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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER 001-11639
LUCENT TECHNOLOGIES INC.
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A DELAWARE I.R.S. EMPLOYER
CORPORATION NO. 22-3408857
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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, 1999, the aggregate market value of the voting stock held
by non-affiliates was approximately $233,000,000,000.
At November 30, 1999, 3,141,898,168 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, 1999 (Part II)
(2) Portions of the registrant's definitive proxy statement dated December
21, 1999, 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:
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TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
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Common Stock (Par Value $.01 Per Share)..................... New York Stock Exchange
6.90% Notes due July 15, 2001............................... New York Stock Exchange
7.25% Notes due July 15, 2006............................... New York Stock Exchange
6.50% Debentures due January 15, 2028....................... New York Stock Exchange
5.50% Notes due November 15, 2008........................... New York Stock Exchange
6.45% Debentures due March 15, 2029......................... New York Stock Exchange
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TABLE OF CONTENTS
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ITEM DESCRIPTION PAGE
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PART I
1. Business.................................................... 4
2. Properties.................................................. 25
3. Legal Proceedings........................................... 26
4. Submission of Matters to a Vote of Security-Holders......... 26
PART II
5. Market for Registrant's Common Equity and Related 26
Stockholder Matters.........................................
6. Selected Financial Data..................................... 26
7. Management's Discussion and Analysis of Financial Condition 26
and Results of Operations...................................
8. Financial Statements and Supplementary Data................. 26
9. Changes in and Disagreements with Accountants on Accounting 26
and Financial Disclosure....................................
PART III
10. Directors and Executive Officers of the Registrant.......... 26
11. Executive Compensation...................................... 27
12. Security Ownership of Certain Beneficial Owners and 27
Management..................................................
13. Certain Relationships and Related Transactions.............. 27
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 28
8-K.........................................................
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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.
I. GENERAL
Lucent Technologies Inc. ("Lucent") was incorporated in Delaware in
November 1995. Lucent has its principal executive offices at 600 Mountain
Avenue, Murray Hill, New Jersey 07974 (telephone number 908-582-8500). Lucent
was formed from the systems and technology units that were formerly a part of
AT&T Corp., including the research and development capabilities of Bell
Laboratories. Prior to February 1, 1996, AT&T conducted Lucent's original
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. In April 1996, Lucent completed the initial public offering of its
common stock ("IPO") and on September 30, 1996, became independent of AT&T when
AT&T distributed to its shareowners all of its Lucent shares. References to
"Lucent" include the historical operating results and activities of the business
and operations transferred to Lucent in the Separation. In 1996, Lucent changed
its fiscal year to begin October 1 and end September 30.
Lucent is one of the world's leading designers, developers and
manufacturers of communications systems, software and products. Lucent is a
global leader in the sale of public and private communications systems,
supplying systems and software to most of the world's largest communications
network operators and service providers (together referred to as "service
providers"). Lucent 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. Lucent's research and development activities are conducted through
Bell Laboratories ("Bell Labs"), one of the world's foremost industrial research
and development organizations.
The communications industry is experiencing rapid changes in the
technologies used to service customers' needs. Traditional circuit based
switching and data packet transmission are converging. This convergence of
technologies is driven by the growing demands on the transmission of information
using data, voice, video and fax, or any combination of these. The demand is
driven by the expansion of Internet traffic over existing networks -- both
wireline and wireless -- as well as the buildout of new and improved networks.
Lucent's strategy is to meet its customers' needs by offering an end-to-end
solutions platform, which brings together Lucent's core products with new
offerings obtained through strategic acquisitions and the research and
development of Bell Laboratories. This strategy brings together products related
to data, voice, optical, wireless, software, services and support.
Lucent has three reportable segments: Service Provider Networks ("SPN"),
Enterprise Networks ("Enterprise"), and Microelectronics and Communications
Technologies ("MCT"). SPN provides public networking systems and software to
telecommunications service providers and public network operators around the
world. Enterprise develops, manufactures, markets and services advanced
communications products and data networking systems for business customers. MCT
designs and manufactures high-performance integrated circuits, power systems,
optical fiber and fiber cables, and optoelectronic components for applications
in the communications and computing industries. The three reportable operating
segments are strategic market units based on the customers and the markets
served.
II. SERVICE PROVIDER NETWORKS
A. General
Lucent designs, develops, manufactures and services systems, including
software, which enable service providers to provide wireline and wireless
access, local, long distance and international voice, data and video and cable
services. The SPN segment includes the product groups responsible for Lucent's
optical networking, switching solutions, access, wireless networks and
communications software businesses. It also includes the businesses which are
focused on the needs of cable television operators and data networking systems
for service providers as well as the sales and support organizations responsible
for offers, sales, distribution, installation and maintenance for service
provider customers worldwide.
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Lucent's 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 multi-functional communications. Lucent has a wireline
local access installed base (the number of access lines serviced by switches
manufactured by Lucent) of approximately 150 million lines.
Lucent designs, develops, manufactures, sells, and services each of the
five broad elements that comprise communications networks for service providers:
switching systems, which route information through the network; transmission
systems (including optical networking and access products) which provide the
communications path through the network that carries information between points
in the network as well as to and from subscribers; 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 (as described below under
Enterprise and MCT). These systems collectively comprise the infrastructure that
enables communications service providers to provide traditional narrow band
voice and data services and enables both new and traditional network operators
to offer broadband multi-media services.
In fiscal year 1999, Lucent acquired or merged with several companies
related to the SPN segment's business, including: Nexabit, a developer of
high-speed switching equipment and software that directs traffic along
telecommunications networks; Ascend Communications, Inc., a developer,
manufacturer and seller of wide area networking solutions; Kenan Systems
Corporation, a developer of third-party billing and customer care software; Wave
Access Ltd., a developer of high-speed systems for wireless data communications;
and Quadritek Systems, Inc., a start-up developer of next-generation Internet
protocol network administration software solutions.
B. Switching Solutions
Lucent manufactures, develops, markets and manages switching products and
software for the service provider market. Lucent's primary switching products
are the 5ESS(R) switch for local and long distance switching and international
gateways, the 4ESS(TM) Digital Switch for long distance and international
switching and the new 7R/E (TM) Packet Solutions switch.
Lucent's primary switching solutions products include:
- 5ESS(R)-2000 Switch for local, toll, international gateway and wireless
network service providers around the globe. 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(R) 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.
- 7R/E Packet Solutions portfolio (includes the 7R/E Call Feature Server)
is for use by emerging or existing service providers to build new packet
networks. In addition, the 7R/E Packet Driver allows existing service
providers to evolve their circuit-based networks to packet networks to
handle increasing data traffic as needed. It delivers both voice and data
services over Internet protocol ("IP") or Asynchronous Transfer Mode
("ATM") networks. The 7R/E Packet Driver permits service providers to use
a substantial percent of their existing hardware when they migrate to
packet networks. The 7R/E OneLink Manager(TM) gives service providers a
single tool to easily and cost-effectively handle operations,
administration, management, and provisioning across all network elements.
- GTD-5(R) Switch for local network service providers
- 4ESS Switch for toll and international gateway applications
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- Subscriber loop carrier systems, including the SLC(R)-5 and SLC-2000,
sold primarily to local exchange carriers
- AnyMedia(R) Access System is a global platform designed to provide
network access from any medium (copper/fiber and voice/data/video)
C. Optical Networking
Lucent designs, manufactures and markets optical networking systems,
offering a complete portfolio of optical networking products. Lucent's family of
optical networking systems provides service providers with fast, efficient
information transport over fiber-optic lines. The enabler of optical networking
is photonics, a technology that uses light particles, or photons, to transport
information over hair-thin glass fibers.
Most transmission systems currently comply with one of two similar
standards designed to promote the implementation of maximum transmission
capacity with the greatest simplicity and lowest cost for service providers. The
Synchronous Optical Network ("SONET") standard has been widely adopted in North
America. The Synchronized Digital Hierarchy ("SDH") predominates throughout the
rest of the world. Lucent markets transmission access systems supporting both
standards.
Lucent's primary optical networking products include:
- Dense Wavelength Division Multiplexing ("DWDM") systems such as the
WaveStar(TM) 40G OLS and 400G OLS which use prism-like technology to
combine the information generated by up to 80 individual lasers onto a
single strand of fiber-optic cable.
- Systems that automatically route large amounts of information from fiber
to fiber, such as the WaveStar Bandwidth Manager and WaveStar DACS.
- Systems that combine many low-speed electronic signals into a single
high-speed signal, and then convert that signal to an optical signal for
transmission over fiber-optic cable. Examples include the current SONET
and SDH product lines (FT 2000, DDM 2000, ISM 2000, SLM 2000) as well as
the new global product line (WaveStar(TM) 2.5G, WaveStar(TM) 10G,
WaveStar(TM) 40G Express).
D. Wireless Networks
Lucent manufactures and markets total-system solutions for the global
wireless networks industry. Lucent provides end-to-end capabilities for
operators to plan, deploy, operate and maintain mobile and fixed wireless
networks to maximum efficiency, and to competitively meet their customers'
needs. Lucent's portfolio includes Mobile Switching Centers, base station
products, and network support software. Lucent also provides global customer
technical support and training.
Lucent's solutions for wireless network operators encompass all of the
major wireless mobile network standards, including AMPS, TDMA, CDMA and GSM,
spreading over a broad frequency spectrum including: 800 MHz, 900 MHz, 1800 MHz
or 1900 MHz. Lucent's solutions offer scaleable platforms for wireless services
that are fully compatible with the larger telecommunications environment of
today, yet are able to evolve to next-generation networks.
Lucent's three primary wireless product families include:
- Mobile Switching centers that provide the transfer of calls within the
wireless network and interface to the public switched telephone networks.
- Operations and maintenance centers which are software systems allowing
for the provisioning, diagnostics and administration of the wireless
networks.
- Base station systems that are the radio systems that transmit and receive
subscriber calls and manage handoffs as customers move from cell to cell.
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E. Communications Software
Lucent develops open, standards-based, multi-vendor software products and
services to help service providers manage their complex, converging voice and
data networks. Lucent's portfolio of software solutions includes software for
network and service management, billing and customer care, programmable
switching, and intelligent network services for wireline (fixed), wireless
(mobile), Internet, and converging networks. Lucent's solutions are modular and
scalable and designed to help reduce costs.
Lucent's primary communications software products include:
- Operations Support Software -- Lucent's Kenan Systems provides
established and growing service providers with service ready solution
sets that include: convergent customer care and billing management;
multiple switching software platforms; network performance and assurance;
number portability; service activation, provisioning, and management;
transport provisioning; and wireless/mobile network management. Some of
our modular, scalable, leading-edge software products include: Arbor(R)
Product Suite, Actiview(R) Service Management, ConnectVu(TM)
Configuration Management, Integrated Transport Management, Mechanized
Loop Testing, NetMinder(TM) System Network Performance, Network Fault
Management, and OneVision(R) Network Management Solution.
- Intelligent Network Services -- Lucent's Intelligent Network ("IN")
provides a broad range of targeted, flexible, end-to-end solutions for
wireline and wireless providers. The services run on a proven intelligent
network platform that supports the world's major national and
multi-national IN protocols. Our IN portfolio contains over 50 IN
services including Calling Card Services, Prepaid, Number Portability and
Over-the-Air Activation Function and several servers and platforms such
as Service Control Point, Service Creation Environment and Compact
Service Node.
- Programmable Switching -- Lucent's Programmable Switching Solutions gives
service providers and third parties the ability to quickly develop and
deploy new advanced-type services. Our Programmable Switching Solutions
include: SoftSwitch -- a Bell Labs-developed "software switch" that
enables seamless connectivity between public and internet telephony
networks, 7R/E -- a portfolio of ATM and IP Packet data networking
solutions products delivering over 3,000 services to packet network
operators, and multiple products from our recent acquisition of Excel
Switching Corporation.
F. Data Networking -- Service Providers and Access
Lucent develops, markets, sells and services data networking solutions for
service provider customers worldwide. For the service provider market, Lucent's
product and services portfolio includes ATM, Frame Relay, IP, Digital Subscriber
Line ("DSL"), Broadband ATM Access, Remote Access and Network Management
offerings.
Lucent's primary data networking and access solutions for service providers
include:
- Lucent's GRF multigigabit routers deliver high performance in dynamic
heavy-traffic IP networking environments. Routers are network controllers
that determine the best routing for data transmission between end
stations. They perform their operations by looking at network layer
information found in data packets and either forwarding the packets
directly to a destination or sending them through a series of
intermediate devices.
- The GX Smart Core ATM product family includes the GX 550 Smart Core ATM
Switch -- a scalable, high-capacity switching system that provides the
necessary capacity, performance, and port fanout capabilities for carrier
services. ATM switches incorporate a cell-based switching and
multiplexing communications technology which permits transportation of
substantially all traffic types (e.g., video, voice, data, interactive
video, etc.). ATM is a connection-oriented technology -- i.e., before
data can be transferred, a connection between the sending and receiving
nodes must be established.
- Lucent's NX64000 multi-terabit switch/router is an architectural
innovation that provides high-speed optical interfaces and integrates
substantially all of the key core requirements onto a single,
carrier-class multi-service device. It provides features of ATM switches
and high-capacity routers.
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- B-STDX Multiservice wide area network ("WAN") switches (deployed to build
core frame relay networks) are carrier-class switches which are evolving
as an access point to the next-generation WAN with the addition of
internetworking modules for IP and ATM services for high-speed trunking
and low-speed converged access. Frame relay technology allows bits to be
packaged and sent out into the network with source and destination
addresses. Products include the B-STDX 8000, B-STDX 9000 and B-STDX 8200.
Another Lucent multi-service WAN switch is the CBX(TM) 500 which is of
greater bandwidth than the B-STDX family of products. In addition, Lucent
has its MAX family of WAN access switches.
- Lucent's Stinger(TM) DSL Access Concentrator is a new carrier class DSL
access concentrator. Access concentrators are call aggregation devices
designed for large dial-in applications such as Internet service
providers. They aggregate analog and digital calls over channelized lines
such as T1/E1 and T3/E3. The Stinger offers features that ATM brings to
multi-service networks, including effective bandwidth management and high
availability. Addressing the needs of carriers implementing cell-based
backbone networks, it features high-capacity traffic aggregation
capabilities and performance. Other DSL access concentrators include the
DSLTNT, DSL MAX 20 and the DSL Terminator 100 Access Concentrators.
G. NetCare(R) Professional Services -- Service Providers and Engineering
Services
Lucent's NetCare Professional Services provides a comprehensive suite of
value added services in the communications industry. NetCare Professional
Services includes the full lifecycle of planning, design, implementation and
operations support services that allow customers to manage their networks.
The NetCare Professional Services unit is focused on network planning and
design, consulting, integration and support services, including remote
diagnostics and around-the-clock network monitoring services. In addition,
NetCare Professional Services offers specialized solutions focused on clients'
network security, performance and service level management, Microsoft Windows
2000, and voice/data convergence requirements.
The NetCare Professional Services unit is focused on network engineering,
provisioning, installation, and warranty and post-warranty support. In addition,
Netcare Professional Services offers specialized solutions for system upgrades
and conversions, system health assessments, capacity planning, network
optimization, and program/project management services of complex network
implementations.
H. Cable Communications
Lucent's Cable Communications provides a set of integrated products and
services that enables cable network operators to offer customers full-featured,
reliable IP telephony service, high-speed data access and digital video over
their existing cable networks.
Marketed as Lucent CableConnect(SM) Solutions, CableConnect is part of
Lucent's End to End Solution(SM)service program that includes all elements
needed to upgrade existing cable networks. CableConnect Solutions include
network management services (planning, implementation, and maintenance), a full
portfolio of network elements including switching and access infrastructure
components, cable headend products, and premises equipment for the subscriber's
home, as well as provisioning, billing, and customer care software platforms.
Lucent's solutions deliver IP telephony and high-speed data access via the
PathStar(TM) Access Server and 7R/E.
I. Markets/Sales/Distribution
The principal customers for Lucent's systems in the SPN segment are service
providers that provide wireline and wireless local, long distance and
international telecommunications services, including local, long distance and
international telecommunications companies, cable television companies and
internet service providers. Lucent's systems for service providers 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/Multi-Year Contracts."
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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 response, existing service providers have expanded beyond
traditional offerings and are offering new services. In emerging markets,
privatization, competition and economic expansion have increased demand for the
systems marketed by Lucent's SPN business and its competitors. At the same time,
technological advances also have increased demand by reducing operating costs
and facilitating new applications, including multi-functional services.
Lucent markets and sells its SPN systems worldwide, primarily through a
direct sales force. Many of Lucent's SPN sales 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 -- Reliance on Major Customers/Multi-Year Contracts."
As a result of the increasing complexity of SPN systems and the high cost
of developing and maintaining in-house expertise, service providers typically
demand complete, integrated turn-key projects. Service providers are
increasingly seeking overall network or systems solutions that require an
increased software content which would enable them to rapidly deploy new and
differentiable services. In response, Lucent has formed an organization focused
on turn-key network engineering projects for both public and private sector
customers. Lucent markets integrated solutions for the project and engineers,
designs and installs the network, including equipment and software manufactured
by both Lucent and third parties.
Increasingly, as a result of the financial demands of major network
deployments, service providers 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 non-U.S. markets and in some cases Lucent furnishes
or guarantees financing for customers. As a result, Lucent works with its
customers to structure and lay off financing packages. See "Outlook -- Future
Capital Requirements."
In order to market its product line for service products worldwide, Lucent
has established wholly-owned subsidiaries and joint ventures with local
companies in many countries.
J. Competition
Lucent believes that its key competitive assets in the SPN segment are its
broad product line, large installed base, relationship with key customers,
technological expertise and new product and software development capabilities.
Lucent's primary competitors in the service provider market 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. Lucent estimates that in 1998, Lucent and these
four competitors collectively accounted for approximately 39% of the world's
service provider network systems sales, with Lucent's accounting for about 11%
of world sales.
In addition, in each of Lucent's product areas covered in the SPN segment,
Lucent faces significant competition from other companies which do business in
one or a number of such product areas. For example, in wireless systems,
Motorola, Inc. and Nokia Corporation, which are very large companies with
substantial technological and financial resources, are two additional
significant competitors. In optical networking and communications software,
competition in the markets includes hundreds of smaller competitors. Lucent is
also encountering competition from companies that design and manufacture data
networking equipment such as Cisco Systems Inc. As Lucent continues to expand
its SPN business, it is likely that other competitors will arise in each new
technology or market area.
K. Customer Dependency
Historically, a limited number of customers have provided a substantial
portion of the SPN segment and total revenues. These customers include AT&T,
SPN's largest customer, as well as other large service providers such as the
Regional Bell Operating Companies ("RBOCs"). The communications industry is
experiencing a
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consolidation of both U.S. and non-U.S. companies. 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 in the SPN segment
and total results.
Concurrent with this consolidation among the larger service providers, the
dynamics of the marketplace have created opportunities for new competitors to
enter the market. Lucent is diversifying its customer base in the SPN segment
and seeking out new types of customers globally. These new customers include
competitive access providers and local exchange carriers, wireless service
providers, cable television network operators and internet service providers.
L. Sources and Availability of Raw Materials -- See "Sources and Availability
of Raw Materials"
M. Seasonality
Historically, revenues and earnings related to the SPN segment have been
higher in the first fiscal quarter. This is primarily due to the fact many of
Lucent's large customers in the SPN segment have historically delayed a
disproportionate percentage of their capital expenditures until the fourth
quarter of the calendar year (Lucent's first fiscal quarter). Lucent has taken
measures to manage the seasonality of its business related to the SPN segment by
changing the date on which its fiscal year ends as well as its compensation
programs for employees, resulting in a more uniform distribution of revenues and
earnings throughout the year.
N. Intellectual Property -- See "Patents, Trademarks and Other Intellectual
Property".
O. Industry Practices Impacting Working Capital
Existing industry practices affect working capital and cash flow provided
by (or required for) operations include the level and variability of customer
orders relative to the volume of production, vendor lead times and/or materials
availability for critical high dollar parts, inventory levels held to achieve
rapid customer fulfillment, the provisions of extended payment terms to
customers, the provision of return/stock rotation rights for certain key
customers and distributors and the extension of financing terms. Also, see
"Outlook -- Future Capital Requirements".
III. ENTERPRISE NETWORKS
A. General
Lucent designs, develops, manufactures and services voice and data
communications systems and software for small, mid-sized and large multinational
businesses, government agencies and schools. Enterprise primarily offers
premises-based communications servers for voice and data; e-business solutions;
call center and other customer relationship management software and
applications; messaging systems and applications; wireless systems; conferencing
systems; Internet-based and LAN and WAN products; Systimax network cabling for
buildings; and network management software, such as policy management and
directory services; and network design, integration and management and
maintenance services. Enterprise serves more than 1 million business locations
in the United States and more than 90 countries. Products are sold through
Lucent's direct sales force and through a network of distributors, dealers and
value added resellers.
During fiscal year 1999, Lucent merged with Mosaix, Inc., a provider of
software that links companies' front and back offices and helps them deliver
more responsive and efficient customer service.
B. Enterprise Voice
Lucent's core business communications system products are enterprise
communications servers and private switching systems (PBXs and key systems),
primarily located at the customer's premises, that permit a number of users to
access and use telephony, messaging, customer relationship management and
web-based applications via telephones or terminals. Lucent's communications
servers interoperate over LAN, WAN, wired and wireless networks, as well as in
stand-alone applications. As a market leader in communications systems in the
U.S.
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market, Lucent offers wired and wireless communications systems for large
customers and systems for smaller businesses and home offices through an
extensive distribution network as well as through its direct sales capacity.
Lucent'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, Lucent 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.
Lucent's Customer Relationship Management Systems (Call Centers) 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 businesses via the telephone and the Internet. Lucent'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. Lucent'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 service agents located in geographically dispersed networked sites,
processing tens of thousands of calls per day. 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.
Lucent is also a worldwide leader in providing multimedia messaging
equipment and services to telephone companies, cellular service providers,
businesses, governments and educational institutions in more than 90 countries.
Messaging is a key productivity tool for corporations around the world. Lucent's
messaging systems are used by companies around the globe.
Lucent's primary voice products for enterprise networks include:
- Definity(R) communications servers include the flagship Definity
Enterprise Communications Server (ECS), Definity ProLogix(TM) Solutions,
and Definity One. All Definity servers transport telephony over three
networks: voice, IP and ATM. All three servers support a range of
applications, including messaging, conferencing, call centers and
wireless. The Definity One, designed for small and branch offices, runs
on an NT Server and supports up to 168 ports. Definity ProLogic
Solutions, designed for small and mid-sized businesses, supports up to
600 ports. The Definity ECS, designed for mid-sized and large businesses
scales up to 25,000 ports.
- Merlin Magix(TM) and Partner Advanced Communications System (ACS). Merlin
Magix is a modular hybrid PBX system that gives small and mid-sized
businesses the ability to access the Internet and public switched
telephone network using a single platform. It is designed for up to 80
lines.
- CentreVu(R) Customer Care Solutions comprise a broad array of systems,
software and professional services that include multimedia customer care
and computer telephony applications, customer relationship management
software, predictive dial solutions and interactive voice response
solutions. CentreVu Supervisor gives call center supervisors the ability
to monitor, administer and analyze the performance of call center
operations from a desktop or laptop PC; CentreVu Explorer software
collects and stores historical call information; CentreVu Exchange
consolidates detailed call distribution and voice response reporting from
multiple sites, making it easier for managers to analyze and allocate
call center resources; CentreVu Advocate software uses predictive
algorithms to automatically anticipate, control and optimize the
allocation of call center resources to minimize caller wait times, reduce
the number of abandoned calls, lower network costs and balance agent
workloads while matching callers with the agents who can best serve their
needs; CentreVu Internet Solutions enables callers to browse a web site
and click on an icon to talk with an agent; CentreVu Response Solutions
automates telephone interactions of all types -- using built-in scripts
and digitized speech, it responds to callers, prompts the caller, looks
up and delivers information and routes the call for additional service;
CRM Central 2000 supports multimedia customer contacts, manages and
delivers critical business and customer information, automatically
triggers the work required to fulfill requests and monitors service
levels to ensure quality.
- Lucent Messaging Solutions includes a wide range of servers and software
for enterprises and service providers. Major offers for enterprises
include: Intuity(TM)Audix(TM) Multimedia Messaging System, which uses
industry-standard components to meet the voice, fax and e-mail
integration messaging needs of
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businesses of all sizes; Octel Messaging Servers that support up to
30,000 users; Octel Unified Messenger(TM), which provides a single
mailbox for voice, e-mail and fax that can be accessed and managed from a
PC and telephone; Octel Visual Messenger, which allows users to view and
manage all of their voice and fax messages from a PC; www.messenger, a
standards-based tool that lets users access their messaging mailboxes
through a web browser; and OctelDesigner(TM), which allows the creation
of a wide range of customized voice/fax messaging and computer telephony
applications. Lucent also offers messaging systems to telecommunications
service providers, which, in turn, provide voice mail services to their
residential, business and wireless customers. Lucent's AnyMedia(TM)
Messaging family allows subscribers to send messages from anywhere, to
anyone, at anytime, with any device, on any network.
C. Data Networking -- Enterprise
Lucent provides a wide range of data networking solutions for enterprise
networks, LAN offerings, WAN products, firewall and virtual private networking
appliances, intrusion detection systems and IP address and policy management
software.
In addition to certain products previously described under "Data
Networking -- Service Providers and Access," Lucent's primary data networking
products for enterprise networks include:
- CAJUN(TM) CAMPUS SWITCHES -- a comprehensive family of LAN switches
designed for increasing bandwidth requirements and demands associated
with the convergence of data, voice and video applications across
enterprise networks. These Ethernet, ATM and multifunction products range
from stackable units, to modular chassis platforms capable of moving vast
amounts of backbone network traffic easily and quickly. The Cajun Campus
product suite supports from hundreds to tens of thousands of connections
on a network and scales in performance from four gigabits per second to
92 Gbps.
- WAN SOLUTIONS -- a family of WAN solutions, including Pipeline Access
Routers which provide branch offices with high-speed, secure access to
the Internet, and its SuperPipe Multiservice Access Routers, which are
designed for corporate telecommuters, remote offices and small businesses
for Internet access, remote access, Virtual Private Networks ("VPN") and
voice and video services.
- LUCENT MANAGED FIREWALL -- this product lets network managers run
multiple security zones for different customers or branch offices with
different security policies, all from a central point, with secure remote
access, centralized supervision and comprehensive management reporting.
- LUCENT VPN GATEWAY -- comprised of the Lucent Managed Firewall, the IPSec
client, the Security Management Server and the RealSecure
intrusion-detection software, VPN Gateway allows service providers and
enterprises to deliver secure networks across shared public networks.
With the VPN Gateway, service providers and enterprise customers can
manage hundreds of Lucent Managed Firewall appliances and thousands of
IPSec clients.
- POLICY MANAGEMENT AND IP ADDRESS SOFTWARE SOLUTIONS -- include
RealNet(TM) Rules software, a JAVA-based, client/server policy management
software application running on Windows NT and Sun Solaris, and QIP
Enterprise 5.0, IP address management software. RealNet Rules platforms
allow IT professionals to define specific rules, or policies, regarding
how network resources will be used, by whom and at what times. RealNet
Rules integrates with QIP Enterprise 5.0, an IP address management
software used by network managers to automate and manage IP name and
address services in mid-to-large organizations.
D. NetCare Professional Services -- Enterprise
Lucent offers a wide range of NetCare Professional Services options to
enterprise network customers, including call center design, voice and data
networking, engineering, training, remote diagnostics and dedicated on-site
technicians. On-demand services involve routine testing and diagnostics,
maintenance and repair, moves, rearrangements and software and hardware upgrade
installations. Through Lucent's NetCare Professional Services portfolio of
services, enterprise customers have access to a range of services and support
for the design, integration, management, maintenance and operation of voice,
video and data networks.
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E. Government Solutions
Lucent's Government Solutions is a sales channel representing all of
Lucent's products, services and solutions to the Federal government marketplace.
The organization serves more than 1,000 agencies, departments and offices of the
U.S. government, both domestically and abroad. Government Solutions sells
through a direct sales force, through integrators and service providers and
through a growing network of distributors, dealers and value-added resellers.
F. Systimax
Lucent's SYSTIMAX(R), a structured connectivity system for commercial
applications, provides broadband multifunctional LAN interconnections within a
building or campus and is available worldwide through authorized distributors
and resellers. A single SYSTIMAX copper or fiber cable is capable of carrying
data, voice, video and intelligent building management applications
simultaneously.
Lucent's remote diagnostics and repair capability permits Lucent to
monitor, test, maintain and resolve problems from its regional service centers.
Many of Lucent'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 Lucent to automate many maintenance and repair tasks.
G. Markets/Sales/Distribution
Lucent markets its systems and services in the Enterprise segment 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,
Lucent effects these sales primarily through the direct sales force, while sales
elsewhere occur through dealers and distributors as well as the direct sales
force. Lucent's systems for the Enterprise segment are deployed in applications
for customer sales and service, conferencing and collaboration, mobility and
distributed work force, messaging and enterprise networking. Lucent fields a
large group of application specialists to design call center, distance learning
and other customized applications.
Lucent 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.
Lucent 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.
H. Competition
Lucent believes that key competitive assets in its Enterprise segment are
service support, the ability to upgrade existing systems for new applications,
price and reliability. Lucent considers its working relationships with its
Enterprise customers and knowledge of their individual business needs to be
important competitive advantages. Lucent competes principally with three other
large companies with substantial technological and financial resources in the
Enterprise segment. These competitors are Alcatel, Northern Telecom Limited,
Siemens AG and Cisco. According to Phillips Infotech, in 1998 the first three of
these competitors and Lucent accounted for approximately 30% of the sales of
enterprise networks globally, with Lucent accounting for approximately 10%. In
addition, as the market transforms to multi-media systems, Lucent is
encountering competition from companies that design and manufacture data network
equipment.
I. Customer Dependency
The Enterprise segment services well over a million customer locations
worldwide that range in size from small to medium to large businesses.
Enterprise's success depends on many segments of customers (small, medium, and
large businesses) and our ability to serve them better than our competitors. A
significant amount of the Enterprise segment's revenue comes from approximately
250 global accounts.
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J. Sources and Availability of Raw Materials -- See "Sources and Availability
of Raw Materials"
K. Seasonality
The Enterprise segment is not materially seasonal.
L. Intellectual Property -- See "Patents, Trademarks and Other Intellectual
Property"
M. Industry Practices Impacting Working Capital -- See "Outlook -- Future
Capital Requirements"
IV. MICROELECTRONICS AND COMMUNICATIONS TECHNOLOGIES
A. General
Lucent designs, manufactures and sells integrated circuits ("ICs"),
electronic power systems, optical fiber cables, and optoelectronic components
for communications and computer applications. Lucent supplies these components
to manufacturers of communications systems and computers and also provides these
components for many of Lucent's own systems and products. Lucent offers products
in several IC product areas critical to communications applications, including
digital signal processors ("DSPs") for digital cellular phones and modems, ICs
for voice and data communications and standard-cell application specific
integrated circuits ("ASICs"). High performance cable is utilized in telephony,
data and video applications. Lucent also provides energy reserve systems, power
conversion products and optoelectronic products that are embedded into
communications and computer systems.
During fiscal year 1999, Lucent acquired or merged with the following
companies related to the MCT segment's business: Spectran Corporation (acquired
61% ownership), a designer and manufacturer of specialty optical fiber and fiber
optic products; the Ethernet LAN Component business of Enable Semiconductor; and
Sybarus Technologies, a semiconductor design company.
B. Integrated Circuits
Lucent's ICs are designed to provide advanced communications and control
functions for a wide variety of electronic products and systems. Lucent 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. Lucent offers a wide variety of standard, semi-custom and
custom products for cellular equipment, voice and data communications networks,
computers and computer peripherals, modems and consumer communications products.
Lucent has several GSM hardware/software platforms 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.
Lucent's primary IC product groups include:
- Access Products -- products that allow users to gain access to
communications networks including ICs for modems, analog line cards data
network interface cards, and PC and workstation input/output (I/O).
- Networks and Communications Products -- products that provide high-speed
switching and transmission of voice and data signals within the
communications network.
- Storage and Analog Products -- products targeted at the hard disk drive
market (disk controllers, read channels and associated ICs) and the
analog products market (preamps, line drivers and receivers, power
management and other analog functions).
- Wireless Products -- products for cellular and paging networks and
terminals, cordless phones and digital answering machines.
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C. Optoelectronics
Lucent 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. Lucent 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
internet access video-on-demand, interactive video, teleconferencing, image
transmission and remote database searching. Lucent markets a number of advanced
products, including 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.
Lucent's primary optoelectronic product groups include:
- High-Speed Transport Products -- including lasers and receivers that
enable fiber optic communications at speeds up to 40 Gb/s. These products
support DWDM of up to 160 channels over a single optical fiber.
- Fiber Amplifier Products -- amplifiers that extend the transmission
distance capabilities of optical signals up to 700 kilometers.
- Metro and Internetworking Products -- highly integrated modules and
subsystems that enable DWDM in metropolitan areas.
- Submarine Products -- high reliability products for undersea transmission
system repeaters.
- CATV and Enterprise Products -- products that support high-speed optical
connectivity in cable TV (CATV), LAN and enterprise applications.
D. Power Systems
Lucent designs, develops and manufactures energy systems and electronic
power supplies for the telecommunications and electronic data processing
industries. These products serve applications ranging from printers to large
telephone central offices. Products include AC/DC converters, AC/DC switching
power supplies, and energy systems that provide alarm, control and backup power
management.
Lucent's primary products for power systems include:
- Galaxy Power Systems (GPS) providing reliable DC power for
telecommunications and data networking applications.
- Board Mounted Power (BMP) modules offering regulated DC power, embedded
within computer, networking and telecommunications equipment.
- Titania point of load power products servicing the demanding power
requirements of high speed processors.
E. Fiber Optics
Lucent designs, develops, and manufactures an extensive line of fiber optic
products, including singlemode and multimode fiber and fiber cables. With 14
cable manufacturing facilities around the world, Lucent is one of the world's
leading suppliers of optical fiber cables.
Lucent's primary fiber optic products include:
- Applications based fibers (TrueWave(R) optical filber family for
submarine and long haul, and AllWave(TM) fiber for metropolitan
networks).
- AllWave Advantage -- optical end to end fiber cable and connectivity
solution for metro AllWave fiber based networks.
- Smart fiber monitoring and connectorization systems (Smart LGX).
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F. Intellectual Property Licensing
The intellectual property licensing organization has the responsibility to
license, protect, and maintain Lucent's intellectual property and to enforce the
company's intellectual property rights. This responsibility includes the
licensing of Lucent's patents and technology to third parties and negotiating
agreements regarding Lucent's licensing of intellectual property from others.
G. Market/Sales/Distribution
Lucent's MCT products are sold globally to service providers and
manufacturers of communications systems and computers through a combination of
direct sales, manufacturers' representatives and distributors. In addition,
Lucent's energy power systems and fiber optics generally are sold directly to
U.S. and foreign telephone companies. Lucent's MCT customers are competing in
markets characterized by rapid technological changes, decreasing product life
cycles, price competition and increased user applications. These markets have
experienced significant expansion in the number and types of products and
services they offer to end-users, particularly in personal computing, portable
access communication devices and expanded networking capability. As a result,
Lucent's MCT customers continue to demand products 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 addition to the revenues from sales to third parties, ICs, Power
Systems, optoelectronic products and fiber optics are also key components of
Lucent's systems sold to the SPN and Enterprise segments. These MCT products
compete with products of third party manufacturers for inclusion in Lucent's SPN
and Enterprise systems and products.
Lucent has traditionally sold its power products via direct sales to large
service providers and OEM's. Lucent has increased market coverage to both
Service Provider and OEM customers by building indirect sales channels.
H. Competition
Lucent considers its technological leadership product leadership, and
relationships with key customers to be important competitive assets. The market
for MCT products is global and generally highly fragmented. Lucent's competitors
differ widely among product categories. Lucent's competitors in certain IC
product categories include Texas Instruments Incorporated, Conexant Systems
Incorporated, STMicroelectronics Incorporated and LSI Logic Corp.; in electronic
power systems, competitors include Astec, a subsidiary of Emerson Electric Co.,
Artesyn Technologies Inc. and Marconi plc; in optoelectronics, competitors
include Fujitsu Limited, Northern Telecom and JDS Uniphase Corporation; and in
optical fiber, competitors include Corning, Siecor, Alcatel, and Societe
Internationale Pirelli.
Lucent believes that key competitive factors in the microelectronics and
communications technology 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.
I. Customer Dependency
Lucent sells its MCT products to a wide variety of global electronic
systems manufacturers and service providers. Over the past several years, the
proportion of revenues gained from customers outside of Lucent has climbed
significantly. Because of the high fixed-cost nature of many MCT manufacturing
processes, the loss of any significant customer could have a material adverse
effect on Lucent's operating results in the MCT segment.
J. Sources and Availability of Raw Materials -- See "Sources and Availability
of Raw Materials"
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K. Seasonality
The MCT segment may experience variability in revenues due to limited
seasonality, changes in market conditions, the timing of product development
cycles and the life cycle of major programs by customers. However, the MCT
segment is not materially seasonal.
L. Intellectual Property -- See "Patents, Trademarks and Other Intellectual
Property"
M. Industry Practices Impacting Working Capital -- See "Outlook -- Future
Capital Requirements"
V. BELL LABORATORIES
Lucent's SPN, Enterprise and MCT segments have 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 Lucent 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; data networking; lightwave
transmission, especially the wavelength division multiplexing systems ("WDM")
which offer 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 Lucent'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 Lucent to achieve a level of system reliability with
off-the-shelf commercial processors that allows Lucent to reduce its reliance on
custom microprocessors.
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 Lucent'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 Lucent's
products, including the elemedia(R) products for Internet applications, and are
sold to outside customers.
Bell Labs also has led in the development of software-based networking
technologies that support Lucent's systems and products. Recently, it has
developed systems for digital cellular, PCS, mobile computing and wireless LANs.
Bell Lab's technology has allowed the recent introduction of data networking
products such as the Internet Telephony Server SP, PacketStar IP switch,
PacketStar IP Services platform and the WaveStar 400G high capacity WDM optical
networking system.
Similarly, Bell Labs' advances extend to the microlasers used in today's
broadband multifunctional transmission systems, and to today's optical
amplifiers and TrueWave fiber. Current photonic research includes work on
passive optical networks, photonic switching and quantum wire lasers.
VI. RECENT DEVELOPMENTS
On October 15, 1999, Lucent merged with International Network Services
(INS), a global provider of network consulting, design and integration. On
November 3, 1999, Lucent merged with Excel Switching Corporation, a Hyannis,
Massachusetts-based developer of programmable switches. On November 12, 1999,
Lucent merged with Xedia Corporation, a privately held Acton,
Massachusetts-based maker of routers for corporate networks.
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VII. BACKLOG
The Company's backlog, calculated as the aggregate of the sales price of
orders received from customers less revenue recognized, was approximately $6,900
million and $10,200 million on September 30, 1999 and 1998, respectively.
Approximately $1,800 million of the orders included in the September 30, 1999
backlog are scheduled for delivery after September 30, 2000. 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 $1,630 million of the amount at September 30, 1999
is under large, multi-year contracts of which about $790 million is scheduled
for delivery after September 30, 2000 and is included in the $1,800 million
referred to above. The amount under large, long-term contracts is with the
Ministry of Post and Telecommunications of Saudi Arabia which requires annual
appropriations by the Saudi Arabian government.
VIII. PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY RIGHTS
From October 1, 1997 to September 30, 1999, Lucent was issued 1,950 patents
in the United States and 3,305 in foreign countries. Lucent owns approximately
9,841 patents in the United States and 16,815 in foreign countries. These
foreign patents are, for the most part, counterparts of Lucent's United States
patents. Many of the patents owned by Lucent are licensed to others and Lucent
is licensed to use certain patents owned by others. In connection with the
Separation, Lucent has entered into an extensive cross-licensing agreement with
AT&T and NCR Corporation. See "Separation Agreements -- Patent Licenses and
Related Matters."
Lucent markets its products primarily under its own name and mark. Lucent
considers its many trademarks to be valuable assets. Many of its trademarks are
registered throughout the world.
Lucent relies on patent, trademark, trade secret and copyright laws both to
protect its proprietary technology and to protect Lucent against claims from
others. Lucent 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 Lucent's systems
and products, however, there can be no assurance that claims of infringement
will not be asserted against Lucent or against Lucent's customers in connection
with their use of Lucent's systems and products, nor can there be any assurance
as to the outcome of any such claims. Lucent 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 Lucent, AT&T and
NCR, Lucent has been given rights, subject to specified limitations, to pass
through to its customers certain rights under approximately 400 patents retained
by AT&T.
IX. SOURCES AND AVAILABILITY OF RAW MATERIALS
Lucent makes significant purchases of electronic components, copper, glass,
silicon, and other materials and components from many U.S. and non-U.S. sources.
Lucent has been able to obtain sufficient materials and components from sources
around the world to meet its needs. Lucent 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. Lucent does not have a concentration of sources
of supply of materials, labor or services that, if suddenly eliminated, could
severely impact its operations. See also "Outlook -- Readiness for Year 2000."
X. OUTLOOK
A. Forward Looking Statements
This Form 10-K report contain forward-looking statements that are based on
current expectations, estimates, forecasts 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 Lucent. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify such
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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. Lucent 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 Lucent's ability to continue to introduce
competitive new products and services on a timely, cost-effective basis; the mix
of products and services; the achievement of lower costs and expenses; customer
demand for Lucent's products and services; the ability to successfully integrate
acquired companies; readiness for Year 2000; the impact of Year 2000 on customer
spending habits; U.S. and non-U.S. governmental and public policy changes that
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 the increasing use of large, multi-year contracts; the cyclical nature
of Lucent's business; the outcome of pending and future litigation and
governmental proceedings; the continued availability of financing, financial
instruments and financial resources in the amounts, at the times and on the
terms required to support Lucent'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 U.S. and non-U.S. economic
conditions including interest rate and currency exchange rate fluctuations and
other Future Factors.
B. General Market Competition
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 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, well-recognized brand names and a
global presence. Such competitors include Alcatel Alsthom, Cisco Systems, Inc.,
Ericsson, Northern Telecom Limited, Motorola, Nokia and Siemens AG. As a result,
Lucent's management periodically assesses market conditions and redirects
Lucent's resources to meet the challenges of competition. Steps Lucent may take
include acquiring or investing in new businesses and ventures, partnering with
existing businesses, delivering new technologies, closing and consolidating
facilities, disposing of assets, reducing work force levels or withdrawing from
markets. See also, the "Competition" section above under "Service Provider
Networks," "Enterprise Networks" and "Microelectronic and Communications
Technologies."
C. Dependence on New Product Development
The markets for Lucent'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 service providers and business customers. Lucent'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, 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 Lucent'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 U.S. and non-U.S.
standards-setting bodies.
D. Reliance on Major Customers/Multi-Year Contracts
The contribution of AT&T to Lucent's total revenues and percentage of total
revenues for the three years ended September 30, 1999, 1998 and 1997 were $4,587
million (12%), $3,841 million (12.1%), and
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$3,789 million (13.7%), respectively. In addition, sales to seven service
providers including AT&T, some of which may vary from year to year, constituted
approximately 29.7% and 34.4% of total revenues in the twelve months ended
September 30, 1999 and 1998, respectively.
The purchasing behavior of Lucent's largest customers has increasingly been
characterized by the use of fewer, larger contracts. Lucent has significant
contracts for the sale of infrastructure systems to service providers which
extend over a multi-year period, and expects to enter into similar contracts in
the future. These contracts typically involve longer negotiating cycles, require
the dedication of substantial amounts of working capital and other resources,
and in general require costs that 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
that may not have been previously deployed on a large-scale commercial basis. On
its multi-year contracts, Lucent may incur significant initial cost overruns and
losses that are recognized in the quarter in which they become 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. See "Future Capital Requirements," and the
Customer Dependency" section above under "Service Provider Networks,"
"Enterprise Networks" and "Microelectronic and Communications Technologies".
E. Readiness for Year 2000
Lucent is in the final phase of a major effort to minimize the impact of
the Year 2000 date change on Lucent's products, information technology systems,
facilities and production infrastructure. The Year 2000 challenge is a priority
within Lucent at every level of the Company. Primary Year 2000 preparedness
responsibility rests with program offices which have been established within
each of Lucent's product groups and corporate centers. A corporate-wide Lucent
Year 2000 Program Office ("LYPO") monitors and reports on the progress of these
offices. Each program office has a core of full-time individuals augmented by a
much larger group who have been assigned specific Year 2000 responsibilities in
addition to their regular assignments. Further, Lucent has engaged third parties
to assist in its readiness efforts in certain cases. LYPO has established a
methodology to measure, track and report Year 2000 readiness status consisting
of five steps: inventory; assessment; remediation; testing; and deployment. In
addition, LYPO tracks and reports on the development and deployment of Year 2000
contingency plans.
Lucent has completed programs to make its commercially available products
Year 2000 ready and has developed evolution strategies for customers who own
non-Year 2000 ready Lucent products. All of the upgrades and products needed to
support customer migration are generally available.
Lucent is completing its extensive efforts to alert customers who have
non-Year 2000 ready products, including direct mailings, phone contacts and
participation in user and industry groups. Lucent also has a Year 2000 website
www.lucent.com/y2k that provides Year 2000 product information. Lucent continues
to cooperate in the Year 2000 information sharing efforts of the Federal
Communications Commission and other governmental bodies.
Lucent believes it has sufficient resources to provide timely support to
its customers that require product migrations or upgrades. However, because this
effort is heavily dependent on customer cooperation, Lucent monitors customer
response and takes steps to encourage customer responsiveness, as necessary.
With very few exceptions, Lucent has completed the five steps of its Year
2000 readiness program with respect to its factories, information systems and
facilities. LYPO has developed a formal "exceptions" tracking process to approve
and track a small number of cases in which factors such as third party
dependencies prevented project completion by Lucent's internal target date of
June 30, 1999. Virtually all of the exceptions identified have since been
closed. In addition, Lucent has implemented various change management mechanisms
to allow the Company to maintain Year 2000 readiness even as systems are
modified or replaced to address non-Year 2000 business needs.
20
<PAGE> 21
To ensure the continued delivery of third party products and services,
Lucent's procurement organization has analyzed Lucent's supplier base and has
sent surveys to approximately 5,000 suppliers. To supplement this effort, Lucent
has conducted more detailed readiness reviews of the Year 2000 status of the
suppliers ranked as most critical based on the nature of their relationship with
Lucent, the product/service provided and/or the content of their survey
responses. Over ninety percent 90% of Lucent's critical suppliers have reported
completion of their Year 2000 readiness efforts. However, Lucent continues to
monitor the Year 2000 status of all of its critical suppliers to minimize its
Year 2000 supply chain risk and is developing appropriate contingency responses
as the risks become clearer.
Lucent has committed considerable resources to Year 2000 contingency
planning throughout the enterprise. These plans focus on risks posed by the Year
2000 date change, as well as other sensitive dates such as February 29, 2000.
Lucent's plans are designed both to mitigate the impact of Year 2000 failures,
as well as providing emergency response mechanisms and supporting the prompt
resumption of regular operations. Lucent is currently in the process of
completing the preparations necessary to support the implementation of its
contingency plans. In addition, the plans are updated as new information is
obtained, the risks posed by external dependencies become clearer and customer
support needs become more focused.
A network of corporate center and business group communications centers,
staffed on a continuous basis during the period before and after the Year 2000
date transition, will support Lucent's contingency planning efforts. These
communications centers will facilitate the handling of Year 2000 issues that may
arise. An initial test of the Lucent Communications Center network was conducted
in connection with the September 9, 1999 date. The September 9, 1999 date passed
with no reported impact on Lucent's business.
The risk to Lucent resulting from the failure of third parties in the
public and private sector to attain Year 2000 readiness is the same as other
firms in Lucent's industry and other business enterprises generally. The
following are representative of the types of risks that could result in the
event of one or more major failures of Lucent's information systems, factories
or facilities to be Year 2000 ready, or similar major failures by one or more
major third party suppliers to Lucent: (1) information systems -- could include
interruptions or disruptions of business and transaction processing such as
customer billing, payroll, accounts payable and other operating and information
processes, until systems can be remedied or replaced; (2) factories and
facilities -- could include interruptions or disruptions of manufacturing
processes and facilities with delays in delivery of products, until
non-compliant conditions or components can be remedied or replaced; and (3)
major suppliers to Lucent -- could include interruptions or disruptions of the
supply of raw materials, supplies and Year 2000 ready components which could
cause interruptions or disruptions of manufacturing and delays in delivery of
products, until the third party supplier remedied the problem or contingency
measures were implemented. Risks of major failures of Lucent's principal
products could include adverse functional impacts experienced by customers, the
costs and resources for Lucent to remedy problems or replace products where
Lucent is obligated or undertakes to take such action and delays in delivery of
new products.
Lucent believes that it is taking the necessary steps to resolve Year 2000
issues; however, given the possible consequences of failure to resolve
significant Year 2000 issues, there can be no assurance that any one or more
such failures would not have a material adverse effect on Lucent. Lucent
estimates that the cost of efforts to prepare for Year 2000 from calendar year
1997 through 2000 is about $560 million, of which an estimated $515 million has
been spent as of September 30, 1999. Lucent has been able to reprioritize work
projects to largely address Year 2000 readiness needs within its existing
organizations. As a result, most of these costs represent costs that would have
been incurred in any event. These amounts cover costs of the Year 2000 readiness
work for inventory, assessment, remediation, testing, deployment and contingency
planning, including fees and charges of contractors for outsourced work and
consultant fees. Costs for previously contemplated updates and replacements of
Lucent's internal systems and information systems infrastructure have been
excluded without attempting to establish whether the timing of non-Year 2000
replacement or upgrading was accelerated.
While the Year 2000 cost estimates above include 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.
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<PAGE> 22
The actual outcomes and results could be affected by Future Factors
including, but not limited to, the continued availability of skilled personnel,
cost control, the ability to locate and remediate software code problems,
critical suppliers and subcontractors meeting their commitments to be Year 2000
ready and provide Year 2000 ready products and timely actions by customers.
F. European Monetary Union -- Euro
On January 1, 1999, eleven member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and adopted the Euro as their new common legal currency. The Euro is currently
trading on currency exchanges and the legacy currencies will remain legal tender
in the participating countries for a transition period between January 1, 1999
and January 1, 2002. During the transition period, cash-less payments can be
made in the Euro, and parties can elect to pay for goods and services and
transact business using either the Euro or a legacy currency. Between January 1,
2002 and July 1, 2002, the participating countries will introduce Euro notes and
coins and withdraw all legacy currencies so that they will no longer be
available.
Lucent has in place a joint European-United States team representing
affected functions within the Company. This team has been evaluating Euro
related issues which may affect Lucent as they develop, including its
pricing/marketing strategy, conversion of information technology systems,
existing contracts and currency risk and risk management in the participating
countries. The Euro conversion may affect cross-border competition by creating
cross-border price transparency.
Lucent will continue to evaluate issues involving the introduction of the
Euro as further accounting, tax and governmental legal and regulatory guidance
is available. Based on current information and Lucent's current assessment,
Lucent does not expect that the Euro conversion will have a material adverse
effect on its business or financial condition.
G. Future Capital Requirements
Lucent'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.
Service providers, inside and outside the United States, 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.
Lucent has increasingly provided or arranged long-term financing for customers.
As market conditions permit, Lucent's intention is to lay off these long-term
financing arrangements, which may include both commitments and drawn down
borrowings, to financial institutions and investors. This enables Lucent to
reduce the amount of its commitments and free up additional financing capacity.
As of September 30, 1999, Lucent had made commitments or entered into an
agreement to extend credit to customers up to an aggregate of approximately
$7,100 million. As of September 30, 1999, approximately $1,600 million had been
advanced and was outstanding. In addition, as of September 30, 1999, Lucent had
made commitments or entered into agreements to guarantee debt of customers up to
an aggregate of approximately $420 million of which approximately $310 million
was outstanding.
In addition to the above arrangements, Lucent will continue to provide or
commit to financing where appropriate for its business. The ability of Lucent to
arrange or provide financing for its customers will depend on a number of
factors, including Lucent's capital structure and level of available credit, and
its continued ability to lay off commitments and drawn down borrowings on
acceptable terms.
Lucent believes that its credit facilities, cash flow from operations,
long- and short-term debt financings and receivables securitizations, will be
sufficient to satisfy its future working capital, capital expenditure, research
and development and debt service requirements. Lucent has a shelf registration
statement to register the possible offering from time to time of long-term debt
of which $1,800 million remained available at September 30, 1999. Lucent
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
22
<PAGE> 23
necessary, and to engage in hedging transactions on commercially acceptable
terms, although there can be no assurance that Lucent will be successful in
regard to any of the foregoing.
H. Growth Outside the United States, Foreign Exchange and Interest Rates
Lucent intends to continue to pursue growth opportunities in markets
outside the United States. In many markets outside the United States,
long-standing relationships between potential customers of Lucent and their
local providers and protective regulations, including local content requirements
and type approvals, create barriers to entry. In addition, pursuit of such
growth opportunities outside the United States 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.
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. A significant change in the
value of the dollar against the currency of one or more countries where Lucent
sells products to local customers or makes purchases from local suppliers may
materially adversely affect Lucent's results. Lucent 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 Lucent hedges certain foreign currency transactions, the decline in
value of non-U.S. dollar currencies, may, if not reversed, adversely affect
Lucent's ability to contract for product sales in U.S. dollars because Lucent's
products may become more expensive to purchase in U.S. dollars for local
customers doing business in the countries of the affected currencies.
I. Legal Proceedings and Environment -- See "Environmental Matters" and "Item
3. Legal Proceedings".
J. Seasonality -- See "Seasonality" above under "Service Provider Networks,"
"Enterprise Networks" and "Microelectronic and Communications Technologies."
K. Intellectual Property -- See "Patents, Trademarks and Other Intellectual
Property Rights" above.
XI. OPERATING REVENUE, RESEARCH AND DEVELOPMENT EXPENSE AND FOREIGN AND DOMESTIC
OPERATIONS
For information about the consolidated operating revenues contributed by
Lucent's major classes of products and services, consolidated research and
development expenses, and foreign and domestic operations, see revenue tables
and discussion on pages 31 through 34, Consolidated Statements of Income on page
44 and Note 12 thereto on pages 58 through 60 of Lucent's annual report to
security holders for the fiscal year ended September 30, 1999. Such information
is incorporated herein by reference pursuant to General Instruction G(2).
XII. EMPLOYEE RELATIONS
On September 30, 1999, Lucent employed approximately 153,000 persons,
including 76.5% located in the United States. Of these domestic employees, about
40% are represented by unions, primarily the Communications Workers of America
("CWA") and the International Brotherhood of Electrical Workers ("IBEW"). Lucent
entered into new five-year agreements with the CWA and IBEW expiring May 31,
2003.
XIII. 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 numerous current and former facilities. In
addition, Lucent was named a
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<PAGE> 24
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
typically 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 Lucent's financial condition, results of operations or cash flows. Any
amounts of environmental costs that may be incurred in excess of those provided
for at September 30, 1999 cannot be determined.
On November 16, 1998, Lucent signed a Consent Order with the Pennsylvania
Department of Environmental Protection settling alleged violations resulting
from etching equipment being installed in 1991 and 1992 without undergoing the
proper state air permit with payment of a civil penalty of approximately
$294,000, a portion of which will be devoted to the creation of community
environmental projects.
XIV. SEPARATION AGREEMENTS
For the purposes of governing certain of the relationships between Lucent
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 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; and the Tax Sharing Agreement and other
tax-related agreements. Certain of the Separation Agreements, including certain
of the Agreements summarized below, are exhibits to this Form 10-K.
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, Lucent 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
24
<PAGE> 25
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 Lucent and the members of
Lucent 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,
Lucent or any member of Lucent 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)
exercise the right to require Lucent to transfer to AT&T certain personnel,
information, technology and software under the Supplemental Agreements; (c)
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 Lucent and the members of Lucent Group
pursuant to the Patent License Agreement and the Technology License Agreement;
and (d) direct Lucent and the members of Lucent Group to reconvey to AT&T all
interests in any and all patents and technology in which Lucent or any member of
Lucent Group was granted an undivided one-half interest pursuant to the Patent
Assignments or the Technology Assignment and Joint Ownership Agreements. Lucent
and the members of Lucent 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 Lucent 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, Lucent 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 Lucent and its affiliates and certain former employees of
AT&T or its affiliates (including retirees) who either were employed in Lucent
Business (as defined) or who otherwise are assigned to Lucent 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 to Lucent are jointly owned with
either AT&T or NCR. Certain of the patents that Lucent jointly owns with AT&T
are subject to a joint ownership agreement under which each of Lucent and AT&T
has full ownership rights in the patents. The other patents that Lucent jointly
owns with AT&T, and the patents that Lucent jointly owns with NCR, are subject
to defensive protection agreements with AT&T and NCR, respectively, under which
Lucent 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 Lucent 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
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<PAGE> 26
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 Lucent 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 Lucent 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
Lucent and AT&T owning technology that was developed by or for, or purchased by,
Lucent'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 Lucent 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, 1999, Lucent operated 40 manufacturing sites, of which 19
were located in the United States, occupying in excess of 19 million square feet
substantially all of which were owned. The remaining 21 sites were located in 14
countries.
At September 30, 1999, Lucent operated 241 warehouse sites, of which 202
were located in the United States, occupying in excess of 4 million square feet,
substantially all of which were leased. The remaining 39 sites were located in
24 countries.
At September 30, 1999, Lucent operated 973 office sites (administration,
sales, field service), of which 662 were located in the United States, occupying
in excess of 16 million square feet, of which 10 million square feet of which
were leased. The remaining 311 sites were located in 57 countries.
At September 30, 1999, Lucent operated additional sites in 17 cities, of
which 11 were located in the United States, with significant research and
development activities, occupying in excess of 8 million square feet, of which
approximately 2 million square feet were leased.
Lucent believes its plants and facilities are suitable and adequate to meet
its current needs.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of business, Lucent 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 -- XIV
Separation Agreements" regarding the assumption by Lucent of certain liabilities
and contingent liabilities.) All such matters are subject to many uncertainties
and outcomes are not predictable with assurance. Consequently, Lucent is unable
to ascertain the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at September 30, 1999. 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 Lucent beyond that provided in the consolidated balance
sheet at September 30, 1999 would not be material to Lucent's annual
consolidated financial statements.
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See also the discussion in Item 1. "Business -- XIII. Environmental
Matters" for additional legal proceedings, and environmental matters and
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
During the fourth quarter of the fiscal year covered by this report on Form
10-K, no matter was submitted to a vote of Security-Holders.
PART II
ITEMS 5. THROUGH 8.
The information required by these items is included in pages 29 through 64
of the Company's annual report to security holders for the fiscal year ended
September 30, 1999. 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, 1999, there were approximately 1,677,810
shareholders of record.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding executive officers required by Item 401 of Regulation
S-K is furnished in this separate disclosure because the Company did not furnish
such information in its definitive proxy statement prepared in accordance with
Schedule 14A.
EXECUTIVE OFFICERS OF THE REGISTRANT
(AS OF DECEMBER 1, 1999)
<TABLE>
<CAPTION>
BECAME LUCENT
EXECUTIVE
NAME AGE OFFICER ON
---- --- -------------
<S> <C> <C> <C>
Richard A. McGinn................... 53 Chairman of the Board and Chief 2-96
Executive Officer
Bernardus J. Verwaayen.............. 47 Vice Chairman 9-97
John T. Dickson..................... 53 Executive Vice President and Chief 10-99
Executive Officer, Microelectronics
and Communications Technologies
Arun N. Netravali................... 53 President, Bell Labs 10-99
William T. O'Shea................... 52 Executive Vice President and Chief 10-99
Executive Officer, Enterprise
Networks
Donald K. Peterson.................. 50 Executive Vice President and Chief 2-96
Financial Officer
Richard J. Rawson................... 47 Senior Vice President and General 2-96
Counsel
Patricia F. Russo................... 47 Executive Vice President and Chief 2-96
Executive Officer, Service Provider
Networks
</TABLE>
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<PAGE> 28
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 years, except in the case of Messrs. Peterson and
Verwaayen who have held such positions 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). Mr. Verwaayen joined the Company after serving
as President of PTT Telecom, the national telecommunications operator of the
Netherlands since May 1988. 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.
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 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, 1999
were complied with.
The other information required by Item 10 is included in the Company's
definitive proxy statement dated December 21, 1999, on pages 10 through 12. Such
information is incorporated herein by reference, pursuant to General Instruction
G(3).
ITEMS 11. THROUGH 13.
The information required by Items 11 through 13 is included in the
Company's definitive proxy statement dated December 21, 1999, on pages 7 through
9, page 13 and pages 23 through page 37. Such information is incorporated herein
by reference, pursuant to General Instruction G(3).
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<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of this Form 10-K:
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
(1) Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... *
(2) Report of Management.................................... *
(3) Report of Independent Accountants....................... *
(4) Financial Statements:
(i) Consolidated Statements of Income..................... *
(ii) Consolidated Balance Sheets.......................... *
(iii) Consolidated Statements of Changes in Shareowners'
Equity................................................. *
(iv) Consolidated Statements of Cash Flows................ *
(v) Notes to Consolidated Financial Statements............ *
(5) Financial Statement Schedules:
(i) Report of Independent Accountants..................... 31
(ii) Schedule II -- Valuation and Qualifying Accounts..... 32
</TABLE>
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.
- ---------------
* Incorporated herein by reference to the appropriate portions in pages 29
through 64 of the Company's annual report to security holders for the fiscal
year ended September 30, 1999. (See Part II and Exhibit 13.)
(6) Exhibits:
The following documents are filed as Exhibits to this report on Form 10-K
or incorporated by reference herein. Any document incorporated by reference is
identified by a parenthetical referencing the SEC filing which included such
document.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
(3)(i) Articles of Incorporation of the registrant, as amended
February 17, 1999 (Exhibit 3(i) to Quarterly Report on Form
10-Q for the quarter ended March 31, 1999, File No.
001-11639).
(3)(ii) By-Laws of the registrant, as amended, October 24, 1999
(4)(i) 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)(iii) Other instruments in addition to Exhibit 4(i) 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).
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
(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 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)(i)5 Amendment to Rights Agreement between Lucent Technologies
Inc. and First Chicago Trust Company of New York, dated as
of February 18, 1998.
(10)(ii)(B)1 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)2 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)3 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. Short Term Incentive Program
(Exhibit (10)(iii)(A)(2) to the Quarterly Report on Form
10-Q for the quarter ended March 31, 1998).*
(10)(iii)(A)2 Lucent Technologies Inc. 1996 Long Term Incentive Program
(Exhibit(10)(iii)(A)1 to Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998).*
(10)(iii)(A)3 Lucent Technologies Inc. 1996 Long Term Incentive Program
(Plan) Restricted Stock Unit Award Agreement.
(10)(iii)(A)4 Lucent Technologies Inc. 1996 Long Term Incentive Program
(Plan) Nonstatutory Stock Option Agreement.
(10)(iii)(A)5 Lucent Technologies Inc. Deferred Compensation Plan (Exhibit
(10)(iii)(A)3 to the Annual Report on Form 10-K for the
period ended September 30, 1998).*
(10)(iii)(A)6 Pension Plan for Lucent Non-Employee Directors (Exhibit
10.11 to Registration Statement on Form S-1 No. 333-00703).*
(This plan has been terminated)
(10)(iii)(A)7 Lucent Technologies Inc. Stock Retainer Plan for
Non-Employee Directors (Exhibit (10)(iii)(A)5 to the Annual
Report on Form 10-K for the period ended September 30,
1998).*
(10)(iii)(A)8 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)9 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)10 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)11 Lucent Technologies Inc. Officer Long-Term Disability and
Survivor Protection Plan (Exhibit (10)(iii)(A)8 to the
Annual Report on Form 10-K for Transition Period ended
September 30, 1996).*
(10)(iii)(A)12 Employment Agreement of Mr. Verwaayen dated June 12, 1997
(Exhibit (10)(iii)(A)(1)) to the Annual Report on Form 10-K
for the period ended September 30, 1997).*
(10)(iii)(A)13 Employment Agreement of Mr. Peterson dated August 8, 1995
(Exhibit (10)(iii)(A)(9) to the Annual Report on Form 10-K
for the period ended September 30, 1997).*
(10)(iii)(A)14 Consulting Agreement of Mr. Schacht, effective March 1, 1998
(Exhibit (10)(iii)(A)5 to the Quarterly Report on Form 10-Q
for the period ended March 31, 1998).*
(10)(iii)(A)15 Description of the Lucent Technologies Inc. Supplemental
Pension Plan. (Exhibit (10)(iii)(A)13 to the Annual Report
on Form 10-K for the period ended September 30, 1998).*
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
(10)(iii)(A)16 Lucent Technologies Inc. 1999 Stock Compensation Plan for
Non-Employee Directors (Exhibit 10(iii)(A)14 to the Annual
Report on Form 10-K for the period ended September 30,
1998).*
(10)(iii)(A)17 Lucent Technologies Inc. Voluntary Life Insurance Plan
(Exhibit 10(iii)(A)15 to the Annual Report on Form 10-K for
the period ended September 30, 1998).
(12) Computation of Ratio of Earnings to Fixed Charges.
(13) Specified portions (pages 29 through 64) of the Company's
Annual Report to security holders for the year ended
September 30, 1999.
(21) List of subsidiaries of Lucent Technologies Inc.
(23) Consent of PricewaterhouseCoopers LLP
(24) Powers of Attorney executed by officers and directors who
signed this report.
(27) Financial Data Schedule.
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement.
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 during the last quarter of the fiscal year covered
by this Report:
On August 2, 1999 Lucent filed a report on Form 8-K which presented the:
(1) restated consolidated financial information, including restated consolidated
financial statements, at September 30, 1998 and 1997 and for the years ended
September 30, 1998 and 1997 and the nine months ended September 30, 1996; and
(2) restated financial information, including restated condensed consolidated
financial statements, as of March 31, 1999 and for the six months ended March
31, 1999 and 1998, in each case giving retroactive effect to the merger between
Lucent and Ascend for all periods presented..
31
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of Lucent Technologies Inc.:
Our audits of the consolidated financial statements referred to in our
report dated October 25, 1999 appearing in the 1999 Annual Report to the
Shareowners of Lucent Technologies Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the consolidated financial statement schedule listed
in Item 14(5)(ii) of this Form 10-K. In our opinion, this consolidated financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PricewaterhouseCoopers LLP
New York, New York
October 25, 1999
32
<PAGE> 33
LUCENT TECHNOLOGIES INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
ADDITIONS
---------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING OF COSTS & OTHER ACCOUNTS AT END OF
DESCRIPTION PERIOD EXPENSES (NET) DEDUCTIONS PERIOD
----------- ------------ ---------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year 1999
Allowance for doubtful accounts 416 68 37 159(a) 362
Reserves related to business
restructuring and facility
consolidation 251 -- -- 233(b) 18
Deferred tax asset valuation allowance 261 66 15 163 179
Inventory valuation (c) 845 279 (68) 234 822
Year 1998
Allowance for doubtful accounts 363 132 (59) 20(a) 416
Reserves related to business
restructuring and facility
consolidation 569 -- -- 318(b) 251
Deferred tax asset valuation allowance 234 31 45 49 261
Inventory valuation (c) 880 257 30 322 845
Year 1997
Allowance for doubtful accounts 276 120 5 38(a) 363
Reserves related to business
restructuring and facility
consolidation 1,289 -- -- 720(b) 569
Deferred tax asset valuation allowance 208 86 3 63 234
Inventory valuation (c) 815 382 19 336 880
</TABLE>
- ---------------
(a) Amounts written off as uncollectible, payments or recoveries.
(b) Included in these deductions were cash payments of $77, $176, and $483 for
the years ended September 30, 1999, 1998 and 1997, respectively. In
addition, Lucent reversed $141, $100, and $201 for the years ended September
30, 1999, 1998 and 1997, respectively.
(c) Certain prior year amounts have been reclassified to conform to the 1999
presentation.
33
<PAGE> 34
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.
LUCENT TECHNOLOGIES INC.
By: /s/ JAMES S. LUSK
------------------------------------
James S. Lusk
Senior Vice President and Controller
December 21, 1999
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.
<TABLE>
<S> <C>
Principal Executive Officer
Richard A. McGinn
Chief Executive Officer
Principal Financial Officer
Donald K. Peterson
Executive Vice President and
Chief Financial Officer
Principal Accounting Officer By: /s/ JAMES S. LUSK
James S. Lusk --------------------------------------------
Senior Vice President and James S. Lusk
Controller (attorney-in-fact)
December 21, 1999
Directors
Paul A. Allaire
Carla A. Hills
Richard A. McGinn
Drew Lewis
Donald S. Perkins
Henry B. Schacht
Franklin A. Thomas
John A. Young
</TABLE>
- ---------------
34
<PAGE> 35
EXHIBIT INDEX
The following documents are filed as Exhibits to this report on Form 10-K
or incorporated by reference herein. Any document incorporated by reference is
identified by a parenthetical referencing the SEC filing which included such
document.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
(3)(i) Articles of Incorporation of the registrant, as amended
February 17, 1999 (Exhibit 3(i) to Quarterly Report on Form
10-Q for the quarter ended March 31, 1999, File No.
001-11639).
(3)(ii) By-Laws of the registrant, as amended, October 24, 1999
(4)(i) 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)(iii) Other instruments in addition to Exhibit 4(i) 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 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)(i)5 Amendment to Rights Agreement between Lucent Technologies
Inc. and First Chicago Trust Company of New York, dated as
of February 18, 1998 (Exhibit (10)(i)5 to the Annual Report
on Form 10-K for the period ended September 30, 1998).
(10)(ii)(B)1 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)2 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)3 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. Short Term Incentive Program
(Exhibit (10)(iii)(A)(2) to the Quarterly Report on Form
10-Q for the quarter ended March 31, 1998).*
(10)(iii)(A)2 Lucent Technologies Inc. 1996 Long Term Incentive Program
(Exhibit(10)(iii)(A)1 to Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998).*
(10)(iii)(A)3 Lucent Technologies Inc. 1996 Long Term Incentive Program
(Plan) Restricted Stock Unit Award Agreement.
(10)(iii)(A)4 Lucent Technologies Inc. 1996 Long Term Incentive Program
(Plan) Nonstatutory Stock Option Agreement.
(10)(iii)(A)5 Lucent Technologies Inc. Deferred Compensation Plan (Exhibit
(10)(iii)(A)3 to the Annual Report on Form 10-K for the
period ended September 30, 1998).*
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
(10)(iii)(A)6 Pension Plan for Lucent Non-Employee Directors (Exhibit
10.11 to Registration Statement on Form S-1 No. 333-00703).*
(This plan has been terminated)
(10)(iii)(A)7 Lucent Technologies Inc. Stock Retainer Plan for
Non-Employee Directors (Exhibit (10)(iii)(A)5 to the Annual
Report on Form 10-K for the period ended September 30,
1998).*
(10)(iii)(A)8 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)9 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)10 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)11 Lucent Technologies Inc. Officer Long-Term Disability and
Survivor Protection Plan (Exhibit (10)(iii)(A)8 to the
Annual Report on Form 10-K for Transition Period ended
September 30, 1996).*
(10)(iii)(A)12 Employment Agreement of Mr. Verwaayen dated June 12, 1997
(Exhibit (10)(iii)(A)(1)) to the Annual Report on Form 10-K
for the period ended September 30, 1997).*
(10)(iii)(A)13 Employment Agreement of Mr. Peterson dated August 8, 1995
(Exhibit (10)(iii)(A)(9) to the Annual Report on Form 10-K
for the period ended September 30, 1997).*
(10)(iii)(A)14 Consulting Agreement of Mr. Schacht, effective March 1, 1998
(Exhibit (10)(iii)(A)5 to the Quarterly Report on Form 10-Q
for the period ended March 31, 1998).*
(10)(iii)(A)15 Description of the Lucent Technologies Inc. Supplemental
Pension Plan. (Exhibit (10)(iii)(A)13 to the Annual Report
on Form 10-K for the period ended September 30, 1998).*
(10)(iii)(A)16 Lucent Technologies Inc. 1999 Stock Compensation Plan for
Non-Employee Directors (Exhibit 10(iii)(A)14 to the Annual
Report on Form 10-K for the period ended September 30,
1998).*
(10)(iii)(A)17 Lucent Technologies Inc. Voluntary Life Insurance Plan
(Exhibit 10(iii)(A)15 to the Annual Report on Form 10-K for
the period ended September 30, 1998).
(12) Computation of Ratio of Earnings to Fixed Charges.
(13) Specified portions (pages 29 through 64) of the Company's
Annual Report to security holders for the year ended
September 30, 1999.
(21) List of subsidiaries of Lucent Technologies Inc.
(23) Consent of PricewaterhouseCoopers LLP
(24) Powers of Attorney executed by officers and directors who
signed this report.
(27) Financial Data Schedule.
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement.
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.
36
<PAGE> 1
EXHIBIT 3(ii)
BY-LAWS
OF
LUCENT TECHNOLOGIES INC.
(AMENDED AS OF OCTOBER 24, 1999)
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
ARTICLE I
OFFICES AND RECORDS
SECTION 1.1. DELAWARE OFFICE. The principal office of the Corporation in the
State of Delaware shall be located in the City of Wilmington, County of New
Castle, and the name and address of its registered agent is The Prentice Hall
Corporation System, Inc.
SECTION 1.2. OTHER OFFICES. The Corporation may have such other offices, either
within or without the State of Delaware, as the Board of Directors may designate
or as the business of the Corporation may from time to time require.
SECTION 1.3. BOOKS AND RECORDS. The books and records of the Corporation may be
kept outside the State of Delaware at such place or places as may from time to
time be designated by the Board of Directors.
ARTICLE II
STOCKHOLDERS
SECTION 2.1. ANNUAL MEETING. The annual meeting of the stockholders of the
Corporation shall be held on such date and at such time as may be fixed by
resolution of the Board of Directors.
SECTION 2.2. SPECIAL MEETING. Except as otherwise required by law and subject to
the rights of the holders of any class or series of stock having a preference
over the Common Stock as to dividends or upon liquidation, special meetings of
stockholders of the Corporation for any purpose or purposes may be called only
by (i) the Board of Directors pursuant to a resolution stating the purpose or
purposes thereof approved by a majority of the total number of Directors which
the Corporation would have if there were no vacancies (the "Whole Board"), or
(ii) by the Chairman of the Board of Directors of the Corporation. In addition,
prior to the Trigger Date (as defined in the Certificate of Incorporation), the
Corporation will call a special meeting of stockholders promptly upon request by
AT&T Corp., a New York corporation ("AT&T"), or any of its affiliates, in each
case, if such entity is a stockholder of the Corporation. No business other than
that stated in the notice shall be transacted at any special meeting.
Adopted 4/1/96
Ratified 4/3/96
Amended 7/17/96
Amended as of 2/17/99
Amended as of 10/24/99
<PAGE> 2
SECTION 2.3. PLACE OF MEETING. The Board of Directors or the Chairman of the
Board, as the case may be, may designate the place of meeting for any annual
meeting or for any special meeting of the stockholders. If no designation is so
made, the place of meeting shall be the principal office of the Corporation.
SECTION 2.4. NOTICE OF MEETING. Written or printed notice, stating the place,
day and hour of the meeting and the purpose or purposes for which the meeting is
called, shall be delivered by the Corporation not less than 10 calendar days nor
more than 60 calendar days before the date of the meeting, either personally or
by mail, to each stockholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail with postage thereon prepaid, addressed to the stockholder at such
person's address as it appears on the stock transfer books of the Corporation.
Such further notice shall be given as may be required by law. Only such business
shall be conducted at a special meeting of stockholders as shall have been
brought before the meeting pursuant to the Corporation's notice of meeting.
Meetings may be held without notice if all stockholders entitled to vote are
present, or if notice is waived by those not present in accordance with Section
6.4 of these By-Laws. Any previously scheduled meeting of the stockholders may
be postponed, and any special meeting of the stockholders may be canceled, by
resolution of the Board of Directors upon public notice given prior to the date
previously scheduled for such meeting of stockholders.
SECTION 2.5. QUORUM AND ADJOURNMENT; VOTING. Except as otherwise provided by law
or by the Certificate of Incorporation, the holders of a majority of the voting
power of all outstanding shares of the Corporation entitled to vote generally in
the election of directors (the "Voting Stock"), represented in person or by
proxy, shall constitute a quorum at a meeting of stockholders, except that when
specified business is to be voted on by a class or series of stock voting as a
class, the holders of a majority of the shares of such class or series shall
constitute a quorum of such class or series for the transaction of such
business. The Chairman of the meeting may adjourn the meeting from time to time,
whether or not there is such a quorum. No notice of the time and place of
adjourned meetings need be given except as required by law. The stockholders
present at a duly called meeting at which a quorum is present may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
SECTION 2.6. PROXIES. At all meetings of stockholders, a stockholder may vote by
proxy executed in writing (or in such manner prescribed by the General
Corporation Law of the State of Delaware (the "DGCL")) by the stockholder, or by
such person's duly authorized attorney in fact.
2
Adopted 4/1/96
Ratified 4/3/96
Amended 7/17/96
Amended as of 2/17/99
Amended as of 10/24/99
<PAGE> 3
SECTION 2.7. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS.
(A) Annual Meetings of Stockholders.
(1) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (a) pursuant to the
Corporation's notice of meeting pursuant to Section 2.4 of these By-Laws, (b) by
or at the direction of the Board of Directors, or (c) by any stockholder of the
Corporation who was a stockholder of record at the time of giving of notice
provided for in this By-Law, who is entitled to vote at the meeting and who
complies with the notice procedures set forth in this By-Law.
(2) For nominations or other business to be properly brought before an annual
meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this
By-Law, the stockholder must have given timely notice thereof in writing to the
Secretary of the Corporation and such other business must otherwise be a proper
matter for stockholder action. To be timely, a stockholder's notice shall be
delivered to the Secretary at the principal executive offices of the Corporation
not later than the close of business on the 45th calendar day nor earlier than
the 75th calendar day prior to the first anniversary of the record date of
stockholders entitled to vote at the preceding year's annual meeting; provided,
however, that in the event that the record date is more than 30 calendar days
before or more than 60 calendar days after such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the 75th calendar
day prior to such record date and not later than the close of business on the
later of the 45th calendar day prior to such record date or the 10th calendar
day following the calendar day on which public announcement of such record date
is first made by the Corporation. In no event shall the public announcement of
an adjournment of an annual meeting commence a new time period for the giving of
a stockholder's notice as described above. Such stockholder's notice shall set
forth (a) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and Rule 14a-11 thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (b) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (c) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (ii) the class and number of shares of the Corporation which are owned
beneficially and of record by such stockholder and such beneficial owner.
3
Adopted 4/1/96
Ratified 4/3/96
Amended 7/17/96
Amended as of 2/17/99
Amended as of 10/24/99
<PAGE> 4
(3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this
By-Law to the contrary, in the event that the number of directors to be elected
to the Board of Directors of the Corporation is increased and there is no public
announcement by the Corporation naming all of the nominees for director or
specifying the size of the increased Board of Directors at least 55 calendar
days prior to the first anniversary of the record date for the preceding year's
annual meeting, a stockholder's notice required by this By-Law shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the 10th calendar day following the day on which such public
announcement is first made by the Corporation.
(B) Special Meetings of Stockholders.
Only such business shall be conducted at a special meeting of stockholders as
shall have been brought before the meeting pursuant to the Corporation's notice
of meeting under Section 2.4 of these By-Laws. Nominations of persons for
election to the Board of Directors may be made at a special meeting of
stockholders at which directors are to be elected pursuant to the Corporation's
notice of meeting (a) by or at the direction of the Board of Directors, or (b)
provided that the Board of Directors has determined that directors shall be
elected at such meeting, by any stockholder of the Corporation who is a
stockholder of record at the time of giving of notice provided for in this
By-Law, who shall be entitled to vote at the meeting and who complies with the
notice procedures set forth in this By-Law. In the event the Corporation calls a
special meeting of stockholders for the purpose of electing one or more
directors to the Board of Directors, any stockholder may nominate a person or
persons (as the case may be), for election to such position(s) as specified in
the Corporation's notice of meeting pursuant to such clause (b), if the
stockholder shall have delivered written notice thereof containing the
information set forth in the notice specified in the last sentence of paragraph
(A) (2) of this By-Law to the Secretary at the principal executive offices of
the Corporation not earlier than the 120th calendar day prior to such special
meeting and not later than the close of business on the later of the 90th
calendar day prior to such special meeting or the 10th calendar day following
the date on which public announcement is first made of the date of the special
meeting and of the nominees proposed by the Board of Directors to be elected at
such meeting. In no event shall the public announcement of an adjournment of a
special meeting commence a new time period for the giving of a stockholder's
notice as described above.
(C) General.
(1) Only such persons who are nominated in accordance with the procedures set
forth in this By-Law shall be eligible to serve as directors and only such
business shall be conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
By-Law. Except as otherwise provided by law, the Certificate of Incorporation or
these By-Laws, the Chairman of the meeting
4
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Amended 7/17/96
Amended as of 2/17/99
Amended as of 10/24/99
<PAGE> 5
shall have the power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made or proposed, as the case may
be, in accordance with the procedures set forth in this By-Law and, if any
proposed nomination or business is not in compliance with this By-Law, to
declare that such defective proposal or nomination shall be disregarded.
(2) For purposes of this By-Law, "public announcement" shall mean disclosure in
a press release reported by the Dow Jones News Service, Associated Press or
comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this By-Law, a stockholder shall
also comply with all applicable requirements of the Exchange Act and the rules
and regulations thereunder with respect to the matters set forth in this By-Law.
Nothing in this By-Law shall be deemed to affect any rights (i) of stockholders
to request inclusion of proposals in the Corporation's proxy statement pursuant
to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of
Preferred Stock to elect directors under an applicable Preferred Stock
Designation (as defined in the Corporation's Certificate of Incorporation).
SECTION 2.8. PROCEDURE FOR ELECTION OF DIRECTORS; REQUIRED VOTE. Election of
directors at all meetings of the stockholders at which directors are to be
elected shall be by ballot, and, subject to the rights of the holders of any
series of Preferred Stock to elect directors under an applicable Preferred Stock
Designation, a plurality of the votes cast thereat shall elect directors. Except
as otherwise provided by law, the Certificate of Incorporation, Preferred Stock
Designation, or these By-Laws, in all matters other than the election of
directors, the affirmative vote of a majority of the voting power of the shares
present in person or represented by proxy at the meeting and entitled to vote on
the matter shall be the act of the stockholders.
SECTION 2.9. INSPECTORS OF ELECTIONS; OPENING AND CLOSING THE POLLS. The Board
of Directors by resolution shall appoint, or shall authorize an officer of the
Corporation to appoint, one or more inspectors, which inspector or inspectors
may include individuals who serve the Corporation in other capacities,
including, without limitation, as officers, employees, agents or
representatives, to act at the meetings of stockholders and make a written
report thereof. One or more persons may be designated as alternate inspector(s)
to replace any inspector who fails to act. If no inspector or alternate has been
appointed to act or is able to act at a meeting of stockholders, the Chairman of
the meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before discharging such person's duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of such person's ability. The inspector(s) shall have the
duties prescribed by law. The Chairman of the meeting shall
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Ratified 4/3/96
Amended 7/17/96
Amended as of 2/17/99
Amended as of 10/24/99
<PAGE> 6
fix and announce at the meeting the date and time of the opening and the closing
of the polls for each matter upon which the stockholders will vote at a meeting.
SECTION 2.10. NO STOCKHOLDER ACTION BY WRITTEN CONSENT. Effective as of the
Trigger Date, any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called annual or special meeting
of such holders and may not be effected by any consent in writing by such
holders.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.1. GENERAL POWERS. The business and affairs of the Corporation shall
be managed under the direction of the Board of Directors. In addition to the
powers and authorities by these By-Laws expressly conferred upon them, the Board
of Directors may exercise all such powers of the Corporation and do all such
lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these By-Laws required to be exercised or done by the
stockholders.
SECTION 3.2. NUMBER AND TENURE. Except as otherwise fixed by or pursuant to the
provisions of Article IV of the Certificate of Incorporation relating to the
rights of the holders of any class or series of stock having a preference over
the Common Stock as to dividends or upon liquidation to elect additional
directors under specified circumstances, the number of the Directors of the
Corporation shall be fixed from time to time exclusively pursuant to a
resolution adopted by a majority of the Whole Board (but shall not be less than
three). The Directors, other than those who may be elected by the holders of any
class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation, shall be classified, with respect to the time for
which they severally hold office, into three classes, as nearly equal in number
as possible, one class to be originally elected for a term expiring at the
annual meeting of stockholders to be held in 1997, another class to be
originally elected for a term expiring at the annual meeting of stockholders to
be held in 1998, and another class to be originally elected for a term expiring
at the annual meeting of stockholders to be held in 1999, with each class to
hold office until its successor is duly elected and qualified. At each
succeeding annual meeting of stockholders, directors elected to succeed those
directors whose terms then expire shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders after their
election, with each director to hold office until such person's successor shall
have been duly elected and qualified.
SECTION 3.3. REGULAR MEETINGS. A regular meeting of the Board of Directors shall
be held without other notice than this By-Law immediately after, and at the same
place as, the annual meeting of stockholders. The Board of Directors may, by
resolution, provide
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Amended 7/17/96
Amended as of 2/17/99
Amended as of 10/24/99
<PAGE> 7
the time and place for the holding of additional regular meetings without other
notice than such resolution.
SECTION 3.4. SPECIAL MEETINGS. Special meetings of the Board of Directors shall
be called at the request of the Chairman of the Board, the President or a
majority of the Board of Directors then in office. The person or persons
authorized to call special meetings of the Board of Directors may fix the place
and time of the meetings.
SECTION 3.5. NOTICE. Notice of any special meeting of directors shall be given
to each director at such person's business or residence in writing by hand
delivery, first-class or overnight mail or courier service, telegram or
facsimile transmission, or orally by telephone. If mailed by first-class mail,
such notice shall be deemed adequately delivered when deposited in the United
States mails so addressed, with postage thereon prepaid, at least 5 calendar
days before such meeting. If by telegram, overnight mail or courier service,
such notice shall be deemed adequately delivered when the telegram is delivered
to the telegraph company or the notice is delivered to the overnight mail or
courier service company at least 24 hours before such meeting. If by facsimile
transmission, such notice shall be deemed adequately delivered when the notice
is transmitted at least 12 hours before such meeting. If by telephone or by hand
delivery, the notice shall be given at least 12 hours prior to the time set for
the meeting. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice of such meeting, except for amendments to these By-Laws, as provided
under Section 8.1. A meeting may be held at any time without notice if all the
directors are present or if those not present waive notice of the meeting either
before or after such meeting.
SECTION 3.6. ACTION BY CONSENT OF BOARD OF DIRECTORS. Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
SECTION 3.7. CONFERENCE TELEPHONE MEETINGS. Members of the Board of Directors or
any committee thereof may participate in a meeting of the Board of Directors or
such committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at such meeting.
SECTION 3.8. QUORUM. Subject to Section 3.9, a whole number of directors equal
to at least a majority of the Whole Board shall constitute a quorum for the
transaction of business, but if at any meeting of the Board of Directors there
shall be less than a quorum
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Amended 7/17/96
Amended as of 2/17/99
Amended as of 10/24/99
<PAGE> 8
present, a majority of the directors present may adjourn the meeting from time
to time without further notice. The act of the majority of the directors present
at a meeting at which a quorum is present shall be the act of the Board of
Directors. The directors present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
directors to leave less than a quorum.
SECTION 3.9. VACANCIES. Except as otherwise provided for or fixed by or pursuant
to the provisions of Article IV of the Certificate of Incorporation relating to
the rights of the holders of any class or series of stock having a preference
over the Common Stock as to dividends or upon liquidation to elect directors
under specified circumstances, newly created directorships resulting from any
increase in the number of Directors and any vacancies on the Board of Directors
resulting from death, resignation, disqualification, removal or other cause
shall be filled by the affirmative vote of a majority of the remaining Directors
then in office, even though less than a quorum of the Board of Directors. A
Director elected in accordance with the preceding sentence shall hold office
until the next succeeding annual meeting of stockholders following his election
by the Directors, and if elected by the stockholders at such meeting, shall
serve for the remainder of the full term of the class of Directors in which the
new directorship was created or the vacancy occurred and until such Director's
successor shall have been duly elected and qualified. No decrease in the number
of Directors constituting the Board of Directors shall shorten the term of any
incumbent Director.
SECTION 3.10. EXECUTIVE AND OTHER COMMITTEES. (a) The Board of Directors may, by
resolution adopted by a majority of the Whole Board, designate an Executive
Committee to exercise, subject to applicable provisions of law, all the powers
of the Board in the management of the business and affairs of the Corporation
when the Board is not in session, including without limitation the power to
declare dividends, to authorize the issuance of the Corporation's capital stock
and to adopt a certificate of ownership and merger pursuant to Section 253 of
the General Corporation Law of the State of Delaware, and may, by resolution
similarly adopted, designate one or more other committees. The Executive
Committee and each such other committee shall consist of one or more directors
of the Corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. Any such committee, other than the Executive
Committee (the powers of which are expressly provided for herein), may to the
extent permitted by law exercise such powers and shall have such
responsibilities as shall be specified in the designating resolution. In the
absence or disqualification of any member of such committee or committees, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not constituting a quorum, may unanimously appoint another
member of the Board to act at the meeting in the place of any such absent or
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Amended 7/17/96
Amended as of 2/17/99
Amended as of 10/24/99
<PAGE> 9
disqualified member. Each committee shall keep written minutes of its
proceedings and shall report such proceedings to the Board when required.
(b) A majority of any committee may determine its action and fix the time and
place of its meetings, unless the Board shall otherwise provide. Notice of such
meetings shall be given to each member of the committee in the manner provided
for in Section 3.5 of these By-Laws. The Board shall have power at any time to
fill vacancies in, to change the membership of, or to dissolve any such
committee. Nothing herein shall be deemed to prevent the Board from appointing
one or more committees consisting in whole or in part of persons who are not
directors of the Corporation; provided, however, that no such committee shall
have or may exercise any authority of the Board.
SECTION 3.11. REMOVAL. Subject to the rights of any class or series of stock
having a preference over the Common Stock as to dividends or upon liquidation to
elect Directors under specified circumstances, any Director may be removed from
office only for cause by the affirmative vote of the holders of at least a
majority of the voting power of all Voting Stock then outstanding, voting
together as a single class.
SECTION 3.12. RECORDS. The Board of Directors shall cause to be kept a record
containing the minutes of the proceedings of the meetings of the Board and of
the stockholders, appropriate stock books and registers and such books of
records and accounts as may be necessary for the proper conduct of the business
of the Corporation.
ARTICLE IV
OFFICERS
SECTION 4.1. ELECTED OFFICERS. The elected officers of the Corporation shall be
a Chairman of the Board of Directors, a President, a Secretary, a Treasurer, and
such other officers (including, without limitation, Senior Vice Presidents and
Executive Vice Presidents and Vice Presidents) as the Board of Directors from
time to time may deem proper. The Chairman of the Board shall be chosen from
among the directors. All officers elected by the Board of Directors shall each
have such powers and duties as generally pertain to their respective offices,
subject to the specific provisions of this Article IV. Such officers shall also
have such powers and duties as from time to time may be conferred by the Board
of Directors or by any committee thereof. The Board or any committee thereof may
from time to time elect, or the Chairman of the Board or President may appoint,
such other officers (including one or more Vice Presidents, Controllers,
Assistant Secretaries and Assistant Treasurers), as may be necessary or
desirable for the conduct of the business of the Corporation. Such other
officers and agents shall have such duties and shall hold their offices for such
terms as shall be
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Amended 7/17/96
Amended as of 2/17/99
Amended as of 10/24/99
<PAGE> 10
provided in these By-Laws or as may be prescribed by the Board or such committee
or by the Chairman of the Board or President, as the case may be.
SECTION 4.2. ELECTION AND TERM OF OFFICE. The elected officers of the
Corporation shall be elected annually by the Board of Directors at the regular
meeting of the Board of Directors held after the annual meeting of the
stockholders. If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as convenient. Each officer shall
hold office until such person's successor shall have been duly elected and shall
have qualified or until such person's death or until he shall resign or be
removed pursuant to Section 4.8.
SECTION 4.3. CHAIRMAN OF THE BOARD; CHIEF EXECUTIVE OFFICER. The Chairman of the
Board shall preside at all meetings of the stockholders and of the Board of
Directors and shall be the Chief Executive Officer of the Corporation. The
Chairman of the Board shall be responsible for the general management of the
affairs of the Corporation and shall perform all duties incidental to such
person's office which may be required by law and all such other duties as are
properly required of him by the Board of Directors. He shall make reports to the
Board of Directors and the stockholders, and shall see that all orders and
resolutions of the Board of Directors and of any committee thereof are carried
into effect. The Chairman of the Board may also serve as President, if so
elected by the Board. The Directors also may elect a Vice-Chairman to act in the
place of the Chairman upon his or her absence or inability to act.
SECTION 4.4. PRESIDENT. The President shall act in a general executive capacity
and shall assist the Chairman of the Board in the administration and operation
of the Corporation's business and general supervision of its policies and
affairs. The President, if he or she is also a Director, shall, in the absence
of or because of the inability to act of the Chairman of the Board, perform all
duties of the Chairman of the Board and preside at all meetings of stockholders
and of the Board of Directors.
SECTION 4.5. VICE PRESIDENTS. Each Senior Vice President and Executive Vice
President and any Vice President shall have such powers and shall perform such
duties as shall be assigned to him by the Board of Directors.
SECTION 4.6. TREASURER. The Treasurer shall exercise general supervision over
the receipt, custody and disbursement of corporate funds. The Treasurer shall
cause the funds of the Corporation to be deposited in such banks as may be
authorized by the Board of Directors, or in such banks as may be designated as
depositories in the manner provided by resolution of the Board of Directors. The
Treasurer shall have such further powers and duties and shall be subject to such
directions as may be granted or imposed from time to time by the Board of
Directors, the Chairman of the Board or the President.
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Amended 7/17/96
Amended as of 2/17/99
Amended as of 10/24/99
<PAGE> 11
SECTION 4.7. SECRETARY. (a) The Secretary shall keep or cause to be kept in one
or more books provided for that purpose, the minutes of all meetings of the
Board, the committees of the Board and the stockholders; the Secretary shall see
that all notices are duly given in accordance with the provisions of these
By-Laws and as required by law; shall be custodian of the records and the seal
of the Corporation and affix and attest the seal to all stock certificates of
the Corporation (unless the seal of the Corporation on such certificates shall
be a facsimile, as hereinafter provided) and affix and attest the seal to all
other documents to be executed on behalf of the Corporation under its seal; and
shall see that the books, reports, statements, certificates and other documents
and records required by law to be kept and filed are properly kept and filed;
and in general, shall perform all the duties incident to the office of Secretary
and such other duties as from time to time may be assigned to the Secretary by
the Board, the Chairman of the Board or the President.
(b) Assistant Secretaries shall have such of the authority and perform such of
the duties of the Secretary as may be provided in these By-Laws or assigned to
them by the Board of Directors or the Chairman of the Board or by the Secretary.
During the Secretary's absence or inability, the Secretary's authority and
duties shall be possessed by such Assistant Secretary or Assistant Secretaries
as the Board of Directors, the Chairman of the Board, the President or a Vice
Chairman of the Board may designate.
SECTION 4.8. REMOVAL. Any officer elected, or agent appointed, by the Board of
Directors may be removed by the affirmative vote of a majority of the Whole
Board whenever, in their judgment, the best interests of the Corporation would
be served thereby. Any officer or agent appointed by the Chairman of the Board
or the President may be removed by him whenever, in such person's judgment, the
best interests of the Corporation would be served thereby. No elected officer
shall have any contractual rights against the Corporation for compensation by
virtue of such election beyond the date of the election of such person's
successor, such person's death, such person's resignation or such person's
removal, whichever event shall first occur, except as otherwise provided in an
employment contract or under an employee deferred compensation plan.
SECTION 4.9. VACANCIES. A newly created elected office and a vacancy in any
elected office because of death, resignation, or removal may be filled by the
Board of Directors for the unexpired portion of the term at any meeting of the
Board of Directors. Any vacancy in an office appointed by the Chairman of the
Board or the President because of death, resignation, or removal may be filled
by the Chairman of the Board or the President.
ARTICLE V
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Amended 7/17/96
Amended as of 2/17/99
Amended as of 10/24/99
<PAGE> 12
STOCK CERTIFICATES AND TRANSFERS
SECTION 5.1. STOCK CERTIFICATES AND TRANSFERS. The interest of each stockholder
of the Corporation shall be evidenced by certificates for shares of stock in
such form as the appropriate officers of the Corporation may from time to time
prescribe. The shares of the stock of the Corporation shall be transferred on
the books of the Corporation by the holder thereof in person or by such person's
attorney, upon surrender for cancellation of certificates for at least the same
number of shares, with an assignment and power of transfer endorsed thereon or
attached thereto, duly executed, with such proof of the authenticity of the
signature as the Corporation or its agents may reasonably require. The
certificates of stock shall be signed, countersigned and registered in such
manner as the Board of Directors may by resolution prescribe, which resolution
may permit all or any of the signatures on such certificates to be in facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon a certificate has ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issue. Notwithstanding the foregoing
provisions regarding share certificates, the proper officers of the Corporation
may provide that some or all of any or all classes or series of the
Corporation's common or any preferred shares may be uncertificated shares.
SECTION 5.2. LOST, STOLEN OR DESTROYED CERTIFICATES. No certificate for shares
of stock in the Corporation shall be issued in place of any certificate alleged
to have been lost, destroyed or stolen, except on production of such evidence of
such loss, destruction or theft and on delivery to the Corporation of a bond of
indemnity in such amount, upon such terms and secured by such surety, as the
Board of Directors or any financial officer may in its or such person's
discretion require.
ARTICLE VI
MISCELLANEOUS PROVISIONS
SECTION 6.1. FISCAL YEAR. The fiscal year of the Corporation shall begin on the
first day of October and end on the last day of September of each year.
SECTION 6.2. DIVIDENDS. The Board of Directors may from time to time declare,
and the Corporation may pay, dividends on its outstanding shares in the manner
and upon the terms and conditions provided by law and the Certificate of
Incorporation.
SECTION 6.3. SEAL. The corporate seal shall have inscribed thereon the words
"Corporate Seal," the year of incorporation and the word "Delaware."
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Amended 7/17/96
Amended as of 2/17/99
Amended as of 10/24/99
<PAGE> 13
SECTION 6.4. WAIVER OF NOTICE. Whenever any notice is required to be given to
any stockholder or director of the Corporation under the provisions of the DGCL
or these By-Laws, a waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent to the giving of such notice. Neither the business to be
transacted at, nor the purpose of, any annual or special meeting of the
stockholders or the Board of Directors or committee thereof need be specified in
any waiver of notice of such meeting.
SECTION 6.5. AUDITS. The accounts, books and records of the Corporation shall be
audited upon the conclusion of each fiscal year by an independent certified
public accountant selected by the Board of Directors, and it shall be the duty
of the Board of Directors to cause such audit to be done annually.
SECTION 6.6. RESIGNATIONS. Any director or any officer, whether elected or
appointed, may resign at any time by giving written notice of such resignation
to the Chairman of the Board, the President, or the Secretary, and such
resignation shall be deemed to be effective as of the close of business on the
date said notice is received by the Chairman of the Board, the President, or the
Secretary, or at such later time as is specified therein. No formal action shall
be required of the Board of Directors or the stockholders to make any such
resignation effective.
ARTICLE VII
CONTRACTS, PROXIES, ETC.
SECTION 7.1. CONTRACTS. Except as otherwise required by law, the Certificate of
Incorporation, a Preferred Stock Designation, or these By-Laws, any contracts or
other instruments may be executed and delivered in the name and on the behalf of
the Corporation by such officer or officers of the Corporation as the Board of
Directors may from time to time direct. Such authority may be general or
confined to specific instances as the Board may determine. The Chairman of the
Board, the President or any Senior Vice President, Executive Vice President or
Vice President may execute bonds, contracts, deeds, leases and other instruments
to be made or executed for or on behalf of the Corporation. Subject to any
restrictions imposed by the Board of Directors or the Chairman of the Board, the
President or any Senior Vice President, Executive Vice President or Vice
President of the Corporation may delegate contractual powers to others under
such person's jurisdiction, it being understood, however, that any such
delegation of power shall not relieve such officer of responsibility with
respect to the exercise of such delegated power.
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Amended 7/17/96
Amended as of 2/17/99
Amended as of 10/24/99
<PAGE> 14
SECTION 7.2. PROXIES. Unless otherwise provided by resolution adopted by the
Board of Directors, the Chairman of the Board, the President or any Senior Vice
President, Executive Vice President or Vice President may from time to time
appoint an attorney or attorneys or agent or agents of the Corporation, in the
name and on behalf of the Corporation, to cast the votes which the Corporation
may be entitled to cast as the holder of stock or other securities in any other
corporation, any of whose stock or other securities may be held by the
Corporation, at meetings of the holders of the stock or other securities of such
other corporation, or to consent in writing, in the name of the Corporation as
such holder, to any action by such other corporation, and may instruct the
person or persons so appointed as to the manner of casting such votes or giving
such consent, and may execute or cause to be executed in the name and on behalf
of the Corporation and under its corporate seal or otherwise, all such written
proxies or other instruments as he may deem necessary or proper in the premises.
ARTICLE VIII
AMENDMENTS
SECTION 8.1. AMENDMENTS. The By-Laws may be altered or repealed and new By-Laws
may be adopted (1) at any annual or special meeting of stockholders by the
affirmative vote of the holders of a majority of the voting power of the stock
issued and outstanding and entitled to vote thereat, provided, however, that any
proposed alteration or repeal of, or the adoption of any By-Law inconsistent
with, Section 2.2, 2.7 or 2.10 of Article II or Section 3.2, 3.9 or 3.11 of
Article III of the By-Laws by the stockholders shall require the affirmative
vote of the holders of at least 80% of the voting power of all Voting Stock then
outstanding, voting together as a single class, and provided, further, however,
that, in the case of any such stockholder action at a special meeting of
stockholders, notice of the proposed alteration, repeal or adoption of the new
By-Law or By-Laws must be contained in the notice of such special meeting, or
(2) by the affirmative vote of a majority of the Whole Board.
I HEREBY CERTIFY that the foregoing is a full, true, and correct copy
of the By-Laws of Lucent Technologies Inc., a Delaware corporation, as in effect
on the date hereof.
Effective as of October 24, 1999
---------------------------------------
Pamela F. Craven
Secretary of Lucent Technologies Inc.
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Amended 7/17/96
Amended as of 2/17/99
Amended as of 10/24/99
<PAGE> 15
[Seal]
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Amended 7/17/96
Amended as of 2/17/99
Amended as of 10/24/99
<PAGE> 1
10(iii)(A)(3)
FORM OF
LUCENT TECHNOLOGIES INC. 1996 LONG TERM INCENTIVE PROGRAM ("PLAN")
RESTRICTED STOCK UNIT AWARD AGREEMENT
- --------------------------------------------------------------------------------
NAME SOCIAL SECURITY NO. GRANT DATE
- --------------------------------------------------------------------------------
Capitalized terms not otherwise defined herein shall have the same meanings as
in the Plan.
- --------------------------------------------------------------------------------
You have been granted as of the Grant Date set forth above, ________ restricted
stock units ("Restricted Stock Units"). Upon termination of the restrictions
related thereto each Restricted Stock Unit will be converted into one common
share par value $.01 of Lucent ("Shares").
1. VESTING OF AWARD. The Restricted Stock Units shall vest and become
nonforfeitable on the following schedule; [insert vesting schedule], (the date
on which any Restricted Stock Unit vests being the "Vesting Date" for such
Restricted Stock Unit). The period beginning on the Grant Date hereof and ending
on the day prior to the Vesting Date for a Restricted Stock Unit is herein
referred to as the "Restriction Period" with respect to such Restricted Stock
Unit.
2. TERMINATION OF EMPLOYMENT. Upon termination of your employment for any reason
other than death or disability as described below, including without limitation,
retirement and termination as a result of your employer ceasing to be either an
Affiliate or Lucent, any Restricted Stock Units that are not vested shall be
forfeited. Transfer to or from Lucent and any Affiliate shall not be considered
a termination of employment for purposes of this Agreement. Nor shall it be
considered a termination of employment for purposes of this Agreement if you are
placed on a military leave or other approved leave of absence, unless the
Committee shall otherwise determine.
(a) DEATH - If you die during the Restriction Period, the Restricted Stock
Units will become nonforfeitable, the Restriction Period will end and the award
will be paid at time of termination as specified in Section 4.
(b) DISABILITY - Upon termination of your employment prior to the Vesting
Date as a result of your Disability (as defined below) this award will become
nonforfeitable, the Restriction Period will end and the award will be paid at
time of termination as specified in Section 4. "Disability" means termination of
employment under circumstances entitling you to one of the follow:
(i) Disability Pension under Lucent's Management Pension Plan;
(ii) Disability Benefit under the Long Term Disability Plan for
Management Employees of Lucent;
(iii)Similar disability benefits under any plan of Lucent that is a
successor to or offered in substitution for one or more of the
foregoing plans; or
(iv) Disability benefits of a type similar to those described in (i)
through (iii) under any plan of an Affiliate that adopts
reasonable standards and criteria for benefit entitlement.
3. DIVIDEND EQUIVALENT. On each dividend payment date the Company will pay you a
cash payment in an amount equal to the dividend payable on one Share for each
Restricted Stock Unit you hold on the record date for such dividend, which has
not been forfeited, canceled or converted to a Share and distributed. You have
no rights as a shareholder of Lucent with respect to any Restricted Stock Unit
that has not vested and been converted to a Share.
4. PAYMENT OF SHARES. As soon as practicable after termination of the
Restriction Period, the Company will deliver a certificate representing the
Shares being distributed to you or to your legal representative.
[Insert the following where receipt of stock at the end of the Restriction
Period may be deferred: 5. DEFERRAL. You may irrevocably elect, in accordance
with the Lucent Technologies Inc. Deferred Compensation Plan (or any successor
to such Plan) to defer the distribution of all or any portion of this Award,
that you otherwise would have become entitled to receive pursuant to the terms
of this Agreement.]
6. TRANSFERABILITY. You may not transfer, pledge, assign, sell or otherwise
alienate your Restricted Stock Units.
7. NO RIGHT OF EMPLOYMENT. Neither the Plan nor this Restricted Stock Unit Award
shall be construed as giving you the right to be retained in the employ of
Lucent or any Affiliate.
8. TAXES. Lucent shall deduct or cause to be deducted from, or collect or cause
to be collected with respect to, any distribution hereunder any federal, state,
or local taxes required by law to be withheld or paid with respect to such
<PAGE> 2
distribution, and you or your legal representative or beneficiaries shall be
required to pay any such amounts. Lucent shall have the right to take such
action as may be necessary, in Lucent's opinion, to satisfy such obligations.
9. BENEFICIARY. You may, in accordance with procedures established by the
Committee, designate one or more beneficiaries to receive all or part of this
award in case of your death, and you may change or revoke such designation at
any time. Such designation shall not be effective unless and until the Senior
Vice President-Human Resources shall determine, on advice of counsel, that
resale of Shares by your beneficiary(ies) does not require any registration,
qualification, consent or approval of any securities exchange or governmental or
regulatory agency or authority. In the event of your death, any portion of this
Award that is subject to such a designation (to the extent such designation is
valid, effective and enforceable under this Agreement and applicable law) shall
be distributed to such beneficiary or beneficiaries in accordance with this
Agreement. Any other portion of this Award shall be distributed to your estate.
If there shall be any question as to the legal right of any beneficiary to
receive a distribution hereunder, or to the extent your designation is not
effective, such portion will be delivered to your estate, in which event neither
Lucent nor any Affiliate shall have any further liability to anyone with respect
to such award.
10. NONCOMPETITION. (a) In addition to your separately enforceable obligations
under existing Lucent intellectual property and non-disclosure agreements, and
at common law, you will not without the prior written consent of Lucent entity
that employs you (the "Employer"), both during and for a period of nine (9)
months after termination for any reason of your employment with Lucent, on
behalf of any competitor of Lucent (A) render 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 Lucent about which you gained any proprietary or confidential
information or on which you worked during the three (3) years prior to your
termination of employment, or (2) any actual or potential customer of Lucent
about whom you gained any proprietary or confidential knowledge or with whom you
worked during the three (3) years prior to your termination of employment, or
(B) solicit or offer, or induce or encourage others to solicit or offer,
employment to any employee of Lucent. You recognize and agree that such
restrictions are necessary and reasonable to protect Lucent's highly
confidential and proprietary information, valuable goodwill, customer
relationships and competitive position.
(b) You agree that upon termination of employment with Lucent, you will
immediately inform Lucent of the identity of your new employer (or the nature of
self-employment) and of your new title and job description, and hereby authorize
Lucent to provide a copy of this Agreement to your new employer. Further you
will provide such information as Lucent may from time to time request to
determine your compliance with the terms of this Agreement.
(c) You agree that the damages which Lucent would sustain upon any
violation of this Agreement are difficult or impossible to ascertain in advance
and that immediate and irreparable harm would be caused to Lucent. In the event
of any breach of this Agreement, Lucent shall be entitled to obtain injunctive
relief; and, in addition, to cancel this award; recoup any profits with respect
to the payout of this award realized within nine (9) months prior to termination
for any reason of your employment at Lucent through nine (9) months after
termination, to be repaid within ten (10) days of Lucent's written request (or,
at Lucent's option, to be set off against any amounts Lucent owes you); and
obtain reimbursement for all costs and expenses, including attorneys' fees, it
may incur in connection with enforcement of rights hereunder. Lucent shall be
entitled to any or all of such remedies, the use of one not precluding others or
constituting a binding election.
(d) The restrictions set forth in Section 10 are the essence of this
Agreement. They shall be construed as independent of any other provision of this
Agreement, and the existence of any claim or cause of action by you against
Lucent, whether or not predicated on this Agreement, shall not constitute a
defense to the enforcement by Lucent of these restrictions.
(e) The terms and provisions of this Section 10 shall be administered in
accordance with such policies and procedures as Lucent, in its sole discretion,
may from time to time adopt.
11. GOVERNING LAW. The validity, construction and effect of this Agreement shall
be determined in accordance with the laws of the State of Delaware without
giving effect to principles of conflicts of law.
[The following may be inserted in awards to individuals that may be covered
employees for purposes of Section 162(m) of the Internal Revenue Code: 12.
SECTION 162(m). (a) Notwithstanding any contrary provision in this Agreement,
Section 12 of the Plan and this Section shall apply to your award if you are, or
are expected to be as of the end of the tax year in which the Company intends to
claim a tax deduction related to this award, a "covered employee" of Lucent
within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as
amended (i.e., the Chief Executive Officer and the four most highly compensated
officers of Lucent, other than the Chief Executive Officer).
<PAGE> 3
(b) Vesting of your award shall be subject (i) to Lucent having Net
Income (as defined in the Plan) in the fiscal year preceding each applicable
Vesting Date at least equal to an amount determined by the Committee and (ii) to
the Committee certifying in writing that such level of Net Income was achieved.]
- --------------------------------------------------------------------------------
Please indicate your acceptance of terms 1-12, AND IN PARTICULAR THE PROVISIONS
OF SECTION 10, HEREOF, and acknowledge that you have received a copy of the
Plan, as currently in effect, by signing at the place provided and returning the
original of this Agreement.
ACCEPTED AND AGREED: LUCENT TECHNOLOGIES INC.
- --------------------------------------------------------------------------------
SIGNATURE BY
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 10(iii)(A)(4)
FORM OF
LUCENT TECHNOLOGIES INC. 1996 LONG TERM INCENTIVE PROGRAM ("PLAN")
NONSTATUTORY STOCK OPTION AGREEMENT
- --------------------------------------------------------------------------------
NAME SOCIAL SECURITY NO. GRANT DATE EXPIRATION DATE
- --------------------------------------------------------------------------------
Capitalized terms not otherwise defined herein shall have the same meanings as
in the Plan.
- --------------------------------------------------------------------------------
You have been granted as of the Grant Date set forth above, an option (the
"Option") under the Plan to purchase from Lucent Technologies Inc. ("Lucent")
________ common shares, par value $.01, of Lucent ("Shares") at the price of
________ per Share, subject to the terms and conditions of the Plan and this
agreement.
1. EXERCISABILITY OF OPTION. Except as provided in Sections 2 and 3 below,
[insert vesting provisions and definition of "Vesting Date"] and ending on the
Expiration Date set forth above.
2. TERMINATION OF EMPLOYMENT. [Appropriate changes are made to this section in
options providing for graded vesting] (a)Upon your termination of employment for
any reason prior to the Vesting Date, this Option will be immediately forfeited
and canceled in its entirety, except as provided in this Section 2. If you
terminate employment on or after the Vesting Date, this Option will remain
exercisable until the earlier of the ninetieth day after termination of
employment or the original Expiration Date, except as provided in Sections 2, 3
and 4. It will not be considered a termination of your employment if you (i)
transfer to or from Lucent and any Affiliate or (ii) are placed on an approved
leave of absence. Unless otherwise determined by the Committee, it will be
considered a termination of employment if your employer ceases to be Lucent or
an Affiliate.
(b) RETIREMENT - [For regular grants, such as grants made under the
annual grant program, include the following: Upon your Retirement prior
to the six month anniversary of the Grant Date, this Option will be
immediately forfeited and canceled in its entirety. Upon your
Retirement (as defined below) on or after the six month anniversary of
the Grant Date, this Option shall become immediately exercisable in
full and shall remain exercisable until the original Expiration Date,
except as provided in Section 3.] [For special grants, such as
retention grants, include the following: Upon your Retirement (as
defined below) prior to the Vesting Date this Option will be forfeited
and canceled. Upon your Retirement on or after the Vesting Date this
Option will remain exercisable until the original Expiration Date,
except as provided in Section 3.] "Retirement" means termination of
employment with Lucent or any of its Affiliates under any of the
following circumstances or entitlements:
(i) Service Pension under Lucent's Management Pension
Plan;
(ii) Minimum Retirement Benefit under Lucent's
Supplemental Pension Plan;
(iii) Similar pension under any plan of Lucent that is a
successor to or offered in substitution for one or
more of the foregoing plans;
(iv) Pension of a type similar to those described in (i)
through (iii) under any plan of an Affiliate that
adopts reasonable standards and criteria for benefit
entitlement; or
(v) You are at least age 50 with a minimum of 15 years
service or your age and years of service at the time
of termination add up to at least 75.
(c) DEATH AND DISABILITY - Upon your termination of employment as a
result of your Death or Disability (as defined below), any portion of
this Option which is not then exercisable shall become immediately
exercisable in full and the outstanding portion of this Option shall
remain exercisable until the original Expiration Date, except as
provided in Section 3. "Disability" means termination of employment
under circumstances entitling you to any of the following benefits:
(i) Disability Pension under Lucent's Management Pension
Plan;
(ii) Disability Benefit under the Long Term Disability
Plan for Management Employees of Lucent;
(iii) Similar disability benefits under any plan of Lucent
that is a successor to or offered in substitution for
<PAGE> 2
one or more of the foregoing plans; or
(iv) Disability benefits of a type similar to those
described in (i) through (iii) under any plan of an
Affiliate that adopts reasonable standards and
criteria for benefit entitlement.
3. NONCOMPETITION. (a) In addition to your separately enforceable obligations
under existing Lucent intellectual property and non-disclosure agreements, and
at common law, you will not without the prior written consent of Lucent, both
during and for a period of nine (9) months after termination for any reason of
your employment with the Lucent entity that employs you (the "Employer"), on
behalf of any competitor of Lucent (A) render 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 Lucent about which you gained any proprietary or confidential
information or on which you worked during the three (3) years prior to your
termination of employment, or (2) any actual or potential customer of Lucent
about whom you gained any proprietary or confidential knowledge or with whom you
worked during the three (3) years prior to your termination of employment, or
(B) solicit or offer, or induce or encourage others to solicit or offer,
employment to any employee of Lucent or any Affiliate. You recognize and agree
that such restrictions are necessary and reasonable to protect Lucent's and any
Employer's highly confidential and proprietary information, valuable goodwill,
customer relationships and competitive position.
(b) You agree that upon termination of employment with Lucent, you will
immediately inform Lucent of the identity of your new employer (or the nature of
self-employment) and of your new title and job description, and hereby authorize
Lucent to provide a copy of this Agreement to your new employer. Further you
will provide such information as Lucent may from time to time request to
determine your compliance with the terms of this Agreement.
(c) You agree that the damages which Lucent would sustain upon any
violation of this Agreement are difficult or impossible to ascertain in advance
and that immediate and irreparable harm would be caused to Lucent. In the event
of any breach of this Agreement, Lucent shall be entitled to obtain injunctive
relief; and, in addition, to cancel any unexercised portion of this Option;
recoup any profits with respect to the exercise of this Option realized within
nine (9) months prior to termination for any reason of your employment at Lucent
through nine (9) months after termination, to be repaid within ten (10) days of
Lucent's written request (or, at Lucent's option, to be set off against any
amounts Lucent owes you); and obtain reimbursement for all costs and expenses,
including attorneys' fees, it may incur in connection with enforcement of rights
hereunder. Lucent shall be entitled to any or all of such remedies, the use of
one not precluding others or constituting a binding election.
(d) The restrictions set forth in Section 3 are the essence of this
Agreement. They shall be construed as independent of any other provision of this
Agreement; and the existence of any claim or cause of action by you against
Lucent, whether or not predicated on this Agreement, shall not constitute a
defense to the enforcement by Lucent of these restrictions.
(e) The terms and provisions of this Section 3 shall be administered in
accordance with such policies and procedures as Lucent, in its sole discretion,
may from time to time adopt.
4. TERMINATION FOR CAUSE. Upon the termination of your employment for "Cause",
Lucent will immediately cancel any unexercised portion of this Option. For
purposes of this agreement, "Cause" shall be defined as follows: (a) violation
of the Lucent Business Guideposts, its code of conduct; (b) conviction of
(including a plea of guilty or nolo contendere) of a felony or any crime of
theft, dishonesty or moral turpitude, or (c) gross omission or gross dereliction
of any statutory or common law duty of loyalty to Lucent.
5. EXERCISE PROCEDURE. This Option shall be exercised by delivering to Lucent a
notice in the form prescribed for this purpose. The notice shall specify the
number of Shares as to which the Option is being exercised. The Option or any
portion thereof may be exercised only upon payment of the exercise price thereof
in full, and in accordance with procedures established by the Committee. Payment
shall be made in cash or in Shares or a combination of cash and Shares such that
the total of the cash plus the Fair Market Value, as determined in accordance
with procedures established by the Committee, of the Shares on the date of
exercise at least equals the aggregate exercise price of the Shares as to which
the Option is being exercised; provided, however, that any Shares surrendered as
payment must have been owned by you at least six months prior to the date of
exercise. Exercise of the Option shall take effect on the date the notice of
exercise, properly completed, is actually received at the address specified in
the form.
<PAGE> 3
6. ISSUANCE OF LUCENT SHARES. Following exercise of this Option, Lucent will
issue the number of Shares purchased under this Option. Neither you nor anyone
else shall be, or have any of the rights and privileges of, a shareholder of
Lucent in respect of any Shares purchasable upon the exercise of this Option, in
whole or in part, unless and until such Shares shall have been issued.
7. TRANSFERABILITY. (a) [Insert in options that are transferable: Except as
provided in Section (b),] This Option is not transferable by you otherwise than
by will or the laws of descent and distribution, and during your lifetime the
Option may be exercised only by you or your guardian or legal representative.
[Insert in transferable options: (b) This Option may be transferred by you,
in accordance with rules established by the Company, to one or more members of
your immediate family, to a partnership of which the only partners are members
of your immediate family or to a trust established by you for the benefit of one
or more members of your immediate family (each such transferee a "Permitted
Transferee"). For purposes of this Section (b), your immediate family means your
spouse, parents, children, grandchildren and the spouses of children and
grandchildren. Adopted children will be considered to be your children or
grandchildren, as the case may be, for this purpose. A Permitted Transferee may
not further transfer the Option. An Option transferred pursuant to this Section
shall remain subject to all of the provisions of the Plan and this Agreement,
including, but not limited to, the provisions of Section 2 relating to the
exercise of the Option upon termination of your employment, Section 3 relating
to the forfeiture of the Option (or any benefits from its exercise) in the event
of certain activities by you in competition with Lucent, and Section 4 relating
to the cancelation of the Option in the event of termination for Cause .
(c) No Option may be exercised by a Permitted Transferee unless and until
the Shares to be purchased upon exercise of such Option shall have been listed,
registered or otherwise qualified as provided in Section 9 of this Agreement.]
[Insert in non-transferable options: (b)] [Insert in transferable options:
(d)] You may, in accordance with procedures established by the Committee,
designate one or more beneficiaries to receive all or part of the Option in case
of your death, and you may change or revoke such designation at any time. Such
designation shall not be effective unless and until the Senior Vice
President-Human Resources or the Vice President Compensation and Benefits shall
determine, on advice of counsel, that exercise of the Option by your
beneficiary(ies) does not require any registration, qualification, consent or
approval of any securities exchange or governmental or regulatory agency or
authority. In the event of your death, any portion of this Option that is
subject to such a designation (to the extent such designation is valid,
effective and enforceable under this Agreement and applicable law) shall be
distributed to such beneficiary or beneficiaries in accordance with this
Agreement. Any other portion of this Option shall be distributable to your
estate. If there shall be any question as to the legal right of any beneficiary
to receive a distribution hereunder, or to the extent your designation is not
effective, such portion may be exercised by your estate, in which event neither
Lucent nor any Affiliate shall have any further liability to anyone with respect
to such Option.
8. NO RIGHT OF EMPLOYMENT. Neither the Plan nor this Agreement shall be
construed as giving you the right to be retained in the employ of Lucent or any
Affiliate.
9. REGULATORY APPROVALS. If the Senior Vice President-Human Resources or the
Vice President Compensation and Benefits of the Company shall determine, on
advice of counsel, that the listing, registration or qualification of Shares
upon any securities exchange or under any law, or the consent or approval of any
governmental or regulatory agency or authority, is necessary or desirable as a
condition of, or in connection with, the exercise of the Option, no portion of
the Option may be exercised until or unless such listing, registration,
qualification, consent or approval shall have been effected or obtained. The
foregoing shall not be construed as requiring any such listing, registration,
qualification, consent or approval.
10. DETERMINATIONS OF THE COMMITTEE. Any determinations or decisions made or
actions taken arising out of or in connection with the interpretation and
administration of this Agreement and the Plan by the Committee shall be final
and conclusive.
11. AMENDMENTS. This Agreement may be amended by the Committee provided that no
such amendment shall impair your rights hereunder without your consent.
<PAGE> 4
12. TAXES. Lucent may withhold or require payment of taxes or social insurance
payments due upon the exercise of this Option. Payments may be paid in cash or a
combination of cash and shares if permitted by the Administrator.
13. GOVERNING LAW. The validity, construction and effect of this Agreement shall
be determined in accordance with the laws of the State of Delaware without
giving effect to principles of conflicts of laws.
- --------------------------------------------------------------------------------
Please indicate your acceptance of terms 1-13, and in particular the provisions
contained in Section 3 hereof, and acknowledge that you have received a copy of
the Plan as currently in effect, by signing at the place provided and returning
the original of this Agreement.
ACCEPTED AND AGREED: LUCENT TECHNOLOGIES INC.
- --------------------------------------------------------------------------------
SIGNATURE BY
- --------------------------------------------------------------------------------
VICE PRESIDENT
<PAGE> 1
EXHIBIT 12
LUCENT TECHNOLOGIES INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE TWELVE FOR THE TWELVE FOR THE TWELVE FOR THE NINE FOR THE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Earnings Before
Income Taxes ............ $ 5,443 $ 2,512 $ 1,458 $ 627 $(1,050)
Less Interest
Capitalized During
the Period ............. 20 17 14 14 14
Less Undistributed
Earnings of
Less than 50%
Owned Affiliates ....... 2 11 3 1 2
Add Fixed Charges ........ 635 503 460 313 327
------- ------- ------- ------- -------
Total Earnings .......... $ 6,056 $ 2,987 $ 1,901 $ 925 $ (739)
Fixed Charges
Total Interest Expense
Including
Capitalized Interest .... $ 453 $ 297 $ 281 $ 209 $ 257
Interest Portion of
Rental Expenses ........ 182 142 112 63 70
------- ------- ------- ------- -------
Total Fixed Charges ..... $ 635 $ 439 $ 393 $ 272 $ 327
Ratio of Earnings to
Fixed Charges .......... 9.5 6.8 4.8 3.4 (A)
</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 indebtedness 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 $1,066.
<PAGE> 1
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
HIGHLIGHTS
Lucent Technologies Inc. (the "Company") reported net income of $4,766 million,
or $1.52 per share (diluted), for the year ended September 30, 1999, compared
with year-ago net income of $1,035 million, or $0.34 per share (diluted). In
1999, Lucent changed its method for determining annual net pension and
postretirement benefit costs. As a result, included in 1999 net income is a
$1,308 million, or $0.42 per share (diluted), cumulative effect of accounting
change. See Note 10 to the Consolidated Financial Statements for further detail
of the accounting change. Lucent's income before the cumulative effect of the
accounting change was $3,458 million for the year ended September 30, 1999.
In 1999, Lucent recorded a $141 million ($93 million after-tax) reversal of
business restructuring charges, a $101 million non-tax deductible charge to
operating expenses for merger-related costs and a $236 million charge ($169
million after-tax) primarily associated with asset impairments and
integration-related charges associated with the Ascend Communications, Inc. and
Nexabit Networks, Inc. mergers, a $274 million gain ($167 million after-tax) on
the sale of an equity investment in Juniper Networks, and $282 million ($272
million after-tax) purchased in-process research and development expenses
related to the acquisitions of Stratus Computer, Inc., Quadritek Systems, Inc.,
Sybarus Technologies, WaveAccess Ltd. and the Ethernet local area network
("LAN") component business of Enable Semiconductor ("Enable").
In 1998, Lucent recorded a $118 million ($76 million after-tax) reversal of
business restructuring charges (including an $18 million pre-tax reversal of
merger-related costs by Ascend), a $149 million ($95 million after-tax) gain on
the sale of Lucent's Advanced Technology Systems ("ATS") business, and $1,683
million ($1,679 million after-tax) purchased in-process research and development
expenses related to the acquisitions of Stratus, JNA Telecommunications Limited,
LANNET, MassMedia Communications Inc., SDX Business Systems plc, Yurie Systems,
Inc., Optimay GmBH, Prominet Corporation and Livingston Enterprises, Inc.
All per share amounts have been adjusted to reflect the two-for-one stock splits
of Lucent common stock that became effective April 1, 1999 and April 1, 1998.
All financial information has been restated to reflect the Ascend and Kenan
Systems Corporation mergers.
CONVERGENCE
The communications industry is experiencing rapid changes in the technologies
used to service customers' needs. Traditional circuit-based switching and data
packet transmission are converging. This convergence of technologies is driven
by the growing demands for the transmission of information using data, voice,
video and fax, or any combination of these. The demand is driven by the
expansion of Internet traffic over existing networks - both wireline and
wireless - as well as the buildout of new and improved networks.
Lucent's strategy is to meet its customers' needs by offering an end-to-end
solutions platform. This strategy brings together the core products of
switching, transmission, software, messaging and optoelectronics (including
microelectronic componentry) with the new portfolio offerings obtained through
strategic acquisitions as well as the research and development of Bell
Laboratories. These new offerings are in the areas of data packet switching,
access products, software and services. With these new offerings, Lucent will
enhance its spectrum of communications products and services - data, voice,
optical, wireless, software, services and support - and is able to offer a
full-service package for the next generation of networks.
In June 1999, Lucent merged with Ascend. The Ascend merger enhances Lucent's
data switching and remote access products. The February 1999 merger with Kenan
refines Lucent's expertise in the field of billing software and customer care.
Subsequent to the close of fiscal 1999, Lucent continued to broaden its
portfolio by merging with International Network Services ("INS"), a global
provider of network consulting and software solutions, and Excel Switching
Corporation, a provider of open switching solutions for telecom carriers.
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Lucent will continue to review its portfolio of offerings and may use
acquisitions to enhance those offerings where it makes good business sense.
These acquisitions may occur through the use of cash, the issuance of debt or
common stock, or any combination of the three.
ACQUISITIONS AND DISPOSITIONS
As part of Lucent's continued efforts to provide its customers with end-to-end
communications solutions, the Company completed the following acquisitions and
dispositions during the three years ended September 30, 1999:
August 1999 Acquisition of 61% interest in SpecTran Corporation, a
designer and manufacturer of specialty optical fiber and
fiber-optic products. Lucent expects to acquire the remaining
shares of SpecTran by the end of the first quarter of fiscal
year 2000
July 1999 Merger with Nexabit, a developer of high-speed switching
equipment and software that directs traffic along
telecommunications networks
Merger with Mosaix Inc., a provider of software that links
companies' front and back offices and helps them deliver more
responsive and efficient customer service
June 1999 Merger with Ascend, a developer, manufacturer and seller of
wide area networking solutions
March 1999 Acquisition of the Ethernet LAN component business of Enable
Semiconductor
February 1999 Merger with Kenan, a developer of third-party billing and
customer care software
Acquisition of Sybarus, a semiconductor design company
January 1999 Acquisition of the remaining 80% interest in WaveAccess, a
developer of high-speed systems for wireless data
communications
October 1998 Acquisition of Quadritek, a start-up developer of
next-generation Internet protocol ("IP") network
administration software solutions
Ascend acquisition of Stratus, a manufacturer of
fault-tolerant computer systems
September 1998 Acquisition of JNA, an Australian telecom equipment
manufacturer, reseller and system integrator
August 1998 Acquisition of LANNET, an Israeli-based supplier of Ethernet
and asynchronous transfer mode ("ATM") switching solutions
July 1998 Acquisition of SDX, a United Kingdom-based provider of
business communications systems
Acquisition of MassMedia, a developer of next-generation
network interoperability software
May 1998 Acquisition of Yurie, a provider of ATM access technology and
equipment for data, voice and video networking
April 1998 Acquisition of Optimay, a Germany-based developer of software
products and services for chip sets to be used for Global
System for Mobile Communications cellular phones
January 1998 Acquisition of Prominet, a participant in the emerging Gigabit
Ethernet networking industry
December 1997 Acquisition of Livingston, a global provider of equipment
used by Internet service providers to connect their
subscribers to the Internet
September 1997 Acquisition of Octel Communications Corporation, a provider of
voice, fax and electronic messaging technologies
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
June 1997 Ascend merger with Cascade Communications Corp., a developer
and manufacturer of wide area network switches
April 1997 Ascend merger with Whitetree, Inc., a developer and
manufacturer of high-speed ATM switching products
February 1997 Ascend acquisition of InterCon Systems Corporation, a
developer of remote access client software products
January 1997 Ascend acquisition of Sahara Networks, Inc., a developer of
scalable high-speed broadband access products
Lucent has also sought to divest itself of non-core businesses:
October 1, 1997 Lucent contributed its Consumer Products business to a new
venture formed by Lucent and Philips Electronics N.V.
("Philips") in exchange for 40% ownership of the venture. The
venture, Philips Consumer Communications ("PCC"), was formed
to create a worldwide provider of personal communications
products. On October 22, 1998, Lucent and Philips announced
their intention to end the venture in PCC. The venture was
terminated in late 1998. In December 1998, Lucent sold certain
assets of its wireless handset business to Motorola. Lucent is
continuing to look for opportunities to sell the remaining
consumer products business.
October 1997 Sale of ATS unit
December 1996 Sale of interconnect products and Custom Manufacturing
Services ("CMS") businesses
In addition, subsequent to the 1999 fiscal year-end, Lucent merged with the
following:
On October 15, 1999, Lucent merged with INS, a global provider of network
consulting and software solutions
On November 3, 1999, Lucent merged with Excel, a provider of open switching
solutions for telecom carriers
On November 12, 1999, Lucent merged with Xedia Corporation, a developer of
high-performance Internet access routers for wide area networks
LUCENT'S FORMATION
Lucent was formed from the systems and technology units that were formerly part
of AT&T Corp., including the research and development capabilities of Bell
Laboratories. Prior to February 1, 1996, AT&T conducted Lucent's original
business through various divisions and subsidiaries. On February 1, 1996, AT&T
began executing its decision to separate Lucent into a stand-alone company by
transferring to Lucent the assets and liabilities related to its business. In
April 1996, Lucent completed the initial public offering of its common stock
("IPO") and on September 30, 1996, became independent of AT&T when AT&T
distributed to its shareowners all of its Lucent shares.
OPERATING SEGMENTS
Lucent operates in the global telecommunications networking industry and has
three reportable segments: Service Provider Networks ("SPN"), Enterprise
Networks ("Enterprise"), and Microelectronics and Communications Technologies
("MCT"). SPN provides public networking systems and software to
telecommunications service providers and public network operators around the
world. Enterprise develops, manufactures, markets and services advanced
communications products and data networking systems for business customers. MCT
designs and manufactures high-performance integrated circuits, power systems and
optoelectronic components for applications in the communications and computing
industries. In addition, MCT includes network products, new ventures and
intellectual property. The results of other smaller units and corporate
operations are reported in Other and Corporate.
The three reportable operating segments are strategic market units that offer
distinct products and services. These segments were determined based on the
customers and the markets that Lucent serves. Each market unit is managed
separately as each operation requires different technologies and marketing
strategies.
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SEGMENT REVENUES-for the year ended September 30, 1997, 1998 and 1999
(Dollars in Billions)
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Other $ 1.4 $ 0.1 $ 0.7
Microelectronics and Communications
Technologies 4.2 4.6 5.4
Enterprise Networks 6.3 8.0 8.6
Service Provider Networks 15.7 19.1 23.6
</TABLE>
Lucent's Service Provider Networks segment represents about 62% of the total
external sales for 1999. Lucent offers a wide range of products and services
that represent a full-service package for the next generation of networks.
PRODUCT AND SERVICE REVENUES-for the year ended September 30, 1999
Core Networking Systems 46%
Business Communications Systems 18%
Wireless Products 15%
Microelectronics 7%
NetCare Professional Services 2%
Other 12%
Lucent's segments include products and services businesses focused on developing
and delivering systems and technologies to our customers.
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 the trend toward global
expansion by U.S. and non-U.S. competitors as well as continued changes in
technology and public policy. These competitors may include entrants from the
telecommunications, software, data networking, cable television and
semiconductor industries. Existing competitors have, and new competitors may
have, strong financial capabilities, technological expertise, well-recognized
brand names and a global presence. Such competitors may include Alcatel Alsthom,
Cisco Systems, Inc., Ericsson, Nortel Networks, and Siemens AG. Lucent's
management periodically assesses market conditions and redirects the Company's
resources to meet new challenges. Steps Lucent may take include acquiring or
investing in new businesses and ventures, partnering with other companies,
delivering new technologies, closing and consolidating facilities, disposing of
assets, reducing work force levels and withdrawing from markets.
Historically, revenues and earnings were higher in the first fiscal quarter
primarily because many of Lucent's large customers delay a disproportionate
percentage of their capital expenditures until the fourth quarter of the
calendar year (Lucent's first fiscal quarter). Lucent has taken measures to
manage the seasonality of its business by changing the date on which its fiscal
year ends to September 30 and its compensation programs for employees, resulting
in a more uniform distribution of revenues and earnings throughout the year.
The purchasing behavior of Lucent's largest customers has increasingly been
characterized by the use of fewer, larger contracts. These contracts typically
involve longer negotiating cycles, require the dedication of substantial amounts
of working capital and other resources, and in general require costs that may
substantially precede the 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 multiyear
contracts involve new technologies that may not have been previously deployed on
a large-scale commercial basis. On its multiyear contracts, Lucent may incur
significant initial cost overruns and losses that are recognized in the quarter
in which they become 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.
Historically, a limited number of customers have provided a substantial portion
of Lucent's total revenues. These customers include AT&T, which continues to be
a significant customer, and the Regional Bell Operating Companies ("RBOCs"). The
communications industry is experiencing a consolidation of both U.S. and
non-U.S. companies. The loss of any of these customers, or any
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
substantial reduction in orders by any of these customers, could materially
adversely affect the Company's operating results.
Lucent is diversifying its customer base and seeking out new types of customers
globally. These new types of customers include competitive access providers and
local exchange carriers, wireless service providers, cable television network
operators and computer manufacturers.
RESULTS OF OPERATIONS
REVENUES
Total revenues for 1999 increased 20.4% to $38,303 million compared with 1998,
due to increases in sales from all reportable operating segments, as well as
Other and Corporate. Revenue growth was driven by sales increases globally. For
1999, sales within the United States grew 11.1% compared with 1998. Non-U.S.
revenues increased 47.0% compared with 1998. These non-U.S. sales represented
31.8% of total revenues compared with 26.1% in 1998.
REVENUES BY NON-U.S. REGIONS-for the year ended September 30, 1997, 1998 and
1999
(Dollars in Billions)
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Canada $0.1 $0.5 $0.4
Caribbean/Latin America 0.7 0.9 1.5
Asia/Pacific 2.8 3.0 3.5
Europe/Middle East/Africa 3.0 3.9 6.8
</TABLE>
Lucent continues to expand its business outside of the United States, with
growth led by the Europe/Middle East/ Africa region for the past three years.
Total revenues for 1998 increased 15.2% to $31,806 million compared with 1997,
due to increases in sales from all reportable operating segments. Revenue growth
was driven by sales increases globally. For 1998, U.S. sales grew 12.7% compared
with 1997 and non-U.S. sales increased 22.8% compared with 1997. These sales
represented 26.1% of total revenues compared with 24.5% in 1997.
The following table presents Lucent's revenues by segment and the approximate
percentage of total revenues for the years ended September 30, 1999, 1998, and
1997:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
% of % of % of
- ---------------------------------------------------------------------------------------------------------------------------
Total Total Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service Provider Networks $23,562 62 $19,108 60 $15,675 57
- ---------------------------------------------------------------------------------------------------------------------------
Enterprise Networks 8,559 22 7,954 25 6,257 23
- ---------------------------------------------------------------------------------------------------------------------------
Microelectronics and Communications Technologies 5,424 14 4,628 15 4,238 15
- ---------------------------------------------------------------------------------------------------------------------------
Other and Corporate 758 2 116 - 1,441 5
- ---------------------------------------------------------------------------------------------------------------------------
Total Lucent $38,303 100 $31,806 100 $27,611 100
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Revenues in 1999 from the SERVICE PROVIDER NETWORKS segment increased by 23.3%,
or $4,454 million compared with 1998, and increased 21.9%, or $3,433 million for
1998 compared with 1997. These increases resulted primarily from higher sales of
switching and wireless systems products with associated software, optical
networking and data networking systems and communications software. Continued
demand for voice, data and wireless services, as well as the need for increased
network capacity contributed to the group's revenues.
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
U.S. revenues in 1999 from the Service Provider Networks segment increased by
9.0% over 1998, and by 22.3% comparing 1998 with 1997. The 1999 U.S. revenue
increase was led by sales to local exchange carriers, wireless service providers
and long distance carriers. The 1998 U.S. revenue increase was led by sales to
RBOCs, local exchange carriers, wireless service providers and long distance
carriers. Non-U.S. revenues for 1999 increased 64.8% compared with 1998 due to
revenue growth in the Europe/Middle East/Africa, Caribbean/Latin America and
Asia/Pacific regions and represented 34.2% of revenues for 1999 compared with
25.6% in 1998. Non-U.S. revenues for 1998 increased 20.8% compared with 1997 due
to growth in all non-U.S. regions, led by the Europe/Middle East/Africa region.
Non-U.S. revenues represented 25.8% of revenues in 1997.
Revenues in 1999 from the ENTERPRISE NETWORKS segment increased by 7.6%, or $605
million compared with 1998. This increase was led by sales of DEFINITY
enterprise communication servers, including those with call center applications
and messaging systems. Revenue gains were partially offset by decreased sales of
SYSTIMAX(R) structured cabling systems. Revenues in 1998 increased 27.1%, or
$1,697 million compared with 1997. This increase was led by sales of messaging
systems, including systems provided by Octel, SYSTIMAX structured cabling and
services. Non-U.S. revenues increased by 16.3% in 1999 compared with 1998 and
52.0% in 1998 compared with 1997 due to growth in all non-U.S. regions, led by
the Europe/Middle East/Africa region. Non-U.S. revenues represented 20.6% of the
revenues for 1999 compared with 19.0% for 1998 and 15.9% for 1997. For 1999,
U.S. sales increased 5.6% compared with 1998 and 22.4% for 1998 compared with
1997.
Revenues in 1999 from the MICROELECTRONICS AND COMMUNICATIONS TECHNOLOGIES
segment increased 17.2%, or $796 million compared with 1998, due to higher sales
of optoelectronic components and integrated circuits for high-speed
communications, data networking, wireless, and computing systems. Increased
sales of power systems also contributed to the increase. Revenues increased
9.2%, or $390 million for 1998 compared with 1997, due to higher sales of chips
for computing and communications, including semiconductor components for
broadband and narrowband networks, data networking, wireless telephones and
infrastructure, high-end workstations, optoelectronic transmission systems,
power systems and the licensing of intellectual property. U.S. sales in 1999
increased 11.8% compared with 1998 and 8.2% in 1998 compared with 1997. Non-U.S.
revenues increased 25.0% compared with 1998 driven by sales in the Asia/Pacific
and the Europe/Middle East/Africa regions. Non-U.S. revenues increased 10.7% in
1998 compared with 1997 due to growth in all non-U.S. regions, led by the
Europe/Middle East/Africa region. Non-U.S. revenues represented 43.6% of sales
compared with 40.8% in 1998 and 40.3% in 1997.
Revenues in 1999 from sales of OTHER AND CORPORATE increased $642 million
compared with 1998, primarily due to the consolidation of the businesses
regained from the PCC venture. On October 22, 1998, Lucent and Philips announced
they would end their PCC venture. The venture was terminated in late 1998. The
results of operations and net assets of the remaining businesses Lucent
previously contributed to PCC had been consolidated as of October 1, 1998. The
revenues are included in Other and Corporate. In December 1998, Lucent sold
certain assets of the wireless handset portion of the remaining businesses to
Motorola, Inc. Lucent is continuing to look for opportunities to sell the
remaining consumer products businesses. Revenues for 1998 decreased 92.0%, or
$1,325 million, compared with 1997. The reduction in revenues was primarily due
to Lucent's contribution of its Consumer Products business in exchange for 40%
ownership of PCC in October 1997. In addition, the sale of Lucent's ATS and CMS
businesses contributed to the decrease in Other and Corporate.
(R) Registered trademark of Lucent
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
COSTS AND GROSS MARGIN
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C>
Costs $19,688 $16,715 $15,318
Gross margin $18,615 $15,091 $12,293
Gross margin % 48.6% 47.4% 44.5%
</TABLE>
Total costs in 1999 increased $2,973 million, or 17.8%, compared with 1998, and
$1,397 million, or 9.1%, in 1998 compared with 1997 due to the increase in sales
volume. Gross margin percentage increased 1.2 percentage points from 1998. The
increase in gross margin percentage for the year was due to a more favorable mix
of products. Gross margin percentage increased 2.9 percentage points in 1998
from 1997 due to an overall favorable mix of higher margin products and services
sales.
OPERATING EXPENSES - SG&A
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Selling, general and administrative ("SG&A") $ 8,417 $ 6,867 $ 6,254
As a percentage of revenues 22.0% 21.6% 22.7%
As a percentage of revenues excluding amortization
of goodwill and existing technology 20.9% 21.1% 22.5%
</TABLE>
SG&A expenses increased $1,550 million, or 22.6%, and increased 0.4 percentage
points as a percentage of revenues comparing 1999 with 1998 and increased $613
million, or 9.8%, and decreased 1.1 percentage points as a percentage of
revenues comparing 1998 with 1997. The dollar increases are attributable to
higher sales volume, investment in growth initiatives, and increased
amortization of goodwill and existing technology. In addition, the 1998 increase
reflects the implementation of SAP, an integrated software platform.
Amortization expense associated with goodwill and existing technology was $394
million, $149 million and $32 million for the years ended September 30, 1999,
1998, and 1997, respectively. The 1999 increase largely relates to the write-off
of Livingston goodwill and existing technology. For further detail see
IN-PROCESS RESEARCH AND DEVELOPMENT below. The 1998 increase relates to
increased business acquisition activity in 1998.
In addition, 1999 includes a $118 million reversal of 1995 business
restructuring charges compared with $66 million in 1998 and $174 million in
1997. The 1998 period also includes an $18 million reversal of merger-related
costs associated with the acquisition of Cascade.
OPERATING EXPENSES - R&D
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(Dollars in Millions)
<S> <C> <C> <C>
Research and development ("R&D") $4,510 $3,903 $3,185
As a percentage of revenues 11.8% 12.3% 11.5%
Purchased in-process research and
development $ 282 $1,683 $1,255
</TABLE>
R&D expenses in 1999 increased $607 million, or 15.6%, and decreased 0.5
percentage points as a percentage of revenues compared with 1998, and increased
$718 million, or 22.5%, and increased 0.8 percentage points in 1998 as a
percentage of revenues compared with 1997. The dollar increases were primarily
due to increased expenditures in support of wireless, data networking, optical
networking, switching and microelectronic products. The 1998 increase also
reflected increased expenditures in support of software development and sales.
The 1999 decrease in R&D as a percentage of revenues includes more custom
contract work that is recorded in Costs as opposed to R&D.
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Purchased in-process research and development expenses for 1999 reflect charges
associated with the acquisitions of Stratus, Quadritek, Sybarus, WaveAccess and
Enable, compared with 1998 expenses associated with the acquisitions of Stratus,
JNA, LANNET, MassMedia, SDX, Optimay, Yurie, Prominet and Livingston and with
1997 expenses associated with the acquisitions of Octel, InterCon, Sahara and
Agile Networks, Inc.
In 1999, $24 million of in-process research and development charges related to
the acquisition of Stratus by Ascend were reversed. Since the proceeds received
by Ascend in the divestiture of the non-telecommunications business units of
Stratus exceeded the carrying value of the assets held for sale, a portion of
the original charge for purchased in-process research and development was
reversed, reducing the amount of the purchase price allocated to non-current
assets on a pro-rata basis. The Stratus acquisition is reported in the 1999 and
1998 fiscal years as a result of the merger with Ascend, which had a different
year-end than Lucent.
OTHER INCOME-NET, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(Dollars in Millions)
<S> <C> <C> <C>
Other income-net $ 443 $ 128 $ 97
Interest expense $ 406 $ 254 $ 238
Provision for income taxes $1,985 $1,477 $1,009
Effective income tax rate 36.5% 58.8% 69.2%
Adjusted income tax rate * 33.9% 35.3% 36.8%
</TABLE>
* excludes non-tax deductible purchased in-process research and development
expenses and merger-related costs
Other income - net in 1999 increased $315 million compared with 1998. This
increase was primarily due to the $274 million gain on the sale of an equity
investment in Juniper Networks and lower net equity losses in 1999, partially
offset by the $149 million gain on the sale of the Company's ATS business in
1998. For 1998, the increase was $31 million compared with 1997. This increase
was primarily due to gains recorded on the sale of certain business operations,
including the gain on ATS. The 1998 gain was partially offset by higher net
losses associated with Lucent's equity investments, primarily from the PCC
investment. Also included in Other income - net for 1998 is a charge of $110
million related to a write-down associated with Lucent's investment in the PCC
venture. This charge was offset by one-time gains of $103 million primarily
related to the sale of an investment and the sale of certain business operations
including Bell Labs Design Automation Group.
Interest expense for 1999 increased $152 million compared with 1998 and $16
million for 1998 compared with 1997. The increases in interest expense are due
to higher debt levels in each comparable period.
The effective income tax rates for 1998 and 1997 exceed the U.S. federal
statutory income tax rates primarily due to the write-offs of purchased
in-process research and development costs and merger-related expenses that are
not deductible for tax purposes. Excluding the impact of non-tax deductible
purchased in-process research and development expenses and certain
merger-related costs, the effective income tax rate decreased 1.4 percentage
points in 1999 compared with 1998. This decrease was primarily due to a reduced
state effective tax rate and the tax impact of foreign activity. Excluding the
impact of the purchased in-process research and development expenses associated
with acquisitions, the effective income tax rate decreased 1.5 percentage points
in 1998 compared with 1997. This decrease was primarily due to a reduced state
effective tax rate and increased research tax credits.
The 1998 and 1997 effective income tax rates do not include a federal income tax
provision for Kenan since Kenan was an S-Corporation during those years.
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CASH FLOWS
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C>
Net cash (used in) provided by:
Operating activities $ ( 276) $ 1,860 $ 2,129
Investing activities $(1,787) $(3,100) $(3,371)
Financing activities $ 2,685 $ 849 $ 297
</TABLE>
Cash from operating activities decreased $2,136 million in 1999 compared with
1998. This decrease was primarily due to increases in receivables and
inventories as well as a decrease in payroll and benefit-related liabilities.
Cash payments of $77 million were charged against the 1995 business
restructuring reserves in 1999, compared with $176 million in 1998. As of
September 30, 1999, $18 million of reserves remained, and substantially all of
the 23,000 positions that Lucent announced it would eliminate in connection with
the 1995 restructuring charges have been eliminated.
Cash provided by operating activities decreased $269 million in 1998 compared
with 1997. This decrease in cash was largely due to the increase in receivables,
partially offset by the increase in payroll and benefit-related liabilities.
Cash payments of $176 million were charged against the December 1995 business
restructuring reserves in 1998 compared with $483 million in 1997.
The restructuring reserves were established in December 1995 after AT&T decided
to spinoff Lucent, but before the formal transfer of assets and personnel. The
restructuring plans included the exit of certain businesses as well as
consolidating and re-engineering numerous corporate and business unit
operations. The reserves were in support of Lucent's intention to focus on the
technologies and markets it viewed as critical to its long-term success as a
stand-alone entity.
Many of the 1995 restructuring projects were significant and complex
initiatives, some of which could not be completed until new enterprisewide
information technology systems, centralized back office support hubs and
provisioning centers were in place. At the time the restructuring plans were
adopted, the estimated time lines and project plans indicated that substantially
all projects would be complete within two years. Some of the restructuring
projects have taken longer than anticipated to complete due to their complicated
nature and size, and the complicated nature and size of other projects that
needed to be completed first. All projects have been substantially completed as
of September 30, 1999.
Cash used in investing activities decreased $1,313 million in 1999 compared with
1998, primarily due to increased sales of investment securities and a reduction
in cash used for acquisitions, partially offset by increased capital
expenditures.
Cash used in investing activities decreased $271 million in 1998 compared with
1997, primarily due to a decrease in cash used for acquisitions as well as an
increase in proceeds from sales of investment securities, partially offset by an
increase in cash used to purchase investment securities. In 1998, cash was used
in the acquisitions of Yurie, Optimay, SDX, LANNET and JNA. The acquisitions of
Livingston, Stratus and Prominet in 1998 were completed through the issuance of
stock and options and did not require the use of cash. The use of cash in 1998
was partially offset by proceeds from the sale of ATS and $269 million of cash
acquired as part of the acquisition of Stratus. In 1997, Lucent acquired Octel,
InterCon, Sahara and Agile and disposed of its interconnect products and CMS
businesses. The 1997 acquisition of Sahara was completed through the issuance of
stock and options and did not require the use of cash.
Capital expenditures were $2,215 million, $1,791 million and $1,744 million for
1999, 1998, and 1997, respectively. Capital expenditures relate to expenditures
for equipment and facilities used in manufacturing and research and development,
including expansion of manufacturing capacity, and expenditures for cost
reduction efforts and non-U.S. growth.
Cash provided by financing activities increased $1,836 million in 1999 compared
with 1998. This increase was primarily due to increased issuances of long-term
debt. Cash provided by financing activities increased $552 million in 1998
compared with 1997. The increase was due to increased issuances of long-term
debt and common stock when compared with the prior year.
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
<TABLE>
<CAPTION>
1999 1998
------- -------
(Dollars in Millions)
<S> <C> <C>
Total assets $38,775 $29,363
Total liabilities $25,191 $21,654
Working capital $10,153 $ 4,899
Debt to total capital (debt plus equity) 34.1% 37.6%
Inventory turnover ratio 4.5x 5.6x
Average days outstanding - receivables 85 days 71 days
</TABLE>
Total assets as of September 30, 1999, increased $9,412 million, or 32.1%, from
September 30, 1998. This increase was largely due to increases in cash and cash
equivalents, receivables, prepaid pension costs, inventories and other current
assets of $662 million, $3,033 million, $2,421 million, $1,769 million and
$1,031 respectively. Cash increased primarily due to the securitization of
certain customer receivables. The increase in receivables reflects higher sales
volume and a higher percentage of sales from outside the United States. Prepaid
pension costs increased due to the change in accounting for pensions. The
increase in inventories resulted from the need to meet current and anticipated
sales commitments to customers. The increase in other current assets is largely
due to increases in notes receivable and prepaid expenses.
Total liabilities increased $3,537 million, or 16.3%, from September 30, 1998.
This increase was due primarily to higher short- and long-term debt levels,
including debt recorded in connection with the sale of certain customer
receivables with recourse.
Working capital, defined as current assets less current liabilities, increased
$5,254 million from September 30, 1998, primarily resulting from the increase in
receivables and inventories, partially offset by higher short-term debt and
accounts payable.
Debt to total capital decreased 350 basis points due to the increase in
shareowners' equity, partially offset by the increase in total debt.
For the year ended September 30, 1999, Lucent's inventory turnover ratio
decreased 1.1 times compared with the year ended September 30, 1998. The
decrease includes the build-up of inventory to meet current and anticipated
sales to customers. Inventory turnover ratio is calculated by dividing cost of
sales for the three months ended September 30 by the fourth quarter average
ending inventory balance, using a two-point average.
Average days outstanding - receivables were up 14 days in 1999 compared with
1998 reflecting the growth in Lucent's sales outside the United States, which
typically carry longer payment terms. Average days outstanding is calculated by
dividing the fourth quarter average ending receivables balance, using a
two-point average, by total revenues for the three months ended September 30.
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 1999 and which is expected to continue in the near
term.
LIQUIDITY AND CAPITAL RESOURCES
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, 1999, Lucent maintained approximately $4.7 billion in credit
facilities, of which a portion is used to support Lucent's commercial paper
program. At September 30, 1999, approximately $4.4 billion was unused.
Future financings will be arranged to meet Lucent's requirements with the
timing, amount and form of issue depending on the 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, short- and long-term debt financings and receivable securitizations
will be adequate to satisfy its future cash requirements, although there can be
no assurance that this will be the case.
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Network operators worldwide are requiring their suppliers to arrange or provide
long-term financing for them as a condition of obtaining or bidding on
infrastructure projects. These projects may require financing in amounts ranging
from modest sums to more than a billion dollars. Lucent has increasingly
provided or arranged long-term financing for customers. As market conditions
permit, Lucent's intention is to lay off these long-term financing arrangements,
which may include both commitments and drawn-down borrowings, to financial
institutions and other investors. This enables Lucent to reduce the amount of
its commitments and free up additional financing capacity.
As of September 30, 1999, Lucent had made commitments or entered into agreements
to extend credit to certain network operators, including personal communications
service and wireless operators, for an aggregate of approximately $7.1 billion.
As of September 30, 1999, approximately $1.6 billion had been advanced and was
outstanding under these agreements.
In September 1999, a subsidiary of Lucent sold approximately $625 million of
accounts receivable to a non-consolidated qualified special purpose entity
("QSPE") which, in turn, sold an undivided ownership interest in these
receivables to entities managed by an unaffiliated financial institution.
Additionally, Lucent transferred a designated pool of qualified accounts
receivable of approximately $700 million to the QSPE as collateral for the
initial sale. Lucent's retained interest in the QSPE's designated pool of
qualified accounts receivable has been included in Receivables. Lucent will
continue to service, administer and collect the receivables on behalf of the
purchaser. The impact of the above transaction reduced Receivables and increased
cash flows from operating activities in the Consolidated Statements of Cash
Flows by $600 million.
As part of the revenue recognition process, Lucent assesses the collectibility
of its receivables relating to contracts with customers for which Lucent
provides financing.
In addition to the above arrangements, Lucent will continue to provide or commit
to financing where appropriate for its business. The ability of Lucent to
arrange or provide financing for its customers will depend on a number of
factors, including Lucent's capital structure and level of available credit, and
its continued ability to lay off commitments and drawn-down borrowings on
acceptable terms. Lucent believes that it will be able to access the capital
markets on terms and in amounts that will be satisfactory to Lucent 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.
IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the acquisitions of Octel, Livingston and Yurie, Lucent
allocated a significant portion of the purchase price to purchased in-process
research and development. In addition, in connection with the purchase of
Stratus, Lucent allocated $267 million to purchased in-process research and
development. As part of the process of analyzing each of these acquisitions,
Lucent made a decision to buy technology that had not yet been commercialized
rather than develop the technology internally. Lucent based this decision on
factors such as the amount of time it would take to bring the technology to
market. Lucent also considered Bell Labs' resource allocation and its progress
on comparable technology, if any. Lucent management expects to use the same
decision process in the future.
Lucent estimated the fair value of in-process research and development for each
of the above acquisitions using an income approach. This involved estimating the
fair value of the in-process research and development using the present value of
the estimated after-tax cash flows expected to be generated by the purchased
in-process research and development, using risk-adjusted discount rates and
revenue forecasts as appropriate. The selection of the discount rate was based
on consideration of Lucent's weighted average cost of capital, as well as other
factors, including the useful life of each technology, profitability levels of
each technology, the uncertainty of technology advances that were known at the
time, and the stage of completion of each technology. Lucent believes that the
estimated in-process research and development amounts so determined represent
fair value and do not exceed the amount a third party would pay for the
projects.
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Where appropriate, Lucent deducted an amount reflecting the contribution of the
core technology from the anticipated cash flows from an in-process research and
development project. At the date of acquisition, the in-process research and
development projects had not yet reached technological feasibility and had no
alternative future uses. Accordingly, the value allocated to these projects was
capitalized and immediately expensed at acquisition. If the projects are not
successful or completed in a timely manner, management's product pricing and
growth rates may not be achieved and Lucent may not realize the financial
benefits expected from the projects.
Set forth below are descriptions of certain acquired in-process research and
development projects, including their status at the end of fiscal 1999.
Octel
On September 29, 1997, Lucent completed the purchase of Octel for $1,819
million. Octel was a public company involved in the development of voice, fax
and electronic messaging technologies. The allocation of $945 million to
in-process research and development represented its estimated fair value using
the methodology described above. The $945 million was allocated to the following
projects: Unified Messenger ($245 million), Phoenix/Intelligent Messaging
Architecture ("IMA") ($540 million), Octel Network Services ("ONS") Projects
($111 million) and three other projects ($49 million in total).
Unified Messenger - Revenues attributable to Unified Messenger were estimated to
be $5 million in 1998 and $46 million in 1999. Revenue was expected to peak in
2004 and decline thereafter through the end of the product's life (2008) as new
product technologies were expected to be introduced by Lucent. Revenue growth
was expected to decrease from 179% in 2000 to 20% in 2004, and be negative for
the remainder of the projection period. At the acquisition date, costs to
complete the research and development efforts related to the initial release of
the project were expected to be $3 million.
Phoenix/IMA - Revenues attributable to Phoenix/IMA were estimated to be $94
million in 1998 and $508 million in 1999. Revenue was expected to peak in 2004
and decline thereafter through the end of the product's life (2010) as new
product technologies were expected to be introduced by Lucent. Revenue growth
was expected to decrease from 59% in 2000 to 10% in 2004, and be negative for
the remainder of the projection period. At the acquisition date, costs to
complete the research and development efforts related to the Phoenix/IMA project
were expected to be $49 million.
ONS Projects - Revenues attributable to the ONS Projects were estimated to be
$18 million in 1998 and $93 million in 1999. Revenue was expected to peak in
2003 and decline thereafter through the end of the product's life (2006) as new
product technologies were expected to be introduced by Lucent. Revenue growth
was expected to decrease from 52% in 2000 to 10% in 2003, and be negative for
the remainder of the projection period. At the acquisition date, costs to
complete the research and development efforts related to the ONS projects were
expected to be less than $1 million.
An average risk-adjusted discount rate of 20% was utilized to discount projected
cash flows.
There have not been any significant departures from the planned efforts for
Unified Messenger. The Phoenix and ONS efforts have been completed. The IMA
research and development effort has been delayed twice as a result of the
inclusion of new capability specifications, first, in January 1998 to include
unified messaging capabilities and, second, in September 1998 to include
significant new hardware platform capabilities and incorporate Internet software
capabilities. This enhanced version reached technological feasibility, a beta
stage, in August 1999, and is scheduled for shipment in December 1999. Since
intermediate milestones for IMA have been met on schedule and Phoenix will
continue to earn revenues through completion of IMA development, the completion
and exploitation of this project and current market conditions make it
reasonable that estimated revenue and cash flow levels will be achieved,
although on a delayed basis. The IMA version enhancements and the rescheduled
market introduction are not expected to impact the originally forecasted market
penetration rates.
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Livingston
On December 15, 1997, Lucent completed the purchase of Livingston for $610
million. Livingston was involved in the development of equipment used by
Internet service providers to connect subscribers to the Internet. The
allocation to in-process research and development of $427 million represented
its estimated fair value using the methodology described above. Approximately
$421 million was allocated to the PortMaster4, a remote access concentrator
targeted at large independent telecommunication companies, cable television
companies, and Internet service providers, and the remaining $6 million was
allocated to another project.
Revenues attributable to the PortMaster4 were estimated to be $48 million in
1998 and $261 million in 1999. Revenue was expected to peak in 2002 and decline
thereafter through the end of the product's life (2007) as new product
technologies were expected to be introduced by Lucent. Revenue growth was
expected to decrease from 69% in 2000 to 11% in 2002, and be negative for the
remainder of the projection period. At the acquisition date, costs to complete
the research and development efforts related to the PortMaster4 were expected to
be $5 million.
A risk adjusted discount rate of 20% was utilized to discount projected cash
flows.
Livingston's Portmaster4 was commercially released in July 1998 and started
generating revenues immediately after commercial launch. As a result of the
merger between Lucent and Ascend, the decision was made to discontinue future
development and sales of the PortMaster4 platform in order to maximize research
and development efficiency by concentrating on the MAX TNT platform. Instead of
having two platforms to address the full spectrum of access switching products,
Lucent will be able to have one platform that can address a broad spectrum of
applications while minimizing duplicative research and development.
Yurie
On May 29, 1998, Lucent completed the purchase of Yurie for $1,056 million.
Yurie was involved in the development of ATM access solutions. The allocation to
in-process research and development of $620 million represented its estimated
fair value using the methodology described above. The $620 million was allocated
to the following projects: (i) LDR 50/200/250 ($609 million) and (ii) LDR 4 ($11
million).
Revenues attributable to the LDR 50/200/250 were estimated to be $132 million in
1999. Revenue was expected to peak in 2000 and decline thereafter through the
end of the product's life (2009) as new product technologies were expected to be
introduced by Lucent. Revenue growth was expected to decrease from 84% in 2000
to 9% in 2007, and be negative for the remainder of the projection period. Costs
to complete the research and development efforts related to the LDR 50/200/250
were expected to be $29 million at the acquisition date.
A risk-adjusted discount rate of 20% was utilized to discount projected cash
flows.
The LDR 50, LDR 200 and LDR 250 were all completed on time or have met all of
their scheduled milestones. Some of the product releases have been renamed.
Stratus
On October 20, 1998, Ascend completed the purchase of Stratus for $917 million.
Stratus was a manufacturer of fault-tolerant computer systems. The allocation to
in-process research and development of $267 million represented its estimated
fair value using the methodology described above. The primary projects that made
up the in-process research and development were as follows: HP-UX, Continuum
1248, Continuum 448, M708, SPHINX, HARMONY, LNP, CORE IN, Personal Number
Portability (PN), Signaling System 7 (SS7) Gateway and Internet Gateway.
Revenues attributable to the projects were estimated to be $84 million in 1999
and $345 million in 2000. Revenue was expected to peak in 2002 and decline
thereafter through the end of the product's life (2009) as new product
technologies were expected to be introduced by Lucent. Revenue growth was
expected to decrease from 310% in 2000 to 6% in 2002, and be negative for the
remainder of the projection period. At the acquisition date, costs to complete
the research and development efforts related to the projects were expected to be
$48 million.
A risk-adjusted discount rate of 35% was utilized to discount projected cash
flows.
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The actual results to date have been consistent, in all material respects, with
our assumptions at the time of the acquisition, except as noted below. During
fiscal 1999 the product development relating to the HARMONY, SPHINX, and
Continuum 448 projects were discontinued due to management's reprioritization of
product direction. In addition, it was decided that the development relating to
the Continuum 1248 will cease by the quarter ending December 31, 1999.
Consequently, Lucent will not realize the forecasted revenues from these
projects.
RISK MANAGEMENT
Lucent is exposed to market risk from changes in foreign currency exchange rates
and interest rates that 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. Lucent uses derivative financial
instruments as risk management tools and not 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 exchange contracts, and to a lesser extent foreign
currency options, to reduce significant exposure to the risk that the eventual
net cash inflows and outflows resulting from the sale of products to non-U.S.
customers and purchases from non-U.S. suppliers will be adversely affected by
changes in exchange rates. Foreign currency exchange contracts are designated
for recorded, firmly committed or anticipated 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, 1999, Lucent's primary net
foreign currency market exposures included Canadian dollars and Brazilian reals.
As of September 30, 1998, Lucent's primary net foreign currency market exposures
included German marks and British pounds. In 1999, Lucent revised its hedging
policy regarding anticipated purchase and sales transaction exposures. Prior to
the revision, the Company hedged 100% of all recorded, firmly committed and
anticipated transactions with amounts over $1 million. Beginning on August 31,
1999, Lucent's policy is to hedge 50% of the first six months of a 12-month
anticipated exposure forecast, with the hedging of the remainder of the forecast
to be evaluated on an ongoing basis. This applies to all transactions with value
equal to the lesser of $5 million or 10% of the relevant subsidiary's 12-month
trailing net revenues. These revisions provide greater risk management
flexibility in cases where hedging costs may be excessive relative to the actual
risk and when there is greater cash flow uncertainty. Management does not expect
that this revised policy will have any material impact on the results of
operations or financial condition of the Company. In addition, management does
not foresee or expect any significant changes in foreign currency exposure in
the near future.
The fair value of foreign currency exchange contracts is sensitive to changes in
foreign currency exchange rates. As of September 30, 1999 and 1998, a 10%
appreciation in foreign currency exchange rates from the prevailing market rates
would increase the related net unrealized gain by approximately $41 million and
$11 million, respectively. Conversely, a 10% depreciation in these currencies
from the prevailing market rates would decrease the related net unrealized gain
by approximately $55 million and $18 million, as of September 30, 1999 and 1998,
respectively. 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.
While Lucent hedges certain foreign currency transactions, the decline in value
of non-U.S. dollar currencies, may, if not reversed, adversely affect Lucent's
ability to contract for product sales in U.S. dollars because Lucent's products
may become more expensive to purchase in U.S. dollars for local customers doing
business in the countries of the affected currencies.
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The fair value of Lucent's fixed rate long-term debt is sensitive to changes in
interest rates. Interest rate changes would result in gains/losses in the market
value of this debt due to differences between the market interest rates and
rates at the inception of the debt obligation. Based on a hypothetical immediate
150 basis point increase in interest rates at September 30, 1999 and 1998, the
market value of Lucent's fixed rate long-term debt would be impacted by a net
decrease of approximately $360 million and $209 million, respectively.
Conversely, a 150 basis point decrease in interest rates would result in a net
increase in the market value of Lucent's fixed rate long-term debt outstanding
at September 30, 1999 and 1998 of approximately $456 million and $247 million,
respectively.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Results of Operations and Financial
Condition and other sections of this report contain forward-looking statements
that are based on current expectations, estimates, forecasts and projections
about the industries in which Lucent operates, management's beliefs and
assumptions made by management. In addition, other written or oral statements
that 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") that 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 products and services competition by
non-U.S. and U.S. 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 and services; the achievement of lower costs and expenses; customer
demand for the Company's products and services; the ability to successfully
integrate the operations and business of acquired companies; readiness for Year
2000; the impact of Year 2000 on customer spending habits; U.S. and non-U.S.
governmental and public policy changes that may affect the level of new
investments and purchases made by customers; changes in environmental and other
U.S. and non-U.S. governmental regulations; protection and validity of patent
and other intellectual property rights; reliance on large customers;
technological, implementation and cost/financial risks in the increasing use of
large, multiyear 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 U.S. and non-U.S. economic conditions, including interest
rate and currency exchange rate fluctuations and other Future Factors.
Competition
See discussion above under KEY BUSINESS CHALLENGES.
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, 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 non-U.S. and
U.S. standard-setting bodies.
Reliance on Major Customers
See discussion above under KEY BUSINESS CHALLENGES.
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Readiness for Year 2000
Lucent is in the final phase of a major effort to minimize the impact of the
Year 2000 date change on Lucent's products, information technology systems,
facilities and production infrastructure.
The Year 2000 challenge is a priority within Lucent at every level of the
Company. Primary Year 2000 preparedness responsibility rests with program
offices which have been established within each of Lucent's product groups and
corporate centers. A corporatewide Lucent Year 2000 Program Office ("LYPO")
monitors and reports on the progress of these offices. Each program office has a
core of full-time individuals augmented by a much larger group who have been
assigned specific Year 2000 responsibilities in addition to their regular
assignments. Further, Lucent has engaged third parties to assist in its
readiness efforts in certain cases. LYPO has established a methodology to
measure, track and report Year 2000 readiness status consisting of five steps:
inventory; assessment; remediation; testing; and deployment. In addition, LYPO
tracks and reports on the development and deployment of Year 2000 contingency
plans.
Lucent has completed programs to make its commercially available products Year
2000 ready and has developed evolution strategies for customers who own non-Year
2000 ready Lucent products. All of the upgrades and products needed to support
customer migration are generally available.
Lucent is completing its extensive efforts to alert customers who have non-Year
2000 ready products, including direct mailings, phone contacts and participation
in user and industry groups. Lucent also has a Year 2000 Web site
www.lucent.com/y2k, which provides Year 2000 product information. Lucent
continues to cooperate in the Year 2000 information sharing efforts of the
Federal Communications Commission and other governmental bodies.
Lucent believes it has sufficient resources to provide timely support to its
customers who require product migrations or upgrades. However, because this
effort is heavily dependent on customer cooperation, Lucent monitors customer
response and takes steps to encourage customer responsiveness, as necessary.
With very few exceptions, Lucent has completed the five steps of its Year 2000
readiness program with respect to its factories, information systems and
facilities. LYPO has developed a formal "exceptions" tracking process to approve
and track a small number of cases in which factors such as third-party
dependencies prevented project completion by Lucent's internal readiness target
date of June 30, 1999. Virtually all of the exceptions identified have since
been closed. In addition, Lucent has implemented various change management
mechanisms to allow the Company to maintain Year 2000 readiness even as systems
are modified or replaced to address non-Year 2000 business needs.
To ensure the continued delivery of third-party products and services, Lucent's
procurement organization has analyzed Lucent's supplier base and has sent
surveys to approximately 5,000 suppliers. To supplement this effort, Lucent has
conducted more detailed readiness reviews of the Year 2000 status of the
suppliers ranked as most critical based on the nature of their relationship with
Lucent, the product/service provided and/or the content of their survey
responses. Over 90% of Lucent's critical suppliers have reported completion of
their Year 2000 readiness efforts. However, Lucent continues to monitor the Year
2000 status of all of its critical suppliers to minimize its Year 2000 supply
chain risk and is developing appropriate contingency responses as the risks
become clearer.
Lucent has committed considerable resources to Year 2000 contingency planning
throughout the enterprise. These plans focus on risks posed by the Year 2000
date change, as well as other sensitive dates such as February 29, 2000.
Lucent's plans are designed to mitigate the impact of Year 2000 failures, as
well as providing emergency response mechanisms and supporting the prompt
resumption of regular operations. Lucent is currently in the process of
completing the preparations necessary to support the implementation of its
contingency plans. In addition, the plans are updated as new information is
obtained, the risks posed by external dependencies become clearer and customer
support needs become more focused.
A network of corporate center and business group communications centers, staffed
on a continuous basis during the period before and after the Year 2000 date
transition, will support Lucent's contingency planning efforts. These
communications centers will facilitate the handling of Year 2000 issues that may
arise. An initial test of the Lucent communications center network was conducted
in connection with the September 9, 1999, date change. The September 9, 1999,
date change passed with no reported impacts on Lucent's business.
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The risk to Lucent resulting from the failure of third parties in the public and
private sectors to attain Year 2000 readiness is the same as other firms in
Lucent's industry and other business enterprises generally. The following are
representative of the types of risks that could result in the event of one or
more major failures of Lucent's information systems, factories or facilities to
be Year 2000 ready, or similar major failures by one or more major third-party
suppliers to Lucent: (1) information systems--could include interruptions or
disruptions of business and transaction processing such as customer billing,
payroll, accounts payable and other operating and information processes, until
systems can be remedied or replaced; (2) factories and facilities--could include
interruptions or disruptions of manufacturing processes and facilities with
delays in delivery of products, until non-compliant conditions or components can
be remedied or replaced; and (3) major suppliers to Lucent--could include
interruptions or disruptions of the supply of raw materials, supplies and Year
2000 ready components, that could cause interruptions or disruptions of
manufacturing and delays in delivery of products, until the third-party supplier
remedied the problem or contingency measures were implemented. Risks of major
failures of Lucent's principal products could include adverse functional impacts
experienced by customers, the costs and resources for Lucent to remedy problems
or replace products where Lucent is obligated or undertakes to take such action,
and delays in delivery of new products.
Lucent believes it is taking the necessary steps to resolve Year 2000 issues;
however, given the possible consequences of failure to resolve significant Year
2000 issues, there can be no assurance that any one or more such failures would
not have a material adverse effect on Lucent. Lucent estimates that the costs of
efforts to prepare for Year 2000 from calendar year 1997 through 2000 is about
$560 million, of which an estimated $515 million has been spent as of September
30, 1999. Lucent has been able to reprioritize work projects to largely address
Year 2000 readiness needs within its existing organizations. As a result, most
of these costs represent costs that would have been incurred in any event. These
amounts cover costs of the Year 2000 readiness work for inventory, assessment,
remediation, testing, deployment and contingency planning, including fees and
charges of contractors for outsourced work and consultant fees. Costs for
previously contemplated updates and replacements of Lucent's internal systems
and information systems infrastructure have been excluded without attempting to
establish whether the timing of non-Year 2000 replacement or upgrading was
accelerated.
While the Year 2000 cost estimates above include 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.
The actual outcomes and results could be affected by Future Factors including,
but not limited to, the continued availability of skilled personnel, cost
control, the ability to locate and remediate software code problems, critical
suppliers and subcontractors meeting their commitments to be Year 2000 ready and
provide Year 2000 ready products, and timely actions by customers.
European Monetary Union - Euro
On January 1, 1999, 11 member countries of the European Union established fixed
conversion rates between their existing sovereign currencies, and adopted the
Euro as their new common legal currency. The Euro is currently trading on
currency exchanges and the legacy currencies will remain legal tender in the
participating countries for a transition period between January 1, 1999, and
January 1, 2002. During the transition period, cash-less payments can be made in
the Euro, and parties can elect to pay for goods and services and transact
business using either the Euro or a legacy currency. Between January 1, 2002,
and July 1, 2002, the participating countries will introduce Euro notes and
coins and withdraw all legacy currencies so that they will no longer be
available.
Lucent has in place a joint European-United States team representing affected
functions within the Company. This team is evaluating Euro related issues
affecting the Company that include its pricing/marketing strategy, conversion of
information technology systems, existing contracts and currency risk and risk
management in the participating countries. The Euro conversion may affect
cross-border competition by creating cross-border price transparency.
Lucent will continue to evaluate issues involving introduction of the Euro as
further accounting, tax and governmental legal and regulatory guidance is
available. Based on current information and Lucent's current assessment, Lucent
does not expect that the Euro conversion will have a material adverse effect on
its business or financial condition.
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Employee Relations
On September 30, 1999, Lucent employed approximately 153,000 persons, including
76.5% located in the United States. Of these domestic employees, approximately
40% are represented by unions, primarily the Communications Workers of America
("CWA") and the International Brotherhood of Electrical Workers ("IBEW"). Lucent
entered into new five-year agreements with the CWA and IBEW expiring May 31,
2003.
Multiyear Contracts
Lucent has significant contracts for the sale of infrastructure systems to
network operators that extend over multiyear periods, and expects to enter into
similar contracts in the future, with uncertainties affecting recognition of
revenues, stringent acceptance criteria, implementation of new technologies and
possible significant initial cost overruns and losses. See also discussion above
under LIQUIDITY AND CAPITAL RESOURCES and KEY BUSINESS CHALLENGES.
Seasonality
See discussion above under KEY BUSINESS CHALLENGES.
Future Capital Requirements
See discussion above under LIQUIDITY AND CAPITAL RESOURCES.
Non-U.S. Growth, Foreign Exchange and Interest Rates
Lucent intends to continue to pursue growth opportunities in non-U.S. markets.
In many non-U.S. markets, long-standing relationships between potential
customers of Lucent and their local providers, and protective regulations,
including local content requirements and type approvals, create barriers to
entry. In addition, pursuit of such non-U.S. 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 non-U.S. 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 non-U.S. financial markets and economies, and of non-U.S.
financial institutions, could adversely affect demand from customers in the
affected countries.
See discussion above under RISK MANAGEMENT with respect to foreign exchange and
interest rates. A significant change in the value of the U.S. dollar against the
currency of one or more countries where Lucent sells products to local customers
or makes purchases from local suppliers may materially adversely affect Lucent's
results. Lucent 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.
Legal Proceedings and Environmental Matters
See discussion in Note 14 to the Consolidated Financial Statements.
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Five-Year Summary of Selected Financial Data (Unaudited)
Lucent Technologies Inc. and Subsidiaries
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Year Ended
Year Ended Nine Months December
September 30, Ended 31,
(Twelve Months) September 30, (Twelve
Months)
---------------------------------------------- --------------------- ---------
1999 1998 1997 1996 1996 1995 1995
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS (1)
Revenues $ 38,303 $ 31,806 $ 27,611 $ 24,215 $ 16,639 $ 14,247 $ 21,718
Gross margin 18,615 15,091 12,293 9,506 7,085 6,315 8,669
Depreciation and
amortization expense 1,806 1,411 1,499 1,350 957 1,112 1,504
Operating income(loss) 5,406 2,638 1,599 (656) 734 503 (921)
Income(loss) before
cumulative effect of
accounting change 3,458 1,035 449 (604) 382 197 (813)
Cumulative effect of
accounting change 1,308 - - - - - -
Net income(loss) 4,766 1,035 449 (604) 382 197 (813)
Earnings(loss) per common
share - basic (2)(3):
Income(loss) before
cumulative effect of
accounting change 1.14 0.35 0.16 (0.23) 0.14 0.08 (0.34)
Cumulative effect of
accounting change 0.43 - - - - - -
Net income(loss) 1.57 0.35 0.16 (0.23) 0.14 0.08 (0.34)
Earnings(loss) per common
share - diluted (2)(3):
Income(loss) before
cumulative effect of
accounting change 1.10 0.34 0.15 (0.23) 0.14 0.08 (0.34)
Cumulative effect of
accounting change 0.42 - - - - - -
Net income(loss) 1.52 0.34 0.15 (0.23) 0.14 0.08 (0.34)
Earnings(loss) per common
share - pro forma(3)(4) n/a n/a n/a (0.21) 0.13 0.07 (0.28)
Dividends per common share(3) 0.08 0.0775 0.0563 0.0375 0.0375 - -
FINANCIAL POSITION
Total assets $ 38,775 $ 29,363 $ 25,006 $ 23,572 $ 23,572 $ 18,714 20,217
Working capital 10,153 4,899(5) 2,529 2,728 2,728 523 (50)
Total debt 7,026 4,640 4,203 3,997 3,997 4,196 4,018
Shareowners' equity 13,584 7,709 4,379 3,462 3,462 3,198 1,917
OTHER INFORMATION
Selling, general and administrative
expenses as a
percentage of revenues 22.0% 21.6% 22.7% 31.0% 26.6% 28.8% 33.0%
Research and development expenses
as a percentage
of revenues 11.8 12.3 11.5 10.9 11.5 12.0 11.2
Gross margin percentage 48.6 47.4 44.5 39.3 42.6 44.3 39.9
Ratio of total debt
to total capital
(debt plus equity) 34.1 37.6 49.0 53.6 53.6 56.7 67.7
Capital expenditures $ 2,215 $ 1,791 $ 1,744 $ 1,507 $ 1,002 $ 803 $ 1,302
</TABLE>
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(1) 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.
(2) The calculation of earnings per share on a historical basis includes the
retroactive recognition to January 1, 1995, of the 2,098,499,576 shares
(524,624,894 shares on a pre-split basis) owned by AT&T on April 10, 1996.
(3) All per share data has been restated to reflect the two-for-one splits of
Lucent's common stock that became effective on April 1, 1998, and April 1,
1999.
(4) The calculation of earnings (loss) per share on a pro forma basis assumes
that all 2,896,214,012 shares outstanding on April 10, 1996, were
outstanding since January 1, 1995, and gives no effect to the use of
proceeds from the IPO.
(5) Reflects the reclassification from debt maturing within one year to
long-term debt as a result of the November 19, 1998, sale of $500 ($495 net
of unamortized costs) of 10-year notes.
N/a Not applicable.
Pro Forma Segment Reporting Information (Unaudited)
(Dollars in millions)
The following table presents Lucent's revenues and operating income by
reportable operating segment for the years ended September 30, 1999, 1998, and
1997, and has been prepared giving effect to the mergers of Lucent with Excel
and INS under the pooling-of-interests method of accounting, on a pro forma
basis as if the mergers had occurred before Lucent's fiscal year-end.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
External Revenues
- -----------------
Service Provider Networks $ 23,815 $ 19,274 $ 15,795
Enterprise Networks 8,777 8,090 6,329
Microelectronics and Communications Technologies 5,424 4,628 4,238
Total reportable segments 38,016 31,992 26,362
Other and corporate 758 116 1,441
Total revenues $ 38,774 $ 32,108 $ 27,803
Operating Income
- ----------------
Service Provider Networks $ 4,587 $ 3,139 $ 1,543
Enterprise Networks 651 650 675
Microelectronics and Communications Technologies 944 608 549
Total reportable segments (a) 6,182 4,397 2,767
Acquisition/integration-related costs (530) (1,690) (1,439)
Goodwill and existing technology amortization (396) (149) (32)
Other and corporate 187 122 336
Operating income 5,443 2,680 1,632
Other income-- net 452 137 100
Interest expense (407) (254) (239)
Income before income taxes $ 5,488 $ 2,563 $ 1,493
</TABLE>
(a) Segment operating income excludes goodwill and existing technology
amortization, acquisition/integration-related costs, and one-time gains and
charges.
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table provides external revenue for groups of similar products and
services, on a pro forma basis as if the Excel and INS mergers had occurred
before Lucent's fiscal year-end for the years ended September 30, 1999, 1998,
and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Products and Services Revenues
Core Networking Systems (a) $17,906 $14,541 $12,621
Wireless Products 5,516 4,456 2,984
Business Communications Systems (b) 6,977 6,399 5,077
Microelectronics 2,827 2,405 2,214
NetCare Professional Services 1,083 656 374
Other (c) 4,465 3,651 4,533
Totals $38,774 $32,108 $27,803
</TABLE>
a) Core Networking Systems includes switching and access products, data
networking systems for service providers, optical networking products,
communications software and engineering services.
b) Business Communications Systems includes advanced communications products and
messaging services.
c) "Other" principally includes network products.
<PAGE> 22
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 consolidated financial statements and notes have been
prepared in conformity with generally accepted accounting principles and include
certain amounts that 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 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 accountants 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 accountants meet privately with the Audit
and Finance Committee and have access to its individual members.
Lucent engaged PricewaterhouseCoopers LLP, independent 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 the following page.
Richard A. McGinn Donald K. Peterson
Chairman and Executive Vice President and
Chief Executive Officer Chief Financial Officer
<PAGE> 23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareowners of Lucent Technologies Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and changes in shareowners' equity and of cash
flows present fairly, in all material respects, the financial position of Lucent
Technologies Inc. and its subsidiaries at September 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1999, in conformity with accounting principles
generally accepted in the United States. 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 of these statements in accordance with auditing standards generally
accepted in the United States, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
October 25, 1999
<PAGE> 24
Lucent Technologies Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended
September 30,
---------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $38,303 $31,806 $27,611
Costs 19,688 16,715 15,318
Gross margin 18,615 15,091 12,293
Operating expenses
Selling, general
and administrative 8,417 6,867 6,254
Research and development 4,510 3,903 3,185
Purchased in-process
research and development 282 1,683 1,255
Total operating expenses 13,209 12,453 10,694
Operating income 5,406 2,638 1,599
Other income - net 443 128 97
Interest expense 406 254 238
Income before income taxes 5,443 2,512 1,458
Provision for income taxes 1,985 1,477 1,009
Income before cumulative
effect of accounting change 3,458 1,035 449
Cumulative effect of accounting change
(net of income taxes of $842) 1,308 - -
Net income $ 4,766 $ 1,035 $ 449
Earnings per common share - basic:
Income before cumulative
effect of accounting change $ 1.14 $ 0.35 $ 0.16
Cumulative effect of
accounting change 0.43 - -
Net income $ 1.57 $ 0.35 $ 0.16
Earnings per common share - diluted
Income before cumulative
effect of accounting change $ 1.10 $ 0.34 $ 0.15
Cumulative effect of
accounting change 0.42 - -
Net income $ 1.52 $ 0.34 $ 0.15
Dividends per
common share $ 0.08 $0.0775 $0.0563
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 25
Lucent Technologies Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,816 $ 1,154
Receivables less allowances
of $362 in 1999 and $416 in 1998 10,438 7,405
Inventories 5,048 3,279
Contracts in process (net of progress
billings of $5,565 in 1999 and
$3,036 in 1998) 1,103 1,259
Deferred income taxes - net 1,583 1,775
Other current assets 1,943 912
Total current assets 21,931 15,784
Property, plant and equipment - net 6,847 5,693
Prepaid pension costs 6,175 3,754
Deferred income taxes - net - 761
Capitalized software development costs 470 298
Other assets 3,352 3,073
Total assets $ 38,775 $ 29,363
LIABILITIES
Accounts payable $ 2,878 $ 2,157
Payroll and benefit-related liabilities 2,300 2,592
Postretirement and postemployment
benefit liabilities 137 187
Debt maturing within one year 2,864 2,231
Other current liabilities 3,599 3,718
Total current liabilities 11,778 10,885
Postretirement and postemployment
benefit liabilities 6,305 6,380
Long-term debt 4,162 2,409
Other liabilities 2,946 1,980
Total liabilities $ 25,191 $ 21,654
Commitments and contingencies
SHAREOWNERS' EQUITY
Preferred stock - par value $1 per share
Authorized shares: 250,000,000 $ - $ -
Issued and outstanding shares: none
Common stock - par value $.01 per share
Authorized shares: 6,000,000,000
Issued and outstanding shares:
3,071,750,726 at September 30, 1999;
3,022,369,264 at September 30, 1998 31 30
Additional paid-in capital 7,731 6,589
Guaranteed ESOP obligation (33) (49)
Retained earnings 6,099 1,422
Accumulated other comprehensive
income(loss) (244) (283)
Total shareowners' equity $ 13,584 $ 7,709
Total liabilities and shareowners' equity $ 38,775 $ 29,363
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 26
Lucent Technologies Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREOWNERS' EQUITY
(Dollars in Millions)
<TABLE>
<CAPTION>
Additional Guaranteed
Preferred Common Paid-in ESOP Retained
Stock Stock Capital Obligation Earnings
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1996 - 29 3,141 (106) 421
- ------------------------------------------------------------------------------------------------------------------------------
Net Income (excluding undistributed S-Corp earnings) 416
Reclass of undistributed earnings of S-Corp 33
Foreign currency translation adjustment
Unrealized holding gains on certain investments
Minimum pension liability adjustment
Total comprehensive income
Effect of poolings 23 (18)
Dividends declared (146)
Amortization of ESOP obligation 29
Issuance of common stock 281
Tax benefit from employee stock options 88
Issuance of common stock for acquisitions 213
Conversion of common stock related to acquisitions 116
S-Corp distributions (19)
Other 27
- ------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 - 29 3,903 (77) 673
- ------------------------------------------------------------------------------------------------------------------------------
Net Income (excluding undistributed S-Corp earnings) 950
Reclass of undistributed earnings of S-Corp 85
Foreign currency translation adjustment
Unrealized holding losses on certain investments
Minimum pension liability adjustment
Total comprehensive income
Effect of poolings
Dividends declared (201)
Amortization of ESOP obligation 28
Issuance of common stock 1 645
Tax benefit from employee stock options 271
Issuance of common stock for acquisitions 1,525
Conversion of common stock related to acquisitions 186
S-Corp distributions (26)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 - 30 6,589 (49) 1,422
- ------------------------------------------------------------------------------------------------------------------------------
Net Income (excluding undistributed S-Corp earnings) 4,758
Reclass of undistributed earnings of S-Corp 8
Foreign currency translation adjustment
Unrealized holding gains on certain investments (net of tax of $235)
Reclassification adjustment (net of tax of $178)
Minimum pension liability adjustment (net of tax of $6)
Total comprehensive income
Effect of poolings 106 (26)
Dividends declared (222)
Amortization of ESOP obligation 16
Issuance of common stock 1 695
Tax benefit from employee stock options 367
Adjustment to conform pooled companies fiscal year 169
S-Corp distributions (40)
Other 6 (2)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 - 31 7,731 (33) 6,099
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Accumulated
Other Total Total
Comprehensive Shareowners' Comprehensive
Income (Loss) Equity Income
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at October 1, 1996 (23) 3,462
- ---------------------------------------------------------------------------------------------------------------
Net Income (excluding undistributed S-Corp earnings) 416
Reclass of undistributed earnings of S-Corp 33
Foreign currency translation adjustment (175) (175)
Unrealized holding gains on certain investments 40 40
Minimum pension liability adjustment 9 9
-----
Total comprehensive income 323
Effect of poolings
Dividends declared
Amortization of ESOP obligation
Issuance of common stock
Tax benefit from employee stock options
Issuance of common stock for acquisitions
Conversion of common stock related to acquisitions
S-Corp distributions
Other
- ---------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 (149) 4,379
- ---------------------------------------------------------------------------------------------------------------
Net Income (excluding undistributed S-Corp earnings) 950
Reclass of undistributed earnings of S-Corp 85
Foreign currency translation adjustment (89) (89)
Unrealized holding losses on certain investments (37) (37)
Minimum pension liability adjustment (8) (8)
-----
Total comprehensive income 901
Effect of poolings
Dividends declared
Amortization of ESOP obligation
Issuance of common stock
Tax benefit from employee stock options
Issuance of common stock for acquisitions
Conversion of common stock related to acquisitions
S-Corp distributions
- ---------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 (283) 7,709
- ---------------------------------------------------------------------------------------------------------------
Net Income (excluding undistributed S-Corp earnings) 4,758
Reclass of undistributed earnings of S-Corp 8
Foreign currency translation adjustment (33) (33)
Unrealized holding gains on certain investments (net of tax of $235 307 307
Reclassification adjustment (net of tax of $178) (246) (246)
Minimum pension liability adjustment (net of tax of $6) 11 11
-----
Total comprehensive income 4,805
Effect of poolings
Dividends declared
Amortization of ESOP obligation
Issuance of common stock
Tax benefit from employee stock options
Adjustment to conform pooled companies fiscal year
S-Corp distributions
Other
- ---------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 (244) 13,584
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 27
Lucent Technologies Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended
September 30,
--------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 4,766 $ 1,035 $ 449
Adjustments to reconcile
net income
to net cash (used in) provided by
operating activities,
net of effects from
acquisitions of businesses:
Cumulative effect of
accounting change (1,308) - -
Business restructuring reversal (141) (100) (201)
Asset impairment
and other charges 236 - 81
Depreciation and
amortization 1,806 1,411 1,499
Provision for
uncollectibles 75 149 136
Tax benefit from stock options 367 271 88
Deferred income taxes 1,026 56 (21)
Purchased in-process
research and development 15 1,683 1,255
Adjustment to conform Ascend
and Kenan's fiscal years 169 - -
Increase in receivables - net (3,183) (2,161) (484)
Increase in inventories
and contracts in process (1,612) (403) (316)
Increase(decrease) in
accounts payable 668 231 (18)
Changes in other operating
assets and liabilities (2,320) 155 (397)
Other adjustments for
non-cash items - net (840) (467) 58
Net cash (used in)provided by
operating activities (276) 1,860 2,129
Investing Activities:
Capital expenditures (2,215) (1,791) (1,744)
Proceeds from the sale or
disposal of property, plant
and equipment 97 57 108
Purchases of
equity investments (307) (212) (149)
Sales of equity investments 156 71 12
Purchases of investment
securities (450) (1,082) (483)
Sales or maturity
of investment securities 1,132 686 356
Dispositions of businesses 72 329 181
Acquisitions of businesses -
net of cash acquired (264) (1,078) (1,584)
Cash from mergers 61 - -
Other investing
activities - net (69) (80) (68)
Net cash used in
investing activities (1,787) (3,100) (3,371)
</TABLE>
See Notes to Consolidated Financial Statements.
(CONT'D)
<PAGE> 28
Lucent Technologies Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONT'D)
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended
September 30,
--------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Financing Activities:
Repayments of long-term debt (13) (93) (16)
Issuance of long-term debt 2,175 375 52
Proceeds from issuance
of common stock 696 645 281
Dividends paid (222) (201) (192)
S-Corp distribution
to stockholder (40) (26) (19)
Increase in short-term
borrowings - net 89 149 191
Net cash provided by
financing activities 2,685 849 297
Effect of exchange rate
changes on cash
and cash equivalents 40 (61) (11)
Net increase(decrease)in
cash and cash equivalents 662 (452) (956)
Cash and cash equivalents
at beginning of period 1,154 1,606 2,562
Cash and cash equivalents
at end of period $ 1,816 $ 1,154 $ 1,606
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
1. BASIS OF PRESENTATION
On June 24, 1999, Lucent Technologies Inc. (the "Company") merged with Ascend
Communications, Inc. Each share of Ascend common stock was converted into 1.65
shares of Lucent common stock. Lucent issued approximately 371 million shares in
exchange for all of the outstanding shares of Ascend. On February 26, 1999,
under the terms of the Kenan Systems Corporation merger agreement, Lucent issued
approximately 26 million shares (post April 1, 1999 stock split) of Lucent
common stock in exchange for all the outstanding shares of Kenan. These
transactions were accounted for as pooling-of-interests and, accordingly, the
consolidated financial statements of Lucent were restated for all periods prior
to the mergers to include the accounts and operations of Ascend and Kenan.
Before merging with Lucent, both Ascend and Kenan had December 31 fiscal year
ends. Lucent financial information for fiscal 1998 and earlier years was
computed by adding financial information for corresponding quarters of Ascend's
and Kenan's fiscal year. Thus, the consolidated statements of income for the
years ended September 30, 1998, and 1997 were derived by combining the results
of operations of Lucent for the years ended September 30, 1998, and 1997,
respectively, with the results of operations of Ascend and Kenan for the years
ended December 31, 1998, and 1997, respectively. The consolidated balance sheet
at September 30, 1998, was derived by combining the financial position of Lucent
at September 30, 1998, with the financial position of Ascend and Kenan at
December 31, 1998. The consolidated statements of cash flows for the years ended
September 30, 1998, and 1997 were derived by combining the cash flows of Lucent
for the years ended September 30, 1998, and 1997 with the cash flows of Ascend
and Kenan for the years ended December 31, 1998, and 1997.
The results of operations, financial position and cash flows as of and for the
three months ended December 31, 1998, for Ascend and Kenan were included in
Lucent's financial statements as of and for the year ended September 30, 1998.
The results of operations for the three months ended December 31, 1998, also
were included in Lucent's financial statements for the year ended September 30,
1999. As a result, the consolidated balance sheet of Lucent at September 30,
1999, includes an adjustment to retained earnings to eliminate the income
recognized from both Ascend and Kenan for the three months ended December 31,
1998. In addition, information from the statements of cash flows for Ascend and
Kenan for the three months ended December 31, 1998, has been eliminated from the
consolidated statements of cash flows for the year ended September 30, 1999,
since Ascend's and Kenan's activity for this period has been included in the
consolidated statements of cash flows for the year ended September 30, 1998.
On April 1, 1998, and April 1, 1999, two-for-one splits of Lucent's common stock
became effective. Shareowners' equity has been restated to give retroactive
recognition to the stock splits for all periods presented by reclassifying from
retained earnings to common stock the par value of the additional shares issued
as a result of the stock splits. In addition, all references in the financial
statements and notes to number of shares, per share amounts, stock option data
and market prices have been restated to reflect these stock splits.
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
ACQUISITIONS
Purchase Method
The following table presents information about certain acquisitions by Lucent in
the fiscal years ended September 30, 1999, 1998, and 1997. All the acquisitions
were accounted for under the purchase method of accounting, and the acquired
technology valuation included both existing technology and purchased in-process
research and development. All charges were recorded in the quarter in which the
transaction was completed.
<TABLE>
<CAPTION>
Amortization Amortization
Purchased Period Period
Acquisition Purchase Existing IPRD Goodwill Existing Tech.
Date Price Goodwill Technology (after-tax) (in years) (in years)
<S> <C> <C> <C> <C> <C> <C> <C>
1999
STRATUS(1) 10/98 $ 917 $ 0 $130 $267* n/a 10
OTHER (2) various 187 133 17 29 4-8 6-7
1998
YURIE(3) 5/98 $1,056 $292 $ 40 $620 7 5
PROMINET(4) 1/98 199 35 23 157 5 6
LIVINGSTON(5) 12/97 610 114 69 427 5 8
OTHER (6) various 453 137 67 208 5-10 5-10
1997
OCTEL(7) 9/97 $1,819 $181 $186 $945 7 5
INTERCON(8) 2/97 22 0 3 18 n/a 3
SAHARA(9) 1/97 219 0 0 213 n/a n/a
</TABLE>
(1) Stratus Computer, Inc. was a manufacturer of fault-tolerant computer
systems, acquired by Ascend.
(2) Other acquisitions include the Ethernet LAN business of Enable Semiconductor
("Enable Ethernet"), Sybarus Technologies, WaveAccess Ltd., and Quadritek
Systems, Inc.
(3) Yurie Systems, Inc. was a provider of ATM access technology and equipment
for data, voice and video networking.
(4) Prominet Corporation was a participant in the emerging Gigabit Ethernet
networking industry. The merger involved $164 of Lucent stock and options. In
addition, under the terms of the agreement, Lucent had contingent obligations to
pay former Prominet shareowners $35 in stock. The $35 of stock was paid by
Lucent in July 1998 and recorded primarily as goodwill.
(5) Livingston Enterprises, Inc. was a global provider of equipment used by
Internet service providers to connect their subscribers to the Internet.
(6) Other acquisitions include JNA Telecommunications Limited, LANNET, MassMedia
Communications, Inc., SDX Business Systems plc, and Optimay GmbH. The purchase
price for MassMedia has been deemed immaterial.
(7) Octel Communications Corporation was a provider of voice, fax and electronic
messaging technologies.
(8) InterCon Systems Corporation was a developer of remote access client
software products, acquired by Ascend.
(9) Sahara Networks, Inc. was a developer of scalable high-speed broadband
access products, acquired by Ascend.
n/a Not applicable.
* $24 of purchased in-process research and development was subsequently reversed
in March 1999.
Included in the purchase price for the above acquisitions was purchased
in-process research and development, which was a non-cash charge to earnings as
this technology had not reached technological feasibility and had no future
alternative use. The remaining purchase price was allocated to tangible assets
and intangible assets, including goodwill and existing technology, less
liabilities assumed.
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
The value allocated to purchased in-process research and development was
determined utilizing an income approach that included an excess earnings
analysis reflecting the appropriate cost of capital for the investment.
Estimates of future cash flows related to the in-process research and
development were made for each project based on Lucent's estimates of revenue,
operating expenses and income taxes from the project. These estimates were
consistent with historical pricing, margins and expense levels for similar
products.
Revenues were estimated based on relevant market size and growth factors,
expected industry trends, individual product sales cycles and the estimated life
of each product's underlying technology. Estimated operating expenses, income
taxes, and charges for the use of contributory assets were deducted from
estimated revenues to determine estimated after-tax cash flows for each project.
Estimated operating expenses include cost of goods sold; selling, general and
administrative expenses; and research and development expenses. The research and
development expenses include estimated costs to maintain the products once they
have been introduced into the market and generate revenues and costs to complete
the in-process research and development.
The discount rates utilized to discount the projected cash flows were based on
consideration of Lucent's weighted average cost of capital, as well as other
factors including the useful life of each project, the anticipated profitability
of each project, the uncertainty of technology advances that were known at the
time and the stage of completion of each project.
Management is primarily responsible for estimating the fair value of the assets
and liabilities acquired, and has conducted due diligence in determining the
fair value. Management has made estimates and assumptions that affect the
reported amounts of assets, liabilities and expenses resulting from such
acquisitions. Actual results could differ from those amounts.
SpecTran Corporation
On July 21, 1999, Lucent began its cash tender offer for the outstanding shares
of SpecTran Corporation, a designer and manufacturer of specialty optical fiber
and fiber-optic products. The tender offer expired on August 31, 1999, and
Lucent thereafter accepted and paid for shares giving it a 61% interest in
SpecTran. The acquisition was accounted for under the purchase method of
accounting. Lucent expects to acquire the remaining shares of SpecTran by the
end of the first quarter of fiscal year 2000, resulting in a total purchase
price of approximately $68.
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
Pooling-of-Interests Mergers
Ascend Communications
On June 24, 1999, Lucent merged with Ascend, a developer, manufacturer and
seller of wide area networking solutions. As a result, the outstanding Ascend
common stock was converted into approximately 371 million shares of Lucent
common stock, based on an exchange ratio of 1.65 shares of Lucent common stock
for each share of Ascend common stock. In addition, Lucent assumed Ascend stock
options equivalent to approximately 65 million shares of Lucent common stock.
The merger was accounted for as a pooling-of-interests under Accounting
Principles Board Opinion No. 16, and accordingly, Lucent's consolidated
financial statements have been restated for all periods prior to the merger to
include the results of operations, financial position and cash flows of Ascend
as though it had always been a part of Lucent. Intercompany transactions for
fiscal 1999 have been eliminated. Intercompany transactions prior to 1999 were
immaterial. In connection with the merger, Lucent recorded a third fiscal
quarter charge to operating expenses of approximately $79 (non-tax deductible)
for merger-related costs. The merger-related costs consisted primarily of fees
for investment bankers, attorneys, accountants and financial printing. Certain
reclassifications were made to Ascend's accounts to conform to Lucent's
presentation. The results of operations for the separate companies and the
combined amounts presented in the consolidated financial statements are as
follows:
<TABLE>
<CAPTION>
Nine Months Ended Twelve Months Ended
June 30, September 30,
----------------- ---------------------------
1999 1998 1997
<S> <C> <C> <C>
REVENUES
Lucent $ 26,256 $ 30,328 $ 26,444
Ascend 1,610 1,478 1,167
Eliminations (138) - -
Combined $ 27,728 $ 31,806 $ 27,611
NET INCOME(LOSS)
Lucent $ 3,838(a) $ 1,055 (c) $ 573 (e)
Ascend 66(b) (20)(d) (124)(f)
Eliminations (86) - -
Combined $ 3,818 $ 1,035 $ 449
</TABLE>
(a) Includes $108 of one-time after-tax charges related to Lucent's acquisitions
of Quadritek, WaveAccess, Sybarus and Enable Ethernet and the merger-related
costs for Ascend as well as $1,308 after-tax gain from the cumulative effect
of the accounting change (see Note 10 - EMPLOYEE BENEFIT PLANS).
(b) Includes $243 of one-time after-tax charges related to Ascend's acquisition
of Stratus. The original charge of $267 was reduced by $24 in the second
fiscal quarter of 1999.
(c) Includes $1,412 of one-time after-tax charges related to Lucent's
acquisitions of Livingston, Prominet, Optimay, Yurie, SDX, LANNET, MassMedia
and JNA as well as the $95 after-tax gain on the sale of Advanced Technology
Systems ("ATS") business.
(d) Includes $267 of one-time after-tax charges related to Ascend's acquisition
of Stratus.
(e) Includes $966 of one-time after-tax charges related to Lucent's acquisition
of Octel.
(f) Includes $335 one-time after-tax charges related to Ascend's acquisitions of
Sahara and InterCon and Ascend's mergers with Whitetree, Inc. and Cascade
Communications Corp.
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
Kenan Systems
On February 26, 1999, Lucent merged with Kenan Systems Corporation, a developer
of third-party billing and customer software. Under the terms of the Kenan
merger agreement, Lucent issued approximately 26 million shares (post April 1,
1999 stock split) of Lucent common stock in exchange for all the outstanding
shares of Kenan.
Mosaix
On July 15, 1999, Lucent completed its merger with Mosaix, a provider of
software that links companies' front and back offices and helps them deliver
more responsive and efficient customer service. Under the terms of the
agreement, the outstanding common stock of Mosaix was converted into the right
to receive approximately 2.6 million shares of Lucent common stock. Lucent has
not restated its historical financial statements to reflect its
pooling-of-interests with Mosaix.
Nexabit Networks
On July 19, 1999, Lucent completed its merger with Nexabit, a developer of
high-speed switching equipment and software that directs traffic along
telecommunications networks. Under the terms of the agreement, the outstanding
stock of Nexabit was converted into the right to receive approximately 13.7
million shares of Lucent common stock. Lucent has not restated its historical
financial statements to reflect its pooling-of-interests with Nexabit.
Cascade Communications
On June 30, 1997, Ascend completed its merger with Cascade, a developer and
manufacturer of wide area network switches.
Whitetree
On April 1, 1997, Ascend completed its merger with Whitetree, a developer and
manufacturer of high-speed ATM switching products. Ascend did not restate its
historical financial statements to reflect its pooling-of-interests with
Whitetree.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include all majority-owned subsidiaries in
which Lucent exercises control. 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.
All material intercompany transactions and balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements and related disclosures 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 in
accounting for long-term contracts, allowances for uncollectible receivables,
inventory obsolescence, product warranty, depreciation, employee benefits,
taxes, restructuring reserves and contingencies. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the
financial statements in the period they are determined to be necessary.
FOREIGN CURRENCY TRANSLATION
For operations outside the United States that prepare financial statements in
currencies other than the U.S. 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 accumulated other
comprehensive income (loss) in shareowners' equity.
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
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 generally
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 on 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 on 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.
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 are stated at cost less accumulated depreciation.
Depreciation is determined using a combination of accelerated and straight-line
methods on either the unit or group methods over the estimated useful lives of
the various asset classes. The unit method is used for manufacturing and
laboratory equipment and large computer systems. The group method is used for
other depreciable assets.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
fair value is less than the carrying amount of the asset, a loss is recognized
for the difference.
FINANCIAL INSTRUMENTS
Lucent uses various financial instruments, including foreign currency exchange
contracts and interest rate swap agreements to manage and reduce risk to Lucent
by generating cash flows, which offset the cash flows of certain transactions in
foreign currencies or underlying financial instruments in relation to their
amount and timing. Lucent's derivative financial instruments are for purposes
other than trading and are not entered into for speculative purposes. Lucent's
non-derivative financial instruments include letters of credit, commitments to
extend credit and guarantees of debt. Lucent generally does not require
collateral to support its financial instruments.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of identifiable
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.
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1999
presentation.
3. RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new
accounting and reporting standards for derivative financial instruments and for
hedging activities. SFAS 133 requires Lucent to measure all derivatives at fair
value and to recognize them in the balance sheet as an asset or liability,
depending on Lucent's rights or obligations under the applicable derivative
contract. In June 1999, the FASB issued SFAS No. 137 which deferred the
effective date of adoption of SFAS 133 for one year. Lucent will adopt SFAS 133
no later than the first quarter of fiscal year 2001. SFAS 133 is not expected to
have a material impact on Lucent's consolidated results of operations, financial
position or cash flows.
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance on accounting for the costs of computer software developed or
obtained for internal use. This pronouncement identifies the characteristics of
internal use software and provides guidance on new cost recognition principles.
Certain costs that were previously expensed as incurred will be capitalized and
amortized on a straight-line basis over three years. Lucent will adopt SOP 98-1
on October 1, 1999. The implementation of SOP 98-1 will decrease costs and
expenses in fiscal year 2000, the initial year of adoption, and thereafter is
expected to increase year-over-year costs and expenses as the capitalized
amounts are amortized. Costs for general and administrative, overhead,
maintenance and training, as well as the cost of software that does not add
functionality to the existing system, will be expensed as incurred.
4. SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
Year Ended
September 30,
1999 1998 1997
<S> <C> <C> <C>
INCLUDED IN COSTS
Amortization of software development costs ......... $ 249 $ 234 $ 380
INCLUDED IN SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
Amortization of goodwill and existing
technology ....................................... $ 394 $ 149 $ 32
INCLUDED IN COSTS AND OPERATING EXPENSES
Depreciation and amortization of property,
plant and equipment .............................. $ 1,296 $ 996 $ 1,057
OTHER INCOME -- NET
Interest income .................................... $ 124 $ 112 $ 155
Minority interests in earnings of subsidiaries ..... (27) (24) (35)
Net equity losses from investments ................. (25) (209) (64)
Gain (loss)on foreign currency transactions ........ 1 (44) (12)
Gain on sale of equity investments ................. 359 38 -
Gain on businesses sold ............................ 40 208 -
Miscellaneous -- net ............................... (29) 47 53
------- ------- -------
Total other income -- net .......................... $ 443 $ 128 $ 97
DEDUCTED FROM INTEREST EXPENSE
Capitalized interest ............................... $ 20 $ 17 $ 14
</TABLE>
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
SUPPLEMENTARY BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
September 30,
1999 1998
-------- --------
<S> <C> <C>
INVENTORIES
Completed goods .................................. $ 2,946 $ 1,644
Work in process and raw materials ................ 2,102 1,635
-------- --------
Inventories ...................................... $ 5,048 $ 3,279
PROPERTY, PLANT AND EQUIPMENT -- NET
Land and improvements ............................ $ 360 $ 306
Buildings and improvements ....................... 3,951 3,187
Machinery, electronic and other equipment ........ 9,981 8,838
-------- --------
Total property, plant and equipment .............. 14,292 12,331
Less: Accumulated depreciation and amortization .. (7,445) (6,638)
-------- --------
Property, plant and equipment -- net ............. $ 6,847 $ 5,693
OTHER CURRENT LIABILITIES
Advance billings and customer deposits ........... $ 488 $ 548
</TABLE>
SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year Ended
September 30,
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Interest payments, net of amounts capitalized $ 409 $ 255 $ 240
Income tax payments ............................... $1,025 $ 776 $ 826
Acquisitions of businesses:
Fair value of assets acquired,
net of cash acquired ............................. $ 394 $2,092 $1,838
Less: Fair value of liabilities assumed ........... $ 130 $1,014 $ 254
------ ------ ------
Acquisitions of businesses,
net of cash acquired ............................. $ 264 $1,078 $1,584
</TABLE>
For the year ended September 30, 1999, the Consolidated Statements of Cash Flows
excludes the issuance of common stock related to the mergers with Nexabit and
Mosaix.
On October 1, 1997, Lucent contributed its Consumer Products business to a new
venture formed by Lucent and Philips Electronics N.V. in exchange for 40%
ownership of Philips Consumer Communications ("PCC"). On October 22, 1998,
Lucent and Philips announced their intention to end the PCC venture and agreed
to regain control of their original businesses. The results of operations and
net assets of the remaining businesses Lucent previously contributed to PCC have
been consolidated as of October 1, 1998. However, for the years ended September
30, 1998, and 1999, the Consolidated Statements of Cash Flows exclude both the
contribution and the regaining of Lucent's Consumer Products business.
For the year ended September 30, 1999, costs and operating expenses include a
$236 charge primarily associated with asset impairments and integration-related
charges associated with the Ascend and Nexabit mergers.
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
For the year ended September 30, 1998, Other income -- net includes a charge of
$110 related to a write-down associated with Lucent's investment in the PCC
venture. This charge was offset by gains of $103, primarily related to the sale
of an investment and the sale of certain business operations, including Bell
Laboratories Design Automation Group.
For the year ended September 30, 1998, the Consolidated Statements of Cash Flows
excludes the issuance of common stock related to the acquisitions of Livingston,
Prominet, and Stratus and the conversion of stock options related to the
acquisitions of Livingston, Prominet, Yurie, Optimay, and Stratus.
For the year ended September 30, 1997, the Consolidated Statements of Cash Flows
excludes the conversion of stock options related to the acquisition of Octel and
the issuance of common stock and the conversion of stock options related to the
acquisition of Sahara. For information on the 1999, 1998 and 1997 acquisitions,
see Note 1.
For the year ended September 30, 1997, research and development expenses include
a $127 write-down of special purpose Bell Laboratories assets no longer being
used.
5. EARNINGS PER COMMON SHARE
Basic earnings per common share was calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share was calculated by dividing net income by the sum of the
weighted average number of common shares outstanding plus all additional common
shares that would have been outstanding if potentially dilutive securities or
common stock equivalents had been issued.
The following table reconciles the number of shares utilized in the earnings per
share calculations:
<TABLE>
<CAPTION>
Year Ended
September 30,
1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income ............................... $ 4,766 $ 1,035 $ 449
Earnings per common share - basic:
Income before cumulative effect
of accounting change ................... $ 1.14 $ 0.35 $ 0.16
Cumulative effect of accounting
change ................................. 0.43 - -
Net income .............................. $ 1.57 $ 0.35 $ 0.16
Earnings per common share - diluted:
Income before cumulative effect
of accounting change ................... $ 1.10 $ 0.34 $ 0.15
Cumulative effect of accounting
change ................................. 0.42 - -
Net income .............................. $ 1.52 $ 0.34 $ 0.15
Number of shares (in millions)
- ------------------------------
Common shares - basic 3,035.8 2,963.8 2,894.6
Effect of dilutive securities:
Stock options 101.0 71.9 37.5
Other 5.9 4.0 0.2
Common shares - diluted 3,142.7 3,039.7 2,932.3
Options excluded from the computation
of earnings per share - diluted since
option exercise price was greater than the
average market price of the
common shares for the period 5.5 13.4 15.9
</TABLE>
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
6. COMPREHENSIVE INCOME
Lucent has adopted SFAS No. 130, "Reporting Comprehensive Income" as of October
1, 1998, that requires new standards for reporting and display of comprehensive
income and its components that Lucent has displayed in its Consolidated
Statements of Changes in Shareowners' Equity. However, it does not affect net
income or total shareowners' equity.
The after-tax components of accumulated other comprehensive income (loss) are as
follows:
<TABLE>
<CAPTION>
Total
Accumulated
Foreign Unrealized Minimum Other
Currency Holding Pension Comprehensive
Translation Gains/ Liability Income/
Adjustment (Losses) Adjustment (Loss)
<S> <C> <C> <C> <C>
Beginning balance October 1, 1996......... $ (16) $ 15 $ (22) $ ( 23)
Current-period change..................... (175) 40 9 (126)
Ending balance, September 30, 1997........ $ (191) $ 55 $ (13) $ (149)
Current-period change..................... (89) (37) ( 8) (134)
Ending balance, September 30, 1998........ $ (280) $ 18 $ (21) $ (283)
Current-period change..................... (33) 61 11 39
Ending balance, September 30, 1999........ $ (313) $ 79 $ (10) $ (244)
</TABLE>
The foreign currency translation adjustments are not currently adjusted for
income taxes since they relate to indefinite investments in non-United States
subsidiaries.
7. BUSINESS RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of calendar year 1995, a pre-tax 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 the exit of certain businesses
as well as consolidating and re-engineering numerous corporate and business unit
operations.
Total deductions to Lucent's business restructuring reserves were $233 and $318
for the years ended September 30, 1999, and 1998, respectively. Included in
these deductions were cash payments of $77 and $176 and non-cash related charges
of $15 and $42 for the years ended September 30, 1999, and 1998, respectively.
The non-cash related charges were primarily related to assets for product lines
and businesses that Lucent exited as part of its restructuring activities. The
related costs were included in the 1995 restructuring plan. The assets did not
benefit activities that were to continue, nor were they used to generate future
revenues. The reserves were charged as the product lines and businesses were
exited during 1999 and 1998. In addition, Lucent reversed $141 and $100 of
business restructuring reserves primarily related to favorable experience in
employee separations as well as, other projects being completed at a cost lower
than originally estimated for the years ended September 30, 1999, and 1998,
respectively. As of September 30, 1999, all restructuring plans were
substantially completed and the remaining reserves of $18 are related to
outstanding litigation for certain product lines that were exited.
The following table displays a rollforward of the liabilities for business
restructuring from September 30, 1997, to September 30, 1999:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1999 September 30,
Type of Cost 1997 Balance Deductions 1998 Balance Deductions 1999 Balance
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Employee separation $ 348 $(235) $ 113 $ (113) $ -
Facility closing 66 ( 23) 43 ( 43) -
Other 155 ( 60) 95 ( 77) 18
Total $ 569 $(318) $ 251 $ (233) $ 18
</TABLE>
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
In 1997, Lucent recorded a pre-tax charge of approximately $150 in connection
with the acquisition of Cascade Communications Corp. and Whitetree, Inc. The
total charge included $54 of merger-related costs and $96 of integration
expenses. Included in the integration expenses were $7 for severance and
outplacement costs for approximately 275 employees involved in duplicate
functions; $67 for redundant assets and assets related to duplicate product
lines; and $22 for the cancellation of redundant facility leases and other
contracts and obligations. In 1998, Lucent reversed $18 of these costs. There
were no reserves remaining as of September 30, 1998.
8. 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>
Year Ended
September 30,
1999 1998 1997
<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 2.5% 3.3% 5.4%
Foreign earnings and dividends taxed at
different rates 0.3% 1.0% 0.8%
Research credits (2.6)% (2.6)% (2.4)%
Acquisition-related costs (a) 2.6% 23.5% 32.4%
Other differences - net (1.3)% (1.4)% (2.0)%
Effective income tax rate 36.5% 58.8% 69.2%
Effective income tax rate excluding
acquisition-related costs (a) 33.9% 35.3% 36.8%
</TABLE>
(a) Includes non-tax deductible purchased in-process research and development
and merger-related expenses.
The following table presents the United States and foreign components of income
before income taxes and the provision for income taxes:
<TABLE>
<CAPTION>
Year Ended
September 30,
1999 1998 1997
<S> <C> <C> <C>
INCOME BEFORE INCOME TAXES
United States $4,702 $2,144 $ 861
Foreign 741 368 597
Income before income taxes $5,443 $2,512 $1,458
</TABLE>
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
PROVISION FOR INCOME TAXES
<TABLE>
<S> <C> <C> <C>
CURRENT
Federal $ 505 $ 987 $ 554
State and local 38 168 148
Foreign 336 213 228
Sub-total 879 1,368 930
DEFERRED
Federal 992 63 11
State and local 183 36 72
Foreign (69) 10 (4)
Sub-total 1,106 109 79
Provision for income taxes $ 1,985 $ 1,477 $ 1,009
</TABLE>
As of September 30, 1999, Lucent had tax credit carryforwards of $80 and
federal, state and local, and foreign net operating loss carryforwards (tax
effected) of $146, all of which expire primarily after the year 2000.
The components of deferred tax assets and liabilities at September 30, 1999, and
1998 are as follows:
<TABLE>
<CAPTION>
September 30,
1999 1998
<S> <C> <C>
Deferred Income Tax Assets
Employee pensions and other benefits - net $ 442 $ 1,520
Business restructuring 6 165
Reserves and allowances 1,009 1,137
Net operating loss/credit carryforwards 226 239
Valuation allowance (179) (261)
Other 344 526
Total deferred tax assets $ 1,848 $ 3,326
Deferred Income Tax Liabilities
Property, plant and equipment $ 628 $ 399
Other 511 391
Total deferred tax liabilities $ 1,139 $ 790
</TABLE>
Lucent has not provided for United States deferred income taxes or foreign
withholding taxes on $3,211 of undistributed earnings of its non-United States
subsidiaries as of September 30, 1999, since these earnings are intended to be
reinvested indefinitely.
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
9. DEBT OBLIGATIONS
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
DEBT MATURING WITHIN ONE YEAR
Commercial paper ...................... $1,828 $2,106*
Long-term debt ........................ 34 39
Secured borrowings and other .......... 1,002 86
------ ------
Total debt maturing within one year ... $2,864 $2,231
WEIGHTED AVERAGE INTEREST RATES
Commercial paper .................... 5.0% 5.6%
Long-term debt, secured borrowings
and other ........................ 9.7% 7.9%
</TABLE>
Lucent had revolving credit facilities at September 30, 1999, aggregating $4,711
(a portion of which is used to support Lucent's commercial paper program),
$4,000 with domestic lenders and $711 with foreign lenders. The total credit
facilities available at September 30, 1999, with domestic and foreign lenders
were $4,000 and $351, respectively.
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
LONG-TERM DEBT
6.90% notes due July 15, 2001 $ 750 $ 750
7.25% notes due July 15, 2006 750 750
5.50% notes due November 15, 2008 500 -
6.50% debentures due January 15, 2028 300 300
6.45% debentures due March 15, 2029 1,360 -
Commercial paper refinanced after
September 30, 1998 - 495*
Long-term lease obligations 79 1
Secured borrowings and other (8.40% weighted
average interest rate for both years) 502 164
Less: Unamortized discount 45 12
------ ------
Total long-term debt 4,196 2,448
Less: Amounts maturing within one year 34 39
------ ------
Net long-term debt $4,162 $2,409
====== ======
</TABLE>
* On November 19, 1998, Lucent sold $500 ($495 net of unamortized costs) of
10-year 5.5% notes due November 15, 2008, and reclassified the amount from debt
maturing within one year to long-term debt. The proceeds were used to pay down a
portion of Lucent's commercial paper during the first quarter of fiscal 1999.
Lucent has an effective shelf registration statement for the issuance of debt
securities up to $1,800, all of which remains available at September 30, 1999.
This table shows the maturities, by year, of the $4,196 in total long-term debt
obligations:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------
2000 2001 2002 2003 2004 Later Years
<S> <C> <C> <C> <C> <C>
$34 $850 $26 $128 $107 $3,051
</TABLE>
In the normal course of business, Lucent sells trade accounts receivable and
notes receivable to unaffiliated financial institutions with and without
recourse. Certain sales with recourse are accounted for as secured borrowings
and amounted to $1,037 at September 30, 1999. As a result of these recourse
transactions, these receivables remained in the Consolidated Balance Sheets and
increased cash flows from financing activities in the Consolidated Statements of
Cash Flows by $1,037. See Note 13 for further discussion of sales of receivables
without recourse.
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
10. EMPLOYEE BENEFIT PLANS
PENSION AND POSTRETIREMENT BENEFITS
Lucent maintains defined benefit pension plans covering the majority of its
employees and retirees, and postretirement benefit plans for retirees that
include health care benefits and life insurance coverage.
<TABLE>
<CAPTION>
Pension Postretirement
Benefits Benefits
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at October 1 $27,846 $23,187 $9,193 $7,939
Service cost 509 331 80 63
Interest cost 1,671 1,631 537 540
Actuarial (losses)gains (2,182) 3,811 (240) 919
Amendments 1,534 626 (359) 324
Benefits paid (1,977) (1,740) (607) (592)
- ----------------------------------------------------------------------------------------------------
Benefit obligation at September 30 $27,401 $27,846 $8,604 $9,193
- ----------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at October 1 $36,191 $36,204 $3,959 $4,152
Actual return on plan assets 7,114 1,914 776 349
Company contributions 14 12 29 53
Benefits paid (1,977) (1,740) (607) (592)
Other (including transfer of assets from
pension to postretirement plans) (275) (199) 310 (3)
- ----------------------------------------------------------------------------------------------------
Fair value of plan assets at September 30 $41,067 $36,191 $4,467 $3,959
- ----------------------------------------------------------------------------------------------------
Funded (unfunded) status of the plan $13,666 $ 8,345 $(4,137) $(5,234)
Unrecognized prior service cost 2,583 1,509 121 533
Unrecognized transition asset (645) (944) - -
Unrecognized net gain (9,466) (5,175) (1,014) (408)
- ----------------------------------------------------------------------------------------------------
Net amount recognized $ 6,138 $ 3,735 $(5,030) $(5,109)
====================================================================================================
Amounts recognized in the Consolidated
Balance Sheets consist of:
Prepaid pension costs $ 6,175 $ 3,754 $ - $ -
Accrued benefit liability (63) (44) (5,030) (5,109)
Intangible asset 9 4 - -
Accumulated other comprehensive income 17 21 - -
- ----------------------------------------------------------------------------------------------------
Net amount recognized $ 6,138 $ 3,735 $(5,030) $(5,109)
====================================================================================================
</TABLE>
Pension plan assets include $256 and $159 of Lucent common stock at September
30, 1999, and 1998, respectively. Postretirement plan assets include $20 and $11
of Lucent common stock at September 30, 1999, and 1998, respectively.
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
Components of Net Periodic Benefit Cost
<TABLE>
<CAPTION>
Year Ended September 30,
Pension Cost 1999 1998 1997
- ------------
<S> <C> <C> <C>
Service cost $ 509 $ 331 $ 312
Interest cost on projected benefit obligation 1,671 1,631 1,604
Expected return on plan assets (2,957) (2,384) (2,150)
Amortization of unrecognized prior service costs 461 164 149
Amortization of transition asset (300) (300) (300)
Amortization of net loss 2 - -
Charges for plan curtailments - - 56
- -----------------------------------------------------------------------------------------------
Net pension credit $ (614) $ (558) $ (329)
===============================================================================================
Postretirement Cost
- -------------------
Service cost $ 80 $ 63 $ 57
Interest cost on accumulated benefit obligation 537 540 554
Expected return on plan assets (308) (263) (264)
Amortization of unrecognized prior service costs 53 53 35
Amortization of net loss (gain) 6 3 (15)
Charges for plan curtailments - - 26
- -----------------------------------------------------------------------------------------------
Net postretirement benefit cost $ 368 $ 396 $ 393
===============================================================================================
Pension and Postretirement Benefits
Weighted-average assumptions
as of September 30
- -----------------------------------
Discount rate 7.25% 6.0% 7.25%
Expected return on plan assets 9.0% 9.0% 9.0%
Rate of compensation increase 4.5% 4.5% 4.5%
</TABLE>
Effective October 1, 1998, Lucent changed its method for calculating the
market-related value of plan assets used in determining the expected
return-on-asset component of annual net pension and postretirement benefit
costs. Under the previous accounting method, the calculation of the
market-related value of plan assets included only interest and dividends
immediately, while all other realized and unrealized gains and losses were
amortized on a straight-line basis over a five-year period. The new method used
to calculate market-related value includes immediately an amount based on
Lucent's historical asset returns and amortizes the difference between that
amount and the actual return on a straight-line basis over a five-year period.
The new method is preferable under Statement of Financial Accounting Standards
No. 87 because it results in calculated plan asset values that are closer to
current fair value, thereby lessening the accumulation of unrecognized gains and
losses while still mitigating the effects of annual market value fluctuations.
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
The cumulative effect of this accounting change related to periods prior to
fiscal year 1999 of $2,150 ($1,308 after-tax, or $0.43 and $0.42 per basic and
diluted share, respectively) is a one-time, non-cash credit to fiscal 1999
earnings. This accounting change also resulted in a reduction in benefit costs
in the year ended September 30, 1999 that increased income by $427 ($260
after-tax, or $0.09 and $0.08 per basic and diluted share, respectively) as
compared with the previous accounting method. A comparison of pro forma amounts
below shows the effects if the accounting change were applied retroactively:
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997
<S> <C> <C>
Pro forma net income $ 1,276 $ 657
Earnings per share-basic $ 0.43 $ 0.23
Earnings per share-diluted $ 0.42 $ 0.22
</TABLE>
In 1999, Lucent changed its pension plan benefit for management, technical pay
plan, and non-represented occupational employees hired on or after January 1,
1999, and certain U.S. employees of companies acquired since October 1, 1996,
who are not participating currently in a defined benefit pension plan. These
employees will receive a different pension benefit known as an account balance
program, effective January 1, 2000. All other employees will retain their
current pension benefits and are not affected by the new account balance
program.
Lucent has several non-pension postretirement benefit plans. For postretirement
health care benefit plans, Lucent assumed a 9.2% annual health care cost trend
rate for 2000, gradually declining to 3.9% by the year 2005, after which the
trend rate would remain at that level. The assumed health care cost trend rate
has a significant effect on the amounts reported. A one-percentage-point change
in the assumed health care cost trend rate would have the following effects:
<TABLE>
<CAPTION>
1 Percentage Point
Increase Decrease
<S> <C> <C>
Effect on total of service and interest cost components $ 23 $ 20
Effect on postretirement benefit obligation $371 $344
</TABLE>
SAVINGS PLANS
Lucent's savings plans allow employees to contribute a portion of their
compensation on a pre-tax and/or after-tax basis in accordance with specified
guidelines. Lucent matches a percentage of the employee contributions up to
certain limits. Savings plan expense amounted to $314, $316 and $183 for the
years ended September 30, 1999, 1998, and 1997, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
Lucent's leveraged Employee Stock Ownership Plan ("ESOP") funds the employer
contributions to the Long-Term Savings and Security Plan ("LTSSP") for
non-management employees. 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, 1999, the ESOP contained 18.8 million shares of Lucent's common
stock. Of the 18.8 million shares, 16.2 million have been allocated under the
ESOP and 2.6 million were unallocated. As of September 30, 1999, the unallocated
shares had a fair value of $169.
11. STOCK COMPENSATION PLANS
Lucent has stock-based compensation plans under which outside directors and
certain employees receive stock options and other equity-based awards. The plans
provide for the grant of stock options, stock appreciation rights, performance
awards, restricted stock awards and other stock unit awards.
Stock options generally are granted with an exercise price equal to 100% of the
market value of a share of common stock on the date of grant, have a 10-year
term and vest within four years from the date of grant. Subject to customary
anti-dilution adjustments and certain exceptions, the total number of shares of
common stock authorized for option grants under the plans was 264 million shares
at September 30, 1999.
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
In connection with certain of Lucent's acquisitions, outstanding stock options
held by employees of acquired companies became exercisable, according to their
terms, for Lucent common stock effective at the acquisition date. These options
did not reduce the shares available for grant under any of Lucent's other option
plans. For acquisitions accounted for as purchases, the fair value of these
options was included as part of the purchase price.
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. 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 the last trading day of each month. The amount that may be offered pursuant
to this plan is 200 million shares. In 1999, 1998 and 1997, 6.8 million, 8.9
million and 12.5 million shares, respectively, were purchased under the ESPP and
the employee stock purchase plan of an acquired company, at a weighted average
price of $46.04, $23.93 and $12.77, respectively.
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 ("APB") No. 25 and related interpretations
in accounting for its plans. Compensation expense recorded under APB No. 25 was
$48, $77 and $37 for the years ended September 30, 1999, 1998, and 1997,
respectively. If Lucent had elected to adopt the optional recognition provisions
of SFAS No. 123 for its stock option plans and employee stock purchase plans,
net income and earnings per share would have been changed to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998 1997
<S> <C> <C> <C>
NET INCOME
As reported $ 4,766 $ 1,035 $ 449
Pro forma $ 4,263 $ 756 $ 201
EARNINGS PER SHARE-BASIC
As reported $ 1.57 $ 0.35 $ 0.16
Pro forma $ 1.40 $ 0.26 $ 0.07
EARNINGS PER SHARE-DILUTED
As reported $ 1.52 $ 0.34 $ 0.15
Pro forma $ 1.31 $ 0.24 $ 0.07
</TABLE>
The fair value of stock options used to compute pro forma net income and
earnings per share disclosures is the estimated fair value at grant date using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE ASSUMPTIONS 1999 1998 1997
<S> <C> <C> <C>
Dividend yield 0.12% 0.18% 0.38%
Expected volatility:
Lucent 33.8% 28.2% 22.4%
Acquisitions (1) 57.5% 61.0% 66.0%
Risk-free interest rate 5.2% 5.3% 6.3%
Expected holding period(in years) 3.6 4.1 4.4
</TABLE>
(1) Pre-merger assumptions for companies acquired in a pooling-of-interests.
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
Presented below is a summary of the status of Lucent stock options and the
related transactions for the years ended September 30, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
Shares Weighted Average
(000s) Exercise Price
- ------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding at October 1, 1996 86,266 $14.55
- ------------------------------------------------------------------------------
Granted/assumed* (1)(2) 176,170 $15.19
Exercised (15,967) $ 6.88
Forfeited/expired (2) (63,310) $24.92
- ------------------------------------------------------------------------------
Options outstanding at September 30, 1997 183,159 $12.26
- ------------------------------------------------------------------------------
Granted/assumed* (3) 123,075 $27.95
Exercised (39,404) $ 9.78
Forfeited/expired (15,014) $20.25
- ------------------------------------------------------------------------------
Options outstanding at September 30, 1998 251,816 $19.84
- ------------------------------------------------------------------------------
Granted/assumed* 52,576 $48.77
Exercised (27,067) $13.54
Forfeited/expired (10,870) $23.00
- ------------------------------------------------------------------------------
Options outstanding at September 30, 1999 266,455 $26.06
==============================================================================
</TABLE>
* Includes options converted in acquisitions.
(1) Includes options covering 51,013 shares of common stock granted under a
broad-based employee plan at a weighted average exercise price of $11.15.
(2) Grants and forfeitures include options covering 23,039 and 25,598 shares of
common stock exchanged or amended under pre-merger stock option repricing
programs of a company acquired in a pooling-of-interests, at new exercise
prices of $21.18 and $14.81, respectively.
(3) Includes options covering 32,355 shares of common stock granted under a
broad-based employee plan at a weighted average exercise price of $37.34.
The weighted average fair value of Lucent stock options, calculated using the
Black-Scholes option-pricing model, granted during the years ended September 30,
1999, 1998, and 1997 is $15.92, $12.26 and $3.65 per share, respectively.
The following table summarizes the status of stock options outstanding and
exercisable at September 30, 1999:
<TABLE>
<CAPTION>
-------------------------------- --------------------
Stock Options Stock Options
Outstanding Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
exercise Shares Contractual Exercise Shares Exercise
prices (000s) Life(Years) Price (000s) Price
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.01 to $ 11.14 72,396(1) 6.7 $10.29 12,792 $ 7.42
$11.15 to $ 23.07 70,150(1) 7.5 16.59 31,110 15.52
$23.08 to $ 29.09 21,947 8.8 27.42 20,715 27.48
$29.10 to $ 40.87 60,567 8.9 35.15 9,005 34.78
$40.88 to $ 61.78 25,587 9.2 49.86 5,964 52.44
$61.79 to $102.48 15,808 9.9 65.08 72 67.37
- ------------------------------------------------------------------------------
Total 266,455 $26.06 79,658 $22.32
==============================================================================
</TABLE>
(1) Approximately 43,869 options granted under a broad-based employee plan
became exercisable on October 1, 1999.
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
Other stock unit awards are granted under certain award plans. The following
table presents the total number of shares of common stock represented by awards
granted to employees for the years ended September 30, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998 1997
<S> <C> <C> <C>
Other stock unit awards granted (000s) 532 1,730 8,756
Weighted average market value of
shares granted during the period $31.82 $22.23 $12.00
</TABLE>
12. OPERATING SEGMENTS
Lucent adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," beginning with this Annual Report. This standard requires
disclosure of segment information on the same basis used internally for
evaluating segment performance and for deciding how to allocate resources to
segments.
Lucent operates in the global telecommunications networking industry and has
three reportable operating segments: Service Provider Networks ("SPN"),
Enterprise Networks ("Enterprise"), and Microelectronics and Communications
Technologies ("MCT"). SPN provides public networking systems and software to
telecommunications service providers and public network operators around the
world. Enterprise develops, manufactures, markets and services advanced
communications products and data networking systems for business customers. MCT
designs and manufactures high-performance integrated circuits, power systems and
optoelectronic components for applications in the communications and computing
industries. MCT also includes network products, new ventures and intellectual
property.
The three reportable operating segments are strategic market units that offer
distinct products and services. These segments were determined based on the
customers and the markets that Lucent serves. Each market unit is managed
separately as each operation requires different technologies and marketing
strategies. Intersegment transactions that occur are based on current market
prices and all intersegment profit is eliminated in consolidation.
Performance measurement and resource allocation for the reportable operating
segments are based on many factors. The primary financial measure used is
Operating income, exclusive of goodwill and existing technology amortization,
and of purchased in-process R&D and other costs from business acquisitions
(acquisition/integration-related costs).
Lucent employs shared service concepts to realize economies of scale and
efficient use of resources. The costs of shared services, and other corporate
center operations managed on a common basis, are allocated to the segments based
on usage, where possible, or other factors based on the nature of the activity.
The accounting policies of the reportable operating segments are the same as
those described in the Summary of Significant Accounting Policies (see Note 2).
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
REPORTABLE SEGMENTS
--------------------------------------
Other* & Consolidated
YEAR ENDED 9/30/99 SPN ENTERPRISE MCT CORPORATE TOTALS
- ----------------------- -------- ---------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
External revenues $ 23,562 $ 8,559 $ 5,424 $ 758 $ 38,303
Intersegment revenues 183 195 1,318 (1,696) -
Total revenues 23,745 8,754 6,742 (938) 38,303
Depreciation & amortization 690 134 489 493 1,806
Operating income/(loss) 4,563 616 944 (717) 5,406
Assets 16,939 3,884 4,095 13,857 38,775
Capital expenditures 675 266 707 567 2,215
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Other* & Consolidated
YEAR ENDED 9/30/98 SPN ENTERPRISE MCT CORPORATE TOTALS
- ----------------------- -------- ---------- ------- --------- ------------
<S> <C> <C> <C> <C> <C>
External revenues $19,108 $ 7,954 $ 4,628 $ 116 $31,806
Intersegment revenues 128 148 1,074 (1,350) -
Total revenues 19,236 8,102 5,702 (1,234) 31,806
Depreciation & amortization 638 128 366 279 1,411
Operating income/(loss) 3,107 633 608 (1,710) 2,638
Assets 12,978 3,421 3,298 9,666 29,363
Capital expenditures 525 281 646 339 1,791
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Other* & Consolidated
YEAR ENDED 9/30/97 SPN ENTERPRISE MCT CORPORATE TOTALS
- ----------------------- -------- ---------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
External revenues $ 15,675 $ 6,257 $ 4,238 $ 1,441 $ 27,611
Intersegment revenues 136 130 905 (1,171) -
Total revenues 15,811 6,387 5,143 270 27,611
Depreciation & amortization 730 218 332 219 1,499
Operating income/(loss) 1,517 668 549 (1,135) 1,599
Assets 9,057 2,486 2,928 10,535 25,006
Capital expenditures 447 202 686 409 1,744
- --------------------------------------------------------------------------------------------------------
</TABLE>
* The results of other smaller units and corporate operations are reported in
Other and Corporate, including eliminations of internal business. Assets
included in Other and Corporate consist principally of cash and cash
equivalents, deferred income taxes, and prepaid pension costs.
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
RECONCILING ITEMS
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements is as follows:
<TABLE>
<CAPTION>
Year ended September 30,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
External Revenues
- -----------------
Total reportable segments $ 37,545 $ 31,690 $ 26,170
Other operations 745 70 1,362
Corporate miscellaneous 13 46 79
Total revenues $ 38,303 $ 31,806 $ 27,611
Operating Income:
- -----------------
Total reportable segments $ 6,123 $ 4,348 $ 2,734
Acquisition/integration-related costs (510) (1,683) (1,439)
Goodwill and existing technology
amortization (394) (149) (32)
Other and corporate 187 122 336
Operating income 5,406 2,638 1,599
Other income-net 443 128 97
Interest expense (406) (254) (238)
Income before income taxes $ 5,443 $ 2,512 $ 1,458
</TABLE>
PRODUCTS AND SERVICES REVENUES
The table below presents external revenue for groups of similar products and
services:
<TABLE>
<CAPTION>
Year Ended 9/30 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Core Networking Systems (a) $17,750 $14,412 $12,529
Wireless Products 5,516 4,456 2,984
Business Communications Systems (b) 6,977 6,399 5,077
Microelectronics 2,827 2,405 2,214
NetCare Professional Services 768 483 274
Other (c) 4,465 3,651 4,533
Totals $38,303 $31,806 $27,611
</TABLE>
(a) Core Networking Systems includes switching and access products, data
networking systems for service providers, optical networking products,
communications software and engineering services.
(b) Business Communications Systems includes advanced communications products
and messaging services.
(c) "Other" principally includes network products.
GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
EXTERNAL REVENUES (a) LONG-LIVED ASSETS (b)
----------------- -----------------
Year Ended
-------------------------
September 30, 1999 1998 1997 1999 1998 1997
- ----------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
United States $26,116 $23,513 $20,858 $ 6,244 $ 5,422 $ 4,696
Foreign countries 12,187 8,293 6,753 1,812 1,531 1,188
Totals $38,303 $31,806 $27,611 $ 8,056 $ 6,953 $ 5,884
</TABLE>
(a) Revenues are attributed to geographic areas based on the location of
customers.
(b) Represents property, plant and equipment (net), and goodwill and existing
technology.
<PAGE> 50
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. Revenues from AT&T Corp. accounted
for approximately, 12%, 12% and 14% of consolidated revenues in the years 1999,
1998 and 1997, respectively, principally in the SPN segment. 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 and
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 eliminated suddenly, could impact its operations severely.
13. FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of financial instruments,
including derivative financial instruments were as follows:
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
------- ------- -------- -------
<S> <C> <C> <C> <C>
ASSETS
Derivative and off-balance-sheet
instruments:
Foreign currency forward exchange
contracts/options $ 18 $ 17 $ 26 $ 4
Letters of credit - 2 - 2
LIABILITIES
Long-term debt(1)(2) $ 4,083 $ 3,956 $ 2,408 $ 2,559
Derivative and off-balance-sheet
instruments:
Foreign currency forward exchange
contracts/options 36 27 25 (4)
</TABLE>
(1) Excluding long-term lease obligations of $79 at September 30, 1999 and $1 at
September 30, 1998.
(2) For September 30, 1998 reflects the reclassification of debt maturing within
one year to long-term debt as a result of the November 19, 1998 sale of $500
($495 net of unamortized costs) of 10-year notes.
The following methods were used to estimate the fair value of each class of
financial instruments:
<TABLE>
<CAPTION>
Financial Instrument Valuation Method
- ---------------------------------------------------------------------------------------
<S> <C>
Long-term debt Market quotes for instruments with similar terms
and maturities
Foreign currency forward exchange
contracts/options Market quotes
Letters of credit Fees paid to obtain the obligations
</TABLE>
The carrying amounts of cash and cash equivalents, investments, receivables and
debt maturing within one year contained in the Consolidated Balance Sheets
approximate fair value.
CREDIT RISK AND MARKET RISK
By their nature, all financial instruments involve risk, including credit risk
for non-performance 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 Consolidated Balance Sheets. However, Lucent's maximum
exposure to credit loss in the event of nonperformance by the other party to the
financial instruments for commitments to extend credit and financial guarantees
is limited to the amount drawn and outstanding on those instruments.
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
Lucent seeks to reduce credit risk on financial instruments by dealing only with
financially secure counterparties. Exposure to credit risk is controlled through
credit approvals, credit limits and monitoring procedures. Lucent seeks to limit
its exposure to credit risks in any single country or region.
All financial instruments inherently expose the holders to market risk,
including changes in currency and interest rates. Lucent manages its exposure to
these market risks through its regular operating and financing activities and
when appropriate, through the use of derivative financial instruments.
DERIVATIVE FINANCIAL INSTRUMENTS
Lucent conducts its business on a multinational basis in a wide variety of
foreign currencies. Consequently, Lucent enters into various foreign exchange
forward and option contracts to manage its exposure against adverse changes in
those foreign exchange rates. The notional amounts for foreign exchange forward
and option contracts represent the U.S. dollar equivalent of an amount
exchanged. 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 all hedged contracts for firmly
committed transactions and option contracts for anticipated transactions are
deferred in Other current assets and liabilities, are recognized in income when
the transactions occur, and are not material to the consolidated financial
statements at September 30, 1999, and 1998. All other gains and losses on
foreign currency exchange contracts are recognized in Other income-net as the
exchange rates change.
Lucent engages in foreign currency hedging activities to reduce the risk that
changes in exchange rates will adversely affect the eventual net cash flows
resulting from the sale of products to foreign customers and purchases from
foreign suppliers. Hedge accounting treatment is appropriate for a derivative
instrument when changes in the value of the derivative instrument are
substantially equal, but opposite, to changes in the value of the exposure being
hedged. Lucent believes that it has achieved risk reduction and hedge
effectiveness, because the gains and losses on its derivative instruments
substantially offset the gains on the assets, liabilities and transactions being
hedged. Hedge effectiveness is periodically measured by comparing the change in
fair value of each hedged foreign currency exposure at the applicable market
rate with the change in market value of the corresponding derivative instrument.
The following table summarizes the notional amounts of these derivative
financial instruments in U.S. dollars. In 1999, these notional amounts
principally represent contracts in Canadian dollars, Brazilian reals, Singapore
dollars, British pounds and Euro currencies (primarily Dutch guilders and German
marks). Notional amounts represent the face amount of the contractual
arrangements and the basis on which U.S. dollars are to be exchanged and are not
a measure of market or credit exposure.
<TABLE>
<CAPTION>
Notional Amounts
September 30,
1999 1998
<S> <C> <C>
Foreign exchange forward contracts $1,871 $1,518
Foreign exchange option contracts $ 303 $ 130
</TABLE>
Lucent may enter into certain interest rate swap agreements to manage its risk
between fixed, floating and variable interest rates and long-term and short-term
maturity debt instruments. There were no material interest rate swap agreements
in effect during 1999 and 1998.
NON-DERIVATIVE AND OFF-BALANCE-SHEET INSTRUMENTS
Requests for providing commitments to extend credit and financial guarantees are
reviewed and approved by senior management. Management regularly reviews 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, 1999, and
1998, in management's opinion, there was no significant risk of loss in the
event of non-performance of the counterparties to these financial instruments.
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
The following table presents Lucent's non-derivative and off-balance-sheet
instruments for amounts committed but not drawn-down and the amounts drawn-down
on such instruments. These instruments may exist or expire without being drawn
upon. Therefore, the amounts committed but not drawn-down do not necessarily
represent future cash flows.
<TABLE>
<CAPTION>
Amounts Committed Amounts Drawn-
But Not down and
Drawn-down Outstanding
September 30, September 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Commitments to extend credit... $5,544 $2,086 $1,574 $ 536
Guarantees of debt............. $ 108 $ 87 $ 312 $ 205
</TABLE>
COMMITMENTS TO EXTEND CREDIT
Commitments to extend credit to third parties are conditional agreements
generally having fixed expiration or termination dates and specific interest
rates and purposes.
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.
Certain financial guarantees are backed by amounts held in trust for Lucent or
assigned to a third-party reinsurer.
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 which
amounted to $931 and $805 as of September 30, 1999 and 1998, respectively.
SECURITIZATION
In September 1999, a subsidiary of Lucent sold approximately $625 of accounts
receivable to a non-consolidated qualified special purpose entity ("QSPE")
which, in turn, sold an undivided ownership interest in these receivables to
entities managed by an unaffiliated financial institution. Additionally, Lucent
transferred a designated pool of qualified accounts receivable of approximately
$700 to the QSPE as collateral for the initial sale. Lucent's retained interest
in the QSPE's designated pool of qualified accounts receivable has been included
in Receivables. Lucent will continue to service, administer and collect the
receivables on behalf of the purchaser. The impact of the above transaction
reduced Receivables and increased cash flows from operating activities in the
Consolidated Statements of Cash Flows by $600.
14. COMMITMENTS AND CONTINGENCIES
In the normal course of business, Lucent is subject to proceedings, lawsuits and
other claims, including proceedings under laws and government 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, 1999, 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, 1999, would not be material to the annual consolidated financial statements.
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
In connection with the formation of Lucent from certain units of AT&T Corp. and
the associated assets and liabilities of those units (the "Separation") and
AT&T's distribution of its remaining interest in Lucent to its shareowners (the
"Distribution"), Lucent, AT&T and NCR Corporation executed and delivered the
Separation and Distribution Agreement, dated as of February 1, 1996, as amended
and restated (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.
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 under way at numerous 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
typically range from 5 to 30 years. Reserves for estimated losses from
environmental remediation are, depending on the site, based primarily on
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 Lucent's financial condition, results of operations or cash flows. Any
possible loss or range of possible loss that may be incurred in excess of that
provided for at September 30, 1999, cannot be estimated.
<PAGE> 54
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 2020. Rental expense under operating leases was $545, $425
and $335 for the years ended September 30, 1999, 1998 and 1997, respectively.
The table below shows the future minimum lease payments due under non-cancelable
leases at September 30, 1999. Such payments total $1,509 for operating leases.
The net present value of such payments on capital leases was $81 after deducting
imputed interest of $15.
<TABLE>
<CAPTION>
Year Ended September 30,
Later
2000 2001 2002 2003 2004 Years
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Operating leases ........... $321 $265 $200 $163 $114 $446
Capital leases ............. 2 41 20 20 13 -
Minimum lease payments...... $323 $306 $220 $183 $127 $446
</TABLE>
15. SUBSEQUENT EVENTS
International Network Services
On October 15, 1999, Lucent merged with International Network Services "INS", a
global provider of network consulting, design and integration. Pursuant to the
merger agreement, the outstanding INS stock was converted into the right to
receive approximately 49 million shares of Lucent common stock. In addition,
Lucent assumed outstanding employee stock options covering approximately 16
million shares of Lucent common stock. The transaction will be accounted for as
a pooling-of-interests.
Excel Switching Corporation
On November 3, 1999, Lucent merged with Excel Switching Corporation, a Hyannis,
Massachusetts-based developer of programmable switches. Under the terms of the
agreement, the outstanding Excel stock was converted into the right to receive
approximately 22.3 million shares of Lucent common stock. The transaction will
be accounted for as a pooling-of-interests.
Xedia Corporation
On November 12, 1999, Lucent merged with Xedia Corporation, a privately held
Acton, Massachusetts-based maker of routers for corporate networks. Under the
terms of the agreement, the outstanding Xedia capital stock and warrants were
converted into the right to receive approximately 3.86 million shares of Lucent
common stock. The transaction will be accounted for as a pooling-of-interests.
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
16. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR QUARTERS
FIRST SECOND THIRD FOURTH TOTAL
------- -------- ------ --------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended
September 30, 1999
Revenues......................... $ 9,741 $8,672 $9,315 $10,575 $ 38,303
Gross margin..................... 5,159 4,178 4,481 4,797 18,615
Net income before cumulative 1,231(a) 529(b) 750(c) 948(d) 3,458(a,b,c,d)
effect of accounting change...
Cumulative effect of accounting
change........................ 1,308 - - - 1,308
Net income....................... $ 2,539(a) $ 529(b) $ 750(c) $ 948(d) $ 4,766(a,b,c,d)
Earnings per
common share - basic:
Income before cumulative
effect of accounting change... $ 0.41(a) $ 0.17(b) $ 0.25(c) $ 0.31(d) $ 1.14(a,b,c,d)
Cumulative effect of accounting
change........................ 0.43 - - - 0.43
Net income .................... $ 0.84(a) $ 0.17(b) $ 0.25(c) $ 0.31(d) $ 1.57(a,b,c,d)
Earnings per common share - diluted:
Income before cumulative
effect of accounting change... $ 0.40(a) $ 0.17(b) $ 0.24(c) $ 0.30(d) $ 1.10(a,b,c,d)
Cumulative effect of accounting
change........................ 0.42 - - - 0.42
Net income..................... $ 0.82(a) $ 0.17(b) $ 0.24(c) $ 0.30(d) $ 1.52(a,b,c,d)
Dividends per share............. $ 0.04 $ 0.00 $ 0.02 $ 0.02 $ 0.08
Stock price:(i)
High......................... 56 15/16 60 68 11/16 79 3/4 79 3/4
Low.......................... 26 23/32 47 51 7/8 60 26 23/32
Quarter-end close............ 54 31/32 54 67 7/16 64 7/8 64 7/8
Year Ended
September 30, 1998
Revenues........................ $ 9,079 $6,511 $7,642 $8,574 $31,806
Gross margin.................... 4,447 2,958 3,555 4,131 15,091
Net income(loss)................ 877(e) 88(f) (150)(g) 220(h) 1,035(e,f,g,h)
Earnings(loss) per
common share - basic........... $ 0.30(e) $ 0.03(f) $(0.05)(g) $ 0.07(h) $ 0.35(e,f,g,h)
Earnings(loss) per
common share - diluted......... $ 0.29(e) $ 0.03(f) $(0.05)(g) $ 0.07(h) $ 0.34(e,f,g,h)
Dividends per share............. $ 0.0375 $ 0.00 $ 0.02 $ 0.02 $ 0.0775
Stock price:(i)
High......................... 22 35/64 32 1/16 41 27/32 54 1/4 54 1/4
Low.......................... 18 3/32 18 23/64 32 34 3/16 18 3/32
Quarter-end close............ 19 31/32 31 31/32 41 19/32 34 5/8 34 5/8
</TABLE>
(a) As a result of the 1999 acquisitions of Quadritek and Stratus, Lucent
recorded an after-tax charge of $281 in the first quarter for purchased
in-process research and development.
(b) As a result of the 1999 acquisitions of WaveAccess, Enable Ethernet, and
Sybarus, Lucent recorded an after-tax charge of $15 in the second quarter
for purchased in-process research and development. In addition, $24 of
Stratus purchased in-process research and development was reversed.
(c) As a result of the merger with Ascend, Lucent recorded a charge to operating
expenses of approximately $79 million (non-tax impacting)in the third
quarter for direct merger-related costs.
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(d) As a result of the mergers with Ascend and Nexabit, Lucent recorded pretax
costs of $258 million ($191 million after-tax) in the fourth quarter primarily
associated with assets impairments, integration-related charges and merger
expenses. These costs principally include the write-off of Livingston goodwill
and existing technology, certain product and system integration and direct
merger expenses related to Nexabit.
(e) As a result of the 1998 acquisition of Livingston, Lucent recorded a non-tax
charge of $427 in the first quarter for purchased in-process research and
development.
(f) As a result of the 1998 acquisition of Prominet, Lucent recorded a non-tax
charge of $157 in the second quarter for purchased in-process research and
development.
(g) As a result of the 1998 acquisitions of Yurie and Optimay, Lucent recorded a
non-tax charge of $668 in the third quarter for purchased in-process
research and development.
(h) As a result of the 1998 acquisitions of SDX, MassMedia, LANNET, JNA and
Stratus, Lucent recorded a charge of $431 ($427 after-tax) in the fourth
quarter for purchased in-process research and development.
(i) Obtained from the Composite Tape. Stock prices have been restated to reflect
the two-for-one splits of the Company's common stock effective April 1,
1998, and April 1, 1999.
<PAGE> 1
EXHIBIT 21
LUCENT TECHNOLOGIES SUBSIDIARIES
AS OF 9/30/99
<TABLE>
<CAPTION>
NAME OF LUCENT TECHNOLOGIES ENTITY LOCATION
<S> <C>
Lucent Technologies Argentina S.A. Argentina
(Lucent Technologies Sociedad Anonima Argentina)
Ascend Australia Pty. Ltd. Australia
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
Ascend Communications Benelux Belgium
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 Ltda. Brazil
Lucent Technologies Brasil Ltda. Brazil
SID Telecomunicacoes E Controles, S.A. Brazil
Lucent Technologies World Services, Inc. (Brunei branch) Brunei
Lucent Technologies Microelectronics Canada ULC Canada
Ascend Communications Canada Ltd. Canada
Lucent Technologies Canada Corp. Canada
Octel Communications 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
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Lucent Technologies Denmark A/S Denmark
Lucent Technologies Dominicana C. por A. Dominican Republic
EcuaLucent Technologies S.A. Ecuador
Lucent Technologies International Inc. (Egypt Branch) Egypt
Lucent Technologies El Salvador S.A. de C.V. El Salvador
Ascend Communications France S.A.R.L. France
Ascend Communications Premea France
Lucent Technologies BCS S.A. France
TRT Lucent Technologies S.A. France
Triple C Call Center Communications GmbH Germany
Ascend Communications GmbH Germany
Lucent Technologies Business Communications Systems and Germany
Microelectronics GmbH
Lucent Technologies Network Systems GmbH Germany
Lucent Technologies EMEA B.V. (Greece) Greece
Lucent Technologies de Guatemala S.A. Guatemala
Lucent Technologies World Services, Inc. (Honduras Honduras
Branch)
Lucent Technologies de Honduras S.A. Honduras
Lucent Technologies Asia/Pacific Inc. (Hong Kong branch) Hong Kong
Lucent Technologies Korea Ltd. (Hong Kong branch) Hong Kong
Ascend Communications (HK) Limited Hong Kong
Lucent Technologies Asia/Pacific (H.K) Ltd. Hong Kong
Lucent Technologies Hungary Ltd. Lucent Technologies Hungary
Magyarorszag Kft.
Lucent Technologies India Pvt. Ltd. India
Lucent Technologies Network Systems Nederland B.V. Indonesia
(Indonesia)
Lucent Technologies World Services Inc. (Indonesia Project Indonesia
Office)
Lucent Technologies Asia/Pacific Inc. (Indonesia Rep. Indonesia
Office)
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
Lucent Technologies GCM Sales Limited Ireland
Lucent Technologies Ireland Ltd. Ireland
Ascend Communications Europe Limited Ireland
Lucent Technologies Networks Ltd. Israel
WaveAccess, Ltd. Israel
Ascend Communications Srl Italy
Lucent Technologies Italia S.p.A. Italy
Ascend Communications Japan K.K. Japan
Lucent Technologies Japan Ltd. Japan
Lucent Technologies EMEA B.V. (Kazakhstan Kazakhstan
Representative Office)
Lucent Technologies Nederland B.V. (Kazakhstan Kazakhstan
Representative Office)
Lucent Technologies World Services Inc. (Kenya Branch) Kenya
Lucent Technologies Korea Ltd. Korea
Lucent Technologies World Services Inc. (Kuwait branch office) Kuwait
Lucent Technologies Eurasia Ltd. (Lithuania Rep. Office) Lithuania
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 de Mexico S. A. de C. V. Mexico
Lucent Technologies Microelectronica de Monterrey, S.A. de C.V. Mexico
LTCP Holdings de Mexico, S.A. de C.V. Mexico
LTCP de Mexico, S.A. e C.V. Mexico
LTCP Reynosa, S.A. de C.V. Mexico
Lucent Technologies EMEA Services B.V. Netherlands
Lucent Technologies Nederland B.V. Netherlands
Lucent Technologies BCS Nederland B.V. Netherlands
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
Lucent Technologies EMEA B.V. Netherlands
Lucent Technologies (NZ) Limited New Zealand
Lucent Technologies Nicaragua S.A. Nicaragua
Lucent Technologies Qingdao Power Systems Company, Peoples Republic of China
Ltd.
Lucent Technologies Qingdao Telecommunications Systems Peoples Republic of China
Ltd.
Lucent Technologies (China) Co., Ltd. Peoples Republic of China
Lucent Technologies (Shanghai) International Enterprises, Peoples Republic of China
Ltd.
Lucent Technologies World Services Inc. (Panama branch) Panama
Lucent Technologies del Peru S.A. Peru
Lucent Technologies Philippines Inc. Philippines
Lucent Technologies Poland S.A. Poland
Lucent Technologies Polska Spolka z o.o. Poland
Lucent Technologies International Inc. - Secursal en Portugal
Portugal
Lucent Technologies World Services Inc. (Puerto Rico Puerto Rico
branch)
Lucent Technologies Puerto Rico Inc. Puerto Rico
Lucent Technologies Eurasia Ltd. (Romania branch) Romania
Lucent Technologies EMEA B.V. (Moscow Rep. Office) Russian Federation
Lucent Technologies Eurasia Ltd. (Russia Moscow Rep. Russian Federation
Office)
ZAO Lucent Technologies Russian Federation
Lucent Technologies International Inc. (Saudi Arabia Saudi Arabia
branch)
Ascend Communications Pte. Ltd. Singapore
Lucent Technologies Consumer Products Pte. Ltd. Singapore
Lucent Technologies Investments Asia Pte. Ltd. Singapore
Lucent Technologies Microelectronics Pte. Ltd. Singapore
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
Lucent Technologies Singapore Pte. Ltd. Singapore
Lucent Technologies Slovensko s.r.o. Slovak Republic
Lucent Technologies South Africa (Proprietary) Ltd. South Africa
Lucent Technologies Microelectronica S.A. Spain
Lucent Technologies Network Systems Espana S.A. Spain
Lucent Technologies Asia/Pacific Inc. (Sri Lanka branch) Sri Lanka
Ascend Communications Nordic AB Sweden
Lucent Technologies Sweden AB. Sweden
Lucent Technologies A.G. Switzerland
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) United Arab Emirates
Ascend Communications M.E., Inc. Dubai United Arab Emirates
Lucent Technologies Network Systems UK Ltd. United Kingdom
Lucent Technologies Holdings UK Limited United Kingdom
Telectron Systems Ltd. United Kingdom
Lucent Technologies plc. United Kingdom
Lucent Technologies ECS plc. United Kingdom
Lucent CheZaRa Ukraine
Lucent Technologies EMEA B.V. (Kiev - Ukraine) Ukraine
L.T. Funding, LLC United States
Ascend Communications, Inc. United States
Ascend Credit Corporation United States
Ascend Communications, M.E., Inc. United States
ATOR Corporation United States
Cascade Communications Securities Corporation United States
Cascade Communications Asia Corporation United States
Cascade Communications HC Corporation United States
Bell Laboratories, Inc. United States
Kenan Systems Corporation United States
Litespec, Inc. United States
</TABLE>
<PAGE> 6
<TABLE>
<S> <C>
Loose Tube Inc. United States
LTI Corporation United States
Lucent Asset Management Corporation United States
Lucent Technologies Americas Inc. United States
Lucent Technologies Asia/Pacific Inc. United States
Lucent Technologies Construction Services, Inc. United States
Lucent Technologies Eastern Ventures Inc. United States
Lucent Technologies Engineering Inc. United States
Lucent Technologies Eurasia Ltd. United States
Lucent Technologies Guardian Corporation United States
Lucent Technologies GRL Corporation United States
Lucent Technologies Holdings Inc. United States
Lucent Technologies International Inc. United States
Lucent Technologies Kazakhstan Ltd United States
Lucent Technologies Management Services Inc. United States
Lucent Technologies Maquiladoras Inc. United States
Lucent Technologies Opto Inc. United States
Lucent Technologies Realty Inc. United States
Lucent Technologies Sentinel, Inc. United States
Lucent Technologies Services Company Inc. United States
Lucent Technologies Taiwan Inc. United States
Lucent Technologies Technical Services Company, Inc. United States
Lucent Technologies Thailand Inc. United States
Lucent Technologies Ventures Inc. United States
Lucent Technologies Western Investments Inc. United States
Lucent Technologies World Services Inc. United States
Lucent Venture Partners Inc. United States
Mosaix, Inc. United States
Nassau Metals Corporation United States
NCS OSP Development Corp. United States
NCS Ventures, Inc. United States
</TABLE>
<PAGE> 7
<TABLE>
<S> <C>
Nexabit Networks, Inc. United States
Octel Communications Corporation United States
Optimay Corporation United States
Prominet Corporation United States
Telecommunications Technology Middle East Inc. United States
Western Electric Company, Incorporated United States
Western Electric International Incorporated United States
Xedia Corporation United States
Lucent Cable Communications Inc. United States
Lucent Consumer Communications, LLC United States
Lucent Technologies Consumer Products LP United States
Lucent Technologies Venezuela S.A. Venezuela
Lucent Technologies Asia/Pacific Inc. Vietnam
(Vietnam Rep. Office)
</TABLE>
Certain subsidiaries, which considered in the aggregate as a single subsidiary,
would not constitute a significant subsidiary as of September 30, 1999, have
been omitted in accordance with Item 601(b)(21)(ii) of Regulation S-K.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statements on Form S-3 (File No. 333-89347, 333-85219 and 333-85061), and Forms
S-8 (File No.'s 333-45253, 333-64525, 333-46589, 333-52799, 333-72425,
333-79007, 333-52805, 333-56133, 333-08775, 333-37041, 333-33943, 333-18975,
333-18977, 333-08783, 333-81751, 333-87685, 333-88201, 333-87151, 333-84981,
333-80267 333-08789, 333-08793, 333-08801, 333-23043 and 333-42475), of Lucent
Technologies Inc. of our reports dated October 25, 1999, relating to the
consolidated financial statements and financial statement schedule, which
appears in this Form 10-K.
PricewaterhouseCoopers LLP
New York, New York
December 21, 1999
<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, an Annual Report on Form 10-K for the fiscal year ended September 30,
1999; and
WHEREAS, the undersigned is a Director (and/or Officer) of the Company,
as indicated below his or her signature:
NOW, THEREFORE, the undersigned hereby constitutes and appoints Donald
K. Peterson 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 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 15th day of December, 1999.
By /s/ Richard A. McGinn By /s/ Donald S. Perkins
---------------------------- ------------------------
Name: Richard A. McGinn Name: Donald S. Perkins
Title: Chairman of the Board and Title: Director
Chief Executive Officer
By /s/ Paul A. Allaire By /s/ Henry B. Schacht
---------------------------- ------------------------
Name: Paul A. Allaire Name: Henry B. Schacht
Title: Director Title: Director
By /s/ Carla A. Hills By /s/ Franklin A. Thomas
---------------------------- ------------------------
Name: Carla A. Hills Name: Franklin A. Thomas
Title: Director Title: Director
By /s/ Drew Lewis By /s/ John A. Young
---------------------------- ------------------------
Name: Drew Lewis Name: John A. Young
Title: Director Title: Director
By
----------------------------
Name: Paul H. O'Neill
Title: Director
<PAGE> 2
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, an Annual Report on Form 10-K for the fiscal year ended September 30,
1999; and
WHEREAS, the undersigned is an Officer of the Company, as indicated
below his signature:
NOW, THEREFORE, the undersigned hereby constitutes and appoints Donald
K. Peterson as attorney for and in the name, place and stead of the undersigned,
and in the capacity of the undersigned as an Officer of the Company, to execute
and file such Form 10-K and any amendments or supplements thereto, hereby giving
and granting to said attorney, 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 attorney 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 15 day of December, 1999.
By /s/ James S. Lusk
--------------------------------
Name: James S. Lusk
Title: Senior Vice President and
Controller
<PAGE> 3
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, an Annual Report on Form 10-K for the fiscal year ended September 30,
1999; and
WHEREAS, the undersigned is an Officer of the Company, as indicated
below his signature:
NOW, THEREFORE, the undersigned hereby constitutes and appoints James
S. Lusk as attorney for and in the name, place and stead of the undersigned, and
in the capacity of the undersigned as an Officer of the Company, to execute and
file such Form 10-K and any amendments or supplements thereto, hereby giving and
granting to said attorney, 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 attorney 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 15 day of December, 1999.
By /s/ Donald K. Peterson
-----------------------------------
Name: Donald K. Peterson
Title: Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
balance sheet of Lucent at September 30, 1999 and the audited consolidated
statement of income for the year ended September 30, 1999 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> SEP-30-1999
<CASH> 1,816
<SECURITIES> 0
<RECEIVABLES> 10,800
<ALLOWANCES> 362
<INVENTORY> 5,048
<CURRENT-ASSETS> 21,931
<PP&E> 14,292
<DEPRECIATION> 7,445
<TOTAL-ASSETS> 38,775
<CURRENT-LIABILITIES> 11,778
<BONDS> 4,162
0
0
<COMMON> 31
<OTHER-SE> 13,553
<TOTAL-LIABILITY-AND-EQUITY> 38,775
<SALES> 38,303
<TOTAL-REVENUES> 38,303
<CGS> 19,688
<TOTAL-COSTS> 19,688
<OTHER-EXPENSES> 4,792
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> 406
<INCOME-PRETAX> 5,443
<INCOME-TAX> 1,985
<INCOME-CONTINUING> 3,458
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,308
<NET-INCOME> 4,766
<EPS-BASIC> 1.57
<EPS-DILUTED> 1.52
</TABLE>
