February
1, 2001, the Company or any member of the Company Group offers, furnishes or
provides any Telecommunications Services of the type offered by the AT&T
Services Business as of the Closing Date, then AT&T may, in its sole discretion:
(a) terminate all or any portion of the rights granted by AT&T under the Brand
License Agreement; (b) terminate all or any remaining portion of the purchase
commitments made by AT&T and the members of the AT&T Group in the General
Purchase Agreement; (c) exercise the right to require the Company to transfer to
AT&T certain personnel, information, technology and software under the
Supplemental Agreements; (d) terminate all or any portion of the rights to
patents and technology of AT&T or any member of the AT&T Group granted to the
Company and the members of the Company Group pursuant to the Patent License
Agreement and the Technology License Agreement; and (e) direct the Company and
the members of the Company Group to reconvey to AT&T all interests in any and
all patents and technology in which the Company or any member of the Company
Group was granted an undivided one-half interest pursuant to the Patent
Assignments or the Technology Assignment and Joint Ownership Agreements. The
Company and the members of the Company Group will not be deemed to offer,
furnish or provide any Telecommunications Services (and the foregoing provisions
will not apply) solely by virtue of certain specified investments in Persons
that offer, furnish or provide Telecommunications Services or by virtue of
offering, furnishing or providing Telecommunications Services below a specified
de minimis amount.
Employee Benefits Agreement
AT&T and the Company entered into the Employee Benefits Agreement that
governs the employee benefit obligations of the Company, including both
compensation and benefits, with respect to active employees and retirees
assigned to the Company. Pursuant to the Employee Benefits Agreement, the
Company assumed and agreed to pay, perform, fulfill and discharge, in accordance
with their respective terms, all Liabilities (as defined) to, or relating to,
former employees of AT&T or its affiliates employed by the Company and its
affiliates and certain former employees of AT&T or its affiliates (including
retirees) who either were employed in the Company Business (as defined) or who
otherwise are assigned to the Company for purposes of allocating employee
benefit obligations (including all retirees of Bell Labs).
Patent Licenses And Related Matters
The Company, AT&T and NCR executed and delivered assignments and other
agreements, including a patent license agreement, related to patents then owned
or controlled by AT&T and its subsidiaries. The patent assignments divided
ownership of patents, patent applications and foreign counterparts among the
Company, AT&T and NCR, with the substantial portion of those then owned or
controlled by AT&T and its subsidiaries (other than NCR) being assigned to the
Company. A small number of the patents assigned
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to the Company are jointly owned with either AT&T or NCR. Certain of the patents
that the Company jointly owns with AT&T are subject to a joint ownership
agreement under which each of the Company and AT&T has full ownership rights in
the patents. The other patents that the Company jointly owns with AT&T, and the
patents that the Company jointly owns with NCR, are subject to defensive
protection agreements with AT&T and NCR, respectively, under which the Company
holds most ownership rights in the patents exclusively. Under these defensive
protection agreements, AT&T or NCR, as the case may be, has the ability, subject
to specified restrictions, to assert infringement claims under the patents
against companies that assert patent infringement claims against them, and has
consent rights in the event the Company wishes to license the patents to certain
third parties or for certain fields of use under specified circumstances. The
defensive protection agreements also provide for one-time payments from AT&T and
NCR to the Company.
The patent license agreement entered into by the Company, AT&T and NCR
provides for cross-licenses to each company, under each of the other company's
patents that are covered by the licenses, to make, use, lease, sell and import
any and all products and services of the businesses in which the licensed
company (including specified related companies) is now or hereafter engaged. The
cross-licenses also permit each company, subject to specified limitations, to
have third parties make items under the other companies' patents, as well as to
pass through to customers certain rights under the other companies' patents with
respect to products and services furnished to customers by the licensed company.
In addition, the rights granted to the Company and AT&T include the right to
license third parties under each of the other company's patents to the extent
necessary to meet existing patent licensing obligations as of March 29, 1996,
and AT&T has the right, subject to specified restrictions and procedures, to ask
the Company to license third parties under a limited number of identified
patents that were assigned to the Company.
Technology Licenses And Related Matters
The Company, AT&T and NCR executed and delivered assignments and other
agreements, including the Technology License Agreement, related to technology
then owned or controlled by AT&T and its subsidiaries. Technology includes
copyrights, mask works and other intellectual property other than trademarks,
trade names, trade dress, service marks and patent rights. The technology
assignments divide ownership of technology among the Company, AT&T and NCR, with
the Company and AT&T owning technology that was developed by or for, or
purchased by, the Company's business or AT&T's services business, respectively,
and NCR owning technology that was developed by or for, or purchased by, NCR.
Technology that is not covered by any of these categories is owned jointly by
the Company and AT&T or, in the case of certain specified technology, owned
jointly by the Company, AT&T and NCR.
The Technology License Agreement entered into by the Company, AT&T and NCR
provides for royalty-free cross-licenses to each company to use the other
companies' technology existing as of April 10, 1996, except for specified
portions of each company's technology as to which use by the other companies is
restricted or prohibited.
ITEM 2. PROPERTIES.
At September 30, 1997, the Company operated 45 manufacturing and repair
sites, of which 15 were located in the United States, occupying in excess of
16.0 million square feet, of which approximately 2 million square feet were
leased. The remaining 30 sites were located in 18 countries.
At September 30, 1997, the Company operated 137 warehouse sites, of which 96
were located in the United States, occupying in excess of 5.0 million square
feet, substantially all of which were leased. The remaining 41 sites were
located in 22 countries.
At September 30, 1997, the Company operated 1016 office sites
(administration, sales, field service), of which 816 were located in the United
States, occupying in excess of 16.0 million square feet, substantially all of
which were leased. The remaining 200 sites were located in 56 countries.
At September 30, 1997, the Company operated additional sites in 15 cities, of
which 14 were located in the United States, with significant research and
development
17
<PAGE> 21
activities, occupying in excess of 9.0 million square feet, of which
approximately 1.4 million square feet were leased.
The Company believes its plants and facilities are suitable and adequate, and
have sufficient productive capacity, to meet its current needs.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of business, the Company is subject to proceedings,
lawsuits and other claims, including proceedings under laws and regulations
related to environmental and other matters. (Also see Item 1. "Business --
Separation Agreements -- Separation and Distribution Agreement" regarding the
assumption by the Company of certain liabilities and contingent liabilities.)
All such matters are subject to many uncertainties and outcomes are not
predictable with assurance. Consequently, the Company is unable to ascertain the
ultimate aggregate amount of monetary liability or financial impact with respect
to these matters at September 30, 1997. While these matters could affect
operating results of any one quarter when resolved in future periods and, while
there can be no assurance with respect thereto, it is management's opinion that
after final disposition, any monetary liability or financial impact to the
Company beyond that provided in the consolidated balance sheet at September 30,
1997 would not be material to the Company's annual consolidated financial
statements.
See also the discussion in Item 1. "Business -- Environmental Matters" for
additional legal proceedings, and environmental matters and proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matter was submitted to a vote of security holders in the final quarter of
the fiscal year covered by this report.
Executive Officers of the Registrant
(as of December 1, 1997)
Became
Lucent
Executive
Officer On
Name Age
---- ---
Henry B. Schacht*............63...Chairman of the Board.................2-96
Richard A. McGinn*...........51...Chief Executive Officer...............2-96
and President
Donald K. Peterson...........48...Executive Vice President and..........2-96
Chief Financial Officer
Richard J. Rawson............45...Senior Vice President,................2-96
General Counsel and Secretary
Patricia F. Russo............45...Executive Vice President,.............2-96
Corporate Staff Operations
Daniel C. Stanzione..........52...Executive Vice President..............2-96
and Chief Operating Officer
Bernardus J. Verwaayen.......45...Executive Vice President and..........9-97
Chief Operating Officer
- ----------
* Member of the Board of Directors.
All of the above executive officers have held high level managerial positions
with the Company and prior thereto with AT&T or its affiliates for more than the
past five
18
<PAGE> 22
years, except in the case of Messrs. Peterson and Verwaayen since September 1,
1995 and September 1, 1997, respectively. Prior to joining AT&T, Mr. Peterson
held various senior executive positions at Northern Telecom, Inc., a
telecommunications equipment company, which included President of Nortel
Communications Systems, Inc. (from January 1993 to September 1995), Vice
President of Finance of Northern Telecom, Inc. (from January 1991 to January
1993) and Group Vice President of Northern Telecom, Inc. (from September 1987 to
January 1991). Mr. Verwaayen joined the Company after serving since May 1988 as
President of PTT Telecom, the national telecommunications operator of the
Netherlands. He was a co-founder of Unisource, the pan-European alliance of
Telia of Sweden, Swiss Telecom and PTT Telecom.
Officers are not elected for a fixed term of office but hold office until
their successors have been elected.
PART II
Items 5. through 8.
The information required by these items is included in pages 34 through 63 of
the Company's annual report to security holders for the fiscal year ended
September 30, 1997. The referenced pages of the Company's annual report to
security holders have been filed as Exhibit 13 to this document. Such
information is incorporated herein by reference, pursuant to General Instruction
G(2). The New York Stock Exchange is the principal market for the Company's
Common Shares. As of November 30, 1997, there were approximately 1,760,000
shareholders of record.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Items 10. through 13.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Directors and officers to file reports of holdings and transactions in the
Company's Common Shares with the Securities and Exchange Commission ("SEC") and
the New York Stock Exchange. Based on Company records and other information, the
Company believes that all SEC filing requirements applicable to its Directors
and officers with respect to the Company's fiscal year ending September 30, 1997
were complied with.
Information regarding executive officers required by Item 401 of Regulation
S-K is furnished in a separate disclosure in Part I of this report because the
Company did not furnish such information in its definitive proxy statement
prepared in accordance with Schedule 14A.
The other information required by Items 10 through 13 is included in the
Company's definitive proxy statement dated December 22, 1997, on pages 8
through 13 and pages 29 through page 45. Such information is incorporated herein
by reference, pursuant to General Instruction G(3).
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as a part of the report:
(1) Financial Statements:
Pages
Report of Management ................................ *
- ----------
* Incorporated herein by reference to the appropriate portions in pages 34
through 63 of the Company's annual report to security holders for the fiscal
year ended September 30, 1997. (See Part II.)
19
<PAGE> 23
Report of Independent Auditors ...................... *
Statements:
Consolidated Statements of Income ................ *
Consolidated Balance Sheets ...................... *
Consolidated Statements of Changes in
Shareowners' Equity.............................. *
Consolidated Statements of Cash Flows ............ *
Notes to Consolidated Financial Statements ....... *
(2) Financial Statement Schedules:
Report of Independent Auditors ..................... 23
Schedules:
II -- Valuation and Qualifying Accounts ............ 24
Separate financial statements of subsidiaries not consolidated and 50 percent or
less owned persons are omitted since no such entity constitutes a "significant
subsidiary" pursuant to the provisions of Regulation S-X, Article 3-09.
(3) Exhibits:
Exhibits identified in parentheses below, on file with the SEC,
are incorporated herein by reference as exhibits hereto.
Exhibit
Number
(3)(i) Articles of Incorporation of the registrant, as
amended April 8, 1996 (Exhibit 3(i) to Form 8-K
dated July 18, 1996, File No. 001-11639).
(3)(ii) By-Laws of the registrant, as amended July 17, 1996
(Exhibit 3(ii) to Form 8-K dated July 18, 1996, File
No. 001-11639).
(4)(a) Indenture dated as of April 1, 1996 between Lucent
Technologies Inc. and the Bank of New York, as
Trustee (Exhibit 4A to Registration Statement on
Form S-3 No. 333-01223).
(4)(b) Other instruments in addition to Exhibit 4(a) which
define the rights of holders of long term debt, of
the registrant and all of its consolidated
subsidiaries, are not filed herewith pursuant to
Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to
this regulation, the registrant hereby agrees to
furnish a copy of any such instrument to the SEC
upon request.
(10)(i)1 Separation and Distribution Agreement by and among
Lucent Technologies Inc., AT&T Corp. and NCR
Corporation, dated as of February 1, 1996 and
amended and restated as of March 29, 1996 (Exhibit
10.1 to Registration Statement on Form S-1 No.
333-00703).
(10)(i)2 Tax Sharing Agreement by and among Lucent
Technologies Inc., AT&T Corp. and NCR Corporation,
dated as of February 1, 1996 and amended and
restated as of March 29, 1996 (Exhibit 10.6 to
Registration Statement on Form S-1 No. 333-00703).
(10)(i)3 Employee Benefits Agreement by and between AT&T and
Lucent Technologies Inc., dated as of February 1,
1996 and amended and restated as of March 29, 1996
(Exhibit 10.2 to Registration Statement on Form S-1
No. 333-00703).
(10)(i)4 Lucent Technologies Inc. Operating Agreement between
Lucent Technologies and AT&T Capital Corporation,
dated as of April 2, 1996 (Exhibit 10.13 to
Registration Statement on Form S-1 No. 333-00703).
- --------------------------------------------------------------------------------
20
<PAGE> 24
(10)(i)5 Rights Agreement between Lucent Technologies Inc.
and First Chicago Trust Company of New York, as
Rights Agent, dated as of April 4, 1996 (Exhibit 4.2
to Registration Statement on Form S-1 No.
333-00703).
(10)(ii)(B)1 General Purchase Agreement by and between AT&T Corp.
and Lucent Technologies Inc., dated February 1, 1996
and amended and restated as of March 29, 1996
(Exhibit 10.3 to Registration Statement on Form S-1
No. 333-00703).
(10)(ii)(B)2 Interim Services and Systems Replication Agreement
by and among AT&T, Lucent Technologies Inc. and NCR,
dated as of February 1, 1996 and amended and
restated as of March 29, 1996 (Exhibit 10.4 to
Registration Statement on Form S-1 No. 333-00703).
(10)(ii)(B)3 Brand License Agreement by and between Lucent
Technologies Inc. and AT&T, dated as of February 1,
1996 (Exhibit 10.5 to Registration Statement on Form
S-1 No. 333-00703).
(10)(ii)(B)4 Patent License Agreement among AT&T, NCR and Lucent
Technologies Inc., effective as of March 29, 1996
(Exhibit 10.7 to Registration Statement on Form S-1
No. 333-00703).
(10)(ii)(B)5 Amended and Restated Technology License Agreement
among AT&T, NCR and Lucent Technologies Inc.,
effective as of March 29, 1996 (Exhibit 10.8 to
Registration Statement on Form S-1 No. 333-00703).
(10)(iii)(A)1 Lucent Technologies Inc. 1996 Long Term Incentive
Program (Exhibit(10)(iii)(A)1 to Annual Report on
Form 10-K for Transition Period ended September 30,
1996).*
(10)(iii)(A)2 Lucent Technologies Inc. Deferred Compensation
Plan.*
(10)(iii)(A)3 Pension Plan for Lucent Non-Employee Directors
(Exhibit 10.11 to Registration Statement on Form S-1
No. 333-00703).*
(10)(iii)(A)4 Lucent Technologies Inc. Stock Retainer Plan for
Non-Employee Directors.*
(10)(iii)(A)5 Lucent Technologies Inc. Excess Benefit and
Compensation Plan (Exhibit (10)(iii)(A)5 to Annual
Report on Form 10-K for Transition Period ended
September 30, 1996).*
(10)(iii)(A)6 Lucent Technologies Inc. Mid-Career Pension Plan
(Exhibit (10)(iii)(A)6 to Annual Report on Form 10-K
for Transition Period ended September 30, 1996).*
(10)(iii)(A)7 Lucent Technologies Inc. Non-Qualified Pension Plan
(Exhibit (10)(iii)(A)7 To Annual Report on Form 10-K
for Transition Period ended September 30, 1996).*
(10)(iii)(A)8 Lucent Technologies Inc. Officer Long-Term
Disability and Survivor Protection Plan (Exhibit
(10)(iii)(A)8 to Annual Report on Form 10-K for
Transition Period ended September 30, 1996).*
(10)(iii)(A)9 Employment Agreement of Mr. Verwaayen dated June 12,
1997.*
(10)(iii)(A)10 Employment Agreement of Mr. Peterson dated August
8, 1995.*
(10)(iii)(A)11 Description of the Lucent Technologies Inc.
Supplemental Pension Plan.*
(12) Computation of Ratio of Earnings to Fixed Charges.
(13) Specified portions (pages 34 through 63) of the
Company's Annual Report to security holders for the
year ended September 30, 1997.
(21) List of subsidiaries of Lucent Technologies Inc.
- ----------
* Management contract or compensatory plan or arrangement.
21
<PAGE> 25
(23) Consent of Coopers & Lybrand L.L.P.
(24) Powers of Attorney executed by officers and
directors who signed this report.
(27) Financial Data Schedule.
22
<PAGE> 26
The Company will furnish, without charge, to a security holder upon request a
copy of the annual report to security holders and the proxy statement, portions
of which are incorporated herein by reference thereto. The Company will furnish
any other exhibit at cost.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed by the Company during the last quarter
of the fiscal year covered by this Report on Form 10-K.
REPORT OF INDEPENDENT AUDITORS
To the Shareowners of Lucent Technologies Inc.:
Our report on the consolidated financial statements of Lucent Technologies
Inc. and subsidiaries has been incorporated by reference in this Form 10-K from
page 45 of the 1997 Annual Report to the Shareowners of Lucent Technologies Inc.
In connection with our audits of such financial statements, we have also audited
the related consolidated financial statement schedule listed in the index on
page 20 of this Form 10-K.
In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
October 21, 1997
23
<PAGE> 27
<TABLE>
<CAPTION>
Lucent Technologies Inc.
Schedule II - Valuation and Qualifying Accounts
In Millions
Column A Column B Column C Column D Column E
- ----------------------------------------- ------------ ----------------------- ---------- -----------
-------Additions-------
Balance at Charged to Charged to Balance at
Description Beginning of Costs & Other End
Period Expenses Accounts Deductions(a) of Period
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year 1997
Allowance for doubtful accounts 273 111 5 37 352
Reserves related to business restructuring
and facility consolidation 1,289 201(b) - 519(b) 569
Deferred tax asset valuation allowance 208 86 3 63 234
Inventory valuation 644 221 19 247 637
Year 1996
Allowance for doubtful accounts 248 64 - 39 273
Reserves related to business restructuring
and facility consolidation 1,907 (98) - 520 1,289
Deferred tax asset valuation allowance 142 7 102(d) 43 208
Inventory valuation 790 92 9 247 644
Year 1995
Allowance for doubtful accounts 206 94 (3) 49 248
Reserves related to business restructuring
and facility consolidation 133 1,774 - - 1,907
Deferred tax asset valuation allowance 96 46 - - 142
Inventory valuation 591 336(c) - 137 790
</TABLE>
(a) Amounts written off as uncollectible, payments or recoveries.
(b) See Note 5 of the Notes to Consolidated Financial Statements for
background information.
(c) Includes $194 related to business restructuring in the fourth quarter of
1995.
(d) Relates to net asset additions and net liability reductions from AT&T. See
Note 1 of the Notes to Consolidated Financial Statements for Background
information.
24
<PAGE> 28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
By James S. Lusk
Vice President and Controller
December 22, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Principal Executive Officer: #
#
Richard A. McGinn #
Chief Executive #
Officer and #
President #
Principal Financial Officer: #
#
Donald K. Peterson Executive #
Vice President and #
Chief Financial #
Officer #
#
Principal Accounting Officer: #
#
James S. Lusk Vice President ## By James S. Lusk
and Controller # (attorney-in-fact)*
#
Directors: #
# December 22, 1997
#
Paul A. Allaire #
Carla A. Hills #
Drew Lewis #
Richard A. McGinn #
Paul H. O'Neill #
Donald S. Perkins #
Henry B. Schacht #
Franklin A. Thomas #
John A. Young #
#
#
# * As Principal Accounting Officer
# and by power of attorney
#
25
<PAGE> 29
EXHIBIT INDEX
Exhibits identified in parentheses below, on file with the SEC,
are incorporated herein by reference as exhibits hereto.
Exhibit
Number
(3)(i) Articles of Incorporation of the registrant, as
amended April 8, 1996 (Exhibit 3(i) to Form 8-K
dated July 18, 1996, File No. 001-11639).
(3)(ii) By-Laws of the registrant, as amended July 17, 1996
(Exhibit 3(ii) to Form 8-K dated July 18, 1996, File
No. 001-11639).
(4)(a) Indenture dated as of April 1, 1996 between Lucent
Technologies Inc. and the Bank of New York, as
Trustee (Exhibit 4A to Registration Statement on
Form S-3 No. 333-01223).
(4)(b) Other instruments in addition to Exhibit 4(a) which
define the rights of holders of long term debt, of
the registrant and all of its consolidated
subsidiaries, are not filed herewith pursuant to
Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to
this regulation, the registrant hereby agrees to
furnish a copy of any such instrument to the SEC
upon request.
(10)(i)1 Separation and Distribution Agreement by and among
Lucent Technologies Inc., AT&T Corp. and NCR
Corporation, dated as of February 1, 1996 and
amended and restated as of March 29, 1996 (Exhibit
10.1 to Registration Statement on Form S-1 No.
333-00703).
(10)(i)2 Tax Sharing Agreement by and among Lucent
Technologies Inc., AT&T Corp. and NCR Corporation,
dated as of February 1, 1996 and amended and
restated as of March 29, 1996 (Exhibit 10.6 to
Registration Statement on Form S-1 No. 333-00703).
(10)(i)3 Employee Benefits Agreement by and between AT&T and
Lucent Technologies Inc., dated as of February 1,
1996 and amended and restated as of March 29, 1996
(Exhibit 10.2 to Registration Statement on Form S-1
No. 333-00703).
(10)(i)4 Lucent Technologies Inc. Operating Agreement between
Lucent Technologies and AT&T Capital Corporation,
dated as of April 2, 1996 (Exhibit 10.13 to
Registration Statement on Form S-1 No. 333-00703).
<PAGE> 30
(10)(i)5 Rights Agreement between Lucent Technologies Inc.
and First Chicago Trust Company of New York, as
Rights Agent, dated as of April 4, 1996 (Exhibit 4.2
to Registration Statement on Form S-1 No.
333-00703).
(10)(ii)(B)1 General Purchase Agreement by and between AT&T Corp.
and Lucent Technologies Inc., dated February 1, 1996
and amended and restated as of March 29, 1996
(Exhibit 10.3 to Registration Statement on Form S-1
No. 333-00703).
(10)(ii)(B)2 Interim Services and Systems Replication Agreement
by and among AT&T, Lucent Technologies Inc. and NCR,
dated as of February 1, 1996 and amended and
restated as of March 29, 1996 (Exhibit 10.4 to
Registration Statement on Form S-1 No. 333-00703).
(10)(ii)(B)3 Brand License Agreement by and between Lucent
Technologies Inc. and AT&T, dated as of February 1,
1996 (Exhibit 10.5 to Registration Statement on Form
S-1 No. 333-00703).
(10)(ii)(B)4 Patent License Agreement among AT&T, NCR and Lucent
Technologies Inc., effective as of March 29, 1996
(Exhibit 10.7 to Registration Statement on Form S-1
No. 333-00703).
(10)(ii)(B)5 Amended and Restated Technology License Agreement
among AT&T, NCR and Lucent Technologies Inc.,
effective as of March 29, 1996 (Exhibit 10.8 to
Registration Statement on Form S-1 No. 333-00703).
(10)(iii)(A)1 Lucent Technologies Inc. 1996 Long Term Incentive
Program (Exhibit(10)(iii)(A)1 to Annual Report on
Form 10-K for Transition Period ended September 30,
1996).*
(10)(iii)(A)2 Lucent Technologies Inc. Deferred Compensation
Plan.*
(10)(iii)(A)3 Pension Plan for Lucent Non-Employee Directors
(Exhibit 10.11 to Registration Statement on Form S-1
No. 333-00703).*
(10)(iii)(A)4 Lucent Technologies Inc. Stock Retainer Plan for
Non-Employee Directors.*
(10)(iii)(A)5 Lucent Technologies Inc. Excess Benefit and
Compensation Plan (Exhibit (10)(iii)(A)5 to Annual
Report on Form 10-K for Transition Period ended
September 30, 1996).*
(10)(iii)(A)6 Lucent Technologies Inc. Mid-Career Pension Plan
(Exhibit (10)(iii)(A)6 to Annual Report on Form 10-K
for Transition Period ended September 30, 1996).*
(10)(iii)(A)7 Lucent Technologies Inc. Non-Qualified Pension Plan
(Exhibit (10)(iii)(A)7 To Annual Report on Form 10-K
for Transition Period ended September 30, 1996).*
(10)(iii)(A)8 Lucent Technologies Inc. Officer Long-Term
Disability and Survivor Protection Plan (Exhibit
(10)(iii)(A)8 to Annual Report on Form 10-K for
Transition Period ended September 30, 1996).*
(10)(iii)(A)9 Employment Agreement of Mr. Verwaayen dated June 12,
1997.*
(10)(iii)(A)10 Employment Agreement of Mr. Peterson dated August
8, 1995.*
(10)(iii)(A)11 Description of the Lucent Technologies Inc.
Supplemental Pension Plan.*
(12) Computation of Ratio of Earnings to Fixed Charges.
(13) Specified portions (pages 34 through 63) of the
Company's Annual Report to security holders for the
year ended September 30, 1997.
(21) List of subsidiaries of Lucent Technologies Inc.
- ----------
* Management contract or compensatory plan or arrangement.
<PAGE> 31
(23) Consent of Coopers & Lybrand L.L.P.
(24) Powers of Attorney executed by officers and
directors who signed this report.
(27) Financial Data Schedule.
<PAGE> 1
Exhibit (10)(iii)(A)2
LUCENT TECHNOLOGIES INC. DEFERRED COMPENSATION PLAN
---------------------------------------------------
Adopted July 18, 1997
Preamble
--------
Effective October 1, 1996, Lucent Technologies Inc. (the "Company")
established the Lucent Technologies Inc. Officer Incentive Award Deferral Plan
and the Lucent Technologies Inc. Deferred Compensation Plan for Non-Employee
Directors, each of which was merged into the Lucent Technologies Inc. Deferred
Compensation Plan (the "Plan") in July 1997. The Plan is intended to constitute
an unfunded, deferred compensation plan maintained primarily for a select group
of management or highly compensated employees and for members of the Board of
Directors who are not employees of the Company. The purpose of the Plan is to
provide a means by which eligible employees and non-employee Directors may
defer the receipt of certain forms of compensation while at the same time
giving the Company the present use of the compensation so deferred. The Plan is
intended to be an employee pension benefit plan within the meaning of Section
3(2) of the Employee Retirement Income Security Act of 1974, as amended. The
Plan is not a qualified plan under Section 401(a) of the Internal Revenue Code
of 1986, as amended. Benefits under the Plan are paid directly by the Company
out of its general assets when due.
<PAGE> 2
-2-
SECTION 1. DEFINITIONS.
As used in the Plan, the following terms shall have the
meanings set forth below:
(a) "1996 Program" shall mean the Lucent Technologies Inc.
1996 Long Term Incentive Program.
(b) "Account" shall mean, for each Participant, such
Participant's Deferred Cash Equivalent Account and Deferred Share Equivalent
Account.
(c) "Administrator" shall mean the Senior Vice President -
Human Resources of the Company.
(d) "Affiliate" shall mean (i) any Person that directly, or
through one or more intermediaries, controls, or is controlled by, or is under
common control with, the Company or (ii) any entity in which the Company has a
significant equity interest, as determined by the Committee.
(e) "Beneficiary Election" shall mean a written instrument, in
a form prescribed by the Administrator, relating to elections under Section 5.
(f) "Board" shall mean the Board of Directors of the Company.
(g) "Change in Control" shall mean the happening of any of the
following events:
(1) An acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2)
of the Exchange Act) (an "Entity") of beneficial
ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of
either (A) the then outstanding shares of common
stock of the Company (the "Outstanding Company Common
Stock") or (B) the combined voting power of the then
outstanding voting securities of the Company entitled
to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); excluding,
however, the following: (1) any acquisition directly
from the Company, other than an acquisition by virtue
of the exercise of a conversion privilege unless the
security being so converted was itself acquired
directly from the Company, (2) any acquisition by the
Company, (3) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by
the Company or any corporation controlled by the
Company, or (4) any acquisition by any corporation
pursuant to a transaction which complies with clauses
(A), (B) and (C) of subsection (3) of this Section
1(g); or
<PAGE> 3
-3-
(2) A change in the composition of the Board during any
two year period such that the individuals who, as of
the beginning of such two year period, constitute the
Board (such Board shall be hereinafter referred to as
the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board;
provided, however, that for purposes of this
definition, any individual who becomes a member of
the Board subsequent to the beginning of the two year
period, whose election, or nomination for election by
the Company's shareowners, was approved by a vote of
at least a majority of those individuals who are
members of the Board and who were also members of the
Incumbent Board (or deemed to be such pursuant to
this proviso) shall be considered as though such
individual were a member of the Incumbent Board; and
provided, further however, that any such individual
whose initial assumption of office occurs as a result
of or in connection with either an actual or
threatened election contest (as such terms are used
in Rule 14a-11 of Regulation 14A promulgated under
the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf
of an Entity other than the Board shall not be so
considered as a member of the Incumbent Board; or
(3) The approval by the shareowners of the Company of a
merger, reorganization or consolidation or sale or
other disposition of all or substantially all of the
assets of the Company (each, a "Corporate
Transaction") or, if consummation of such Corporate
Transaction is subject, at the time of such approval
by shareowners, to the consent of any government or
governmental agency, the obtaining of such consent
(either explicitly or implicitly by consummation);
excluding however, such a Corporate Transaction
pursuant to which (A) all or substantially all of the
individuals and entities who are the beneficial
owners of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately
prior to such Corporate Transaction will beneficially
own, directly or indirectly, more than 60% of the
outstanding shares of common stock, and the combined
voting power of the then outstanding voting
securities entitled to vote generally in the election
of directors of the corporation resulting from such
Corporate Transaction (including, without limitation,
a corporation or other Person which as a result of
such transaction owns the Company or all or
substantially all of the Company's assets either
directly or through one or more subsidiaries (a
"Parent Company")) in substantially the same
proportions as their ownership, immediately prior to
such Corporate Transaction, of the Outstanding
Company Common Stock and Outstanding Company Voting
Securities, (B)
<PAGE> 4
-4-
no Entity (other than the Company, any employee
benefit plan (or related trust) of the Company, such
corporation resulting from such Corporate Transaction
or, if reference was made to equity ownership of any
Parent Company for purposes of determining whether
clause (A) above is satisfied in connection with the
applicable Corporate Transaction, such Parent
Company) will beneficially own, directly or
indirectly, 20% or more of the outstanding shares of
common stock of the corporation resulting from such
Corporate Transaction or the combined voting power of
the outstanding voting securities of such corporation
entitled to vote generally in the election of
directors unless such ownership resulted solely from
ownership of securities of the Company prior to the
Corporate Transaction, and (C) individuals who were
members of the Incumbent Board will immediately after
the consummation of the Corporate Transaction
constitute at least a majority of the members of the
board of directors of the corporation resulting from
such Corporate Transaction (or, if reference was made
to equity ownership of any Parent Company for
purposes of determining whether clause (A) above is
satisfied in connection with the applicable Corporate
Transaction, of the Parent Company); or
(4) The approval by the shareowners of the Company of a
complete liquidation or dissolution of the Company.
(h) "Change in Control Election" shall mean a written
instrument, in a form prescribed by the Administrator, relating to elections
under Section 7.
(i) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(j) "Committee" shall mean the Corporate Governance and
Compensation Committee of the Board (or any successor committee).
(k) "Company" shall mean Lucent Technologies Inc.
(l) "Deferral Election" shall mean a written election, in a
form prescribed by the Administrator, to defer receipt of Incentive Awards,
Retainer Payments or salary otherwise payable to a Participant.
(m) "Deferred Cash Equivalent Account" shall mean a book-entry
account in the name of a Participant maintained in the Company's records with
entries denominated in dollars.
(n) "Deferred Share Equivalent Account" shall mean a
book-entry account in the name of a Participant maintained in the Company's
records with entries denominated in Share equivalents.
<PAGE> 5
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(o) "Director" shall mean any non-employee member of the
Board.
(p) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(q) "Eligible Member" shall mean an Officer, a Director, Other
Participant or a participant in either Predecessor Plan or another person who
is designated by the Committee as an Eligible Member.
(r) "Fiscal Year" shall mean the period commencing October 1
and ending on the next succeeding September 30.
(s) "Incentive Award" shall mean any award under the Short
Term Plan, any other bonus payment, any performance awards, stock unit awards or
other awards under the 1996 Program (other than options) and any dividend
equivalent payment under the 1996 Program.
(t) "NYSE" shall mean the New York Stock Exchange, Inc.
(u) "Officer" shall mean any employee of the Company or any of
its Affiliates holding a position evaluated or classified above the executive
("E-band") level or its equivalent, and identified in the Company's records as
an officer of the Company (including an Officer who was a participant in any
Predecessor Plan).
(v) "Other Participant" shall mean any employee of the Company
or any of its Affiliates (1) holding a position evaluated or classified at or
above the "D-Band" level or its equivalent, and identified in the Company's
records as affected by the limitations on covered compensation described in
Section 401(a)(17) of the Code or the limitations on benefits described in
Section 415 of the Code or who has an Account with a positive balance, or (2)
holding a position evaluated or classified at or above the "E-Band" level or its
equivalent, in either case, only if the Administrator determines that such group
of employees shall be eligible to participate in the Plan.
(w) "Participant" shall mean an Eligible Member who delivers a
Deferral Election to the Company or who receives a Savings Plan Make-Up Credit.
A person shall not cease being a Participant if the person ceases being an
Eligible Member, if the person has an Account with a positive balance.
(x) "Participating Company" shall mean the Company and any of
its Affiliates.
(y) "Payment Election" shall have the meaning set forth in
Section 6(a).
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(z) "Person" shall mean any individual, corporation,
partnership, association, joint-stock company, trust, unincorporated
organization, limited liability company, other entity or government or political
subdivision thereof.
(aa) "Plan" shall mean this Lucent Technologies Inc. Deferred
Compensation Plan.
(bb) "Plan Year" shall mean each twelve (12) consecutive month
period commencing January 1 and ending on December 31 of the same calendar year.
(cc) "Potential Change in Control" shall mean the happening of
any of the following events: (1) the Company enters into an agreement, the
consummation of which would result in the occurrence of a Change in Control, (2)
any person (including the Company) publicly announces its intention to take or
to consider taking actions which if consummated would constitute a Change in
Control, (3) any person becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 10% or more of the combined voting power
of the Company's then outstanding securities or (4) the Board adopts a
resolution to the effect that a Potential Change in Control for purposes of the
Plan has occurred.
(dd) "Predecessor Plans" shall mean the Lucent Technologies
Inc. Officer Incentive Award Deferral Plan and the Lucent Technologies Inc.
Deferred Compensation Plan for Non-Employee Directors.
(ee) "Retainer Payments" shall mean any amounts payable to a
Director for service as a Director.
(ff) "Savings Plan" shall mean the Lucent Technologies Inc.
Long Term Savings Plan for Management Employees.
(gg) "Savings Plan Make-Up Credit" shall mean, for any
Eligible Member and any Plan Year, an amount equal to the excess, if any, of the
value of the contribution that would have been made by the Company for the
applicable Plan Year on behalf of the Eligible Member under Section 4.4 of the
Savings Plan (based upon the Pay Reduction Agreement (as defined in the Savings
Plan) made by the Eligible Member pursuant to Section 4.5(a) of the Savings
Plan) or any similar provision under any similar plan of the Company, without
regard to any limitation imposed by Sections 401(a)(17), 401(m)(2)(A) or 415 of
the Code, over the contribution actually made to the Savings Plan pursuant to
such Section 4.4, or to such other plan pursuant to such similar provision, for
the applicable Plan Year.
(hh) "Shares" shall mean the shares of common stock, $.01 par
value, of the Company.
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(ii) "Short Term Plan" shall mean the Lucent Technologies Inc.
Short Term Incentive Plan.
SECTION 2 . DEFERRAL ELECTIONS.
(a) DELIVERY AND EFFECTIVENESS OF DEFERRAL ELECTIONS. A
Participant may elect to defer receipt of Incentive Awards, Retainer Payments or
salary otherwise payable to the Participant in future Fiscal Years by delivering
a Deferral Election to the Participant's employing Participating Company not
later than September 15 preceding the Fiscal Year in which the Deferral Election
is to become effective or such other time as the Committee shall determine. A
Deferral Election shall become irrevocable for a Fiscal Year at the end of the
last day of the preceding Fiscal Year. A deferral election under a Predecessor
Plan that has not been terminated shall be deemed a Deferral Election for
purposes of the Plan. During the period that a Deferral Election is effective,
the Participant shall not be entitled to receive currently payments covered by
such Deferral Election. The Company shall instead make credits to the
Participant's Account in accordance with Section 3.
(b) CONTENTS OF DEFERRAL ELECTIONS. Each Deferral Election
shall specify the types of compensation which shall be subject to such Deferral
Election and the effective date of the Deferral Election and shall contain the
Participant's Payment Election. A Deferral Election may also contain the date on
which the Deferral Election is to terminate.
(c) MODIFICATION AND RENEWAL OF DEFERRAL ELECTIONS. A Deferral
Election shall remain effective until the Participant terminates or modifies
such election by written notice to the Company. Any such termination or
modification shall become effective immediately following the end of the Fiscal
Year in which such notice is given. A Participant who has terminated a Deferral
Election may, so long as such Participant remains an Eligible Member or has an
Account with a positive balance, thereafter file a new Deferral Election in
accordance with Section 2(a).
(d) DEFERRAL OF INCENTIVE AWARDS. A Deferral Election may
relate to all or any portion of the Incentive Awards otherwise payable to a
Participant. The Deferral Election shall also specify the percentages of such
Incentive Awards that shall be credited to the Participant's Deferred Cash
Equivalent Account and Deferred Share Equivalent Account. If the amount of the
part of any Incentive Award (other than dividend equivalent payments) subject to
a Deferral Election is less than $1,000 (based on a valuation at the time the
award would otherwise be paid), that Incentive Award will be paid currently and
no credit relating to such Incentive Award will be made under the Plan.
(e) DEFERRAL OF SALARY. A Deferral Election may relate to all
or part of a Participant's salary; provided, however, that a Participant may not
elect to defer salary
<PAGE> 8
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in any Fiscal Year unless the Participant has elected to defer all of his or her
awards under the Short Term Plan and any other bonus payments for such Fiscal
Year.
(f) DEFERRAL OF RETAINER PAYMENTS. A Director's Deferral
Election may relate to all or part of the Retainer Payments otherwise payable to
the Director. Notwithstanding Section 2(a), a newly-elected Director may deliver
a Deferral Election to the Company within 30 days after his or her election,
which Deferral Election shall be effective for all Retainer Payments after the
date on which the Deferral Election is delivered to the Company.
SECTION 3 . PARTICIPANT ACCOUNTS.
(a) DEFERRED CASH EQUIVALENT ACCOUNT. (i) There shall be
credited to a Participant's Deferred Cash Equivalent Account the following:
amounts related to Incentive Awards for which a Deferral Election specifies
crediting to the Participant's Deferred Cash Equivalent Account, that portion of
a Director's Retainer Payment which is subject to a Deferral Election and which
would otherwise have been distributed in cash by the Company, deferred amounts
related to salary, amounts previously deferred under the Predecessor Plans and
credited to the Deferred Cash Equivalent Account, and Savings Plan Make-Up
Credits.
(ii) If the Savings Plan Make-up Credit for an Eligible Member
for any Plan Year shall be greater than zero, the Deferred Cash Equivalent
Account of such Eligible Member shall be credited with an amount equal to such
Savings Plan Make-Up Credit at such time as the Committee shall determine.
(iii) Amounts credited to the Participant's Deferred Cash
Equivalent Account shall bear interest as provided in Section 4 from the date
the Incentive Award, Retainer Payment, salary or Savings Plan Make-Up Credits
would otherwise have been paid to the Participant or paid or credited to the
Savings Plan, as applicable. Interest shall be credited to Deferred Cash
Equivalent Accounts at the end of each fiscal quarter of the Company.
(b) DEFERRED SHARE EQUIVALENT ACCOUNT. (i) There shall be
credited to a Participant's Deferred Share Equivalent Account the following:
amounts related to Incentive Awards for which a Deferral Election specifies
crediting to the Participant's Deferred Share Equivalent Account, Retainer
Payments which would otherwise have been distributed in Shares and amounts
previously deferred in share equivalents under the Predecessor Plans credited
under this Plan.
(ii) Cash amounts credited to a Participant's Deferred Share
Equivalent Account shall be converted to the number of Share equivalents
determined by dividing such cash amount by the Conversion Price. In addition,
the Participant's Deferred
<PAGE> 9
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Share Equivalent Account shall be credited on each dividend payment date for
Shares, with an amount equal to the number of Shares that could be purchased at
the Conversion Price with dividends that would have been payable on the number
of Shares equal to the number of Share equivalents in the Participant's Deferred
Share Equivalent Account on the record date for such dividend. "Conversion
Price" means the average of the daily high and low sale prices of Shares on the
NYSE for the period of five trading days ending on the date such amount
otherwise would have been paid to the Participant or, in the case of a dividend
equivalent, on the dividend payment date, or the period of five trading days
immediately preceding such applicable date if the NYSE is closed on such
applicable date.
(iii) In the event of any change in outstanding Shares by
reason of any stock dividend or stock split, recapitalization, merger,
consolidation, combination or exchange of shares or other similar corporate
change, the Board shall make such adjustments, if any, that it deems appropriate
in the number of Share equivalents then credited to Participants' Deferred Share
Equivalent Accounts. Any and all such adjustments shall be within the sole
discretion of the Board and its decision in regard to such adjustments shall be
conclusive, final and binding upon all parties concerned.
SECTION 4 . DEFERRED CASH EQUIVALENT ACCOUNT INTEREST RATE.
(a) INTEREST RATE GENERALLY. The interest rate to be accrued
on a Participant's Deferred Cash Equivalent Account shall be such rate as is
determined, from time to time, by the Board. Such rate may be applied by the
Board to a Participant's existing balance in a Deferred Cash Equivalent Account
or to amounts subsequently credited to such Participant's Account. The
determination by the Board pursuant to this Section 4 shall be within its sole
discretion and its decision shall be conclusive, final and binding upon all
parties concerned.
(b) INTEREST RATE FOLLOWING TERMINATION WITHOUT THE COMPANY'S
CONSENT. Notwithstanding Section 4(a), with respect to amounts credited to the
Deferred Cash Equivalent Accounts of Officers and Other Participants who
terminate employment (other than by death or disability) under circumstances
that the Administrator determines are not in the interests of the Company, the
effective annual rate of interest following the date of such termination of
employment shall be the one-year U.S. Treasury note rate.
SECTION 5 . PAYMENTS FOLLOWING DEATH.
(a) FORM OF PAYMENT. A Participant may deliver a Beneficiary
Election to the Administrator electing that, in the event the Participant should
die before full payment of all amounts credited to the Participant's Account,
the balance of the Account shall be distributed in one payment or in some other
number of approximately
<PAGE> 10
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equal annual installments (not exceeding five (5)) to the person(s) designated
in the Beneficiary Election. In the event that a Participant fails to designate
such a beneficiary, or the beneficiary(ies) predecease(s) him, payment following
the death of the Participant shall be made to the Participant's surviving spouse
or, if there is no surviving spouse, to the Participant's estate. The first
installment (or the single payment if the Participant has so elected) shall be
paid on the first day of the calendar quarter next following the month of death;
provided, however, that the Committee may, in its sole discretion, direct that
the first installment (or the single payment) shall be paid on the first day of
the calendar year next following the year of death.
(b) CHANGE OF BENEFICIARY DESIGNATION. The elections referred
to in Section 5(a), including the designation of a beneficiary or beneficiaries,
may be changed by a Participant at any time by delivering a new Beneficiary
Election to the Administrator.
SECTION 6. PAYMENTS.
(a) COMMENCEMENT OF BENEFITS. (i) At the time a Participant
makes a Deferral Election, a Participant shall also make an election under
Section 6(a)(ii) with respect to the distribution of the amounts credited to
such Participant's Account other than Savings Plan Make-Up Credits (each such
election, a "Payment Election"). Any similar election related to the
distribution of deferred amounts under the Predecessor Plans which has not been
modified or terminated shall be deemed a Payment Election under this Plan. A
Participant may, at any time earlier than twelve (12) months prior to the date
on which a distribution of a portion (or all) of a Participant's Account would
be payable under the terms of such Payment Election, submit a written election
to the Company requesting that the initial distribution date be further deferred
(hereinafter a "Redeferral Election"). A participant may make a single
Redeferral Election with respect to each Payment Election, and the Redeferral
Election shall supersede the Payment Election and be irrevocable upon delivery
to the Administrator.
(ii) Each Payment Election shall specify whether payments
related to Account balances other than Savings Plan Make-Up Credits shall
commence (i) on the first day of the calendar quarter next following the month
in which the Participant attains the age specified in such election, which age
shall not be earlier than 55 or later than 70, (ii) on the first day of the
calendar quarter next following the month in which the Participant retires from
a Participating Company or otherwise terminates employment with any
Participating Company (except for a transfer to another Participating Company);
provided, however, that the Committee may, in its sole discretion, direct that
the Participant's benefits shall commence on the first day of the calendar year
next following the year of retirement or other termination of employment, or
(iii) on the first day of the calendar year next following the calendar year in
which the Participant retires from a Participating Company or otherwise
terminates employment with any Participating Company (except for a transfer to
another Participating Company).
<PAGE> 11
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(iii) Notwithstanding the foregoing, amounts credited to a
Participant's Account as Savings Plan Make-Up Credits or earnings thereon shall
be distributed in one payment following the Participant's termination of
employment.
(b) FORM OF DISTRIBUTIONS. Amounts credited to a Participant's
Deferred Cash Equivalent Account shall be distributed in cash. Amounts credited
to a Participant's Deferred Share Equivalent Account as Share equivalents shall
be distributed in the form of an equal number of Shares, unless the Company
shall determine that payment of an equivalent cash amount is necessary or
convenient for its purposes.
(c) PAYMENT PERIOD. (i) A Participant may elect in a Payment
Election to receive the amounts credited to the Participant's Account other than
Savings Plan Make-Up Credits in one payment or in some other number of
approximately equal annual installments (not exceeding ten (10) or such longer
period as approved by the Committee, in individual cases), provided, however,
that the number of annual installments may not extend beyond the life expectancy
of the Participant, determined as of the date the first installment is paid.
Notwithstanding an election pursuant to the previous sentence, the entire amount
then credited to a Participant's Account shall be paid immediately in a single
payment (A) if the Participant is discharged for cause by his or her
Participating Company, (B) if the Administrator determines that the Participant
engaged in misconduct in connection with the Participant's employment with the
Participating Company, (C) if the Participant terminates employment under
circumstances that the Administrator determines are not in the interest of the
Company, or (D) if the Participant without the consent of the board of directors
of his or her Participating Company, both during and for a period of nine (9)
months after termination for any reason of the Participant's employment, on
behalf of any competitor of the Company (x) renders any services relating to:
(1) strategic planning, research and development, manufacturing, marketing, or
selling with respect to any product, process, material or service which
resembles, competes with, or is the same as a product, process, material or
service of the Company about which the Participant gained any proprietary or
confidential information or on which the Participant worked during the three (3)
years prior to termination of employment, or (2) any actual or potential
customer of Lucent about whom the Participant gained any proprietary or
confidential knowledge or with whom the Participant worked during the three (3)
years prior to termination of employment, or (y) solicits or offers, or induces
or encourages others to solicit or offer, employment to any employee of the
Company.
(ii) Installments subsequent to the first installment to the
Participant, or to a beneficiary or to the Participant's estate, shall be paid
on the first day of the applicable calendar quarter in each succeeding calendar
year until the entire amount credited to the Participant's Account shall have
been paid. Prior to distribution, Accounts shall continue to receive credits
under Section 3(a)(ii) and Section 3(b)(ii).
<PAGE> 12
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(d) ACCELERATION OF PAYMENT FOR SEVERE FINANCIAL HARDSHIP. In
the event a Participant, or the Participant's beneficiary after the
Participant's death, incurs a severe financial hardship, the Committee may, in
its sole discretion, accelerate or otherwise revise the payment schedule for the
Participant's Account to the extent reasonably deemed necessary to eliminate or
alleviate the severe financial hardship. For the purpose of this Section 6(d) a
severe financial hardship must have been caused by an accident, illness or other
event beyond the control of the Participant or, if applicable, the beneficiary.
(e) IMMEDIATE DISTRIBUTION OF DEFERRED CASH EQUIVALENT ACCOUNT
BALANCE. A Participant or former Participant participating in the Plan may at
any time elect to receive a distribution of all or any portion of the balance in
his or her Deferred Cash Equivalent Account. Amounts credited to Deferred Share
Equivalent Accounts shall not be available for distribution under this Section
6(e). Requests for distributions shall be submitted in writing (on a form
prescribed by the Administrator for such purpose) to the Administrator.
Distributions from the Participant's (or former Participant's) Deferred Cash
Equivalent Account pursuant to this Section 6(e) will at all times be subject to
(i) reduction for applicable tax withholdings pursuant to Section 9(h), and (ii)
a percentage reduction in the amount requested equal to six percent (6%) of the
amount requested. Distributions pursuant to this Section 6(e) shall be payable
in a single lump sum, in cash, within thirty (30) days of submission of the
completed form.
SECTION 7 . CHANGE IN CONTROL.
(a) Notwithstanding any Payment Election, a Participant may,
prior to the earlier of a Change in Control or September 30, 1998, deliver a
Change in Control Election to the Administrator, electing to have the aggregate
amount credited to the Participant's Account both before and after the filing of
such Change in Control Election paid in one lump-sum payment as soon as
practicable following a Change in Control, but in no event later than 90 days
after such Change in Control. Notwithstanding any Payment Election, any person
who becomes a Participant after September 30, 1998, may file a written notice
with the Administrator within 90 days of becoming a Participant, electing to
have the aggregate amount credited to the Participant's Account paid in one
lump-sum payment as soon as practicable following a Change in Control, but in no
event later than 90 days after such Change in Control.
(b) A Participant may, prior to the earlier of a Change in
Control or the beginning of the Fiscal Year in which the election is to take
effect, deliver a Change in Control Election to the Administrator, electing to
have the aggregate amount credited to the Participant's Account, in all Fiscal
Years commencing with the first Fiscal Year beginning after the date the Change
in Control Election is delivered to the Administrator, paid in one lump-sum
payment as soon as practicable following a Change in Control, but in no event
later than 90 days after such Change in Control. Amounts credited to the
Participant's Account prior to the effective date of such Change
<PAGE> 13
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in Control Election shall not be affected by such Change in Control Election and
shall be distributed following a Change in Control in accordance with any prior
Change in Control Election or, if the Participant has not made a Change in
Control Election, in accordance with the Plan.
(c) A Participant may, prior to the earlier of a Change in
Control or the beginning of any Fiscal Year, deliver a written notice to the
Administrator revoking any Change in Control Election with respect to amounts
credited to the Participant's Account in Fiscal Years commencing after the
written notice is delivered. Amounts credited to the Participant's Account prior
to the effective date of the written notice delivered pursuant to this Section
7(c) shall not be affected by such written notice and shall be distributed
following a Change in Control in accordance with any existing Change in Control
Election or, if the Participant has not made a Change in Control Election, in
accordance with the Plan.
SECTION 8. ADMINISTRATION.
(a) ADMINISTRATION. The Administrator shall have the authority
to administer and to interpret the Plan.
(b) RESPONSIBILITIES AND POWERS OF THE ADMINISTRATOR. In
administering the Plan, the Administrator shall have the following
responsibilities:
(1) To administer the Plan in accordance with the terms
hereof, and to exercise all powers specifically
conferred upon the Administrator hereby or necessary
to carry out the provisions hereof;
(2) To construe this Plan, which construction shall be
conclusive, correct any defects, supply omissions,
and reconcile inconsistencies to the extent necessary
to effectuate the Plan;
(3) To determine in his or her sole discretion the amount
of benefits payable to Participants under the Plan.
Any interpretation or determination made by the Plan
Administrator pursuant to its discretionary authority
shall be final and binding on the Company, any
Participant, and any other affected party; and
(4) To keep all records relating to Participants and such
other records as are necessary for proper operation
of the Plan.
(c) ACTIONS OF THE ADMINISTRATOR. In carrying out the
responsibilities set forth in Section 8(b):
<PAGE> 14
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(1) The Administrator may adopt rules and regulations
necessary for the administration of the Plan which
are consistent with the provisions hereof.
(2) All acts and decisions of the Administrator shall
apply uniformly to all Participants in like
circumstances. Written records shall be kept of all
acts and decisions.
(3) The Administrator may delegate, in writing, any of
his or her responsibilities and powers with respect
to the Plan to another individual or individuals.
(d) The Administrator shall have the right to hire, at the
expense of the Company, such professional assistants and consultants as he or
she, in his or her sole discretion, deems necessary or advisable, including but
not limited to accountants, actuaries, consultants, counsel and such clerical
assistance as is necessary for proper discharge of his or her duties hereunder.
SECTION 9 . MISCELLANEOUS.
(a) BENEFITS PAYABLE BY THE COMPANY. All benefits payable
under this Plan constitute an unfunded obligation of the Company. Payments shall
be made, as due, from the general funds of the Company or, in the case of Share
payments, from newly issued Shares, Shares purchased in the market, treasury
Shares or otherwise. The Company may, at its option, maintain one or more
bookkeeping reserve accounts to reflect its obligations under the Plan and may
make such investments as it may deem desirable to assist it in meeting its
obligations. Any such investments shall be assets of the Company subject to the
claims of its general creditors. No person eligible for a benefit under this
Plan shall have any right, title to, or interest in any such investments.
Nothing contained in this Section 9(a) shall limit the ability of the Employer
to pay benefits through a grantor trust as provided in Section 9(b).
Participants are general, unsecured creditors of the Company. This Plan
constitutes a mere promise to pay benefits in the future.
(b) ESTABLISHMENT OF GRANTOR TRUST. The Company shall create a
grantor trust or utilize an existing grantor trust to assist it in accumulating
the Shares and cash needed to fulfill its obligations under this Plan. If such a
trust shall not have been created when a Potential Change in Control shall
occur, the Company shall create such a trust as soon as practicable thereafter.
The Board shall determine whether it is necessary or appropriate to deposit
Shares and cash in said grantor trust to enable the Company to meets its
obligations under this Plan and the extent of any such deposit to the grantor
trust.
<PAGE> 15
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(c) OBLIGATION FOR PAYMENT OF BENEFITS. The obligation to make
a distribution of amounts credited to a Participant's Account shall be borne by
the Participating Company which otherwise would have paid such amounts
currently. However, the obligation to make a distribution with respect to
Accounts which are related to amounts credited under a Predecessor Plan, and
with respect to which no Participating Company would otherwise have paid the
related award or deferred amount currently, shall be borne by the Participating
Company to which the Participant was assigned on October 1, 1996.
(d) AMENDMENT OR TERMINATION. (i) The Board may amend the Plan
or terminate the Plan at any time, but such amendment or termination shall not
adversely affect the rights of any Participant, without his or her consent, to
any benefit under the Plan to which such Participant may have previously become
entitled prior to the effective date of such amendment or termination. The
Administrator with the concurrence of the General Counsel of the Company or his
delegate shall be authorized to make minor or administrative changes to the
Plan, as well as amendments required by applicable federal or state law (or
authorized or made desirable by such statutes). Any amendment to the Plan by the
Board shall be made in writing, with or without a meeting, or shall be made in
writing by the Administrator, to the extent of the aforementioned authorization.
(ii) If the Plan is terminated, a valuation shall be made of
each Participant's Account balance as of the Plan termination date. The amount
of such Account balance shall be payable to the Participant at the time it would
have been payable under Section 5 and Section 6 had the Plan not been
terminated; provided, however, that the Committee may elect instead to
immediately distribute all Participants' Account balances in lump sums upon
termination of the Plan.
(e) ENTIRE AGREEMENT. This Plan constitutes the entire
agreement of the Company with respect to the benefits provided herein and cannot
be modified orally or in any writing other than as set forth in Section 9(d).
(f) PAYMENTS TO INCOMPETENTS. If a Participant entitled to
receive any benefits hereunder is adjudged to be legally incapable of giving
valid receipt and discharge for such benefits, they will be paid to the duly
appointed guardian of such Participant or to such other legally appointed person
as the Administrator may designate. Such payment shall, to the extent made, be
deemed a complete discharge of any liability for such payment under the Plan.
(g) BENEFITS NOT TRANSFERABLE. The right of any person to any
benefit or payment under the Plan shall not be subject to voluntary or
involuntary transfer, alienation or assignment and, to the fullest extent
permitted by law, shall not be subject to attachment, execution, garnishment,
sequestration or other legal or equitable process. In the event a person who is
receiving or is entitled to receive benefits under the Plan attempts to assign,
transfer or dispose of such right, or if an attempt is made to
<PAGE> 16
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subject said right to such process, such assignment, transfer, or disposition
shall be null and void.
(h) TAX WITHHOLDING. The Company is authorized to withhold
from any Account or payment due under the Plan the amount of applicable
withholding taxes in respect of such payment or Account and to take such other
action as may be necessary in the opinion of the Company to satisfy all
obligations for the payment of such federal, state or other governmental entity
tax obligation.
(i) GOVERNING LAW. The provisions of the Plan shall be
construed in accordance with the laws of the State of Delaware.
Approved:
_______________________________________
Curtis R. Artis
Senior Vice President - Human Resources
<PAGE> 1
EXHIBIT (10)(iii)(A)4
LUCENT TECHNOLOGIES INC.
STOCK RETAINER PLAN FOR NON-EMPLOYEE DIRECTORS
ADOPTED APRIL 3, 1996
AMENDED JULY 16, 1997
1. NAME OF PLAN. This plan shall be known as the "Lucent
Technologies Inc. Stock Retainer Plan for Non-Employee Directors" and is
hereinafter referred to as the "Plan."
2. PURPOSE OF PLAN. The purpose of the Plan is to enable
Lucent Technologies Inc., a Delaware corporation (the "Company"), to attract and
retain qualified persons to serve as directors, to enhance the equity interest
of directors in the Company, and to solidify the common interests of its
directors and stockholders in enhancing the value of the Company's common stock,
par value $0.01 per share (the "Common Stock"). The Plan seeks to encourage the
highest level of director performance by providing such directors with a
proprietary interest in the Company's performance and progress by paying a
portion of their annual retainer in the form of Common Stock.
3. EFFECTIVE DATE AND TERM. The Plan shall be effective as of
the date on which the Company's Registration Statement on Form S-1 (No.
333-00703) filed under the Securities Act of 1933, as amended (the "Securities
Act") with respect to the Common Stock is declared effective by the Securities
and Exchange Commission (the "Effective Date").
4. ELIGIBLE PARTICIPANTS. Each member of the Board of
Directors of the Company (the "Board") from time to time who is not a full-time
employee of the Company or any of its subsidiaries or of any controlling
affiliate or its subsidiaries (including AT&T Corp., a New York Corporation, and
its subsidiaries during such time as they are affiliated with the Company) shall
be a participant ("Participant") in the Plan.
5. DELIVERY OF SHARES. (a) Commencing on the Effective Date,
each payment of all or any portion of the retainer payable to each Participant
for service on the Board or (if applicable) for serving as chair of a committee
of the Board (together, the "Retainer"), shall be made by delivering one-half in
cash and one-half in the form of shares of Common Stock (such shares, the "Stock
Retainer") having a Fair Market Value (as defined below) as of the date of
payment, equal to one-half of the amount of the Retainer that is being paid;
provided, that if the number of shares that would otherwise be so paid to any
Participant includes a fractional share, such number shall be rounded down to
the nearest whole number of shares and the Fair Market Value of such fractional
share shall instead be paid in cash; and, provided further, that a Participant
may elect to direct that all or a portion of such shares be credited to the
deferred compensation account of such Participant under the Company's Deferred
Compensation Plan for Non-Employee Directors to be held in the Company Shares
portion of such account. The payment of all
<PAGE> 2
Stock Retainers shall be made subject to any applicable restrictions set forth
in Section 6 hereof.
(b) The "Fair Market Value" of a share of Common Stock as of
any date of determination shall mean the average of the closing prices of a
share of Common Stock over the five consecutive trading days immediately
preceding the date of the valuation. The closing price for each day shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Common Stock is not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Common Stock is listed or admitted to trading or, if the Common
Stock is not listed or admitted to trading on any national securities exchange,
the last quoted price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ")
or such other system then in use, or, if on any such date the Common Stock is
not quoted by any such organization, the average of the closing bid and asked
prices as furnished by a professional market maker making a market in the Common
Stock.
6. SHARE CERTIFICATES; VOTING AND OTHER RIGHTS; RESTRICTIONS.
(a) All Stock Retainers (other than Stock Retainers deferred pursuant to Section
5 (a)) shall be paid by delivering to the Participant share certificates issued
in the name of the Participant, and upon such delivery the Participant shall be
entitled to all rights of a stockholder with respect to Common Stock for all
such shares issued in his or her name, including the right to vote the shares,
and the participant shall receive all dividends and other distributions paid or
made with respect thereto.
(b) Notwithstanding any other provision of the Plan, the
company shall not be required to issue or deliver any certificate or
certificates for shares of Common Stock under the Plan prior to fulfillment of
all of the following conditions:
(i) Any registration or other qualification of such
shares of Common Stock under any state or federal law or
regulation, or the maintaining in effect of any such registration
or other qualification which the Company shall, in its absolute
discretion upon the advice of Counsel, deem necessary or
advisable; and
(ii) Obtaining any other consent, approval, or
permit from any state or federal governmental agency which the
Company shall, in its absolute discretion after receiving the
advice of counsel, determine to be necessary or advisable.
(c ) Nothing contained in the Plan shall prevent the Company
from adopting other or additional compensation arrangements for the
Participants.
7. SHARES AVAILABLE (a) Subject to Section 7 (b) below,
the maximum number of shares of Common Stock which may be delivered as
Stock Retainers pursuant to the Plan is 275,000. Shares of Common Stock
issuable under the Plan shall be taken
2
<PAGE> 3
from authorized but unissued or treasury shares of the Company as shall
from time to time be necessary for issuance pursuant to the Plan.
(b) In the event of any change in the Common Stock by reason
of any stock dividend, stock split, combination of shares, exchange of shares,
warrants or rights offering to purchase Common Stock at a price below its fair
market value, reclassification, recapitalization, spin-off, merger,
consolidation or other change in capitalization, appropriate adjustment shall be
made in the number and kind of shares or other securities subject to the Plan.
8. AMENDMENT. (a) The Board may from time to time make
such amendments to the Plan as it may deem proper and in the best interest
of the Company without further approval of the Company's stockholders;
provided, that to the extent required to qualify transactions under the
Plan for exemption under Rule 16b-3 ("Rule 16b-3") promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act") no amendment to the
Plan shall be adopted without the approval of the Company's stockholders;
and, provided further, that no amendment to the Plan shall be made more
than once in any six-month period other than to comply with changes in the
Internal Revenue Code of 1986, as amended, the Exchange Act, the Employee
Retirement Income Security Act of 1974, as amended, or the regulations
thereunder.
(b) The Board may terminate the Plan at any time,
effective on at least six months and one day advance notice.
(c) Notwithstanding any other provision of the Plan, the
Board shall not be authorized to exercise any discretion with respect to
the selection of persons to receive Stock Retainers under the Plan or
concerning the amount or timing of the delivery of the Stock Retainers
under the Plan.
(d) This Plan shall terminate on the earlier of April 1,
2006 or the date on which all shares provided for under Section 7 have been
issued and delivered to Participants.
9. MISCELLANEOUS. (a) Nothing in the Plan shall be deemed
to create any obligation on the part of the Board to nominate any director
for reelection by the Company's stockholders or to limit the rights of the
stockholders to remove any director.
(b) The Company shall have the right to require, prior to
the issuance or delivery of any shares of Common Stock pursuant to the
Plan, payment by a Participant to the Company of any taxes required by law
to be withheld with respect to the issuance or delivery of such shares.
10. GOVERNING LAW. The Plan and all actions taken
thereunder shall be governed by and construed in accordance with the laws
of the State of Delaware.
3
<PAGE> 1
Exhibit (10)(iii)(A)9
June 12, 1997
Mr. Ben Verwaayen
Biltseweg 11
3735 MA Bosch en Duin
Nederland
Dear Ben:
It gives me great pleasure to offer you a position within Lucent
Technologies Inc. (hereinafter referred to as "Lucent" or "the Company"). In
addition to confirming my offer, this letter agreement ("Agreement") details the
terms and conditions of your employment and outlines the current major features
of Lucent's compensation and benefit plans and practices. By acceptance of this
Agreement, you agree that you have brought to the Company's attention and
provided it with a copy of any agreement which may impact your future employment
at the Company, including, but not limited to, non-disclosure, non-competition,
invention assignment agreements or agreements containing future work
restrictions. Further, you agree that no trade secret or proprietary information
belonging to Royal Dutch Post, Telegraph & Telephone, Inc. will be disclosed or
used by you at the Company, and that no such information, whether in the form of
documents, memoranda, software, drawings, etc. will be retained by you or
brought with you to the Company.
EMPLOYMENT TERMS
General Employment: Subject to the provisions set forth in this Agreement,
the Company agrees to employ you and you agree to be employed by the Company as
the Executive Vice President - President, International for the period of time
set forth in the "Term of Agreement" paragraph of this Agreement.
Assumption of Duties: Effective on or about September 1, 1997, you will
assume the above position, reporting to Richard McGinn, President and Chief
Operating Officer. Your primary work location will be in Murray Hill, New
Jersey. As Executive Vice President - President, International of Lucent, you
shall have the power, authority and responsibility customarily associated with
that position. Your duties shall include operating, developing and implementing
the Company's overall business strategy, with particular emphasis on
international business, with the objective of making Lucent a world leader in
market share and customer satisfaction. In connection with the execution of this
strategy, you will be expected to work closely with certain business unit and
division heads and direct certain international business unit and division
operations. You will be accountable for the overall financial success of
Lucent's international business. During your period of employment by the
Company, you agree to devote your full time, energy, interests and abilities to
the diligent performance of the duties of your position and to the business and
affairs of the Company and its affiliates, as well as such additional duties and
services as may be appropriate to your office. It is understood that you may, in
your discretion and subject to not interfering with your duties and
responsibilities hereunder,
<PAGE> 2
June 12, 1997
Page 2
devote time to civic, public and professional activities. In addition, you may
serve, with the consent of the Board of Directors, as a Director of other
business corporations not engaged in competition with the Company or any
subsidiary or affiliate of the Company. It is agreed that the Company will
explore options for you to join the Board of Directors of other companies.
Term of Agreement: Subject to the terms hereof, the Company agrees to
continue to employ you for a period commencing on or before September 1, 1997
and ending at the close of business on August 31, 2000 (the "Employment Term").
COMPENSATION
Base Salary: Your initial annual base salary will be $600,000 per year.
This rate will be reviewed again around November or December 1997 when we
conduct the Company 1998 fiscal year merit review process and may be adjusted
(but will not be reduced below $600,000 per year) based on updated market data
and individual performance. Officers are paid monthly and based on a September
1, 1997 hire date, you would receive your first paycheck at the end of September
1997.
1997 Annual Incentive: Lucent has adopted a fiscal accounting year which
begins each October 1 and ends each September 30. Your actual annual incentive
award will be based on individual and Company performance during the fiscal
year. Annual incentives are currently based 50% on Company performance and 50%
on supervisor's discretion based on predetermined objectives. The target award
for your position is 80% of base salary paid during the fiscal year. You will be
guaranteed a minimum award for the 1997 fiscal year equal to 80% of the base
salary actually paid to you by the Company during fiscal 1997. If performance
against objectives for the period ending September 30, 1997 exceeds target, the
payment will be greater. The specific terms of your annual incentive award are
contained in the Company's Short Term Incentive Plan.
Future Annual Incentives: The minimum target award for the fiscal years
ending September 30, 1998, 1999 and 2000 will be equal to 80% of your base
salary paid during the applicable fiscal year. Your actual annual incentive
award will be based on individual and Company performance during the fiscal
year. The Company reserves the right to amend the Short Term Incentive Plan at
any time. If the Short Term Incentive Plan is amended or terminated, you will be
offered the opportunity to participate in any other replacement or substitute
plan or program in which the Chief Executive Officer and/or the President of the
Company are eligible to participate.
Lucent Long Term Incentives: In 1997, under the 1996 Long Term Incentive
Program ("LTIP"), you are eligible to receive stock options and performance
award grants. The target long term award grant for your position is 150% of
salary (i.e., 150% x $600,000 = $900,000). Of this target, 50% of the value is
currently in the form of stock options and 50% is in the form of performance
awards, as described below. The mix of the performance award and stock options
is subject to change for future grants, and it is anticipated that the
percentage of the award granted in the form of stock options will
<PAGE> 3
June 12, 1997
Page 3
increase in future years. Any future change would apply to all officers of
Lucent as a group. Following is a more detailed description of such awards.
Lucent Performance Awards: You will be awarded a Performance Award
in 1997 covering a three year performance cycle, i.e., fiscal years
1997-1999. Payout will be at the end of such cycle and could range from 0%
to 200% of the target performance award and will be payable in cash (e.g.,
if the target Performance Award is 50% of a total LTIP award of $900,000,
the maximum Performance Award will be $900,000 ($900,000 / 2 x 200%)).
Performance will be based on measures approved by the Board of Directors.
The target performance award for your position is $450,000 (currently 50%
of the total LTIP award of $900,000). The specific terms of your Award are
contained in the Company's LTIP.
Lucent Stock Options: You will be awarded approximately 31,500
($450,000) Lucent Stock Options, the 1997 target grant for your position.
The term of the stock option grant is ten years. Assuming continued
Company employment, stock options will vest and become exercisable at the
end of 3 years of employment. The option price for this grant will be the
average of the high and low price of Lucent shares on the New York Stock
Exchange on the date your employment commences. The specific terms of your
Stock Options are contained in the Company's LTIP and in your individual
Stock Option Agreement.
The foregoing awards will be based on target levels (i.e., 150 percent of
salary). Stock award grants in future years, however, will be based on
supervisor's discretion of an individual's performance and can vary from the
target. Therefore, in future years you may receive more or less than target
based on your individual performance. As with the Annual Incentive Awards, Long
Term Incentives are closely linked with the Company's strategy to meet the
challenges of an ever-changing marketplace. Accordingly, other than the initial
grants, the Company cannot guarantee continuation of the Long Term Incentive
Plan in its current format, nor can it guarantee annual grant levels to
individual participants. However, you will be eligible to participate in any
long term incentive programs in which the Chief Executive Officer and/or the
President of the Company are eligible to participate.
Hiring Bonus: In order to encourage you to join Lucent and to reflect
certain forfeitures at your current employer, the Company will provide you with
the following:
-- You will be granted a one-time cash award, payable as a lump sum as
soon as administratively possible following your first day of
employment, of $330,000.
-- You will be granted a one-time cash award, payable as a lump sum on
January 1, 1998, of $408,000.
-- You will be paid a lump sum payment equal to the difference between
$320,000 and the amount your receive as a prorated 1997 annual
incentive award. This payment will be made on January 1, 1998, if
you remain in
<PAGE> 4
June 12, 1997
Page 4
employment at that time.
-- You will be awarded the following Lucent Stock Units covering the
three year performance cycles ending in fiscal years 1997 and 1998
(i.e., stock units which would have been granted had you been with
the Company in 1995 and 1996, prorated based on your period of
service within each three year performance cycle). Each stock unit
is equal to one share of Lucent common stock (i.e., based on $53.00
price)
-- Lucent Stock Units with a value at target of approximately
$75,000 (or greater, depending on the date your employment
commences) for the cycle ending in 1997
-- Lucent Stock Units with a value at target of approximately
$225,000 (or greater, depending on the date your employment
commences) for the cycle ending in 1998.
Both of these grants will be made under and subject to the LTIP and
your individual award. Payout will be made at the end of the
performance period and will be made in cash.
-- You will receive a one-time grant of 225,000 Lucent Stock Options
and 85,000 Lucent Restricted Stock Units. The terms and conditions
of the grant are as follows:
Stock Options
Grant Date - Your first day of employment
Option Term - 10 years
Option Price - 100% of market value on date of grant
Vesting - Options will be 50% vested three years after the grant
date, 75% vested four years after the grant date, and 100% vested
five years after the grant date.
Restricted Stock Units
Vesting - Units will vest in 5 years based on continued employment.
Cash and other payments made under this Hiring Bonus are not includable as
earnings in the calculation of any benefits under any benefit plans of the
Company.
<PAGE> 5
June 12, 1997
Page 5
BENEFITS
General Benefits. Except as otherwise provided in this Agreement, you
shall be treated in the same manner as and be entitled to such benefits and
other perquisites and terms and conditions of employment as the Chief Executive
Officer and/or the President of the Company, except to the extent that such
benefits, perquisites and terms and conditions of employment are offered
individually to the Chief Executive Officer or the President of the Company,
including any nonqualified deferred compensation plans otherwise available.
The incentive plans as well as the employee and Officer benefit plans,
programs and practices as briefly outlined in this Agreement and Attachment A
reflect their current provisions. Payments and benefits under these plans and
programs, as well as other payments referred to in this letter, are subject to
IRS rules and regulations with respect to withholding, reporting, and taxation,
and will not be grossed-up unless specifically stated. The Company reserves the
right to discontinue or modify any compensation, incentive, benefit, perquisite
plan, program or practice. Moreover, the brief summaries contained herein are
subject to the terms of such plans, programs and practices.
For purposes of the Officer and employee benefits plans, the definition of
compensation is as stated in the plans. Currently, pensions are based on base
salary and annual incentives. Other benefits are based on either base salary or
base salary plus annual incentives. All other compensation and payments
reflected in this offer, e.g., hiring bonus, perquisites, stock options and
other long term incentives, are not included in the calculation of any employee
or Officer benefits (except for the Lucent Incentive Deferral Award Plan, which
currently permits the deferral of annual incentives and Performance Awards).
Officer and Employee Benefit Plans: Subject to the terms and provisions of
this Agreement, you shall be entitled to coverage under or benefits in
accordance with those material employee benefit plans and programs as are made
available, or which may subsequently become applicable, to the Chief Executive
Officer and/or the President of the Company. Attachment A outlines the benefits
available to you under various Officer, mid-career and employee benefits plans,
programs and practices. For most of these programs, you will be covered from
your date of hire.
Medical. The Company will provide the medical plan available to the Chief
Executive Officer and the President of the Company. During the period that your
family remains in the Netherlands, there will be coverage for dependents
comparable to what would be offered if you had elected the High Indemnity Option
coverage (your dependents can go to any doctor; the provider will be paid
directly by you and you will then be reimbursed by the Company).
Individual Pension Arrangement: Subject to the terms and conditions
described in the following paragraphs, you will be eligible for an individual
non-qualified pension arrangement which will provide you with a monthly benefit
for your lifetime.
Amount of Benefit. If your employment with the Company terminates at or
after the date on which you attain age 60, you will be eligible for an
individual non-qualified pension
<PAGE> 6
June 12, 1997
Page 6
arrangement which will provide you with an annual amount, payable in monthly
installments over your lifetime, equal to 50 percent of your average monthly
base salary and short term incentive bonus (determined as the sum of your base
salary and short term incentive bonus for the three years immediately preceding
your retirement, divided by 36), reduced by any amounts paid or payable from the
Company's Management Pension Plan, Non-Qualified Pension Plan, Mid-Career
Pension Plan, any other Company-sponsored qualified retirement plans and
non-qualified deferred compensation plans which provide retirement payments
(excluding any benefits which represent (i) deferrals of a portion of your
salary or bonus or (ii) employer contributions to a profit sharing plan, a stock
bonus plan or any other defined contribution plan which is not a pension plan),
any successor plans and programs of the Company which provide retirement
payments, any amounts payable to you under the KPN Pension Fund or a successor
plan or program, and any amounts payable under the Social Security system of the
Netherlands. All such calculations shall be based on the value of a single life
annuity commencing at age 60.
In the event of termination of employment for any reason other than
Company-initiated termination for the reasons described in clause (iii) of the
subsection of this Agreement entitled "Termination of Employment by Company"
subsequent to age 50 and prior to age 60, the percentages indicated in the
following table will be substituted for "50 percent" in the preceding paragraph:
Percent of Three-Year Average Base Pay
Age at Termination and Annual Incentive
------------------ --------------------
50 30 percent
55 40 percent
60 50 percent
If you become 100% vested in this arrangement prior to age 50 (see below), you
will be entitled to a benefit commencing at age 60 equal to the benefit to which
you would have been entitled if you had continued in employment until age 50. If
your age at the time you terminate employment is between the ages indicated
above, your benefit will be determined by interpolating the percentage from the
above table. I.e., if you terminate at age 53, your maximum benefit will be 36
percent of the final three-year average of your base pay and annual bonus.
In the event of Company-initiated termination for the reasons described in
clause (iii) of the subsection of this Agreement entitled "Termination of
Employment by Company" at any time, no amounts shall be due under the individual
pension arrangement.
The payments from the individual pension arrangement are in addition to
and, other than the offset described above, not in lieu of any pension, savings
or other qualified or non-qualified defined benefit or defined contribution type
retirement plans of the Company in which you would be eligible to participate as
a Company employee or Company Officer. Accordingly, the individual pension
arrangement will not affect your participation or potential participation in
such plans or programs.
<PAGE> 7
June 12, 1997
Page 7
Payment Options. Payments from the individual pension arrangement will be
made in monthly installments, commencing at the end of the month next following
the end of the month in which you reach age 60 or, if later, terminate
employment with the Company. At your option, in accordance with procedures
established by the Company, you may elect to receive the present value of your
individual pension arrangement in a lump sum payment in the year following your
retirement or, if vested, your other termination of employment. The present
value shall be determined using the mortality tables used in the Company's
pension plan and the interest rate in effect for 30-year U.S. Treasury
securities on January 1 of the year following your termination of employment.
Vesting. Except as provided below, you will become 100% vested in the
benefit provided under the individual pension arrangement, payable at age 60,
upon attainment of age 50 if still employed, or upon the termination of your
employment at any time by the Company due to death, disability, or the reason
described in clause (vi) of the subsection of this Agreement entitled
"Termination of Employment by Company."
In the event of termination of employment by you prior to age 50 for good
reason, as described in clauses (i) and (ii) of the subsection of this Agreement
entitled "Termination of Employment by Employee," you will be eligible for a
benefit determined in accordance with the following vesting schedule:
Percent Vested in Value of
Years of Company Employment Age 50 Benefit
--------------------------- --------------------------
Less than 1 0 percent
Between 1 and 2 20 percent
Between 2 and 3 40 percent
Between 3 and 4 60 percent
Between 4 and 5 80 percent
5 or more 100 percent
In the event of Company-initiated termination of employment at any time
for "cause," as described in clause (iii) of the subsection of this Agreement
entitled "Termination of Employment by Company," you will forfeit all rights
under this individual pension arrangement.
Relocation Benefits: The Company will provide you with the following
benefits in connection with the relocation of you and your family to the United
States:
o reimbursement of the costs of exploratory trips and reasonable related
expenses for you and your spouse to visit the United States and the costs
of the services of an area consultant to acquaint you with the New Jersey
area.
o a special temporary housing allowance of $20,000 per month to reimburse
you for the cost of maintaining two homes during the time your family
remains in the
<PAGE> 8
June 12, 1997
Page 8
Netherlands. This housing allowance will terminate upon the earlier of
your spouse's relocation to the United States or September 1998.
o assistance, within five years of your first day of employment, on the sale
of your home in the Netherlands, including payment of sales commissions
and recording fees.
o assistance in purchasing a home in the United States, including payment of
costs associated with area search assistance; attorney's fees (not to
exceed the customary fee for the area); recording fees; loan origination
fees and/or loan discount points (up to 2% of the mortgage amount); a loan
guarantee of up to $1.5 million for a loan from a United States commercial
lending institution approved by the Company to purchase a residence in the
United States. The loan guarantee will be contingent upon use of the
residence as security for the loan and upon the execution of an agreement
that you will personally indemnify the Company for any losses it should
incur due to the guarantee.
o all reasonable expenses associated with the actual move to the United
States, including the costs of interim lodging in the United States
following the move (for a maximum of four weeks).
o reimbursement for major appliance purchases when not provided with the
residence, including refrigerator, stove/oven, washer, dryer, dishwasher,
microwave oven, increased to reflect any applicable taxes.
Other Benefits
Automobile. A chauffeur-driven car will be made available to you for
business purposes. You will be provided a monthly car allowance of $1,400 to
purchase or lease a car for your personal use, including commuting use (see
Attachment A).
Home office equipment. The Company will provide you with a personal
computer and a fax machine for business use in your home.
Business and entertainment expenses. Subject to the Company's standard
policies and procedures with respect to expense reimbursement as applied to its
Officers generally, the Company will reimburse you for, or pay on your behalf,
reasonable and appropriate expenses incurred by you for business-related
purposes, including costs of entertainment and business development. In
addition, you shall be entitled to have your spouse accompany you on business
trips when the Company deems it necessary and appropriate in light of the
particular business purpose of the travel, and the Company shall reimburse you
for these expenses as well.
Vacation/Holidays. Initially, you will be entitled to 25 days of vacation
per year (see Attachment A) plus 4 personal days and 3 floating holidays per
year. The Company
<PAGE> 9
June 12, 1997
Page 9
reserves the right to amend its vacation policy in the future, in which case you
will be entitled to the same vacation, personal days and floating holidays as
the Chief Executive Officer and/or the President of the Company.
Taxation: Anything in this Agreement to the contrary notwithstanding, in
the event that:
(i) you reside in the United States for at least 183 days during a taxable
year, provided, however, that this clause (i) shall not apply during the
first taxable year in which you are employed by the Company;
(ii) you take reasonable steps to minimize the taxes imposed on your
compensation, including consultation with Company advisors; and
(iii) it shall be determined that the payment or reimbursement to you of
any amounts described in the foregoing paragraphs are taxable to you as
compensation income and give rise to income or similar tax liability at a
rate greater that the rate that would otherwise be payable based on the
tax rate in effect in the United States at the time you receive such
payments (the "Incremental Tax Cost"), then the Company shall pay an
additional amount to you such that, after the imposition of all income or
similar taxes in respect to your receipt of such additional amount, you
shall retain an amount equal to the Incremental Tax Cost. The Incremental
Tax Cost shall be determined on an annual basis as the difference between
the taxes actually paid by you on all compensation from the Company under
all income tax regimes to which you are subject, reduced by the United
States federal and state income tax which would be due and payable for
such year if such compensation were solely taxable under such federal and
state taxation systems, based on the applicable tax rates for the tax year
of determination.
TERMINATION OF EMPLOYMENT
Termination of Employment by Company: Notwithstanding the other provisions
of this Agreement, the Company shall have the right to terminate your employment
under this Agreement at any time for any of the following reasons:
(i) upon your death;
(ii) upon your becoming incapacitated by accident,sickness or other
circumstance which renders you mentally or physically incapable of
performing the duties and services required of you hereunder for a
period of at least 180 days during any 24-month period;
(iii) for cause, following approval of such termination by a majority of
the Board of Directors (the "Board"). You will be given notice that
the Board is going to consider your termination for cause, together
with the specific reasons for such termination, at least 14 days
before Board action will be taken. Within
<PAGE> 10
June 12, 1997
Page 10
that 14-day period, you have the right to appear with counsel before
a duly constituted committee of the Board composed of the Chairman
of the Compensation and Governance Committee and one or more
non-employee director, selected by the Chairman, who are members of
the Compensation and Governance Committee. For purposes of this
Agreement, "cause" shall be defined as follows: (1) gross omission
or gross dereliction of any statutory or common law duty of loyalty
to the Company which, if correctable, remains uncorrected for 30
days following written notice to you by the Company of such breach;
or (2) your conviction (including a plea of guilty or nolo
contendere) of a felony or any crime of theft, dishonesty or moral
turpitude. "Cause" shall not include any act committed in the good
faith performance of your duties, or actions for which you are
indemnified under Article X of the Company's Restated Certificate of
Incorporation; provided, however, that the exclusion of the above
from "cause" in no way is intended to imply that such actions would
not constitute a breach of the terms of this Agreement.
(iv) for a breach of any of the material terms of this Agreement, which,
if correctable, remain uncorrected for 60 days following written
notice to you by the Company of such breach;
(v) knowing, intentional and material violation of the Company's Code of
Conduct, as described in the attached booklet, "Lucent Technologies
Business Guideposts: A Personal Commitment"; or
(vi) for any other reason whatsoever, in the discretion of the Company.
For purposes of clause (v) above, your signature on this Agreement acts as
an acknowledgment that you have received and read the attached booklet, "Lucent
Technologies Business Guideposts: A Personal Commitment" and are aware of the
requirements of the Company's Code of Conduct as described in the booklet.
Termination of Employment by Employee: Notwithstanding the other
provisions of this Agreement, you shall have the right to terminate your
employment under this Agreement at any time for any of the following reasons:
(i) the assignment to you by the Board of Directors or other Officers or
representatives of the Company of duties which represent a material
decrease in responsibility and are materially inconsistent with the
duties associated with the position described in this Agreement, as
such duties are constituted as of the date the Company and you
execute this Agreement, which, if correctable, remain uncorrected
for 60 days following written notice to the Company by you of the
breach;
(ii) a material change in the terms and conditions of your employment,
including a reduction of your annual salary to an amount below
$600,000, a material
<PAGE> 11
June 12, 1997
Page 11
decrease in your compensation (other than the normal operation of
the Company's incentive plans), a material reduction in your job
title, a material negative change in the level of officer to whom
you must report, a material change in geographic location (other
than a change due to a change in the geographic location of the
headquarters, which move includes the President and Chief Executive
Officer, or any other geographic move which is reasonably required
for business purposes as a part of the move of international
operations), a material change in the nature or scope of your
authority from those applicable to the position of Executive Vice
President - President, International on the date you execute this
Agreement, or a breach of any other material term of this Agreement,
any of which, if correctable, remain uncorrected for 60 days
following written notice to the Company by you of such breach;
(iii) for any other reason whatsoever, in your sole discretion.
Notice: If you or the Company desire to terminate your employment at any
time prior to expiration of the Employment Term, you or the Company shall do so
by giving written notice to the other party that you or it have elected to
terminate your employment hereunder and stating the effective date and reasons
for such termination. Neither the provision nor the receipt of any such notice
shall alter or amend any other provisions hereof or rights arising hereunder.
Severance Benefit: In the event that your employment hereunder terminates
upon expiration of the Employment Term, then, except as otherwise specifically
provided herein or under the terms of the relevant plans, all compensation and
all benefits hereunder shall terminate contemporaneously with your termination
of employment and no further vesting service shall accrue with respect to any
such benefit, with the understanding that any incentive compensation, bonuses or
other compensation due with respect to your final year of employment shall be
due and payable following termination in accordance with the terms of the
relevant plans.
If your employment is terminated prior to the tenth anniversary of your
date of hire with the Company by the Company for the reasons described in clause
(iii), clause (iv) or clause (v) of the subsection "Termination of Employment by
Company" or by you for the reason described in clause (iii) of the subsection
"Termination of Employment by Employee", then, upon such termination all
compensation and all benefits hereunder shall terminate contemporaneously with
the termination of such employment.
Notwithstanding the foregoing, if your employment hereunder is terminated
prior to the tenth anniversary of your date of hire with the Company by the
Company for any reason other than the reasons described in clause (iii), clause
(iv) or clause (v) of the subsection "Termination of Employment by Company" or
by you for the reasons described in clause (i) or clause (ii) of the subsection
"Termination of Employment by Employee," then the Company shall pay you a
severance benefit, using your annual base salary in effect on the occurrence of
the termination and the target annual incentive award in effect on the date of
your termination or, if greater, 80% of your annual base salary, equal to the
following
<PAGE> 12
June 12, 1997
Page 12
amounts:
(i) if your employment terminates prior to the third anniversary of your
date of hire with the Company, an amount equal to the amount which
you would have received as base salary and annual short-term
incentive bonus if you had continued in employment after any such
termination through the fifth anniversary of your date of hire with
the Company.
(ii) if your employment terminates on or after the third anniversary of
your date of hire with the Company, but prior to the tenth
anniversary of such date, an amount equal to twice your base salary
and annual short-term incentive bonus.
(iii) if your employment terminates on or after the tenth anniversary of
your date of hire with the Company, no amount shall be payable.
If severance benefits are payable due to an event described in the subsection
"Termination of Employment by Company," the Company shall pay you a lump sum
payment of the present value of severance benefits within 30 days after the last
day of your employment with the Company. If severance benefits are payable due
to an event described in the subsection "Termination of Employment by Employee,"
the Company shall pay you a cash payment equal to one-half of the present value
of the severance payments due within 30 days following your termination of
employment, with the balance payable upon the first anniversary of your
termination of employment. The present value of the cash payments shall be
determined using the interest rate in effect on January 1 of the year in which
you terminate employment for Treasury securities with maturities equivalent to
the number of whole years (with fractional years treated as a whole year) by
which payment of the severance payment precedes the time at which payment of the
corresponding salary and annual incentive award would have been made if you had
remained in employment with the Company.
In the event your employment with the Company terminates due to death or
disability, or in the event your employment hereunder is terminated prior to the
tenth anniversary of your date of hire with the Company by the Company for any
reason other than for "cause", for the failure by you to timely correct a
material breach of the Agreement or for your knowing, intentional and material
violation of the Company's Code of Conduct (as described in clauses (iii), (iv)
and (v), respectively, of the subsection of this Agreement entitled "Termination
of Employment by Company"), the following vesting provisions will apply:
-- All vested and unvested options from the one-time grant of Lucent
Stock Options included in the Hiring Bonus which are unexercised as
of the date of termination will vest upon your termination of
employment and the exercisable term will continue until the earlier
of 5 years from the termination date or the original expiration date
of the options.
-- All unvested Restricted Stock Units from the one-time grant of
Lucent
<PAGE> 13
June 12, 1997
Page 13
Restricted Stock Units included in the Hiring Bonus which are
unvested as of the date of termination will vest upon your
termination of employment.
-- All undistributed annual Performance Awards which were granted more
than six months prior to the date of your termination of employment
will continue (i.e., you will be entitled to the full award which
would be payable for the level of performance goals achieved) until
the end of the performance cycle, and payout will be made at that
time without proration for your period of service. Undistributed
Performance Awards which were granted within six months of the date
of your termination of employment will be cancelled. Notwithstanding
the foregoing, if your employment terminates due to death or
disability, all undistributed annual Performance Award grants as of
the date of death or the date of disability will continue until the
end of the performance cycle and payout will be made at that time
with no prorate.
-- All unvested annual Stock Option grants will vest at termination,
and the exercisable term of all vested and unvested annual Stock
Option grants which are unexercised as of the date of termination
will continue until the earlier of five years from the termination
date or the original expiration date of the options.
In the event your employment with the Company is terminated by you for one
of the reasons stipulated as a permissible reason for you to terminate your
employment in clauses (i) and (ii) of the "Termination of Employment by
Employee" subsection of this Agreement, the following vesting provisions will
apply:
-- All unvested options from the one-time grant of Lucent Stock Options
included in the Hiring Bonus will vest upon the first anniversary of
your termination of employment and the exercisable term of all
vested and unvested options from the one-time grant of Lucent Stock
Options included in the Hiring Bonus which are unexercised as of the
date of termination will continue until the earlier of 5 years from
the termination date or the original expiration date of the options.
-- All unvested Restricted Stock Units from the one-time grant of
Lucent Restricted Stock Units included in the Hiring Bonus which are
unvested as of the date of termination will vest upon the first
anniversary of your termination of employment.
-- All undistributed annual Performance Awards which were granted more
than six months prior to the date of your termination of employment
will continue (i.e., you will be entitled to the full award which
would be payable for the level of performance goals achieved) until
the end of the performance cycle, and payout will be made at that
time without proration for your period of service. Undistributed
Performance Awards which were granted within six months of the date
of your termination of employment will be cancelled. Notwithstanding
the foregoing, if your employment terminates due to death
<PAGE> 14
June 12, 1997
Page 14
or disability, all undistributed annual Performance Award grants as
of the date of death or the date of disability will continue until
the end of the performance cycle and pay out at that time with no
prorate.
-- All vested and unvested annual Stock Option grants which are
unexercised as of the date of termination will vest at termination
and the exercisable term will continue until the earlier of five
years from the termination date or the original expiration date of
the options.
Such payment as described above in this Severance Benefits provision will
be conditioned upon you signing a release and agreement not to sue the Company,
in the form included as Attachment D. The Company may amend or otherwise modify
the release and agreement at any time to ensure it is enforceable within its
present scope, including amendments and modifications to reflect changes in
statutory provisions, related regulations or relevant case law, or other
amendments which the Company, in good faith, determines is necessary to the
proper administration of the release and agreement; provided, however, that no
amendment shall be made which would reduce or eliminate your rights and benefits
hereunder, including your severance benefits.
GENERAL
Confidentiality. It is agreed and understood that you will not talk about,
write about or otherwise disclose the terms of existence of this Agreement or
any fact concerning its negotiation or implementation. You may, however, discuss
the contents of this Agreement with your family, legal and/or financial
counselor.
It is further agreed and understood that you will not, at any time during
your employment pursuant to this Agreement or thereafter, directly or indirectly
reveal to any person or entity, or make any use of, any of Company's trade
secrets, including but not limited to, past, present or future business or
strategic plans, new product development concepts, client or customer lists,
forms, records, practices or other business matters, or any other proprietary or
confidential information of the Company or any subsidiary or affiliate of the
Company, obtained during the course of your employment, except as required in
the course of such employment or with the written permission of the Company or,
as applicable, any subsidiary or affiliate of the Company.
You agree that at the time of the termination of your employment with the
Company, whether at the insistence of you or the Company, and regardless of the
reasons therefore, you will deliver to the Company and not keep or deliver to
anyone else, any and all notes, files, memoranda, papers and, in general, any
and all physical matter containing information, including any and all documents
significant to the conduct of the business of the Company or any subsidiary or
affiliate of the Company, except for this Agreement and any documents which
relate to your benefits, rights, or obligations as an employee or any documents
for which the Company or any subsidiary or affiliate of the Company has given
written consent to removal at the time of the termination of the Employee's
employment.
<PAGE> 15
June 12, 1997
Page 15
Your material, knowing and intentional violation of any of the provisions
of this Confidentiality section may result, at the discretion of the Company, in
the cancellation of all rights and entitlements hereunder, except as such rights
may otherwise be protected under the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and shall give the Company any other rights it may
have under applicable law to restrict the use of any information and/or
documents and/or for the return of any such information and/or documents.
Agreement Not to Compete: By signing this Agreement, you agree that you
will abide by all non-competition guidelines indicated in the attached Lucent
Non-Competition Guideline (Attachment C) with respect to the companies listed
below and any companies affiliated with such companies. A number of Lucent
incentives and benefit plans are subject to the Guidelines. The non-competition
guidelines will extend to the following companies and any companies affiliated
with such companies for a one-year period following your termination of
employment for any reason:
o Nokia Corporation
o Telefonaktiebolaget LM Ericsson
o Nortel (Northern Telecom)
o Motorola, Incorporated
o Octel Communications Corporation
o NEC Corporation
o Siemens AG
o Microsoft Corporation
o Intel Corporation
o Alcatel Alsthom Compagnie Generale d'Electricite
o Cisco Systems Incorporated
For purposes of this Agreement, a company shall be deemed to be affiliated with
one of the above companies if it controls, is controlled by, or is under common
control with one of the above companies. For this purpose, "control" shall mean
ownership, either direct or indirect, of at least a 20% interest in voting power
or value of such other company.
You represent and acknowledge that a breach of the noncompetition
provision would cause the Company serious and irreparable injury and cost.
In the event you breach the terms of the noncompetition provision, the
Company shall be entitled, if it shall so elect, to institute judicial
proceedings to obtain damages for any such breach, to enforce the specific
performance of the noncompetition provision, and/or to enjoin any future
violation of the noncompetition provision and to exercise such remedies
cumulatively or in conjunction with all other rights and remedies provided by
law. You acknowledge, however, that under all circumstances the Company shall be
entitled to injunctive relief in the event of any breach of the noncompetition
provision.
For purposes of this section, you consent to jurisdiction over your person
in the courts of the state of New Jersey, agree that disputes over this section
shall be brought in
<PAGE> 16
June 12, 1997
Page 16
the courts of the state of New Jersey, without any implication as to the right
to remove or transfer any judicial action filed under this section, and agree
that service of process shall be sufficient if served upon you personally or if
served upon you by mail at the most recent address provided to the Company.
Dispute Resolution. At your option or the option of the Company, any
dispute, controversy, or question arising under, out of or relating to this
Agreement or the breach thereof, shall be referred for decision by arbitration
in the State of New Jersey by a neutral arbitrator selected by the parties
hereto. The proceeding shall be governed by the Rules of the American
Arbitration Association then in effect or such rules last in effect (in the
event such Association is no longer in existence). If the parties are unable to
agree upon such a neutral arbitrator within thirty (30) days after each party
has given the other written notice of the desire to submit the dispute,
controversy or question for decision as aforesaid, then either party may apply
to the American Arbitration Association for the appointment of a neutral
arbitrator, or, if such Association is not then in existence or does not desire
to act in the matter, either party may apply to the Presiding Judge of the
Superior Court of any county in New Jersey for the appointment of a neutral
arbitrator to hear the parties and settle the dispute, controversy or question,
and such Judge is hereby authorized to make such appointment. In the event that
either party exercises the right to submit a dispute arising hereunder to
arbitration, the decision of the neutral arbitrator shall be final, conclusive
and binding on all interested persons and no action at law or in equity shall be
instituted or, if instituted, further prosecuted by either party other than to
enforce the award of the neutral arbitrator.
In the event that you are successful in pursuing any claim or dispute
arising out of this Agreement, the Company shall pay all of your attorneys' fees
and costs, including the compensation and expenses of any Arbitrator, costs
directly related to the arbitration proceeding, and any attorneys' fees and
costs incurred in enforcement of the Arbitrator's decision, unless (1) the
Arbitrator, or any court in which litigation is filed, finds the Company to be
without liability on all material issues raised or (2) the dispute or lawsuit is
frivolous in nature. In any other case, you and the Company shall each bear all
their own costs and attorney fees, except that the Company shall pay the costs
of any Arbitrator appointed hereunder and one-half (1/2) of your attorney's fees
and costs in the arbitration of any dispute which is not frivolous in nature.
Governing Law: This Agreement shall be construed and enforced in
accordance with the laws of the State of New Jersey, without reference to any
applicable conflict of law provisions.
Severability: If a court of competent jurisdiction determines that any
provision of this Agreement in invalid or unenforceable, then the invalidity of
unenforceability of that provision shall not affect the validity or
enforceability of any other provision of this Agreement, and all other
provisions shall remain in full force and effect.
Assignment: Except as otherwise provided herein, this Agreement, and the
rights and obligations of the parties hereunder, are personal and neither this
Agreement, nor any right, benefit or obligation of either party hereto, shall be
subject to voluntary or
<PAGE> 17
June 12, 1997
Page 17
involuntary assignment, alienation or transfer, whether by operation of law or
otherwise, without the prior written consent of the other party. Notwithstanding
the foregoing, if you are assigned to or become employed by any subsidiary or
affiliate of the Company during the term of this Agreement, such subsidiary or
affiliate shall be considered to have been assigned all rights of the Company
and accepted all obligations of the Company hereunder, with the Company
remaining jointly and severally liable for all such obligations.
This letter reflects the entire agreement regarding the terms and
conditions of your employment. Accordingly, it supersedes and completely
replaces any prior oral or written communication on this subject. No amendments
or modifications to this Agreement may be made except in writing signed by you
and by an authorized representative of the Company.
Ben, I feel the package we have developed for you is attractive and
anticipates that you will make a critical contribution to the business as it
develops over the coming years. We look forward to having you join us. If you
have any questions, please don't hesitate to call me.
If you agree with the foregoing, and affirm that there are no agreements
or other impediments that would prevent you from providing exclusive service to
the Company, please sign this letter by __________ in the space provided below
and return the original executed copy to me.
Sincerely,
Richard McGinn
- ------------------------------- ----------------
Acknowledged and Agreed Date
to Attachments
<PAGE> 1
Exhibit (10)(iii)(A)10
August 8, 1995
Mr. Donald K. Peterson
11 Breckenridge
Nashville, TN 37215
Dear Don,
This offer letter completely replaces my offers of employment dated July 28 and
August 2, 1995 and supersedes all other oral and written communications on this
subject.
It gives me great pleasure to offer you a Senior Management position within AT&T
(the Company). In addition to confirming my offer, this letter will detail the
terms and conditions of your employment and outline the current major features
of AT&T's compensation and benefit plans and practices.
Assumption of Duties: Effective on or about September 1, 1995, you will
assume the position of CFO within the Communications Services with a dual
reporting relationship to Alex Mandl, Executive Vice President AT&T and
CEO Communications Services Group and to Rick Miller, Executive Vice
President AT&T and Chief Financial Officer.
Base Salary: Your initial base salary will be $325,000 per year. This rate
will increase annually to reflect individual performance and base salary
structure changes applicable to similarly situated Senior Managers. Your
first review for your base salary level will be effective January 1996.
Annual Incentive: The annual incentives for Senior Managers currently take
the form of (1) AT&T Performance Award (APA), (2) Merit Award (MA), and
(3) Unit Performance Award (UPA).
(1) AT&T Performance Award (APA) is predicated on corporate performance.
<PAGE> 2
D.K. Peterson - Page 2
(2) Merit Award (MA) is driven by individual and team contributions.
(3) Unit Performance Award (UPA) is predicated on your organization
meeting its financial targets.
Except as reflected below in the "Guaranteed 1995 Annual Incentive" provision,
the Company cannot make any definitive representations regarding the
continuation of the APA/MA/UPA format or the size of individual awards under
these plans. The following information, however, will provide a frame of
reference regarding the potential size of your annual incentive. Based on your
initial base salary, your 1995 target (not actual) APA/MA is $113,000 and your
target (not actual) UPA is $61,000. These awards are payable in the first
quarter of 1996 and will be prorated to reflect partial 1995 service.
Guaranteed 1995 Annual Incentive Amount: In the event that your earned prorated
1995 APA/MA/UPA (see above provision) is less than $58,000 (assuming a September
1, 1995 start date), you will be provided a lump sum that, when combined with
your actual earned APA/MA/UPA, will total $58,000. In the event that your earned
prorated 1995 APA/MA/UPA is higher than $58,000, you would receive that higher
amount and no lump sum would be payable under this Guaranteed 1995 Annual
Incentive Amount provision.
It is understood that this minimum guaranteed incentive award for performance
year 1995 shall not in any way be construed as a precedent for future
performance years.
AT&T Long Term Incentives:
- --AT&T Performance Shares: Effective on your date of hire, you will receive
2,366 AT&T Performance Shares covering the 1995-97 performance period (payout,
if any, is in the first quarter of 1998). This is the 1995 standard grant for
your Senior Management position. Historically, such awards have been made
annually. Performance shares, which are equivalent in value to AT&T common
shares, are awarded based on position rate at the beginning of a three-year
performance period. Payout of from 0% to 150% of such Performance Shares is made
in the form of cash and/or AT&T shares at the end of the performance period
based on the Company's return to equity performance as approved annually by the
Board of Directors. Dividend equivalents are paid quarterly on all undistributed
Performance Shares.
- --AT&T Stock Options: Effective on the date of your hire, you will be awarded
8,256 AT&T Stock Options. This is the 1995 standard grant for your Senior
Management position. Historically, standard stock option grants have been made
in January of each year to Senior Managers. Currently, the term of the stock
option grant is ten years. Assuming continued Company employment,
<PAGE> 3
D.K. Peterson - Page 3
stock options vest as follows: one-third of the options will vest on the first
anniversary of the date of grant, one-third on the second anniversary, and
one-third on the third anniversary of the date of grant. The option price is
100% of market price on date of grant, e.g., your date of hire for the 1995
award. As with the Annual Incentive Awards, Long Term Incentives are closely
liked with the Company's strategy to meet the challenges of an ever changing
marketplace. Accordingly, other than the initial grant, the Company cannot
guarantee continuation of the Long Term Incentive Plan in its current format,
nor can it guarantee annual grant levels to individual participants.
Hiring Bonus: In order to address certain forfeitures, (e.g., Stock Options)
prompted by leaving your current employer and to incent you to join AT&T, the
Company will provide you with the following:
(I) You will be granted the following "Seasoned" AT&T Performance Shares under
the Company's Long Term Incentive Program:
-- 2,366 AT&T Performance Shares (1993-95 Performance Period, payable
in 1996)
-- 2,366 AT&T Performance Shares (1994-96 Performance Period, payable
in 1997)
Dividend equivalent payments will be made on the above Performance Share
awards.
(II) You will be provided a one-time cash hiring bonus of $111,000 payable
within 30 days of your date of hire.
(III) You will receive a one-time "extra" (over and above the standard annual
award) grant of 24,100 AT&T Stock Options. These "extra" Stock Options
will cliff vest at the end of three years of employment with the Company.
(IV) In the event you forfeit your 1995 annual bonus (payable in 1996) from
your current employer, you will receive a one-time cash payment related to
the amount forfeited, (where the amount forfeited is based on the actual
months of employment at this employer during 1995). Based on an August 31,
1995 termination from your current employer, and an above target payout of
$166,000, this cash payment would be $111,000. Such amount will be payable
within 30 days of your date of hire.
(V) The Company will provide you a housing loan up to $250,000 on terms which
are generally comparable to those provided by your current employer.
<PAGE> 4
D.K. Peterson - Page 4
(VI) In the event you are prevented from exercising your vested stock options
(or are required to repay to your current employer the bargain spread on
such options), the Company will reimburse you up to $89,000 for such
forfeiture.
Severance Benefit: In the event of any Company initiated termination other than
for disability or for "cause" (as defined below), within 36 months from the
effective date of your employment you will be entitled to a payment equal to the
higher of (1) $650,000 or (2) 200% of your annual base salary in effect on the
date of such termination, such payment to be made in the month following the
month of termination.
Such payment as described above in this Severance Benefit provision as well as
any "DCA" benefits payable to you under the "Special Deferred Compensation
Account" provision (below) related to a Company initiated termination, will be
conditioned upon you signing a release and agreement not to sue the Company. The
form of this release and agreement will be that then in use for AT&T Senior
Managers.
For purposes of this employment letter, "cause" shall be defined as follows: (1)
your conviction (including a plea of guilty to nolo contendere) of a felony or
any crime of theft, dishonesty or moral turpitude; or (2) gross omission or
gross dereliction of any statutory or common law duty of loyalty to the Company,
or (3) violation of the Company's Code of Conduct.
Senior Management Employee Benefit Plans: Attachment A outlines the benefits
available to you under various Senior Management, mid-career and employee
benefit plans, programs and practices. In addition, under the provisions of the
Mid-Career Hire Program you will be eligible for the following benefits:
Mid-Career Pension: Managers hired at age thirty-five and over at salary band D
and above who retire or terminate employment at Executive level or above will be
eligible for supplemental pension benefits from the AT&T Mid-Career Hire Pension
Plan provided they have at least five years service credited while at or above
Executive level. (The Senior Management position you would be hired into is
above the Executive level). These supplemental pension payments are in addition
to those provided by other existing plans. For example: under the Plan's current
terms and conditions, a participant hired at age 46 and retired at age 65 would
receive extra pension credit for 16 years at approximately one half the rate
under the AT&T Management Pension Plan.
Special Deferred Compensation Account: Beginning on your date of hire, $190,000
will be credited in your name in an individual Deferred Compensation Account
(DCA). You will have no ownership interest in the DCA nor in any asset of the
Company and you may not assign or pledge the DCA. You will have
<PAGE> 5
D.K. Peterson - Page 5
no right to receive any part of the DCA except as provided below under the
"Vesting, Forfeiture, and Distribution of DCA" paragraphs. Such credited DCA
shall bear interest from the first day following the effective date of your AT&T
employment. The interest credited thereon will be compounded as of the end of
each calendar quarter for as long as any sums remain in the DCA, and the
quarterly rate of interest applied at the end of any calendar quarter shall be
one-quarter of the average 30-year Treasury Note rate for the previous quarter.
Vesting, Forfeiture, and Distribution of DCA: In the event of your termination
of employment prior to August 13, 2009, for any reason other than death, "long
term disability" (as defined below), or Company initiated termination for other
than "cause" (as defined below), all amounts credited to your DCA will be
canceled, and you will not receive any distribution from the DCA.
In the event of your termination of employment, prior to August 13, 2009,
because of death or "long term disability," the amount credited to your DCA as
of such termination will become vested. Your DCA balance as of your date of
death or termination will be distributed to you, or in the case of death, to
your designated beneficiary (or to your estate if no beneficiary has
designated), within 30 business days after your termination or death.
In the event of your termination of employment from your date of hire to August
13, 2009, as a result of a Company initiated termination for other than "cause"
(as defined below), your DCA will vest in full at such date and all amounts
credited to the DCA as of your termination of employment will be distributed to
you within 30 business days after your termination of employment.
As of August 13, 2009, all amounts then credited to your DCA will vest in full,
assuming your continued employment to such date with the Company or any
affiliate of the Company. Any amounts credited to your DCA subsequent to August
13, 2009 will vest as credited.
In the event of your termination of employment on or subsequent to August 13,
2009, because of death all amounts credited to your DCA as of your date of death
will be distributed to your designated beneficiary (or to your estate if no
beneficiary has been designated), within 30 business days after your death.
In the event of your termination of employment on or subsequent to August 13,
2009, for any reason other than for death, then all amounts credited to your DCA
as of your termination of employment will be distributed to you in ten
approximately equal annual installments. Interest will continue to be credited
on the outstanding balance in your DCA.
Notwithstanding any other provision of this Special Deferred Compensation
Account, in the event of your termination of employment for "cause", at any time
<PAGE> 6
D.K. Peterson - Page 6
from your date of hire to August 13, 2009, all amounts credited to your DCA will
be canceled and forfeited in their entirety, and you will not receive any
distribution from the DCA. For purposes of this DCA provision, "cause" shall be
as defined in the Severance Benefit provision above. For purposes of this DCA
provision, "long term disability" will mean your termination of Company
employment with eligibility to receive long term disability benefits under the
AT&T Long Term Disability Plan for Salaried Employees or a replacement or
comparable affiliate plan.
The payments from the DCA are in addition to and not in lieu of any pension,
savings or other defined benefit or defined contribution type retirement plans
of the Company in which you would be eligible to participate as an AT&T employee
or AT&T Senior Manager. Accordingly, the DCA will not affect your participation
or potential participation in such plans. The DCA, however, is not includable in
the base for calculating any AT&T employee or Senior Manager benefits.
Payout of the DCA, when payable in ten installments, will commence on the first
day of the calendar quarter next following the end of the month in which you
terminate employment.
Relocation Plan: You will be eligible for the same AT&T Management Relocation
Plan (AT&TMRP) benefits accorded to other management employees (Attachment B).
It is understood that your family will be remaining in Tennessee through June
1996. Therefore, effective with your month of hire, you will be paid a monthly
amount of $6,000 (100% taxable). These monthly payments will cease after the
earlier of (1) July 31, 1996 or (2) the month you relocate to your New Jersey
residence. It is understood and agreed that these monthly payments will be made
in lieu of the Lump Sum Payment (for interim living, home search, etc.)
provided for in the AT&TMRP (see Attachment B).
It is agreed and understood that you will not talk about, write about or
otherwise disclose the terms of existence of this employment letter or any fact
concerning its negotiation or implementation. You may, however, discuss the
contents of this letter with your spouse, legal and/or financial counselor.
As indicated in the attached AT&T Non-Competition Guideline (Attachment C), a
number of AT&T incentive arrangements and non-qualified pension and benefit
plans are subject to non-competition constraints.
This offer is contingent upon successful completion of AT&T's pre-employment
medical review process.
This letter reflects the entire agreement regarding the terms and conditions of
your employment. Accordingly, it supersedes and completely replaces any prior
oral or written communication on this subject. This letter is not an employment
<PAGE> 7
D.K. Peterson - Page 7
contract and should not be construed or interpreted as containing any guarantee
of continued employment. The employment relationship at AT&T is by mutual
consent ("Employment-At-Will"). This means that managers have the right to
terminate their employment at any time and for any reason. Likewise, the Company
reserves the right to discontinue your employment with or without cause at any
time and for any reason.
The incentive plans as well as the employee and Senior Management benefit plans,
programs and practices as briefly outlined in this letter, reflect their current
provisions. Payments and benefits under these plans and programs, as well as
other payments referred to in this letter, are subject to IRS rules and
regulations with respect to withholding, reporting, and taxation, and will not
be grossed-up unless specifically stated. The Company reserves the right to
discontinue or modify any such plans, programs and practices. Moreover, the
summaries contained herein are subject to the terms of such plans, programs and
practices.
For purposes of the Senior Management and employee benefits plans, the
definition of compensation is as stated in the plans. Currently, pensions are
based on base salary and annual incentives. Other benefits are based on either
base salary or base salary plus annual incentives. All other compensation and
payments reflected in this offer, e.g., hiring bonus, relocation, long term
incentives, are not included in the calculation of any employee or Senior
Management benefits (except for the AT&T Incentive Deferral Award Plan, which
currently permits the deferral of annual incentives and Performance Shares).
By acceptance of this offer, you agree that (1) no trade secret or proprietary
information belonging to your previous employer will be disclosed or used by you
at AT&T, and that no such information, whether in the form of documents,
memoranda, software, drawings, etc., will be retained by you or brought with
your to AT&T, and (2) you have brought to AT&T's attention and provided it with
a copy of any agreement which may impact your future employment at AT&T,
including non-disclosure, non-competition, invention assignment agreements or
agreements containing future work restrictions.
Don, I feel the package we have developed for you is attractive and anticipates
that you will make a critical contribution to the business as it develops over
the coming years. We look forward to having you join us. If you have any
questions, please don't hesitate to call me or Marty O'Donnell on (908)
221-3596.
<PAGE> 8
D.K. Peterson - Page 8
If you agree with the foregoing, and affirm that there are no agreements or
other impediments not disclosed to AT&T that would prevent you from providing
exclusive service to the Company, please sign this letter by August 11, 1995 in
the space provided below and return the original executed copy to me.
Sincerely,
- -------------------------- --------------
Acknowledged and Agreed to Date
Donald K. Peterson
Attachments
<PAGE> 1
Exhibit (10)(iii)(A)11
Description of the Lucent Technologies Inc. Supplemental Pension Plan
The Company has adopted, effective for employees retiring on or after
January 1, 1998, the Lucent Technologies Inc. Supplemental Pension Plan (the
"Plan"). The Plan will replace the Lucent Technologies Inc. Non-Qualified
Pension Plan, the Lucent Technologies Inc. Excess Benefit and Compensation Plan
and the Lucent Technologies Inc. Officer Long-Term Disability and Survivor
Protection Plan. The Plan is intended to provide pension benefits which may be
not provided under the Lucent Technologies Inc. Management Pension Plan (the
"MPP") because of limitations in the Internal Revenue Code of 1986. The Plan
also provides for a minimum pension for executive officers.
The Plan is a non-qualified, non-contributory plan and benefits paid
under the Plan are paid as an operating expense. Annual pension benefits are
computed on an adjusted career average pay basis and are equal to the sum of (a)
1.4% of average annual pay for the five years ending December 31, 1997
(excluding the annual bonus award paid in December 1997), times the number of
years of service prior to January 1, 1998, plus (b) 1.4% of pay subsequent to
December 31, 1997 (including the annual bonus paid in December 1997). Under the
Plan, pay consists of base salary and annual bonus awards, to the extent that
such amounts are not considered for purposes of determining benefits under the
MPP.
The normal retirement age under the Plan is 65; however, retirement
before age 65 can be elected. Employees who are at least age 50 with at least 15
years of service are eligible to retire with reduced benefits. If an employee's
age (must be 50 or older) plus service, when added together, is equal to or
greater than 75, the employee may retire with unreduced pension benefits. A
reduction equal to 3% is made for each year age plus service is less than 75.
Benefits may also be paid under a transition formula if that formula
results in a greater benefit than the formula described above. Under the
transition formula, annual pension benefits are computed on an adjusted career
average pay basis and are equal to 1.6% of average annual pay for the six years
ending December 31, 1996, times the number of years of service through the
earlier of December 31, 2000 or the retirement date. This transition formula is
also applicable to certain management employees who retired in 1997, if that
formula provides a higher benefit than an individual would otherwise receive.
Although age 65 is the normal retirement age under the transition
formula, retirement before age 65 can be elected under certain conditions.
Employees who are at least age 55 with at least 20 years of service are eligible
to retire with an unreduced pension. Employees who meet certain other age and
service requirements can retire with reduced benefits.
<PAGE> 2
The Plan also provides executive officers with minimum pension
benefits. Eligible retired executive officers and surviving spouses may receive
an annual minimum pension equal to 15% of the sum of final base salary plus
annual bonus awards, subject to reduction for pensions paid under other Company
plans.
<PAGE> 1
Exhibit (12)
<TABLE>
<CAPTION>
LUCENT TECHNOLOGIES INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
(Unaudited)
-------------------- ----------------------- -----------------------------------
For the Twelve Months For the Nine Months For the Year Ended
Ended September 30, Ended September 30, December 31,
-------------------- ----------------------- -----------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings Before Income
Taxes $ 1,467 $ 367 $(1,138) $ 784 $ 619
Less Interest Capitalized
During the Period 14 14 14 7 11
Less Undistributed
Earnings of Less Than
50% Owned Affiliates 3 1 2 21 29
Add Fixed Charges 456 311 327 338 321
------- ----- ------- ------ -----
Total Earnings $ 1,906 $ 663 $ (827) $1,094 $ 900
======= ===== ======= ====== =====
Fixed Charges
Total Interest Expense
Including Capitalized
Interest $ 348 $ 250 $ 257 $ 277 $ 254
Interest Portion of
Rental Expenses 108 61 70 61 67
------- ----- ------- ------ -----
Total Fixed
Charges $ 456 $ 311 $ 327 $ 338 $ 321
======= ===== ======= ====== =====
Ratio of Earnings to
Fixed Charges $ 4.2 2.1 (A) 3.2 2.8
======= ===== ======= ====== =====
</TABLE>
(A) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as income(loss) before income taxes, less interest capitalized, less
undistributed earnings of less than 50% owned affiliates and plus fixed charges.
Fixed charges consist of interest expense on all indebtness and that portion of
operating lease rental expense that is representative of the interest factor.
Earnings were inadequate to cover fixed charges for the year ended December 31,
1995 by $1,154.
26
<PAGE> 1
1 Exhibit 13
FINANCIAL SECTION MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
HIGHLIGHTS
Lucent Technologies Inc.("Lucent" or the "Company") is one of the world's
leading designers, developers and manufacturers of communications systems,
software and products. These integrated systems and software applications enable
network operators and business enterprises to connect, route, manage and store
information between and within locations. Lucent is a global market leader in
the sale of public communications systems, and is a supplier of systems and
software to the world's largest networks. Lucent is also a global leader in the
sale of business communications systems and microelectronic components for
communications systems and computer manufacturers. Lucent was formed from the
systems and technology units that were formerly part of AT&T Corp. ("AT&T"),
including the research and development capabilities of Bell Laboratories.
In 1996, Lucent changed its fiscal year to begin October 1st and end September
30th. Due to this change, Lucent reported 1996 audited financial results for a
short fiscal period beginning on January 1, 1996 and ending on September 30,
1996. For comparability to the audited financial statements, Lucent has provided
unaudited statements of income and cash flows for the twelve months ended
September 30, 1996 and for the nine months ended September 30, 1995.
For the fiscal year ended September 30, 1997, Lucent reported net income of $541
million or $0.84 per share compared with a net loss of $793 million or $1.37 per
share for the twelve months ended September 30, 1996. During fiscal 1997, Lucent
recognized one-time charges related to its acquisition of Octel Communications
Corporation ("Octel"), including $945 million for purchased in-process research
and development costs. For the twelve months ended September 30, 1996, Lucent
recorded $2,801 million of business restructuring and other charges. Excluding
these charges from both periods, net income was $1,507 million or $2.34 per
share in fiscal 1997 compared with $1,054 million or $1.65 per share (computed
on a pro forma basis) for the twelve months ended September 30, 1996. The pro
forma presentation assumes that all 636,661,931 common shares outstanding
following the completion of Lucent's Initial Public Offering ("IPO") on April
10, 1996 were outstanding since January 1, 1995, and gives no effect to the use
of proceeds from the IPO.
STRATEGIC TRANSACTIONS
Since October 1, 1996, Lucent has completed a number of strategic transactions
intended to improve the Company's focus on its core businesses. In October 1996,
Lucent acquired Agile Networks, Inc.("Agile"), a provider of advanced
intelligent data switching products that support Ethernet as well as emerging
asynchronous transfer mode ("ATM") technology. These products enable business
customers to manage multimedia networks more effectively. In September 1997,
Lucent acquired Octel, a provider of voice, fax and electronic messaging
technologies that complement those offered by Lucent. In October 1997, Lucent
agreed to acquire Livingston Enterprises, Inc., a global provider of equipment
used by Internet service providers to connect their subscribers to the Internet.
Such investments provide Lucent additional ways to invest in research and
development of leading edge technologies.
On October 1, 1997, Lucent contributed its Consumer Products business to a new
venture formed by Lucent and Philips Electronics N.V. ("Philips"). The venture,
which is 40% owned by Lucent, is a worldwide provider of a complete range of
personal communications products, including digital and analog wireless phones,
corded and cordless phones, answering machines, screen phones and pagers.
During fiscal 1996, Lucent completed the sale of its Paradyne subsidiary. In
addition, Lucent completed the sale of its interconnect products and Custom
Manufacturing Services businesses in December 1996, and its Advanced Technology
Systems ("ATS") unit in October 1997.
<PAGE> 2
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following chart provides Lucent's revenues trend from its three core
businesses and excludes revenues from its Consumer Products unit and from Other
Systems and Products:
LUCENT'S FORMATION
Prior to February 1, 1996, AT&T conducted Lucent's business through various
divisions and subsidiaries. On February 1, 1996, AT&T began executing its
decision to separate Lucent into a stand-alone company (the "Separation") by
transferring to Lucent the assets and liabilities related to its business.
Additionally, AT&T retained $2,000 million of accounts receivable. In April
1996, Lucent completed the IPO and on September 30, 1996, became independent of
AT&T when AT&T distributed to its shareowners all of its Lucent shares.
Lucent's consolidated financial statements for periods prior to February 1, 1996
reflect the financial position, results of operations and cash flows of the
operations transferred to Lucent from AT&T in the Separation and were 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 business.
Additionally, Lucent's 1995 consolidated financial statements include certain
assets, liabilities, revenues and expenses which were not historically recorded
at the level of, but are primarily associated with, the business. Management
believes the assumptions underlying these financial statements are reasonable,
although these financial statements may not necessarily reflect the results of
operations or financial position had Lucent been a separate, stand-alone entity.
THREE CORE BUSINESSES - ANNUAL REVENUES
(in billions of dollars)
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30
- ------------------------------------------------------------------
1995 1996 1997
Total Core Business Revenues $17.5 $21.0 $24.8
Systems for Network Operators 10.6 13.2 15.6
Business Communications Systems 5.1 5.5 6.4
Microelectronic Products 1.8 2.3 2.8
- ------------------------------------------------------------------
Revenues for 1997 from Lucent's three core businesses: Systems for Network
Operators, Business Communications Systems and Microelectronic Products,
increased 17.9% compared with 1996.
KEY BUSINESS CHALLENGES
Lucent continues to face significant competition and expects that the level of
competition on pricing and product offerings will intensify. Lucent expects that
new competitors will enter its markets as a result of both the trend toward
global expansion by foreign and domestic competitors as well as continued
changes in technology and public policy. These competitors may include entrants
from the telecommunications, software, data networking and semiconductor
industries. Existing competitors have, and new competitors may have, strong
financial capability, technological expertise and well-recognized brand names.
As a result, Lucent's management periodically assesses market conditions and
redirects the Company's resources to meet the challenges of competition. Steps
Lucent may take include acquiring and investing in new businesses, partnering
with existing businesses, delivering new technologies, closing and consolidating
facilities, disposing of assets, reducing workforce levels or withdrawing from
markets.
Lucent's sales continue to be highly seasonal. Many of Lucent's large customers
have historically delayed a disproportionate percentage of their capital
expenditures until the fourth quarter of the calendar year. Consequently,
Lucent's results of operations for the first three quarters of each
<PAGE> 3
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
calendar year historically have, in the aggregate, been significantly less
profitable than the fourth calendar quarter. However, Lucent has taken steps to
manage the seasonality by changing its year-end and its compensation programs
for employees.
The purchasing behavior of Lucent's large customers has increasingly been
characterized by the use of fewer, but larger contracts, which contributes to
the variability of Lucent's results. These contracts typically involve longer
negotiating cycles, require the dedication of substantial amounts of working
capital and other resources, and in general require costs which may
substantially precede recognition of associated revenues. Moreover, in return
for larger, longer-term purchase commitments, customers often demand more
stringent acceptance criteria which can also cause revenue recognition delays.
Lucent has increasingly provided or arranged long-term financing for customers
as a condition to obtain or bid on infrastructure projects. Certain multi-year
contracts involve new technologies which may not have been previously deployed
on a large-scale commercial basis. Related to these contracts, Lucent may incur
significant initial cost overruns and losses which would be recognized in the
quarter in which they became ascertainable. Further, profit estimates on such
contracts are revised periodically over the lives of the contracts, and such
revisions can have a significant impact on reported earnings in any one quarter.
To manage the fluctuation caused by the buying behaviors of large customers,
Lucent continues to seek out new types of customers both in the United States
and internationally, such as competitive access providers, cable television
network operators and computer manufacturers.
Historically, Lucent has relied on a limited number of customers for a
substantial portion of its total revenues, including AT&T which continues to be
a significant customer. Lucent is seeking to diversify its customer base;
nevertheless, Lucent expects that a significant portion of its future revenues
will continue to be generated by a limited number of customers. The loss of any
of these customers or any substantial reduction in orders by any of these
customers could materially adversely affect the Company's operating results.
QUARTERLY REVENUES - AS A PERCENTAGE OF ANNUAL REVENUES
NEW FISCAL YEAR BASIS
- ------------------------------------------------------------------
1995 1996 1997
1st Qtr. December 31 31% 32% 30%
2nd Qtr. March 31 21% 20% 20%
3rd Qtr. June 30 25% 23% 24%
4th Qtr. September 30 23% 25% 26%
- ------------------------------------------------------------------
Lucent is taking steps to manage seasonality and moderate wide fluctuations in
revenues from quarter to quarter.
<PAGE> 4
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Lucent Technologies Inc. and Subsidiaries
Five Year Summary
(Dollars in millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, September 30, Year Ended December 31,
--------------- ------------------ -----------------------
1997 1996 1996 1995 1995 1994 1993
(1) (5) (1)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Revenues $26,360 $23,286 $15,859 $13,986 $21,413 $19,765 $17,734
Gross margin 11,462 8,894 6,569 6,143 8,468 8,428 7,646
Operating income(loss) 1,631 (947) 487 434 (1,000) 971 669
Income(loss) before
cumulative effects
of accounting changes 541 (793) 224 150 (867) 482 430
Cumulative effects of
accounting changes - - - - - - (4,208)
Net income(loss) 541 (793) 224 150 (867) 482 (3,778)
Earnings(loss) per common
share - Historical(2) 0.84 (1.37) 0.38 0.28 (1.65) n/a n/a
Earnings(loss) per common
share - Pro Forma(3) n/a (1.25) 0.35 0.24 (1.36) n/a n/a
Dividends per
common share 0.225 0.15 0.15 - - n/a n/a
FINANCIAL POSITION
Total assets $23,811 $22,626 $22,626 $18,219 $19,722 $17,340 $17,109
Working capital 1,763 2,068 2,068 188 (384) 246 1,773
Total debt 4,203 3,997 3,997 4,192 4,014 3,164 3,195
Shareowners' equity 3,387 2,686 2,686 2,783 1,434 2,476 2,580
OTHER INFORMATION
Selling, general
and administrative
expenses as a
percentage of revenues 21.9% 31.3% 26.8% 28.9% 33.1% 27.1% 28.3%
Research and development
expenses as a
percentage of revenues 11.5 (4) 11.0 11.6 12.0 11.1 10.6 11.1
Gross margin percentage 43.5 38.2 41.4 43.9 39.5 42.6 43.1
</TABLE>
(1) Includes pretax restructuring and other charges of $2,801 ($1,847 after
taxes) recorded as $892 of costs, $1,645 of selling, general and
administrative expenses and $264 of research and development expenses.
(2) The calculation of earnings per share on a historical basis includes the
retroactive recognition to January 1, 1995 of the 524,624,894 shares owned
by AT&T on April 10, 1996.
(3) The calculation of earnings per share on a pro forma basis assumes that
all 636,661,931 common shares outstanding on April 10, 1996 were
outstanding since January 1, 1995 and gives no effect to the use of
proceeds from the IPO.
(4) Excludes one-time charges of $1,024 million of purchased in-process
research and development costs from acquisitions of Octel and Agile.
Including these charges, research and development expenses as a percentage
of revenues were 15.4% for 1997.
(5) Beginning September 30, 1996, Lucent changed its fiscal year-end from
December 31 to September 30, and reported results for the nine-month
transition period ended September 30, 1996.
<PAGE> 5
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
TWELVE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS TWELVE MONTHS ENDED SEPTEMBER 30,
1996
REVENUES
Total revenues increased $3,074 million or 13.2% for 1997 compared with 1996,
primarily due to gains in sales from Systems for Network Operators, Business
Communications Systems and Microelectronic Products. The overall revenue growth
was partially offset by the expected decline in revenue from Consumer Products
and Other Systems and Products. Revenues for Lucent's three core businesses
increased 17.9% for 1997 compared with 1996. Revenue growth continued to be
generated from sales both in the United States and internationally (including
exports). International revenues increased 11.9% compared with 1996 and
represented 24.1% of total revenues in 1997. The increased international sales
reflect Lucent's targeted approach toward international revenue expansion for
increased profitability. The following table presents Lucent's revenues by
product line, and the related percentage of total revenues for the twelve months
ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Twelve Months Ended
September 30,
Dollars in Millions ----------------------------------------
As a Percentage As a Percentage
1997 of Total Revenue 1996 of Total Revenue
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Systems for Network Operators........ $15,614 59% $13,192 57%
Business Communications Systems...... 6,411 24 5,509 24
Microelectronic Products............. 2,755 11 2,315 10
Consumer Products.................... 1,013 4 1,431 6
Other Systems and Products........... 567 2 839 3
Total................................ $26,360 100% $23,286 100%
</TABLE>
Revenues from SYSTEMS FOR NETWORK OPERATORS increased $2,422 million or 18.4%
compared with 1996. The increase resulted from higher sales of both switching
and wireless systems with associated software, fiber-optic cable and
professional services. Demand for second lines in businesses and residences for
Internet services and data connectivity contributed to the revenue growth for
1997.
Software sales increased $414 million or 21.7% compared with the same period in
1996. The increase was primarily driven by strong demand for associated software
for Lucent's new Access Interface Unit ("AIU") as well as software sales to
support number portability. The AIU is used in the 5ESS switch and helps speed
voice and Internet traffic.
Sales from Systems for Network Operators in the United States increased 22.2%.
The revenue increase in the United States was led by sales to traditional
service providers and non-traditional customers such as personal communications
services ("PCS") wireless providers, competitive access providers and cable
television companies. International revenues increased 8.2% compared with 1996,
resulting from increased sales in the Europe/Middle East/Africa, Asia/Pacific
and Caribbean/Latin America regions. International revenues represented 25.1% of
Systems for Network Operators revenues for 1997.
<PAGE> 6
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
For 1997, sales of wireless infrastructure increased significantly compared with
the same period in 1996 primarily due to PCS contracts as customers accepted
networks for commercial service in 1997 using various digital technologies.
These technologies include Code Division Multiple Access ("CDMA"), Global System
for Mobile Communications ("GSM") and Time Division Multiple Access ("TDMA").
The Lucent digital technologies continue to show acceptance in both the
international and domestic markets.
Revenues from BUSINESS COMMUNICATIONS SYSTEMS increased $902 million or 16.4%
compared with the same period in 1996. This increase was led by sales of
DEFINITY(R) products, SYSTIMAX(R) structured cabling, messaging systems,
integrated offers such as call centers and higher revenues from service
contracts. This increase was partially offset by the continued erosion of the
rental base. Revenues in the United States increased 17.0% compared with 1996.
International revenues increased by 13.2%, reflecting growth in all
international regions. The increase in the United States and internationally was
primarily due to sales of DEFINITY(R) products, call centers and messaging
systems. In addition, higher sales of SYSTIMAX(R) structured cabling contributed
to the revenue growth in the United States. International revenues represented
15.8% of revenue for 1997.
During fiscal 1997, Lucent acquired Octel and Agile. Combined with Octel, Lucent
offers a wide array of messaging products and services to reach most customer
segments: wireless customers, central-office-based customers and business
customers of any size, while Agile contributes technology that supports a closer
integration of applications that combine voice and data. Through these
acquisitions, Lucent has added new in-process and existing technologies to its
voice and data networking capabilities. Utilizing these acquired in-process
technologies, the development of the next generation of products will involve
certain risks due to the complexity and uncertainty inherent in research and
development efforts.
- ----------
(R) Registered trademark of Lucent
<PAGE> 7
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales of MICROELECTRONIC PRODUCTS increased $440 million or 19.0% compared with
1996, due to higher sales of customized chips for computing and communications,
including components for local area networks, data networking, high-end computer
workstations and wireless telephones. Higher sales of power systems and
optoelectronic components also contributed to the increase for 1997. Domestic
revenues increased 12.5% compared with 1996, led by sales to original equipment
manufacturers ("OEMs"). The growth in international revenues of 25.9% was driven
by application specific integrated circuits ("ASICs") sales in the Asia/Pacific
region as well as the growth of wireless and multimedia integrated circuits and
power products sold to customers in Europe for cellular applications.
International revenues represented 51.3% of the Microelectronic Products sales
for 1997. Microelectronic Products continues to bring to market new
technologies, such as the introduction of the K56flex(TM) modem technology.
Revenues from CONSUMER PRODUCTS decreased $418 million or 29.2% compared with
1996. The decline in revenues was primarily due to decreased product sales
related to the closing of the Phone Center Stores, the discontinuation of
unprofitable product lines and the continued decrease in phone rental revenues.
Lucent's Consumer Products unit was contributed to the venture between Lucent
and Philips on October 1, 1997.
Revenues from OTHER SYSTEMS AND PRODUCTS decreased $272 million or 32.4%
compared with 1996. The decrease is largely due to the sale of Lucent's Custom
Manufacturing Services business in fiscal year 1997 and its Paradyne subsidiary
in fiscal year 1996. Revenues in this product line are expected to continue to
decline, reflecting the sale of Lucent's ATS unit to General Dynamics
Corporation on October 1, 1997. ATS designed and manufactured custom defense
systems for the United States government.
GROSS MARGIN
Gross margin percentage increased to 43.5% from 38.2% in 1996 primarily due to
the restructuring charges recorded in the quarter ended December 31, 1995.
Excluding restructuring charges, gross margin for 1996 was 42.0%. The increase
in gross margin percentage for 1997 was due to an overall favorable mix of
higher margin product revenues and the benefits associated with the business
productivity improvement initiatives.
(TM) Trademark of Lucent
<PAGE> 8
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OPERATING EXPENSES
Selling, general and administrative expenses decreased $1,506 million or 20.7%
compared with 1996. Excluding the $1,645 million of restructuring charges
recorded in December 1995, selling, general and administrative expenses
increased $139 million compared with 1996. This increase was due to expenditures
associated with higher sales levels, investment in growth initiatives, and the
implementation of SAP, an integrated software platform. These increases were
partially offset by the reversal of $174 million of business restructuring
liabilities in 1997, the lower start-up costs incurred in 1997, and business
productivity improvement initiatives, including lower expenses since some
businesses were exited in fiscal 1997 and 1996. Selling, general and
administrative expenses as a percentage of revenue declined 2.3 percentage
points to 21.9% of revenue compared with 24.2% of revenues, excluding
restructuring charges in 1996.
Research and development expenses increased $472 million or 18.5% compared with
1996. Excluding the impact of restructuring charges for the quarter ended
December 31, 1995, research and development expenses increased by $736 million,
primarily due to expenditures in support of wireless infrastructure,
microelectronic products and advanced multimedia communications systems as well
as a $127 million write-down of special-purpose Bell Labs assets no longer being
used. Research and development expenses represented 11.5% of revenues as
compared with 11.0% of revenues in 1996. Research and development expenses as a
percentage of revenues increased 1.7 percentage points from 9.8%, excluding
restructuring charges in 1996.
Purchased in-process research and development for 1997 reflects one-time
write-offs totaling $1,024 million of in-process research and development in
connection with the acquisitions of Octel (see Note 1) and Agile.
OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES
Other income-net decreased $77 million compared with 1996. This decrease was
largely due to gains recognized on the sale of certain investments and insurance
recoveries in 1996, offset in part by increased interest income in 1997.
Interest expense increased $12 million compared with 1996 due primarily to
replacing a portion of commercial paper with long-term debt in July 1996.
The effective tax rate of 63.1% for 1997 increased from the effective tax rate
of 22.4% for the same period of 1996 due to the 1997 write-offs of in-process
research and development costs and the tax impact of restructuring charges
incurred in 1996. Excluding charges related to the acquisition of Agile and
Octel, the effective tax rate for 1997 was 37.2%, a decrease of 3.6 percentage
points from the 1996 effective tax rate of 40.8% before considering the effects
of restructuring charges incurred in 1996. This decrease is primarily
attributable to the tax impact of foreign earnings.
<PAGE> 9
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CASH FLOWS
Cash provided by operating activities was $1,946 million in 1997, an increase of
$967 illion compared with the same period in 1996. This increase in cash was
largely due to the retention of $2,000 million of customer accounts receivable
by AT&T in 1996 as well as the increase in sales associated with higher cash
collections. This was offset by changes in accounts payable due to the end of
payments to AT&T related to the Separation and the change in other operating
assets and liabilities over 1996. The change in other operating assets and
liabilities was primarily due to the receipt of a $500 million cash advance made
to Lucent in April 1996 by AT&T and the utilization by AT&T of that advance in
1997.
Cash payments of $483 million were charged against the December 1995 business
restructuring reserves in 1997. As of September 30, 1997, the workforce had been
reduced by approximately 17,900 positions in connection with business
restructuring. In addition, approximately 1,000 employees left Lucent's
workforce as part of the sale of Paradyne in 1996. Actual experience in employee
separations, combined with redeploying employees into other areas of the
business, has resulted in lower separation costs than originally anticipated.
Comparing 1997 and 1996, cash used in investing activities increased to $3,121
million from $1,638 million primarily due to the acquisition of Octel.
Capital expenditures were $1,635 million and $1,432 million for 1997 and 1996,
respectively. Capital expenditures include expenditures for equipment and
facilities used in manufacturing and research and development, including
expansion of manufacturing capacity and international growth.
Cash provided by financing activities for 1997 was $295 million compared $2,503
million in 1996. This decrease was primarily due to the proceeds received from
the IPO in the year-ago period.
In 1995, Lucent relied on AT&T to provide financing for its operations. The cash
flows from financing activities for the period ended September 30, 1996 reflect
changes in the Company's assumed capital structure. These cash flows are not
necessarily indicative of the cash flows that would have resulted if the Company
had been a stand-alone entity.
<PAGE> 10
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
NINE MONTHS ENDED SEPTEMBER 30, 1996 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1995
REVENUES
Total revenues increased $1,873 million or 13.4% for the nine-month period of
1996, compared with the same period of 1995, primarily due to gains in sales
from Systems for Network Operators, Microelectronic Products and Business
Communications Systems. The overall revenue growth was partially offset by the
expected decline in revenues from Consumer Products due to the closing of the
Phone Center Stores, discontinuance of unprofitable product lines and the
decreased telephone rental revenues. Revenue growth continued to be generated
from sales both in the United States and internationally (including exports).
International revenues represented 23.1% of total revenues in 1996. The
following table presents Lucent's revenues by product line, and the related
percentage of total revenues for the nine months ended September 30, 1996 and
1995 (1995 has been restated to align intellectual property and other service
revenues with Lucent's operating units):
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
Dollars in Millions --------------------------------------------------
As a Percentage As a Percentage
1996 of Total Revenue 1995 of Total Revenue
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Systems for Network Operators........ $ 8,637 54% $ 6,914 49%
Business Communications Systems...... 3,983 25 3,710 27
Microelectronic Products............. 1,756 11 1,420 10
Consumer Products.................... 880 6 1,238 9
Other Systems and Products........... 603 4 704 5
Total................................ $15,859 100% $13,986 100%
</TABLE>
Revenues from SYSTEMS FOR NETWORK OPERATORS increased $1,723 million or 24.9%
compared with the same period in 1995. The increase was driven by higher sales
of switching, transmission, fiber-optic cable products and professional
services. Demand for those products was driven by second-line subscriber growth
and customer demand for continued network upgrades.
Software sales increased $117 million or 15.0% compared with the same period in
1995. For 1996, sales of wireless infrastructure increased $69 million or 6.4%
compared with the same period in 1995.
Sales from Systems for Network Operators in the United States increased 23.4%
and international revenues increased 29.6% compared with the same period in
1995. The revenue increase in the United States was led by sales to AT&T and the
Regional Bell Operating Companies, partially offset by a revenue decrease
resulting from Lucent's exit from the copper cable business in 1995. Increased
sales of infrastructure systems and services drove the international revenue
growth in the Asia/Pacific and Europe/Middle East/Africa regions. In addition,
the international revenue increase included approximately $298 million in
revenue from several manufacturing and other operations of certain subsidiaries
of Philips Electronics N.V. acquired in 1996 ("Philips Acquisition").
International revenues represented 24.8% of revenues from Systems for Network
Operators in the nine-month period of 1996.
<PAGE> 11
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In 1996, Lucent focused resources on marketing CDMA technology since this
technology had shown acceptance in both the international and domestic markets.
In addition, Lucent made progress in the buildout of CDMA infrastructure for
PrimeCo Personal Communications LP in 1996. During the first calendar quarter of
1996, Lucent was awarded a contract from Sprint Spectrum Holdings LP ("Sprint
PCS") to supply equipment and services for approximately 60% of Sprint PCS's
market areas for its nationwide PCS wireless network over a five-year period.
Revenues from BUSINESS COMMUNICATIONS SYSTEMS increased $273 million or 7.4%
compared with the same period in 1995. This increase was primarily due to higher
sales in the United States and internationally, partially offset by the
continued erosion of the rental base. The revenue growth in the United States
was led by sales of DEFINITY(R) products, SYSTIMAX(R) structured cabling systems
and INTUITY(TM) voice messaging products as well as higher revenue from call
centers and maintenance contracts.
International revenues increased by 24.7%, reflecting growth in all
international regions.
Sales of MICROELECTRONIC PRODUCTS increased $336 million or 23.7% compared with
the same period in 1995 due to higher sales of DSPs and ASICs to OEMs, both
internationally and in the United States. Domestic revenues increased 14.7%
compared with the same period in 1995, led by sales to OEMs. The growth in
international revenues of 34.6% was driven by continued strength of DSPs and
ASICs sales in the Asia/Pacific region. International revenues represented 49.0%
of the Microelectronic Products sales for the nine-month period of 1996.
Revenues from CONSUMER PRODUCTS decreased $358 million or 28.9% compared with
the same period in 1995. The expected decline in revenues was primarily due to
the decrease in product sales resulting from the closing of the Phone Center
Stores, the discontinuance of unprofitable product lines and the decrease in
telephone rentals.
Revenues from OTHER SYSTEMS AND PRODUCTS decreased $101 million or 14.3%
compared with the same period in 1995. These revenues included sales from the
Paradyne subsidiary sold in July 1996 as well as the Custom Manufacturing
Services business, which Lucent sold in December 1996.
GROSS MARGIN
Gross margin percent declined to 41.4% from 43.9% in the year-ago period due to
changes in the mix of revenues, erosion of high margin rental revenues and lower
margins on products from the Philips Acquisition. The revenue mix reflected a
high proportion of hardware sales and a high proportion of revenues from
contracts accounted for on a percentage of completion basis.
OPERATING EXPENSES
Selling, general and administrative expenses increased $207 million or 5.1%
compared with the same period in 1995. Included are approximately $160 million
due to expenditures associated with start-up related costs such as advertising
and creating a new information systems infrastructure, as well as the additional
expenses resulting from the Philips Acquisition.
- ----------
(R) Registered trademark of Lucent
(TM) Trademark of Lucent
<PAGE> 12
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Selling, general and administrative expenses were 26.8% of revenues for the
nine-month period of 1996 compared with 28.9% of revenues for the same period in
1995.
Research and development expenses increased $166 million or 9.9% compared with
the same period in 1995. Research and development expenses represented 11.6% of
revenues for the nine-month period of 1996 compared with 12.0% of revenues for
the same period in 1995.
OTHER INCOME AND PROVISION FOR INCOME TAXES
Other income--net increased $54 million compared with the same period in 1995.
The increase was primarily due to interest income on short-term investments.
The effective income tax rate of 39.0% for the nine-month period of 1996
decreased from 40.2% in the same period of 1995, primarily due to increased
federal research tax credits.
CASH FLOWS
Cash used in operating activities was $4 million compared with $505 million in
the same period in 1995. The change was due to an increase in prepayments from
customers. Additionally, inventory in 1996 remained relatively level versus the
buildup reported in 1995. These activities were offset by AT&T's retention of
$2,000 million of accounts receivable in 1996.
Cash payments of $456 million related to business restructuring were made during
the nine months of 1996. The September 30, 1996 remaining balance will result in
future cash payments over the next two years. Of the 22,000 employee separations
announced as part of the 1995 business restructuring, approximately 11,400
people left the workforce as of September 30, 1996. In addition, approximately
1,000 employees left Lucent's workforce as part of the sale of Paradyne. Actual
experience in employee separations, combined with redeployment of employees into
other areas of the business, has resulted in lower separation costs than
originally anticipated. Lucent anticipates that approximately 70% of the total
expected employee separations will be complete by the end of December 1996.
Comparing the nine-month periods ended September 30, 1996 and 1995, cash used in
investing activities increased to $1,066 million from $770 million. The increase
in cash used in investing activities was largely the result of the Philips
Acquisition and higher capital expenditures compared with the same period in
1995. Capital expenditures were $939 million and $784 million for the nine-month
periods ended September 30, 1996 and 1995, respectively. These expenditures
related to the expansion of manufacturing capacity of Microelectronic Products
and the necessary expansion of various other facilities.
Cash provided by financing activities increased primarily due to the proceeds
from the IPO in 1996 compared with the same period in 1995.
In 1995, Lucent relied on AT&T to provide financing for its operations. Cash
flows from financing activities in 1995 principally reflect changes in Lucent's
assumed capital structure. These cash flows are not necessarily indicative of
the cash flows from financing activities that would have resulted if Lucent was
a stand-alone entity.
<PAGE> 13
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total assets as of September 30, 1997, increased $1,185 million or 5.2% from
September 30, 1996, due to increases in contracts in process and other assets
offset by decreases in cash and inventory. The increase in contracts in process
reflects the buildout for large contracts while the increase in other assets
reflects the goodwill associated with the acquisition of Octel. The decrease in
cash was largely due to Lucent's cash payments in connection with the
acquisition of Octel offset by increased cash collections from customers.
For the year ended September 30, 1997, Lucent's inventory turnover ratio was 4.0
times compared with 3.3 times for the twelve months ended September 30, 1996.
The increase was primarily due to improved inventory management at the factories
and in the distribution channels. Inventory turnover is defined as cost of sales
(excluding costs related to long-term contracts) divided by average inventory
during the year.
Accounts receivable were outstanding an average of 64 days for the period ended
September 30, 1997 compared with 68 days for the same period in 1996. The
decrease in days outstanding was due to a faster level of cash collections in
1997 compared with 1996.
Working capital, defined as current assets less current liabilities, decreased
$305 million from September 30, 1996 largely due to the decrease in cash.
The fair value of Lucent's pension plan assets is greater than the projected
pension obligations. Lucent records pension income when the expected return on
plan assets plus amortization of the transition asset is greater than the
interest cost on the projected benefit obligation plus service cost for the
year. Consequently, Lucent continued to have a net pension credit that added to
prepaid pension costs in 1997 and beyond.
Lucent expects that, from time to time, outstanding commercial paper balances
may be replaced with short- or long-term borrowings as market conditions permit.
At September 30, 1997, Lucent maintained approximately $5,200 million in credit
facilities of which a portion is used to support Lucent's commercial paper
program. At September 30, 1997, approximately $5,000 million of these credit
facilities were unused. Future financings will be arranged to meet Lucent's
requirements with the timing, amount and form of issue depending on prevailing
market and general economic conditions. Lucent anticipates that borrowings under
its bank credit facilities, the issuance of additional commercial paper, cash
generated from operations and short- and long-term debt financings will be
adequate to satisfy its future cash requirements, although there can be no
assurance that this will be the case.
Network operators, domestically and internationally, increasingly have required
their suppliers to arrange or provide long-term financing for them as a
condition to obtaining or bidding on infrastructure projects. These projects may
require financing in amounts ranging from modest sums to over a billion dollars.
In this regard, Lucent entered into a credit agreement in October 1996 to
provide Sprint PCS long-term financing of $1,800 million for purchasing
equipment and services for its PCS network.
In May 1997, under the $1,800 million credit facility provided by Lucent to
Sprint PCS, Lucent closed transactions to lay off $500 million of loans and
undrawn commitments and $300 million of undrawn commitments to a group of
institutional investors and Sprint Corporation (a partner in Sprint PCS),
respectively. As of September 30, 1997, $146 million of these commitments were
not yet drawn down by Sprint PCS.
As part of the revenue recognition process, Lucent has assessed the
collectibility of the accounts receivable relating to the Sprint PCS purchase
contract in light of its financing commitment to Sprint PCS. Lucent has
determined that the receivables under the contract are reasonably assured of
collection based on various factors among which was the ability of Lucent to
sell the loans and commitments without recourse. Lucent intends to continue
pursuing opportunities for the sale of future loans and commitments.
<PAGE> 14
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Lucent has also entered into agreements to extend credit of up to an aggregate
of approximately $850 million to three other PCS operators for possible future
sales. As of September 30, 1997, no amounts had been advanced under these
agreements. On October 1, 1997, a commitment for $300 million included in the
$850 million expired and was not extended. The agreement relating to about $200
million of credit is subject to fulfillment of certain conditions and completion
of final contract documentation. Lucent is continuing to propose, and commit to
provide, financing where appropriate for its business, in addition to the above
arrangements. The ability of Lucent to arrange or provide financing for network
operators will depend on a number of factors, including Lucent's capital
structure and level of available credit.
Lucent believes that it will be able to access the capital markets on terms and
in amounts that will be satisfactory, and 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, although there
can be no assurance that this will be the case.
The ratio of total debt to total capital (debt plus equity) was 55.4% at
September 30, 1997 compared with 59.8% at September 30, 1996. Excluding the
one-time charges related to the acquisition of Octel for the twelve months ended
September 30, 1997, the return on assets was 6.5% compared with 5.3% for the
twelve months ended September 30, 1996, excluding business restructuring and
other charges.
RISK MANAGEMENT
Lucent is exposed to market risk from changes in foreign currency exchange rates
and interest rates, which could impact its results of operations and financial
condition. Lucent manages its exposure to these market risks through its regular
operating and financing activities and, when deemed appropriate, through the use
of derivative financial instruments. Derivative financial instruments are viewed
as risk management tools and are not used for speculative or trading purposes.
In addition, derivative financial instruments are entered into with a
diversified group of major financial institutions in order to manage Lucent's
exposure to nonperformance on such instruments.
Lucent uses foreign currency derivative instruments to reduce its exposure to
the risk that the eventual net cash inflows and outflows resulting from the sale
of products to foreign customers and purchases from foreign suppliers will be
adversely affected by changes in exchange rates. The foreign currency exchange
contracts are designated for firmly committed or forecasted purchases and sales.
The use of these derivative financial instruments allows Lucent to reduce its
overall exposure to exchange rate movements, since the gains and losses on these
contracts substantially offset losses and gains on the assets, liabilities and
transactions being hedged. As of September 30, 1997 and 1996, Lucent's primary
foreign currency market exposures include Deutsche marks, Japanese yen and Dutch
guilders. There have been no changes in how such exposures are managed since the
nine-month period ended September 30, 1996. Management does not foresee or
expect any significant changes in foreign currency exposure or in the strategies
it employs to manage such exposures in the near future.
Foreign currency exchange contracts are sensitive to changes in foreign currency
exchange rates. As of September 30, 1997, 10% appreciations from the prevailing
market rates of Deutsche marks, Japanese yen and Dutch guilders would increase
the related unrealized gain by $16 million. Conversely, 10% depreciations of
these currencies from the prevailing market rates would decrease the related
unrealized gain by $20 million. Unrealized gains/losses in foreign currency
exchange contracts are defined as the difference between the hypothetical rates
and the current market exchange rates. Consistent with the nature of the
economic hedge of such foreign currency exchange contracts, such unrealized
gains or losses would be offset by corresponding decreases or increases,
respectively, of the underlying instrument or transaction being hedged.
<PAGE> 15
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
While Lucent hedges actual and anticipated transactions with customers, the
decline in value of the Asia/Pacific currencies may, if not reversed, adversely
affect future product sales because Lucent products may become more expensive
for customers to purchase in their local currency.
Lucent manages its ratio of fixed to floating rate debt with the objective of
achieving a mix that management believes is appropriate. To manage this mix in a
cost effective manner, Lucent, from time to time, enters into interest rate swap
agreements, in which it agrees to exchange various combinations of fixed and/or
variable interest rates based on agreed upon notional amounts. Lucent had no
material interest rate swap agreements in effect as of September 30, 1997 and
1996. The strategy employed by Lucent to manage its exposure to interest rate
fluctuations is unchanged from that date. Management does not foresee or expect
any significant changes in its exposure to interest rate fluctuations or in how
such exposure is managed in the near future.
Various financial instruments held or issued by Lucent are sensitive to changes
in interest rates. Interest rate changes would result in gains/losses in the
market value of Lucent's term debt, commercial paper and investments due to
differences between the market interest rates and rates at the inception of
these financial instruments. Based on Lucent's term debt and commercial paper
outstanding at September 30, 1997 and current market perception, a 100 basis
point increase in the interest rates as of September 30, 1997 would result in a
net reduction of the market value of these instruments of $80 million.
Conversely, a 100 basis point decrease in the interest rates would result in an
$86 million net increase in the market value of Lucent's term debt and
commercial paper outstanding at September 30, 1997. Neither a 100 basis point
increase nor decrease from current interest rates would have a material impact
on the market value of Lucent's investments.
OTHER
Lucent's current and historical operations are subject to a wide range of
environmental protection laws. In the United States, these laws often require
parties to fund remedial action regardless of fault. Lucent has remedial and
investigatory activities underway at about 40 current and former facilities. In
addition, Lucent was named a successor to AT&T as a potentially responsible
party ("PRP") at numerous "Superfund" sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or
comparable state statutes. Under the Separation and Distribution Agreement,
among AT&T, Lucent and NCR Corporation ("NCR") dated as of February 1, 1996, and
amended and restated as of March 29, 1996 ("Separation and Distribution
Agreement"), Lucent is responsible for all liabilities primarily resulting from
or related to the operation of Lucent's business as conducted at any time prior
to or after the Separation including related businesses discontinued or disposed
of prior to the Separation, and Lucent's assets including, without limitation,
those associated with these sites. In addition, under the Separation and
Distribution Agreement, Lucent is required to pay a portion of contingent
liabilities paid out in excess of certain amounts by AT&T and NCR, including
environmental liabilities.
It is often difficult to estimate the future impact of environmental matters,
including potential liabilities. Lucent records an environmental reserve when it
is probable that a liability has been incurred and the amount of the liability
is reasonably estimable. This practice is followed whether the claims are
asserted or unasserted. Management expects that the amounts reserved will be
paid out over the period of remediation for the applicable site which ranges
from 5 to 30 years. Reserves for estimated losses from environmental remediation
are, depending on the site, based primarily upon internal or third party
environmental studies, and estimates as to the number, participation level and
financial viability of any other PRPs, the extent of the contamination and the
nature of required remedial actions. Accruals are adjusted as further
information develops or
<PAGE> 16
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
circumstances change. The amounts provided for in Lucent's consolidated
financial statements in respect to environmental reserves are the gross
undiscounted amount of such reserves, 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 financial statements. Although Lucent believes that its
reserves are adequate, there can be no assurance that the amount of capital and
other expenditures that will be required relating to remedial actions and
compliance with applicable environmental laws will not exceed the amounts
reflected in Lucent's reserves or will not have a material adverse effect on
Lucent's financial condition, results of operations or cash flows.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of financial condition and results of
operations and other sections of this Annual Report contain forward-looking
statements that are based on current expectations, estimates and projections
about the industries in which Lucent operates, management's beliefs and
assumptions made by management. In addition, other written or oral statements
which constitute forward-looking statements may be made by or on behalf of the
Company. Words such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates," or variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions ("Future Factors") which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward-looking statements. The Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
Future Factors include increasing price and product/services competition by
foreign and domestic competitors, including new entrants; rapid technological
developments and changes and the Company's ability to continue to introduce
competitive new products and services on a timely, cost effective basis; the mix
of products/services; the achievement of lower costs and expenses; domestic and
foreign governmental and public policy changes which may affect the level of new
investments and purchases made by customers; changes in environmental and other
domestic and foreign governmental regulations; protection and validity of patent
and other intellectual property rights; reliance on large customers;
technological, implementation and cost/financial risks in increasing use of
large, multi-year contracts; the cyclical nature of the Company's business; the
outcome of pending and future litigation and governmental proceedings and
continued availability of financing, financial instruments and financial
resources in the amounts, at the times and on the terms required to support the
Company's future business. These are representative of the Future Factors that
could affect the outcome of the forward-looking statements. In addition, such
statements could be affected by general industry and market conditions and
growth rates, general domestic and international economic conditions including
interest rate and currency exchange rate fluctuations and other Future Factors.
For a further description of Future Factors that could cause actual results to
differ materially from such forward-looking statements, see below in this Annual
Report and also see the discussion in the Company's Form 10-K for the year ended
September 30, 1997 in Item 1 under the section entitled "OUTLOOK-Forward Looking
Statements" and the remainder of the OUTLOOK section.
Competition:
See discussion above under KEY BUSINESS CHALLENGES.
<PAGE> 17
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Dependence On New Product Development:
The markets for the Company's principal products are characterized by rapidly
changing technology, evolving industry standards, frequent new product
introductions and evolving methods of building and operating communications
systems for network operators and business customers. The Company's operating
results will depend to a significant extent on its ability to continue to
introduce new systems, products, software and services successfully on a timely
basis and to reduce costs of existing systems, software and services. The
success of these and other new offerings is dependent on several factors,
including proper identification of customer needs, cost, timely completion and
introduction, differentiation from offerings of the Company's competitors and
market acceptance. In addition, new technological innovations generally require
a substantial investment before any assurance is available as to their
commercial viability, including, in some cases, certification by international
and domestic standards-setting bodies.
Reliance on Major Customers:
See discussion above under KEY BUSINESS CHALLENGES.
Readiness for Year 2000:
Lucent has taken actions to understand the nature and extent of the work
required to make its systems, products and infrastructure Year 2000 compliant.
Lucent began work several years ago to prepare its products and its financial,
information and other computer-based systems for the Year 2000, including
replacing and/or updating existing legacy systems. Lucent continues to evaluate
the estimated costs associated with these efforts based on actual experience.
While these efforts will involve additional costs, Lucent believes, based on
available information, that it will be able to manage its total Year 2000
transition without any material adverse effect on its business operations,
products or financial prospects.
Multi-Year Contracts:
See discussion above under FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES,
AND KEY BUSINESS CHALLENGES
Seasonality:
See discussion above under KEY BUSINESS CHALLENGES.
Future Capital Requirements:
See discussion above under FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
International Growth:
Lucent intends to continue to pursue growth opportunities in international
markets. In many international markets, long-standing relationships between
potential customers of the Company and their local providers, and protective
regulations, including local content requirements and type approvals, create
barriers to entry. In addition, pursuit of such international growth
opportunities may require significant investments for an extended period before
returns on such investments, if any, are realized. Such projects and investments
could be adversely affected by reversals or delays in the opening of foreign
markets to new competitors, exchange controls, currency fluctuations, investment
policies, repatriation of cash, nationalization, social and political risks,
taxation, and other factors, depending on the country in which such opportunity
arises.
Foreign Exchange:
See discussion above under RISK MANAGEMENT.
<PAGE> 18
18
REPORT OF MANAGEMENT
Management is responsible for the preparation of Lucent Technologies Inc.'s
consolidated financial statements and all related information appearing in this
Annual Report. The financial statements and notes have been prepared in
conformity with generally accepted accounting principles and include certain
amounts which are estimates based upon currently available information and
management's judgment of current conditions and circumstances.
To provide reasonable assurance that assets are safeguarded against loss from
unauthorized use or disposition and that accounting records are reliable for
preparing financial statements, management maintains a system of accounting and
other controls, including an internal audit function. Even an effective internal
control system, no matter how well designed, has inherent limitations including
the possibility of circumvention or overriding of controls - and therefore can
provide only reasonable assurance with respect to financial statement
presentation. The system of accounting and other controls is improved and
modified in response to changes in business conditions and operations and
recommendations made by the independent public accountants and the internal
auditors.
The Audit and Finance Committee of the Board of Directors, which is composed of
directors who are not employees, meets periodically with management, the
internal auditors and the independent auditors to review the manner in which
these groups of individuals are performing their responsibilities and to carry
out the Audit and Finance Committee's oversight role with respect to auditing,
internal controls and financial reporting matters. Periodically, both the
internal auditors and the independent auditors meet privately with the Audit and
Finance Committee and have access to its individual members.
Lucent engaged Coopers & Lybrand L.L.P., independent public accountants, to
audit the consolidated financial statements in accordance with generally
accepted auditing standards, which include consideration of the internal control
structure. Their report appears on this page.
Richard A. McGinn - signed Donald K. Peterson - signed
Chief Executive Officer Executive Vice President,
and President Chief Financial Officer
<PAGE> 19
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners of Lucent Technologies Inc.:
We have audited the consolidated balance sheets of Lucent Technologies Inc. and
subsidiaries as of September 30, 1997 and 1996 and the related consolidated
statements of income, changes in shareowners' equity, and cash flows for the
year and nine-month period ended September 30, 1997 and 1996, respectively and
the year ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lucent
Technologies Inc. and subsidiaries as of September 30, 1997 and 1996, and the
consolidated results of their operations, and their cash flows for the year and
nine-month period ended September 30, 1997 and 1996, respectively and the year
ended December 31, 1995, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P. - Signed
1301 Avenue of the Americas
New York, New York
October 21, 1997
<PAGE> 20
20
Lucent Technologies Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
September 30, September 30, December 31,
----------------- --------------------- --------------
1997 1996 1996 1995 1995
- ------------------------------------------------------------------------------------------
UNAUDITED UNAUDITED
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $26,360 $23,286 $15,859 $13,986 $ 21,413
Costs 14,898 14,392 9,290 7,843 12,945
Gross margin 11,462 8,894 6,569 6,143 8,468
Operating expenses
Selling, general
and administrative 5,784 7,290 4,244 4,037 7,083
Research and development 3,023 2,551 1,838 1,672 2,385
Purchased in-process
research and development 1,024 - - - -
Total operating expenses 9,831 9,841 6,082 5,709 9,468
Operating income(loss) 1,631 (947) 487 434 (1,000)
Other income - net 141 218 96 42 164
Interest expense 305 293 216 225 302
Income(loss) before 1,467 (1,022) 367 251 (1,138)
income taxes
Provision(benefit) for
income taxes 926 (229) 143 101 (271)
Net income(loss) $ 541 $ (793) $ 224 $ 150 $ (867)
Weighted average
common shares
outstanding (millions) 644.1 578.1 595.9 524.6 524.6
Earnings(loss) per
common share $ 0.84 $ (1.37) $ 0.38 $ 0.28 $ (1.65)
Dividends per
common share $ 0.225 $ 0.15 $ 0.15 $ - $ -
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 21
21
Lucent Technologies Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions, Except Per Share Amounts)
September 30, September 30,
1997 1996
------------- ------------
ASSETS
Cash and cash equivalents $ 1,350 $ 2,241
Accounts receivable less
allowances of $352 in 1997 and
$273 in 1996 5,373 4,914
Inventories 2,926 3,288
Contracts in process (net of progress
billings of $2,003 in 1997 and
$708 in 1996) 1,046 505
Deferred income taxes - net 1,333 1,617
Other current assets 473 216
Total current assets 12,501 12,781
Property, plant and equipment, net 5,147 4,687
Prepaid pension costs 3,172 2,828
Deferred income taxes - net 1,262 979
Capitalized software development costs 293 362
Other assets 1,436 989
Total assets $ 23,811 $ 22,626
LIABILITIES
Accounts payable $ 1,931 $ 1,900
Payroll and benefit-related
liabilities 2,178 2,492
Postretirement and postemployment
benefit liabilities 239 220
Debt maturing within one year 2,538 2,363
Other current liabilities 3,852 3,738
Total current liabilities 10,738 10,713
Postretirement and postemployment
benefit liabilities 6,073 5,642
Long-term debt 1,665 1,634
Other liabilities 1,948 1,951
Total liabilities $ 20,424 $ 19,940
Commitments and contingencies
SHAREOWNERS' EQUITY
Preferred stock - par value $1 per share
Authorized 250,000,000 shares $ - $ -
Issued and outstanding shares: none
Common stock - par value $.01 per share
Authorized shares: 3,000,000,000
Issued and outstanding shares:
642,062,656 at September 30, 1997;
636,662,634 at September 30, 1996 6 6
Additional paid-in capital 3,047 2,595
Guaranteed ESOP obligation (77) (106)
Foreign currency translation (191) (16)
Retained earnings 602 207
Total shareowners' equity $ 3,387 $ 2,686
Total liabilities and shareowners' equity $ 23,811 $ 22,626
See Notes to Consolidated Financial Statements.
<PAGE> 22
22
Lucent Technologies Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREOWNERS' EQUITY
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
September 30, 1997 September 30, 1996 December 31,1995
------------------ ------------------ ----------------
<S> <C> <C> <C>
PREFERRED STOCK
COMMON STOCK
Balance at beginning of period $ 6 $ - $ -
Issuance of common shares - 6 -
Balance at end of period 6 6 -
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period 2,595 1,406 -
Issuance of common shares 260 2,881 -
Conversion of Octel stock options 116 - -
Net loss from 1/1/96 through 1/31/96 - (72) -
Dividends declared - (7) -
Accounts receivable holdback
by AT&T - (2,000) -
Unrealized gain on investments 40 15 -
Acceptance of ESOP - 120 -
Other contributions from AT&T - 252 1,406
Other 36 - -
Balance at end of period 3,047 2,595 1,406
GUARANTEED ESOP OBLIGATION
Balance at beginning of period (106) - -
Acceptance of ESOP - (120) -
Amortization of ESOP obligation 29 14 -
Balance at end of period (77) (106) -
FOREIGN CURRENCY
TRANSLATION ADJUSTMENTS
Balance at beginning of period (16) 28 92
Translation adjustments (175) (44) (64)
Balance at end of period (191) (16) 28
SHAREOWNER'S NET INVESTMENT
Balance at beginning of period - - 2,384
Net loss - - (867)
Transfers to AT&T - - (111)
Transfer to additional paid-in capital - - (1,406)
Balance at end of period - - -
RETAINED EARNINGS
Balance at beginning of period 207 - -
Net income 541 - -
Net income from 2/1/96
through 9/30/96 - 296 -
Dividends declared (146) (89) -
Balance at end of period 602 207 -
TOTAL SHAREOWNERS' EQUITY $ 3,387 $ 2,686 $ 1,434
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 23
23
Lucent Technologies Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
September 30, September 30, December 31,
------------------ --------------------- --------------
1997 1996 1996 1995 1995
- ------------------------------------------------------------------------------------------
UNAUDITED UNAUDITED
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income(loss) $ 541 $ (793) $ 224 $ 150 $ (867)
Adjustments to reconcile
net income(loss)
to net cash provided by
(used in)operating activities:
Business restructuring
charge (201) 2,515 (98) - 2,613
Asset impairment
and other charges 81 293 105 - 188
Depreciation and
amortization 1,450 1,326 937 1,104 1,493
Provision for
uncollectibles 127 73 54 50 69
Deferred income taxes 9 (996) (251) 92 (653)
Purchased in-process
research and development 1,024 - - - -
(Increase)decrease in
accounts receivable (389) (3,114) (1,506) 405 (1,203)
Increase in inventories
and contracts in process (273) (309) (524) (1,304) (1,089)
Increase(decrease) in
accounts payable (16) 1,021 629 (121) 271
Changes in other operating
assets and liabilities (315) 1,040 537 (744) (241)
Other adjustments for
noncash items - net (92) (77) (111) (137) (103)
Net cash provided by(used in)
operating activities 1,946 979 (4) (505) 478
Investing Activities:
Capital expenditures (1,635) (1,432) (939) (784) (1,277)
Proceeds from the sale or
disposal of property, plant
and equipment 108 119 15 14 118
Purchases of
equity investments (149) (96) (46) (36) (86)
Sales of equity investments 12 102 102 - -
Dispositions of businesses 181 58 58 10 10
Acquisitions of businesses,
net of cash acquired (1,568) (234) (234) - -
Other investing
activities - net (70) (155) (22) 26 (107)
Net cash used in
investing activities (3,121) (1,638) (1,066) (770) (1,342)
</TABLE>
See Notes to Consolidated Financial Statements.
(CONT'D)
<PAGE> 24
24
Lucent Technologies Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONT'D)
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
September 30, September 30, December 31,
------------------ --------------------- --------------
1997 1996 1996 1995 1995
- ------------------------------------------------------------------------------------------
UNAUDITED UNAUDTIED
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financing Activities:
Repayments of long-term debt (16) (53) (39) (32) (46)
Issuance of long-term debt 52 1,499 1,499 - -
Proceeds of issuance
of common stock 260 2,887 2,887 - -
Dividends paid (192) (48) (48) - -
Proceeds(repayments) of
debt sharing
agreement - net - (67) - 948 881
Transfers from(to) AT&T - (190) 13 92 (111)
(Increase)decrease in
short-term borrowings - net 191 (1,525) (1,436) 89 -
Net cash provided by
financing activities 295 2,503 2,876 1,097 724
Effect of exchange rate
changes on cash
and cash equivalents (11) (16) (13) 11 8
Net increase(decrease)
in cash and
cash equivalents (891) 1,828 1,793 (167) (132)
Cash and cash equivalents
at beginning of period 2,241 413 448 580 580
Cash and cash equivalents
at end of period $ 1,350 $ 2,241 $ 2,241 $ 413 $ 448
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 25
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
Lucent Technologies Inc. ("Lucent" or the "Company") was formed from the systems
and technology units of AT&T Corp. ("AT&T") and the associated assets and
liabilities of those units, including Bell Laboratories (the "Separation").
Lucent was incorporated on November 29, 1995 with 1,000 shares of common stock
("Common Stock"), authorized and outstanding, all of which were owned by AT&T.
On April 2, 1996, AT&T obtained an additional 524,623,894 shares of Common Stock
and on April 10, 1996, Lucent issued 112,037,037 shares in an Initial Public
Offering. On September 30, 1996, AT&T distributed to its shareowners all of its
remaining interest in Lucent (the "Distribution").
BASIS OF PRESENTATION
The consolidated financial statements for the nine months ended September 30,
1996 and the year ended December 31, 1995 reflect the results of operations,
changes in shareowners' equity and cash flows, and the financial position of the
business that was transferred to Lucent from AT&T as if Lucent were a separate
entity. The consolidated financial statements have been prepared using the
historical basis of the assets and liabilities and historical results of
operations of these businesses. Additionally, the aforementioned financial
statements include an allocation of certain AT&T corporate headquarters assets,
liabilities and expenses related to the businesses that were transferred to
Lucent from AT&T. Management believes the allocations reflected in the
consolidated financial statements are reasonable. The aforementioned financial
statements may not necessarily reflect the consolidated results of Lucent's
operations, financial position, changes in shareowners' equity or cash flows in
the future or what they would have been had Lucent been a separate, stand-alone
company during such periods.
ACQUISITION
In September 1997, Lucent completed the purchase of all outstanding stock of
Octel Communications Corporation ("Octel"), a provider of voice, fax and
electronic messaging technologies, at an aggregate purchase price of
approximately $1,819 ($1,703 in cash). Lucent paid for the Octel shares from its
general funds which consist of cash from operations and proceeds from short-term
borrowings. The acquisition was accounted for using the purchase method of
accounting. The fair market value of Octel's assets and liabilities, which was
independently determined, has been included in the statement of financial
position as of September 30, 1997. The purchase price was allocated as follows:
Fair value of assets acquired............ $ 664
Fair value of liabilities assumed........ (157)
Goodwill................................. 181
Acquired existing technology............. 186
Purchased in-process research
and development costs................... 945
Total.................................... $1,819
Acquired technology valuation included both existing technology and that
represented by in-process research and development. The valuation was made by
applying the income forecast method which considers the present value of cash
flows by product lines.
The fair value of existing technology products was valued at $186 and is being
amortized over five years. In-process research and development was valued at
$945 and was charged to expense since this technology had not reached
technological feasibility and has no alternative use. This technology will
require varying additional development, coding and testing efforts over the next
one and a half years before assessment of technological feasibility can be
determined.
Goodwill is being amortized over seven years.
<PAGE> 26
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include all majority-owned subsidiaries in
which Lucent exercises significant influence. Investments in which Lucent
exercises significant influence, but which it does not control (generally a 20%
- - 50% ownership interest), are accounted for under the equity method of
accounting. Investments in which Lucent has less than a 20% ownership interest
are accounted for under the cost method of accounting. All material intercompany
transactions and balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
revenue and expenses during the period reported. Actual results could differ
from those estimates. Estimates are used when accounting for long-term
contracts, allowance for uncollectible accounts receivable, inventory
obsolescence, product warranty, depreciation, employee benefits, taxes,
restructuring reserves and contingencies, among others.
EARNINGS PER COMMON SHARE
Earnings per common share was calculated by dividing the net income by the
weighted average shares of common stock and common stock equivalents outstanding
during the periods. Included in the calculation of the weighted average shares
outstanding is the retroactive recognition to January 1, 1995 of the 524,624,894
shares owned by AT&T.
FOREIGN CURRENCY TRANSLATION
For operations outside the United States that prepare financial statements in
currencies other than the United States dollar, results of operations and cash
flows are translated at average exchange rates during the period, and assets and
liabilities are translated at end of period exchange rates. Translation
adjustments are included as a separate component of shareowners' equity.
REVENUE RECOGNITION
Revenue is generally recognized when all significant contractual obligations
have been satisfied and collection of the resulting receivable is reasonably
assured. Revenue from product sales of hardware and software is recognized at
time of delivery and acceptance, and after consideration of all the terms and
conditions of the customer contract. Sales of services are recognized at time of
performance and rental revenue is recognized proportionately over the contract
term. Revenues and estimated profits on long-term contracts are recognized under
the percentage of completion method of accounting using either a
units-of-delivery or a cost-to-cost methodology. Profit estimates are revised
periodically based upon changes in facts. Any losses on contracts are recognized
immediately.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. However, the
costs incurred for the development of computer software that will be sold,
leased or otherwise marketed are capitalized when technological feasibility has
been established. These capitalized costs are subject to an ongoing assessment
of recoverability based upon anticipated future revenues and changes in hardware
and software technologies. Costs that are capitalized include direct labor and
related overhead.
Amortization of capitalized software development costs begins when the product
is available for general release. Amortization is provided on a
product-by-product basis on either the straight-line method over periods not
exceeding two years or the sales ratio method. Unamortized capitalized software
development costs determined to be in excess of net realizable value of the
product are expensed immediately.
<PAGE> 27
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
CASH AND CASH EQUIVALENTS
All highly liquid investments with original maturities of three months or less
are considered to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (determined principally on a
first-in, first-out basis) or market.
CONTRACTS IN PROCESS
Contracts in process are valued at cost plus accrued profits less progress
billings.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated depreciation.
Depreciation is determined using primarily the unit and group methods. The unit
method is used for manufacturing and laboratory equipment and large computer
systems. The group method is used for other depreciable assets. When assets that
were depreciated using the unit method are sold or retired, the gains or losses
are included in operating results. When assets that were depreciated using the
group method are sold or retired, the original cost is deducted from the
appropriate account and accumulated depreciation. Any proceeds are applied
against accumulated depreciation.
Accelerated depreciation is used for certain high technology computer processing
equipment. All other facilities and equipment are depreciated on a straight-line
basis over their estimated useful lives.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and carrying value of the asset.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net assets
acquired in business combinations accounted for as purchases. Goodwill is
amortized on a straight-line basis over the periods benefited, principally in
the range of 5 to 15 years. Goodwill is reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount may not be
recoverable.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
<PAGE> 28
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
3. CHANGES IN ACCOUNTING POLICIES
In February 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards (the "SFAS") No. 128, "Earnings Per
Share" ("SFAS 128"). SFAS 128 simplifies the standards for computing earnings
per share and is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Earlier application is not permitted.
The adoption of SFAS 128 is not expected to have a material impact on Lucent's
previously reported earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in the financial statements. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Lucent is in the process of determining its
preferred format. The adoption of SFAS no. 130 will have no impact on Lucent's
consolidated results of operations, financial position or cash flows.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. Financial statement disclosures for prior
periods are required to be restated. Lucent is in the process of evaluating the
disclosure requirements. The adoption of SFAS No. 131 will have no impact on
Lucent's consolidated results of operations, financial position or cash flows.
4. SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
Nine
Year Ended Months Ended Year Ended
September 30, September 30, December 31,
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
INCLUDED IN COSTS
Amortization of software development costs..... $ 380 $ 218 $ 312
INCLUDED IN SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
Amortization of goodwill....................... $ 32 $ 25 $ 40
INCLUDED IN COSTS AND OPERATING EXPENSES
Depreciation and amortization of property,
plant and equipment.......................... $ 1,008 $ 674 $ 1,109
OTHER INCOME
Interest income................................ $ 132 $ 71 $ 44
Minority interests in earnings of subsidiaries. (35) (21) (20)
Net equity losses from investments............. (64) (26) (25)
Increase in cash surrender value
of life insurance............................ 54 35 40
Loss on foreign currency transactions.......... (12) (4) (26)
Miscellaneous -- net........................... 66 41 151
------- ------- -------
Total other income -- net...................... $ 141 $ 96 $ 164
</TABLE>
<PAGE> 29
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
DEDUCTED FROM INTEREST EXPENSE
Capitalized interest........................... $ 14 $ 14 $ 14
For the period ended September 30, 1997, research and development costs include
a $127 write-down of special purpose Bell Labs assets no longer being used.
SUPPLEMENTARY BALANCE SHEET INFORMATION
September 30, September 30,
1997 1996
------------- -------------
INVENTORIES
Completed goods.................................. $ 1,611 $ 1,837
Work in process and raw materials................ 1,315 1,451
-------- -------
Inventories...................................... $ 2,926 $ 3,288
PROPERTY, PLANT AND EQUIPMENT -- NET
Land and improvements............................ $ 299 $ 275
Buildings and improvements....................... 2,852 2,875
Machinery, electronic and other equipment........ 8,403 7,870
Total property, plant and equipment.............. 11,554 11,020
Less: Accumulated depreciation and amortization.. (6,407) (6,333)
-------- -------
Property, plant and equipment -- net............. $ 5,147 $ 4,687
OTHER CURRENT LIABILITIES
Advance billings and customer deposits $ 844 $ 1,202
SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine
Year Ended Months Ended Year Ended
September 30, September 30, December 31,
1997 1996 1995
------------ ------------- -----------
<S> <C> <C> <C>
Interest payments, net of amounts capitalized $ 307 $ 209 $ 303
Income tax payments ......................... $ 781 $ 142 $ 224
</TABLE>
For information related to the acquisition of Octel, see Note 1.
In addition, the statement of cash flows for the nine-month period ended
September 30, 1996 excludes $2,000 of customer accounts receivable retained by
AT&T as well as net asset transfers of $239 received from AT&T. These
transactions have not been reflected on the consolidated statement of cash flows
because they were noncash events accounted for as changes in paid-in capital.
5. BUSINESS RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of calendar year 1995, a pretax charge of $2,801 was
recorded to cover restructuring costs of $2,613 and asset impairment and other
charges of $188. The restructuring plans included restructuring Lucent's
Consumer Products business, including closing all of the Company-owned retail
Phone Center Stores; consolidating and reengineering numerous corporate and
business unit operations; and selling the Microelectronics interconnect and
Paradyne businesses.
<PAGE> 30
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
The 1995 business restructuring charge of $2,613 included restructuring
liabilities of $1,774, asset impairments of $497 and $342 of benefit plan
losses. Benefit plan losses were related to pension and other employee benefit
plans and primarily represented losses in 1995 from the actuarial changes that
otherwise might have been amortized over future periods.
The pretax total charge for restructuring, impairments and other charges of
$2,801 for 1995 was recorded as $892 of costs, $1,645 of selling, general and
administrative expenses, and $264 of research and development expenses. The
charges included $1,509 for employee separations; $627 for asset write-downs;
$202 for closing, selling and consolidating facilities; and $463 for other
items. The total charges reduced net income by $1,847.
The restructuring charge of $2,613 incorporated the separation costs, both
voluntary and involuntary, for nearly 22,000 employees. As of September 30,
1997, the workforce has been reduced by approximately 17,900 positions due to
business restructuring. In addition, approximately 1,000 employees left Lucent's
workforce as part of the sale of Paradyne in 1996. Actual experience in employee
separations, combined with redeploying employees into other areas of the
business, has resulted in lower separation costs than originally anticipated.
Lucent anticipates that approximately 90% of the total expected employee
reductions in positions will be complete by September 1998.
The following table displays a rollforward of the liabilities for business
restructuring from December 31, 1995 to September 30, 1997:
<TABLE>
<CAPTION>
December 31, -------------1996--------------- September 30,
Type of Cost 1995 Balance Additions Other Usage 1996 Balance
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Employee Separation $ 1,219 $ - $(81) $(372) $ 766
Facility Closing 272 - (35) (62) 175
Other 416 - 18 (86) 348
Total $ 1,907 $ - $(98) $(520) $1,289
<CAPTION>
September 30, --------------1997------------- September 30,
Type of Cost 1996 Balance Additions Other Usage 1997 Balance
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Employee Separation $ 766 $ - $(154) $(264) $ 348
Facility Closing 175 - (24) (85) 66
Other 348 - (23) (170) 155
Total $ 1,289 $ - $(201) $(519) $ 569
</TABLE>
Management believes that the remaining reserves for business restructuring are
adequate to complete its plan.
Cash payments of $483 and $456 and noncash related charges of $36 and $64
primarily associated with asset write-offs were charged against the business
restructuring reserves for the year and nine-month period ended September 30,
1997 and 1996, respectively. Lucent reversed $201 and $98 of business
restructuring reserves primarily related to employee separations for the year
and nine-month period ended September 30, 1997 and 1996, respectively.
For the year and nine-month period ended September 30, 1997 and 1996,
respectively, the reversals of business restructuring reserves were offset by a
write-down of $127 for special purpose Bell Labs assets no longer being used in
1997 and $105 of non-recurring and other charges in 1996, principally associated
with the separation from AT&T.
<PAGE> 31
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
6. INCOME TAXES
The following table presents the principal reasons for the difference between
the effective tax rate and the United States federal statutory income tax rate:
<TABLE>
<CAPTION>
Nine
Year Ended Months Ended Year Ended
September 30, September 30, December 31,
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
U.S federal statutory income tax rate..... 35.0% 35.0% 35.0%
------- ------- -------
State and local income taxes, net of
federal income tax effect............... 5.4 1.4 5.0
Amortization of intangibles............... 0.2 - (2.5)
Foreign earnings and dividends taxed at
different rates......................... 0.9 4.1 (12.3)
Research credits.......................... (2.6) (5.0) 0.3
Other differences - net................... (1.7) 3.5 (1.7)
------- ------- -------
Effective income tax rate before purchased
in-process research and development costs. 37.2% 39.0% 23.8%
Purchased in-process research and
development costs....................... 25.9 0.0 0.0
------- ------- -------
Effective income tax rate................. 63.1% 39.0% 23.8%
======= ======= =======
</TABLE>
The following table presents the U.S. and foreign components of income before
income taxes and the provision for income taxes:
<TABLE>
<CAPTION>
Nine
Year Ended Months Ended Year Ended
September 30, September 30, December 31,
1997 1996 1995
------------ ------------- -----------
<S> <C> <C> <C>
INCOME(LOSS) BEFORE INCOME TAXES
United States............................. $ 873 $ 101 $ (1,253)
Foreign................................... 594 266 115
------- ------ -------
$ 1,467 $ 367 $ (1,138)
======= ====== =======
PROVISION(BENEFIT) FOR INCOME TAXES
CURRENT
Federal................................... $ 464 $ 242 $ 199
State and local........................... 129 53 42
Foreign................................... 226 98 141
------- ------ -------
819 393 382
------- ------ -------
DEFERRED
Federal................................... 35 (198) (523)
State and local........................... 77 ( 45) (130)
Foreign and other......................... ( 5) ( 7) -
------- ------ -------
107 (250) (653)
------- ------ -------
Provision(benefit) for income taxes....... $ 926 $ 143 $ (271)
======= ====== =======
</TABLE>
<PAGE> 32
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
As of September 30, 1997, Lucent had state and local, and foreign net operating
loss carryforwards (tax effected) of $103, which expire primarily after 2000.
The components of deferred tax assets and liabilities at September 30, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
DEFERRED INCOME TAX ASSETS:
Employee pensions and other benefits, net......... $ 1,777 $ 1,900
Business restructuring............................ 112 417
Reserves and allowances........................... 887 658
Net operating loss/credit carryforwards........... 107 67
Valuation allowance............................... (234) (208)
Other............................................. 664 555
------- -------
Total deferred income tax assets.................... $ 3,313 $ 3,389
======== =======
DEFERRED INCOME TAX LIABILITIES:
Property, plant and equipment..................... $ 478 $ 519
Other............................................. 240 274
------ -------
Total deferred income tax liabilities............... $ 718 $ 793
======= ======
</TABLE>
Lucent has not provided for United States deferred income taxes or foreign
withholding taxes on $2,029 of undistributed earnings of its non-United States
subsidiaries as of September 30, 1997, since these earnings are intended to be
reinvested indefinitely.
7. DEBT OBLIGATIONS
September 30, September 30,
1997 1996
------------- -------------
DEBT MATURING WITHIN ONE YEAR
Commercial paper...................... $ 2,364 $ 2,225
Long-term debt........................ 56 59
Other................................. 118 79
Total debt maturing within one year... $ 2,538 $2,363
WEIGHTED AVERAGE INTEREST RATES
Commercial paper...................... 5.5% 5.4%
Long-term debt and other.............. 6.3% 7.1%
Lucent had revolving credit facilities at September 30, 1997 aggregating $5,181
(a portion of which is used to support Lucent's commercial paper program),
$4,000 with domestic lenders and $1,181 with foreign lenders. At September 30,
1997, $4,000 with domestic lenders and $955 with foreign lenders were available.
<PAGE> 33
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
September 30, September 30,
1997 1996
------------- -------------
LONG-TERM DEBT
6.90% notes due July 15, 2001 $ 750 $ 750
7.25% notes due July 15, 2006 750 750
Long-term lease obligations 2 4
Other 229 201
Less: Unamortized discount 10 12
Total long-term debt 1,721 1,693
Less: Amounts maturing within one year 56 59
Net long-term debt $1,665 $ 1,634
Lucent has an effective shelf registration statement for the issuance of debt
securities up to $3,500, of which 1,960 remains available at September 30, 1997.
This table shows the maturities, by year, of the $1,721 in total long-term debt
obligations:
September 30,
-------------------------------------------------------
1998 1999 2000 2001 2002 Later Years
$56 $52 $23 $761 $0 $829
8. EMPLOYEE BENEFIT PLANS
PENSION AND POSTRETIREMENT BENEFITS
Lucent maintains noncontributory defined benefit pension plans covering the
majority of its employees and retirees, and postretirement benefit plans for
retirees that include health care benefits, life insurance coverage and
telephone reimbursement. Prior to October 1, 1996, Lucent participated in AT&T's
noncontributory defined benefit pension and postretirement plans . Accordingly,
Lucent's financial statements reflect estimates of the costs experienced for its
employees and retirees while they were included in the AT&T plans.
Pension-related benefits for management employees are based principally on
career-average pay while benefits for occupational employees are not directly
pay-related. Pension contributions are determined principally using the
aggregate cost method and are made primarily to trust funds held for the sole
benefit of plan participants.
Effective October 1, 1996, pension obligations under the AT&T plans relating to
Lucent's employees and retirees were transferred to Lucent plans. Assets that
were formerly held by AT&T's Group Pension Trust were subsequently divided
between the master pension trusts for qualified pension plans of Lucent and
AT&T. The pension benefit obligation and plan assets transferred to Lucent as of
September 30, 1996 were $21,269 and $29,805, respectively.
Also effective October 1, 1996, Lucent established separate postretirement
benefit plans for its employees and retirees. Postretirement benefit assets were
transferred from AT&T, pro rata, on the basis of the present value of future
benefit obligations of the applicable plan. The accumulated postretirement
benefit obligation and plan assets transferred to Lucent as of September 30,
1996 were $7,399 and $3,711, respectively.
<PAGE> 34
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
The following table shows the Lucent plans' funded status reconciled with
amounts reported in Lucent's consolidated balance sheets, and the assumptions
used in determining the actuarial present value of the benefit obligation:
<TABLE>
<CAPTION>
Pension Postretirement
September 30, September 30,
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Plan assets at fair value $ 36,204 $ 29,805 $ 4,152 $ 3,711
Less: benefit obligation 23,187 21,269 7,939 7,399
- -----------------------------------------------------------------------------------
Funded(Unfunded) status of the plan 13,017 8,536 (3,787) (3,688)
Unrecognized prior service costs 1,048 1,115 261 367
Unrecognized transition asset (1,244) (1,543) - -
Unrecognized net gain (9,669) (5,308) (1,256) (1,110)
Net minimum liability of nonqualified
plans (23) (19) - -
- -----------------------------------------------------------------------------------
Prepaid(Accrued) benefit cost $ 3,129 $ 2,781 $ (4,782) $(4,431)
===================================================================================
Accumulated pension benefit obligation 22,669 20,475 n/a n/a
Vested pension benefit obligation 21,246 19,077 n/a n/a
- ----------------------------------------------------------------------------------
Accumulated postretirement benefit
obligation:
Retirees n/a n/a 5,902 5,510
Fully eligible active plan
participants n/a n/a 777 821
Other active plan participants n/a n/a 1,260 1,068
- ----------------------------------------------------------------------------------
Accumulated postretirement benefit
obligation n/a n/a $ 7,939 $ 7,399
==================================================================================
Assumptions:
Weighted average discount rate 7.25% 8.0% 7.25% 8.0%
Rate of increase in future
compensation levels 4.50% 5.0% n/a n/a
==================================================================================
</TABLE>
Pension plan assets consist primarily of listed stocks (of which $73 and $6
represent Lucent common stock at September 30, 1997 and September 30, 1996,
respectively). Postretirement plan assets include listed stocks (of which $2 and
$8 represent Lucent common stock at September 30, 1997 and 1996, respectively).
Assets in both plans also include corporate and governmental debt, and cash and
cash equivalents. Pension plan assets also include real estate investments, and
postretirement plan assets also include life insurance contracts.
The prepaid pension benefit costs shown above are net of pension liabilities for
plans where accumulated plan benefits exceed assets. Such liabilities are
included in other liabilities in the Consolidated Balance Sheets.
<PAGE> 35
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Nine
Year Ended Months Ended Year Ended
September 30, September 30, December 31,
PENSION COST 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits $ 312 $ 277 $ 308
earned during the period
Interest cost on projected
benefit obligation 1,604 1,172 1,589
Expected return on plan
assets (1) (2,150) (1,589) (2,000)
Amortization of unrecognized
prior service costs 149 113 160
Amortization of transition
asset (300) (222) (289)
Charges(credits) for plan
curtailments (2) 56 (16) 97
- ---------------------------------------------------------------------------------------
Net pension credit $ (329) $ (265) $ (135)
=======================================================================================
POSTRETIREMENT COST
- ---------------------------------------------------------------------------------------
Service cost-benefits earned
during the period $ 57 $ 51 $ 53
Interest cost on accumulated
postretirement benefit
obligation 554 408 599
Expected return on plan
assets (3) (264) (189) (220)
Amortization of unrecognized
prior service costs 35 53 40
Amortization of net (gain)loss (15) 8 (6)
Charges(credits) for plan
curtailments(2) 26 (2) 2
- ---------------------------------------------------------------------------------------
Net postretirement benefit cost $ 393 $329 $468
=======================================================================================
</TABLE>
(1) A 9.0% long-term rate of return on pension plan assets was assumed for 1997,
1996 and 1995. The actual return on plan assets was $8,523 and $2,204 for
the year and nine-month period ended September 30, 1997 and 1996,
respectively, and $5,471 for the year ended December 31, 1995.
(2) The 1997 pension and postretirement charges for plan curtailments of $56 and
$26, respectively, reflect the final determination of 1996 curtailment
effects.
(3) A 9.0% long-term rate of return on postretirement plan assets was assumed
for 1997, 1996 and 1995. The actual return on plan assets was $1,040 and
$219 for the year and nine-month period ended September 30, 1997 and 1996,
respectively, and $602 for the year ended December 31, 1995.
Pension cost was computed using the projected unit credit method. Lucent is
amortizing over approximately 16 years the unrecognized pension transition asset
related to the adoption of SFAS No. 87, "Employers' Accounting for Pensions," in
1986. Prior service pension costs are amortized primarily on a straight-line
basis over the average remaining service period of active employees.
<PAGE> 36
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
For postretirement benefit plans, Lucent assumed a 5.4% annual rate of increase
in the per capita cost of covered health care benefits (the health care cost
trend rate) for 1998, gradually declining to 4.8% by the year 2005, after which
the costs would remain level. This assumption has a significant effect on the
amounts reported. Increasing the assumed trend rate by 1% in each year would
increase Lucent's accumulated postretirement benefit obligation as of September
30, 1997 by $394 and the interest and service cost by $31 for the year then
ended.
SAVINGS PLANS
Effective October 1, 1996 the AT&T's savings plans assets and liabilities
related to Lucent employees and retirees were transferred to Lucent plans.
Lucent's savings plans allow employees to contribute a portion of their pretax
and/or after-tax income in accordance with specified guidelines. Lucent matches
a percentage of the employee contributions up to certain limits. The expense
amounted to $180 and $131 for the year and nine-month period ended September 30,
1997 and 1996, respectively, and $196 for the year ended December 31, 1995.
EMPLOYEE STOCK OWNERSHIP PLAN
As of September 30, 1996, Lucent established a leveraged Employee Stock
Ownership Plan ("ESOP"), after receiving its portion of the ESOP obligation from
AT&T, to fund the employer's contributions to the long-term savings and security
plan for nonmanagement employees (the "LTSS Plan"). The ESOP obligation is
reported as debt and as a reduction in shareowners' equity. Cash contributions
to the ESOP are determined based on the ESOP's total debt service less dividends
paid on ESOP shares. As of September 30, 1997, the ESOP contained 5.8 million
shares of Lucent's common stock. Of the 5.8 million shares, 4.0 million have
been allocated to the LTSS Plan and 1.8 million were unallocated. As of
September 30, 1997, the unallocated shares had a fair value of $146.
9. STOCK COMPENSATION PLANS
Prior to Lucent's separation from AT&T, certain Lucent employees participated in
AT&T stock-based compensation plans under which they received stock options and
other equity-based awards. Effective October 1, 1996, such awards held by Lucent
employees were replaced by substitute awards under the Lucent Technologies Inc.
1996 Long-Term Incentive Program ("1996 LTIP").
The 1996 LTIP provides for the grant of stock options, stock appreciation
rights, performance awards, restricted stock awards and other stock unit awards.
Awards under the 1996 LTIP are generally made to executives. Lucent also awards
stock options to selected employees below executive levels under the Lucent
Technologies Inc. 1997 Long-Term Incentive Plan ("1997 LTIP"), and awarded a
one-time option grant to each full-time employee as of October 1, 1996 to
acquire 100 shares of Common Stock under the Lucent Technologies Inc. Founders
Grant Stock Option Plan ("FGP"). Stock options are granted with an exercise
price equal to or greater than 100% of market value at the date of grant,
generally have a ten-year term, and vest three years from date of grant. Subject
to customary anti-dilution adjustments and certain exceptions, the total number
of shares of Common Stock authorized for grant under the 1996 LTIP and the 1997
LTIP in each calendar year amounted to 2.5% of the total outstanding shares of
Common Stock as of the first day of the calendar year. Substitute awards do not
reduce the shares available for grant under these two plans. The total number of
shares of Common Stock authorized for grant under the FGP was 15 million.
Options to purchase Common Stock may be granted either alone or in addition to
other awards. The term of each option will be fixed by a Committee of Lucent's
Board of Directors ("Committee"), provided that no incentive stock options, as
defined in the Internal Revenue Code, will be exercisable after the expiration
of ten years from the date the option is granted. Options will be exercisable at
such time or times as determined by the Committee at or subsequent to grant.
<PAGE> 37
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
In connection with Lucent's acquisition of Octel, all Octel stock options held
by Octel employees will become exercisable for Lucent common stock, effective
September 29, 1997. The value of these options was included as part of the
purchase price related to the acquisition of Octel(see Note 1).
Lucent established an Employee Stock Purchase Plan (the "ESPP") effective
October 1, 1996. Under the terms of the ESPP, eligible employees may have up to
10% of eligible compensation deducted from their pay to purchase Common Stock
through June 30, 2001. On the date of exercise, which is the last trading day of
each month, the per share purchase price is 85% of the average high and low
per-share trading price of Common Stock on the New York Stock Exchange on that
date. The amount that may be offered pursuant to this plan is 50 million shares.
Since inception of this plan, 3.1 million shares have been purchased at a
weighted average price of $50.31.
Lucent has adopted the disclosure requirements of SFAS No. 123 "Accounting for
Stock-Based Compensation" and, as permitted under SFAS No. 123, applies
Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for its plans. Compensation expense was $36 and $11 for the year and
nine month periods ended September 30, 1997 and 1996, respectively, and $11 for
the year ended December 31, 1995. If Lucent had elected to adopt the optional
recognition provisions of SFAS No. 123 for its stock option plans and the ESPP,
net income(loss) and earnings(loss) per share would have been changed to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Nine
Year Ended Months Ended Year Ended
September 30, September 30, December 31,
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Net income (loss)
As reported........................ $541 $224 $(867)
Pro forma.......................... $444 $202 $(870)
-----------------------------------------------
Earnings (loss)
per share
As reported........................ $0.84 $0.38 $(1.65)
Pro forma.......................... $0.69 $0.34 $(1.66)
----------------------------------------------
</TABLE>
Note: The pro forma disclosures shown may not be representative of the effects
on net income and earnings per share in future years because the year ended
September 30, 1997 and the nine months ended September 30, 1996 include the
incremental fair value of the Lucent stock options that were substituted for
AT&T stock options.
The fair value of stock options used to compute pro forma net income and
earnings per share disclosures is the estimated present value at grant date
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
- ------------------------------------------------------------------------------
Lucent AT&T
Assumptions: (1) (2) (3)
- ------------
Dividend yield........................ 0.65% 0.75% 2.4%
Expected volatility................... 22.4% 22.4% 19.4%
Risk-free interest rate............... 6.4% 6.1% 6.4%
Expected holding period(in years)..... 5.1 4.5 5.0
- ------------------------------------------------------------------------------
(1) Assumptions for Lucent options awarded during 1997.
(2) Assumptions for Lucent options substituted for AT&T options effective
October 1, 1996.
(3) Assumptions for AT&T options for the years 1996 and 1995.
<PAGE> 38
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
Presented below is a summary of the status of the Lucent stock options held by
Lucent employees and the related transactions for the year ended September 30,
1997. Also shown are the AT&T stock options held by Lucent's employees for the
nine months ended September 30, 1996 and the year ended December 31, 1995.
Weighted
Average
Shares Exercise
(000's) Price
- -----------------------------------------------------------------------
AT&T options outstanding at January 1, 1995 4,824 $ 42.66
Granted 2,046 55.08
Exercised (476) 35.86
Forfeited/Expired (2) 38.75
- -----------------------------------------------------------------------
AT&T options outstanding at December 31, 1995 6,392 47.44
- -----------------------------------------------------------------------
Granted 1,690 65.81
Exercised (183) 38.27
Forfeited/Expired (3) 63.18
- -----------------------------------------------------------------------
AT&T options outstanding at September 30, 1996 7,896 51.36
- -----------------------------------------------------------------------
Lucent options substituted for AT&T options, and
outstanding at October 1, 1996 9,786 41.43
- -----------------------------------------------------------------------
Granted* 25,623 46.37
Exercised (2,022) 33.56
Forfeited/Expired (980) 47.60
- -----------------------------------------------------------------------
Lucent options outstanding at September 30, 1997 32,407 $45.66
- -----------------------------------------------------------------------
* Includes options covering 12,753 shares of Common Stock granted under the FGP
on October 1, 1996 (at a weighted average exercise price of $44.61), and the
substitution of 2,471 Lucent options for Octel options on September 29, 1997 (at
a weighted average exercise price of $39.99).
The weighted average fair value of Lucent stock options, calculated using the
Black-Scholes option-pricing model, granted during the year ended September 30,
1997 is $14.60 per share. The weighted average fair value of AT&T stock options,
calculated using the Black-Scholes option-pricing model, granted during the nine
months ended September 30, 1996 and the year ended December 31, 1995 is $14.13
and $14.15 per share, respectively.
<PAGE> 39
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
The following table summarizes the status of Lucent's stock options outstanding
and exercisable at September 30, 1997:
---------------------------------- --------------------
Stock Options Stock Options
Outstanding Exercisable
- --------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Shares Contractual Exercise Shares Exercise
Prices (000's) Life Price (000's) Price
- --------------------------------------------------------------------------------
$ 3.91 to $42.60 6,138 4.8 $35.83 4,466 $35.85
$42.61 to $44.56 17,547 9.0 44.55 142 43.71
$44.57 to $53.90 7,073 8.6 50.71 810 52.30
$53.91 to $82.09 1,565 8.1 71.74 44 64.04
$83.78 84 9.7 83.78 18 83.78
- --------------------------------------------------------------------------------
Total 32,407 $45.66 5,480 $38.87
- --------------------------------------------------------------------------------
Performance awards, restricted stock awards and other stock unit awards may also
be granted. Presented below is the total number of shares of Common Stock
represented by awards granted to Lucent employees for the year ended September
30, 1997, and the total number of AT&T shares represented by awards granted to
Lucent employees for the nine-month period ended September 30, 1996 and the year
ended December 31, 1995:
Nine Months
Year Ended Ended Year Ended
September 30, September 30, December 31,
1997 1996 1995
- --------------------------------------------------------------------------------
Lucent shares granted (000's)....... 2,141 n/a n/a
AT&T shares granted (000's)......... n/a 262 295
Weighted average market
value of shares granted
during the period.................. $46.38 $66.24 $56.46
- --------------------------------------------------------------------------------
<PAGE> 40
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
10. SEGMENT INFORMATION
INDUSTRY SEGMENT
Lucent operates in the global communications networking industry segment. This
segment includes wire-line and wireless systems, software and products used for
voice, data and video communications.
GEOGRAPHIC SEGMENTS
Transfers between geographic areas are on terms and conditions comparable with
sales to external customers. The methods followed in developing the geographic
segment data require the use of estimates and do not take into account the
extent to which product development, manufacturing and marketing depend upon
each other. Thus, the information may not be indicative of results if the
geographic areas were independent organizations.
Corporate assets are principally cash and temporary cash investments. Data on
other geographic areas pertain to operations that are located outside the United
States. Revenues from all international activities (other geographic areas
revenues plus export revenues) provided 24.1% and 23.1% of consolidated revenues
for the year and nine-month period ended September 30, 1997 and 1996,
respectively, and 23.3% for the year ended December 31, 1995.
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
September 30, September 30, December 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
United States.....................................$ 21,807 $13,334 $17,826
Other geographic areas............................ 4,553 2,525 3,587
------- ------- -------
$ 26,360 $15,859 $21,413
======= ======= =======
TRANSFERS BETWEEN GEOGRAPHIC AREAS
(Eliminated in Consolidation)
United States.....................................$ 1,927 $ 1,353 $ 1,081
Other geographic areas............................ 1,267 648 911
------- ------- -------
$ 3,194 $ 2,001 $ 1,992
======= ======= =======
OPERATING INCOME(LOSS)
United States.....................................$ 1,514 $ 940 $ (679)
Other geographic areas............................ 410 (108) (67)
Corporate, eliminations and nonoperating.......... (457) (465) (392)
------- ------- -------
Income(loss) before income taxes $ 1,467 $ 367 $(1,138)
======= ======= ========
ASSETS (End of Period)
United States.....................................$ 17,054 $16,492 $15,043
Other geographic areas............................ 5,600 3,912 4,696
Corporate assets.................................. 1,778 2,744 738
Eliminations...................................... (621) (522) (755)
------- ------- -------
$ 23,811 $22,626 $19,722
======= ======= =======
</TABLE>
<PAGE> 41
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
CONCENTRATIONS
Historically, Lucent has relied on a limited number of customers for a
substantial portion of its total revenues. In terms of total revenues, Lucent's
largest customer has been AT&T, although other customers may purchase more of
any particular system or product line. Revenues from AT&T were $3,731 and $1,970
for the year and nine-month period ended September 30, 1997 and 1996,
respectively, and $2,119 for the year ended December 31, 1995. Lucent expects
that a significant portion of its future revenues will continue to be generated
by a limited number of customers. The loss of any of these customers or any
substantial reduction in orders by any of these customers could materially
adversely affect Lucent's operating results. Lucent does not have a
concentration of available sources of supply materials, labor, services or other
rights that, if suddenly eliminated, could severely impact its operations.
11. FINANCIAL INSTRUMENTS
In the normal course of business, Lucent uses various financial instruments,
including derivative financial instruments, for purposes other than trading.
Derivative financial instruments are not entered into for speculative purposes.
Lucent's derivative financial instruments include foreign currency exchange
contracts and interest rate swap agreements. Lucent's nonderivative financial
instruments include letters of credit, commitments to extend credit, and
guarantees of debt. Lucent generally does not require collateral to support
these financial instruments.
By their nature, all such instruments involve risk, including market risk and
the credit risk of nonperformance by counterparties. The contract or notional
amounts of these instruments reflect the extent of involvement Lucent has in
particular classes of financial instruments. The maximum potential loss may
exceed any amounts recognized in the balance sheet. However, Lucent's maximum
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and financial guarantees
is limited to the amount drawn and outstanding on those instruments.
Exposure to credit risk is controlled through credit approvals, credit limits
and monitoring procedures. Requests for providing commitments to extend credit
and financial guarantees are reviewed and approved by senior management.
Management conducts regular reviews of all outstanding commitments, letters of
credit and financial guarantees, and the results of these reviews are considered
in assessing the adequacy of Lucent's reserve for possible credit and guarantee
losses. At September 30, 1997 and 1996, in management's opinion, there was no
significant risk of loss in the event of nonperformance of the counterparties to
these financial instruments and there was no significant exposure to any
individual customer or counterparty.
LETTERS OF CREDIT
Letters of credit are purchased guarantees that ensure Lucent's performance or
payment to third parties in accordance with specified terms and conditions.
<PAGE> 42
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
COMMITMENTS TO EXTEND CREDIT
Commitments to extend credit to third parties are legally binding, conditional
agreements generally having fixed expiration or termination dates and specified
interest rates and purposes.
In October 1996, Lucent entered into a credit agreement with Sprint Spectrum LP
("Sprint PCS") to provide long-term financing of $1,800 for its purchase of
equipment and services for its nationwide personal communication services
("PCS") wireless network. In May 1997, under the $1,800 credit facility provided
by Lucent to Sprint PCS, Lucent closed transactions to lay off $500 of loans and
undrawn commitments and $300 of undrawn commitments to a group of institutional
investors and Sprint Corporation (a partner in Sprint PCS), respectively. As of
September 30, 1997, $146 of these commitments were not yet drawn down by Sprint
PCS.
As part of the revenue recognition process, Lucent has assessed the
collectibility of the accounts receivable relating to the Sprint PCS purchase
contract in light of its financing commitment to Sprint PCS. Lucent has
determined that the receivables under the contract are reasonably assured of
collection based on various factors, among which was the ability of Lucent to
sell the loans and commitments without recourse. Lucent intends to continue
pursuing opportunities for the sale of future loans and commitments.
During 1997, Lucent also entered into credit agreements to extend credit of up
to approximately $850 in total to three other PCS operators for possible future
sales. On October 1, 1997, a commitment for $300 included in the $850 expired
and was not extended. The agreement relating to about $200 of credit is subject
to fulfillment of certain conditions and completion of final contract
documentation.
GUARANTEES OF DEBT
From time to time, Lucent guarantees the financing for product purchases by
customers and the debt of certain unconsolidated joint ventures. Requests for
providing such guarantees are reviewed and approved by senior management. Lucent
seeks to limit its exposure to credit risks in any single country or region.
Certain financial guarantees are backed by amounts held in trust for Lucent.
FOREIGN CURRENCY EXCHANGE CONTRACTS
Foreign currency exchange contracts, including forward and option contracts, are
used to manage exposure to changes in currency exchange rates, principally Dutch
guilders, Deutsche marks and Japanese yen. The use of derivative financial
instruments allows Lucent to reduce its exposure to the risk that the eventual
net cash inflows and outflows resulting from the sale of products to foreign
customers and purchases from foreign suppliers will be adversely affected by
changes in exchange rates. Generally, foreign currency exchange contracts are
designated for firmly committed or forecasted sales and purchases that are
expected to occur in less than one year. Gains and losses on foreign currency
exchange contracts that are designated for firmly committed transactions are
deferred in other current assets and liabilities. At September 30, 1997 and
1996, deferred gains and losses associated with foreign exchange currency
contracts designated for firm commitments are not material to the consolidated
financial statements. Gains and losses on foreign currency exchange contracts
that are designated for forecasted transactions are recognized in other income
as the exchange rates change.
<PAGE> 43
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
FAIR VALUE OF FINANCIAL INSTRUMENTS INCLUDING DERIVATIVE FINANCIAL INSTRUMENTS
The tables that follow present the valuation methods and the carrying or
notional amounts and estimated fair values of material financial instruments.
The notional amounts represent agreed-upon amounts on which calculations of cash
to be exchanged are based. Letters of credit, commitments to extend credit and
guarantees of debt may exist or expire without being drawn upon. Therefore, the
total notional or contract amounts do not necessarily represent future cash
flows. For derivative financial instruments, the notional amounts do not
represent amounts exchanged by the parties and, therefore, are not a measure of
the instruments. Lucent's exposure on its derivative financial instruments is
limited to the fair value of the contracts with a positive fair value at the
reporting date.
FINANCIAL INSTRUMENT VALUATION METHOD
Debt maturing within one year The carrying amount is a reasonable
estimate of fair value.
Long-term debt Market quotes for similar terms and
maturities.
Letters of credit Fees paid to obtain the obligations.
Foreign currency exchange contracts Market quotes.
Commitments to extend credit *
Guarantees of debt *
* It is not practicable to estimate the fair value of these financial
obligations because there are no quoted market prices for transactions that
are similar in nature.
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----- --------- ------
<S> <C> <C> <C> <C>
ON BALANCE SHEET INSTRUMENTS
Liabilities:
Long-term debt $ 1,663 $1,748 $ 1,630 $ 1,638
DERIVATIVES AND OFF BALANCE
SHEET INSTRUMENTS
Assets:
Foreign currency exchange contracts $ 28 $ 54 $ 14 $ 17
Letters of credit - 2 - 1
Liabilities:
Foreign currency exchange contracts $ 31 $ 36 $ 11 $ 14
Letters of credit - - - -
</TABLE>
<PAGE> 44
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
The following table presents the contract/notional amount of Lucent's
derivatives and off balance sheet instruments and the amounts drawn down on such
instruments:
<TABLE>
<CAPTION>
Amounts Drawn
September 30, September 30, Down and
1997 1996 Outstanding
Contract/ Contract/ -----------------------
Notional Notional September 30, September 30,
Amount Amount 1997 1996
------------ ----------- ------ ------
<S> <C> <C> <C> <C>
Foreign exchange forward contracts:
British pounds $ 136 $ 7
Dutch guilders 186 128
Deutsche marks 558 228
French francs 116 35
Japanese yen 249 436
Spanish pesetas 109 47
Other 388 276
$1,742 $1,157
Foreign exchange
option contracts - 109
Letters of credit 832 847
Commitments to extend credit 1,898 156 $ 25 $ 7
Guarantees of debt 309 494 118 346
</TABLE>
<PAGE> 45
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
12. TRANSACTIONS AND AGREEMENTS WITH AT&T
SEPARATION AND DISTRIBUTION AGREEMENT
In connection with the Separation and Distribution, Lucent, AT&T and NCR
Corporation ("NCR") executed and delivered the Separation and Distribution
Agreement, dated as of February 1, 1996 and amended and restated as of March 29,
1996 (the "Separation and Distribution Agreement"), and certain related
agreements. The Separation and Distribution Agreement, among other things,
provides that Lucent will indemnify AT&T and NCR for all liabilities relating to
Lucent's business and operations and for all contingent liabilities relating to
Lucent's business and operations or otherwise assigned to Lucent. In addition to
contingent liabilities relating to the present or former business of Lucent, any
contingent liabilities relating to AT&T's discontinued computer operations
(other than those of NCR) were assigned to Lucent. The Separation and
Distribution Agreement provides for the sharing of contingent liabilities not
allocated to one of the parties, in the following proportions: AT&T: 75%,
Lucent: 22%, and NCR: 3%. The Separation and Distribution Agreement also
provides that each party will share specified portions of contingent liabilities
related to the business of any of the other parties that exceed specified
levels. In addition, Lucent had a number of other agreements with AT&T for
federal, state and local tax allocation, tax sharing, general purchase, interim
services, system replication and real estate sharing.
13. COMMITMENTS AND CONTINGENCIES
In the normal course of business, Lucent is subject to proceedings, lawsuits and
other claims, including proceedings under government laws and regulations
related to environmental and other matters. Such matters are subject to many
uncertainties, and outcomes are not predictable with assurance. Consequently,
the ultimate aggregate amount of monetary liability or financial impact with
respect to these matters at September 30, 1997 cannot be ascertained. While
these matters could affect the operating results of any one quarter when
resolved in future periods and while there can be no assurance with respect
thereto, management believes that after final disposition, any monetary
liability or financial impact to Lucent beyond that provided for at September
30, 1997 would not be material to the annual consolidated financial statements.
<PAGE> 46
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
ENVIRONMENTAL MATTERS
Lucent's current and historical operations are subject to a wide range of
environmental protection laws. In the United States, these laws often require
parties to fund remedial action regardless of fault. Lucent has remedial and
investigatory activities underway at about 40 current and former facilities. In
addition, Lucent was named a successor to AT&T as a potentially responsible
party ("PRP") at numerous "Superfund" sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or
comparable state statutes. Under the Separation and Distribution Agreement,
Lucent is responsible for all liabilities primarily resulting from or relating
to the operation of Lucent's business as conducted at any time prior to or after
the Separation including related businesses discontinued or disposed of prior to
the Separation, and Lucent's assets including, without limitation, those
associated with these sites. In addition, under such Separation and Distribution
Agreement, Lucent is required to pay a portion of contingent liabilities paid
out in excess of certain amounts by AT&T and NCR, including environmental
liabilities.
It is often difficult to estimate the future impact of environmental matters,
including potential liabilities. Lucent records an environmental reserve when it
is probable that a liability has been incurred and the amount of the liability
is reasonably estimable. This practice is followed whether the claims are
asserted or unasserted. Management expects that the amounts reserved will be
paid out over the periods of remediation for the applicable sites which range
from 5 to 30 years. Reserves for estimated losses from environmental remediation
are, depending on the site, based primarily upon internal or third party
environmental studies, and estimates as to the number, participation level and
financial viability of any other PRPs, the extent of the contamination and the
nature of required remedial actions. Accruals are adjusted as further
information develops or circumstances change. The amounts provided for in
Lucent's consolidated financial statements for environmental reserves are the
gross undiscounted amount of such reserves, 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 financial statements. Although Lucent believes that its
reserves are adequate, there can be no assurance that the amount of capital
expenditures and other expenses which will be required relating to remedial
actions and compliance with applicable environmental laws will not exceed the
amounts reflected in Lucent's reserves or will not have a material adverse
effect on the financial condition of Lucent or Lucent's results of operations or
cash flows. Any amounts of environmental costs that may be incurred in excess of
those provided for at September 30, 1997 cannot be determined.
<PAGE> 47
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
LEASE COMMITMENTS
Lucent leases land, buildings and equipment under agreements that expire in
various years through 2016. Rental expense under operating leases was $324 and
$182 for the year and nine-month period ended September 30, 1997 and 1996,
respectively, and $209 for the year ended December 31, 1995. The table below
shows the future minimum lease payments due under noncancelable operating leases
at September 30, 1997. Such payments total $1,037.
<TABLE>
<CAPTION>
Year Ended September 30,
Later
1998 1999 2000 2001 2002 Years
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Operating leases............... $300 $235 $171 $103 $55 $173
</TABLE>
<PAGE> 48
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
14. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
FISCAL YEAR QUARTERS
FIRST SECOND THIRD FOURTH TOTAL
------- -------- ------ --------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended
September 30, 1997
Revenues.................... $7,938 $5,149 $6,340 $6,933 $26,360
Gross margin................ 3,642 2,168 2,600 3,052 11,462
Net income(loss)............ 859 66 213 (597)(b) 541 (b)
Earnings(loss) per
weighted average share..... $ 1.35 $ 0.10 $ 0.33 $(0.92)(b) $ 0.84 (b)
Dividends per share......... 0.075 0.000 0.075 0.075 0.225
Stock price:(d)
High..................... 53 1/8 60 5/8 74 3/16 90 3/4 90 3/4
Low...................... 42 1/8 44 3/4 49 7/8 72 3/16 42 1/8
Quarter-end close........ 46 1/4 52 1/2 72 1/16 81 3/8 81 3/8
Year Ended
September 30, 1996
Revenues.................... $7,427 $4,577 $5,364 $5,918 $23,286
Gross margin................ 2,325 (a) 1,824 2,170 2,575 8,894 (a)
Net income(loss)............ (1,017)(a) (103) 72 255 (793)(a)
Earnings(loss) per
weighted average share(c).. $(1.94)(a) $(0.20) $ 0.11 $ 0.40 $ (1.37)(a)
Dividends per share......... 0.00 0.00 0.075 0.075 0.15
Stock price:(d)
High..................... n/a n/a 39 1/4 45 7/8 45 7/8
Low...................... n/a n/a 29 3/4 30 5/8 29 3/4
Quarter-end close........ n/a n/a 37 7/8 45 7/8 45 7/8
</TABLE>
(a) 1996 includes a pretax charge of $2,801 ($1,847 after taxes), to cover
restructuring costs of $2,613 and asset impairment and other charges of
$188.
(b) As a result of the 1997 acquisition of Octel, Lucent took a charge of $979
($966 after tax) in the fourth quarter for acquired in-process research and
development.
(c) The number of weighted average shares outstanding increased in 1996 as new
common shares were issued through the IPO. For this reason, the sum of the
quarterly earnings(loss) per weighted average share amounts for 1996 does
not equal the earnings per weighted average share for the year. The
calculation of earnings per share on a historical basis includes the
retroactive recognition to January 1, 1995 of the 524,624,894 shares owned
by AT&T.
(d) Obtained from the Composite Tape.
<PAGE> 49
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
15. SUBSEQUENT EVENTS
On October 1, 1997, Lucent formed a venture with Philips Electronics N.V. called
Philips Consumer Communications, L.P. ("PCC"). Lucent's Consumer Products
business unit was contributed to PCC at net book value in return for an initial
equity interest of 40%. Lucent will account for its interest in PCC under the
equity method of accounting. The Consumer Products business unit was not
material to the consolidated financial position, results of operations or cash
flows of Lucent.
On October 1, 1997, Lucent sold the Advanced Technology Systems unit of its
Government Solutions division ("ATS") to General Dynamics Corporation for $265
in cash. A pretax gain of $149 was realized on the sale. ATS was not material to
the consolidated financial position, results of operations or cash flows of
Lucent.
On October 15, 1997, Lucent announced that it will acquire Livingston
Enterprises, Inc., a provider of remote access networking solutions, in a merger
involving approximately $610 worth of Lucent common stock and options. Lucent
will account for the transaction under purchase accounting.
It is anticipated that approximately $427 of the purchase price would be
allocated to in-process research and development. This amount would be charged
to income at the date of acquisition, which is currently expected to be in the
quarter ending December 31, 1997. The remaining purchase price would be
allocated to tangible assets, acquired technology and goodwill, less liabilities
assumed. Based on current estimates, Lucent anticipates goodwill and acquired
technology to be approximately $180, which will be amortized over periods not
exceeding eight years.
<PAGE> 1
Exhibit 21
LUCENT TECHNOLOGIES INC. SUBSIDIARIES
Name Jurisdiction of Organization
- ---- ----------------------------
Lucent Technologies Argentina S.A. Argentina
(Lucent Technologies Sociedad Anonima Argentina)
Lucent Technologies Australia Pty. Ltd. Australia
Lucent Technologies Austria Ges.m.b.H. Austria
Lucent Technologies Middle East W.L.L. Bahrain
Lucent Technologies Foreign Sales Corporation Barbados
Lucent Technologies Belgium S.A./N.V. Belgium
Lucent Technologies Network Systems Belgium S.A./N.V. Belgium
Lucent Technologies (Bermuda) Ltd. Bermuda
Lucent Technologies Network Systems do Brasil S.A. Brazil
Lucent Technologies Brasil Ltda. Brazil
SID Telecommunicacoes E Controles, S.A. Brazil
Lucent Technologies World Services, Inc. Brunei
(Brunei branch)
Lucent Technologies Eurasia Ltd. (Bulgaria) Bulgaria
Lucent Technologies Canada Inc. Canada
Lucent Technologies (Chile) Limitada Chile
Lucent Technologies Colombia S.A. Colombia
Lucent Technologies de Costa Rica S.A. Costa Rica
Lucent Technologies s.r.o. Czech. Republic
Lucent Technologies EMEA B.V. (Czech. branch) Czech. Republic
Lucent Technologies Denmark A/S Denmark
Lucent Technologies Dominicana C. por A. Dominican Republic
EcuaLucent Technologies S.A. Ecuador
Lucent Technologies International Inc. Egypt
(Egypt branch)
Lucent Technologies El Salvador S.A. de C.V. El Salvador
Lucent Technologies BCS S.A. France
TRT Lucent Technologies France
Triple C Call Center Communications Germany
Lucent Technologies Business Communications Germany
Systems and Microelectronics GmbH
Lucent Technologies Network Systems Gmbh Germany
Lucent Technologies de Guatemala S.A. Guatemala
Lucent Technologies World Services, Inc. Honduras
(Honduras Branch Office)
Lucent Technologies de Honduras S.A. Honduras
Lucent Technologies Asia/Pacific Inc. Hong Kong
Lucent Technologies Korea Ltd. (Hong Kong branch) Hong Kong
Lucent Technologies Asia/Pacific Ltd. Hong Kong
Lucent Technologies Hungary Ltd./Lucent Hungary
Technologies Magyarorszag Kft.
Lucent Technologies India Pvt. Ltd. India
Lucent Technologies Network Systems Indonesia
Nederland B.V. (Indonesia)
Lucent Technologies World Services Inc. Indonesia
(Indonesia Project Office)
<PAGE> 2
Lucent Technologies Asia/Pacific Inc. Indonesia
(Indonesia Rep. Office)
Lucent Technologies Ireland Ltd. Ireland
Lucent Technologies GCM Sales Limited Ireland
Lucent Technologies Italia S.p.A. Italy
Lucent Technologies Japan Ltd. Japan
Lucent Technologies EMEA B.V. Kazakstan
(Kazakstan Rep. Office)
Lucent Technologies Eurasia Ltd. Kazakstan
(Kazakstan Rep. Office)
Lucent Technologies Korea Ltd. Korea
Lucent Technologies World Services Inc. Kuwait
(Kuwait branch office)
Lucent Technologies Eurasia Ltd. Lithuania
(Lithuania Rep. Office)
Lucent Technologies (Malaysia) Sdn. Bhd. Malaysia
Lucent Technologies BCS de Mexico, S.A. de C.V. Mexico
Lucent Technologies de Mexico S.A. de C.V. Mexico
Lucent Technologies Holdings de Mexico S.A. de C.V. Mexico
Lucent Technologies Microelectronica Mexico
de Mexico S.A. de C.V.
Lucent Technologies Microelectronica Mexico
de Monterrey, S.A. de C.V.
Lucent Technologies EMEA Services B.V. Netherlands
Lucent Technologies Network Systems Nederland B.V. Netherlands
Lucent Technologies BCS Nederland B.V. Netherlands
Lucent Technologies EMEA B.V. Netherlands
Lucent Technologies (NZ) Limited New Zealand
Lucent Technologies Nicaragua S.A. Nicaragua
Lucent Technologies Qingdao Power People's Republic of China
Systems Company, Ltd.
Lucent Technologies (China) Co., Ltd. People's Republic of China
Lucent Technologies (Shanghai) People's Republic of China
International Enterprises, Ltd.
Telecommunications Redioelectriques et Pakistan
Telephoniques (TRT) (Pakistan branch)
Lucent Technologies World Services, Inc. Panama
(Panama branch)
Lucent Technologies del Peru S.A. Peru
Telecommunications Redioelectriques et Philippines
Telephoniques (TRT) (Philippines branch)
Lucent Technologies Philippines Inc. Philippines
Lucent Technologies Poland S.A. Poland
Lucent Technologies Polska Spolka z o.o. Poland
Lucent Technologies World Services Inc. Puerto Rico
(Puerto Rico branch)
Lucent Technologies Puerto Rico Inc. Puerto Rico
Lucent Technologies Euradia Ltd. Romania
(Romania branch)
Lucent Technologies EMEA B.V. Russian Federation
(Moscow Rep. Office)
Lucent Technologies Eurasia Ltd. Russian Federation
(Russian Moscow Rep. Office)
ZAO Lucent Technologies Russian Federation
Lucent Technologies International Inc. Saudi Arabia
(Saudi Arabia branch)
Lucent Technologies Consumer Products Pte. Ltd. Singapore
Lucent Technologies Investments Pte. Ltd. Singapore
Lucent Technologies Microelectronics Pte. Ltd. Singapore
Lucent Technologies Singapore Pte. Ltd. Singapore
<PAGE> 3
Lucent Technologies Slovensko s.r.o. Slovak Republic
Lucent Technologies South Africa (Proprietary) Ltd. South Africa
Lucent Technologies World Services, Inc. (Spain branch) Spain
Lucent Technologies Microelectronica S.A. Spain
Lucent Technologies Network Systems Espana S.A. Spain
Lucent Technologies Asia/Pacific Inc. (Sri Lanka branch) Sri Lanka
Lucent Technologies Sweden AB. Sweden
Lucent Technologies A.G. Switzerland
Lucent Technologies International Purchasing Company
(Taiwan branch) Taiwan
Lucent Technologies Taiwan Inc. (Taiwan branch) Taiwan
Lucent Technologies Thailand Inc. (Thailand branch) Thailand
Lucent Technologies Microelectronics Thailand Ltd. Thailand
Lucent Technologies International Inc. (U.A.E. branch) UAE (United Arab
Emirates)
AT&T Business Communications Europe Ltd. United Kingdom
Lucent Technologies Network Systems UK Ltd. United Kingdom
Lucent Technologies UK Limited United Kingdom
Telectron Systems Ltd. United Kingdom
Western Electric Company, Ltd. United Kingdom
Lucent Technologies EMEA B.V. (Kiev-Ukraine) Ukraine
L.T. Funding, LLC Delaware
AG Communications Systems Corp. Delaware
Lucent Technologies Kazakhstan Ltd. Delaware
Lucent Technologies Systems & Technology Africa Inc. Delaware
ATOR Corporation New York
Bell Laboratories, Inc. Delaware
Bell Telephone Laboratories Inc. Delaware
Litespec, Inc. Delaware
Loose Tube Inc. Delaware
Lucent Technologies Americas Inc. Delaware
Lucent Technologies Asia/Pacific Inc. Delaware
Lucent Technologies Construction Services, Inc. Delaware
Lucent Technologies Eastern Ventures Inc. Delaware
Lucent Technologies Engineering Inc. Delaware
Lucent Technologies Eurasia Ltd. Delaware
Lucent Technologies Holdings Inc. Delaware
Lucent Technologies International Inc. Delaware
Lucent Technologies International Purchasing Company Delaware
Lucent Technologies Management Services Inc. Delaware
Lucent Technologies Maquiladoras Inc. Delaware
Lucent Technologies Opto Inc. Delaware
Lucent Technologies Realty Inc. New Jersey
Lucent Technologies Services Company Inc. Delaware
Lucent Technologies Taiwan Inc. Delaware
Lucent Technologies of Tampa Inc. Delaware
Lucent Technologies Technical Services Company, Inc. Delaware
Lucent Technologies Thailand Inc. Delaware
<PAGE> 4
Lucent Technologies Western Investments Inc. Delaware
Lucent Technologies World Services Inc. Delaware
Morris County Aircraft Leasing Inc. Delaware
Nassau Metals Corporation New York
NCS OSP Development Corp. Delaware
NCS Ventures, Inc. Delaware
Octel Communications Corp. Delaware
Telecommunications Technology Middle East Inc. Delaware
Western Electric Company, Incorporated Delaware
Western Electric International Incorporated North Carolina
Lucent Consumer Communications Inc. Delaware
Lucent Consumer Communications, LLC Delaware
Lucent Technologies Ventures Inc. Delaware
Lucent Technologies Venezuela S.A. Venezuela
Lucent Technologies Asia/Pacific Inc.
(Vietnam Rep. Office) Vietnam
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Lucent Technologies Inc. on Form S-3 (File No. 333-01223), Form S-4 (File No.
333-42261), and Forms S-8 (File No.'s 333-08789, 333-08793, 333-08775,
333-08801, 333-37041, 333-33943, 333-23043, 333-18975, 333-18977, 333-08783,
and 333-42475), of our reports dated October 21, 1997, on our audits of the
consolidated financial statements and financial statement schedule of Lucent
Technologies Inc. and subsidiaries as of September 30, 1997 and 1996, and for
the year and nine-month period ended September 30, 1997 and 1996, respectively,
and the year ended December 31, 1995, which reports are included in this Form
10-K.
Coopers & Lybrand L.L.P.
New York, New York
December 22, 1997
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Lucent Technologies Inc., a Delaware corporation
(hereinafter referred to as the "Company"), proposes to file with the Securities
and Exchange Commission, under the provisions of the Securities Exchange Act of
1934, as amended, a Form 10-K for the fiscal year ended September 30, 1997; and
WHEREAS, the undersigned is a Director and/or Officer of the
Company, as indicated below following the signature:
NOW, THEREFORE, the undersigned hereby constitutes and
appoints Donald K. Peterson, Florence L. Walsh, and James S. Lusk and each of
them, as attorneys for and in the name, place and stead of the undersigned, and
in the capacity of the undersigned as a Director and/or Officer of the Company,
to execute and file such Form 10-K and any amendments or supplements thereto,
hereby giving and granting to said attorneys, and each of them, full power and
authority to do and perform each and every act and thing whatsoever requisite
and necessary to be done in and about the premises, as fully, to all intents and
purposes, as the undersigned might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or
shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 17th day of December, 1997.
By /s/ Henry B. Schacht
------------------------------------
Name: Henry B. Schacht
Title: Chairman of the Board
<PAGE> 2
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Lucent Technologies Inc., a Delaware corporation
(hereinafter referred to as the "Company"), proposes to file with the Securities
and Exchange Commission, under the provisions of the Securities Exchange Act of
1934, as amended, a Form 10-K for the fiscal year ended September 30, 1997; and
WHEREAS, the undersigned is a Director and/or Officer of the
Company, as indicated below following the signature:
NOW, THEREFORE, the undersigned hereby constitutes and
appoints Donald K. Peterson, Florence L. Walsh, and James S. Lusk and each of
them, as attorneys for and in the name, place and stead of the undersigned, and
in the capacity of the undersigned as a Director and/or Officer of the Company,
to execute and file such Form 10-K and any amendments or supplements thereto,
hereby giving and granting to said attorneys, and each of them, full power and
authority to do and perform each and every act and thing whatsoever requisite
and necessary to be done in and about the premises, as fully, to all intents and
purposes, as the undersigned might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or
shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 17th day of December, 1997.
By /s/ Richard A. McGinn
------------------------------------
Name: Richard A. McGinn
Title: Director and Chief Executive
Officer and President
<PAGE> 3
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Lucent Technologies Inc., a Delaware corporation
(hereinafter referred to as the "Company"), proposes to file with the Securities
and Exchange Commission, under the provisions of the Securities Exchange Act of
1934, as amended, a Form 10-K for the fiscal year ended September 30, 1997; and
WHEREAS, the undersigned is a Director and/or Officer of the
Company, as indicated below following the signature:
NOW, THEREFORE, the undersigned hereby constitutes and
appoints Donald K. Peterson, Florence L. Walsh, and James S. Lusk and each of
them, as attorneys for and in the name, place and stead of the undersigned, and
in the capacity of the undersigned as a Director and/or Officer of the Company,
to execute and file such Form 10-K and any amendments or supplements thereto,
hereby giving and granting to said attorneys, and each of them, full power and
authority to do and perform each and every act and thing whatsoever requisite
and necessary to be done in and about the premises, as fully, to all intents and
purposes, as the undersigned might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or
shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 17th day of December, 1997.
By /s/ Donald K. Peterson
------------------------------------
Name: Donald K. Peterson
Title: Executive Vice President and
Chief Financial Officer
<PAGE> 4
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Lucent Technologies Inc., a Delaware corporation
(hereinafter referred to as the "Company"), proposes to file with the Securities
and Exchange Commission, under the provisions of the Securities Exchange Act of
1934, as amended, a Form 10-K for the fiscal year ended September 30, 1997; and
WHEREAS, the undersigned is a Director and/or Officer of the
Company, as indicated below following the signature:
NOW, THEREFORE, the undersigned hereby constitutes and
appoints Donald K. Peterson, Florence L. Walsh, and James S. Lusk and each of
them, as attorneys for and in the name, place and stead of the undersigned, and
in the capacity of the undersigned as a Director and/or Officer of the Company,
to execute and file such Form 10-K and any amendments or supplements thereto,
hereby giving and granting to said attorneys, and each of them, full power and
authority to do and perform each and every act and thing whatsoever requisite
and necessary to be done in and about the premises, as fully, to all intents and
purposes, as the undersigned might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or
shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 17th day of December, 1997.
By /s/ James S. Lusk
------------------------------------
Name: James S. Lusk
Title: Vice President and Controller
<PAGE> 5
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Lucent Technologies Inc., a Delaware corporation
(hereinafter referred to as the "Company"), proposes to file with the Securities
and Exchange Commission, under the provisions of the Securities Exchange Act of
1934, as amended, a Form 10-K for the fiscal year ended September 30, 1997; and
WHEREAS, the undersigned is a Director and/or Officer of the
Company, as indicated below following the signature:
NOW, THEREFORE, the undersigned hereby constitutes and
appoints Donald K. Peterson, Florence L. Walsh, and James S. Lusk and each of
them, as attorneys for and in the name, place and stead of the undersigned, and
in the capacity of the undersigned as a Director and/or Officer of the Company,
to execute and file such Form 10-K and any amendments or supplements thereto,
hereby giving and granting to said attorneys, and each of them, full power and
authority to do and perform each and every act and thing whatsoever requisite
and necessary to be done in and about the premises, as fully, to all intents and
purposes, as the undersigned might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or
shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 17th day of December, 1997.
By /s/ Paul A. Allaire
------------------------------------
Name: Paul A. Allaire
Title: Director
<PAGE> 6
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Lucent Technologies Inc., a Delaware corporation
(hereinafter referred to as the "Company"), proposes to file with the Securities
and Exchange Commission, under the provisions of the Securities Exchange Act of
1934, as amended, a Form 10-K for the fiscal year ended September 30, 1997; and
WHEREAS, the undersigned is a Director and/or Officer of the
Company, as indicated below following the signature:
NOW, THEREFORE, the undersigned hereby constitutes and
appoints Donald K. Peterson, Florence L. Walsh, and James S. Lusk and each of
them, as attorneys for and in the name, place and stead of the undersigned, and
in the capacity of the undersigned as a Director and/or Officer of the Company,
to execute and file such Form 10-K and any amendments or supplements thereto,
hereby giving and granting to said attorneys, and each of them, full power and
authority to do and perform each and every act and thing whatsoever requisite
and necessary to be done in and about the premises, as fully, to all intents and
purposes, as the undersigned might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or
shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 17th day of December, 1997.
By /s/ Carla A. Hills
------------------------------------
Name: Carla A. Hills
Title: Director
<PAGE> 7
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Lucent Technologies Inc., a Delaware corporation
(hereinafter referred to as the "Company"), proposes to file with the Securities
and Exchange Commission, under the provisions of the Securities Exchange Act of
1934, as amended, a Form 10-K for the fiscal year ended September 30, 1997; and
WHEREAS, the undersigned is a Director and/or Officer of the
Company, as indicated below following the signature:
NOW, THEREFORE, the undersigned hereby constitutes and
appoints Donald K. Peterson, Florence L. Walsh, and James S. Lusk and each of
them, as attorneys for and in the name, place and stead of the undersigned, and
in the capacity of the undersigned as a Director and/or Officer of the Company,
to execute and file such Form 10-K and any amendments or supplements thereto,
hereby giving and granting to said attorneys, and each of them, full power and
authority to do and perform each and every act and thing whatsoever requisite
and necessary to be done in and about the premises, as fully, to all intents and
purposes, as the undersigned might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or
shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 17th day of December, 1997.
By /s/ Drew Lewis
------------------------------------
Name: Drew Lewis
Title: Director
<PAGE> 8
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Lucent Technologies Inc., a Delaware corporation
(hereinafter referred to as the "Company"), proposes to file with the Securities
and Exchange Commission, under the provisions of the Securities Exchange Act of
1934, as amended, a Form 10-K for the fiscal year ended September 30, 1997; and
WHEREAS, the undersigned is a Director and/or Officer of the
Company, as indicated below following the signature:
NOW, THEREFORE, the undersigned hereby constitutes and
appoints Donald K. Peterson, Florence L. Walsh, and James S. Lusk and each of
them, as attorneys for and in the name, place and stead of the undersigned, and
in the capacity of the undersigned as a Director and/or Officer of the Company,
to execute and file such Form 10-K and any amendments or supplements thereto,
hereby giving and granting to said attorneys, and each of them, full power and
authority to do and perform each and every act and thing whatsoever requisite
and necessary to be done in and about the premises, as fully, to all intents and
purposes, as the undersigned might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or
shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 17th day of December, 1997.
By /s/ Paul H. O'Neill
------------------------------------
Name: Paul H. O'Neill
Title: Director
<PAGE> 9
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Lucent Technologies Inc., a Delaware corporation
(hereinafter referred to as the "Company"), proposes to file with the Securities
and Exchange Commission, under the provisions of the Securities Exchange Act of
1934, as amended, a Form 10-K for the fiscal year ended September 30, 1997; and
WHEREAS, the undersigned is a Director and/or Officer of the
Company, as indicated below following the signature:
NOW, THEREFORE, the undersigned hereby constitutes and
appoints Donald K. Peterson, Florence L. Walsh, and James S. Lusk and each of
them, as attorneys for and in the name, place and stead of the undersigned, and
in the capacity of the undersigned as a Director and/or Officer of the Company,
to execute and file such Form 10-K and any amendments or supplements thereto,
hereby giving and granting to said attorneys, and each of them, full power and
authority to do and perform each and every act and thing whatsoever requisite
and necessary to be done in and about the premises, as fully, to all intents and
purposes, as the undersigned might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or
shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 17th day of December, 1997.
By /s/ Donald S. Perkins
------------------------------------
Name: Donald S. Perkins
Title: Director
<PAGE> 10
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Lucent Technologies Inc., a Delaware corporation
(hereinafter referred to as the "Company"), proposes to file with the Securities
and Exchange Commission, under the provisions of the Securities Exchange Act of
1934, as amended, a Form 10-K for the fiscal year ended September 30, 1997; and
WHEREAS, the undersigned is a Director and/or Officer of the
Company, as indicated below following the signature:
NOW, THEREFORE, the undersigned hereby constitutes and
appoints Donald K. Peterson, Florence L. Walsh, and James S. Lusk and each of
them, as attorneys for and in the name, place and stead of the undersigned, and
in the capacity of the undersigned as a Director and/or Officer of the Company,
to execute and file such Form 10-K and any amendments or supplements thereto,
hereby giving and granting to said attorneys, and each of them, full power and
authority to do and perform each and every act and thing whatsoever requisite
and necessary to be done in and about the premises, as fully, to all intents and
purposes, as the undersigned might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or
shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 17th day of December, 1997.
By /s/ Franklin A. Thomas
------------------------------------
Name: Franklin A. Thomas
Title: Director
<PAGE> 11
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Lucent Technologies Inc., a Delaware corporation
(hereinafter referred to as the "Company"), proposes to file with the Securities
and Exchange Commission, under the provisions of the Securities Exchange Act of
1934, as amended, a Form 10-K for the fiscal year ended September 30, 1997; and
WHEREAS, the undersigned is a Director and/or Officer of the
Company, as indicated below following the signature:
NOW, THEREFORE, the undersigned hereby constitutes and
appoints Donald K. Peterson, Florence L. Walsh, and James S. Lusk and each of
them, as attorneys for and in the name, place and stead of the undersigned, and
in the capacity of the undersigned as a Director and/or Officer of the Company,
to execute and file such Form 10-K and any amendments or supplements thereto,
hereby giving and granting to said attorneys, and each of them, full power and
authority to do and perform each and every act and thing whatsoever requisite
and necessary to be done in and about the premises, as fully, to all intents and
purposes, as the undersigned might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or
shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 17th day of December, 1997.
By /s/ John A. Young
------------------------------------
Name: John A. Young
Title: Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
balance sheet of Lucent at September 30, 1997 and the audited consolidated
statement of income for the year ended September 30, 1997 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 1,350
<SECURITIES> 0
<RECEIVABLES> 5,725
<ALLOWANCES> 352
<INVENTORY> 2,926
<CURRENT-ASSETS> 12,501
<PP&E> 11,554
<DEPRECIATION> 6,407
<TOTAL-ASSETS> 23,811
<CURRENT-LIABILITIES> 10,738
<BONDS> 1,665
0
0
<COMMON> 6
<OTHER-SE> 3,381
<TOTAL-LIABILITY-AND-EQUITY> 23,811
<SALES> 26,360
<TOTAL-REVENUES> 26,360
<CGS> 14,898
<TOTAL-COSTS> 14,898
<OTHER-EXPENSES> 9,831
<LOSS-PROVISION> 127
<INTEREST-EXPENSE> 305
<INCOME-PRETAX> 1,467
<INCOME-TAX> 926
<INCOME-CONTINUING> 541
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 541
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.84
</TABLE>
