<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) :
February 26, 1999
---------------------------------------------------
Lucent Technologies Inc.
--------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
--------------------------------------------------
(State or other jurisdiction of incorporation)
1-11639 22-3408857
(Commission File Number) (IRS Employer Identification No.)
600 Mountain Avenue, Murray Hill, New Jersey 07974
---------------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
(908) 582-8500
---------------------------------------------------
(Registrant's Telephone Number)
<PAGE>
Item 5. Other Events.
On February 26, 1999, pursuant to the Agreement and Plan of Merger (the "Merger
Agreement") dated as of January 11, 1999 by and among Lucent Technologies Inc.
("Lucent"), Lando Acquisition, Inc. ("Lando"), a wholly-owned subsidiary of
Lucent, Kenan Sahin and Kenan Systems Corporation ("Kenan"), Lando was merged
with and into Kenan (the "Merger"). Kenan was the surviving corporation in the
Merger and became a wholly owned subsidiary of Lucent. In accordance with the
Merger Agreement, all the outstanding common stock of Kenan was exchanged for
approximately 12.88 million shares of Lucent common stock. The Merger has been
accounted for as a "pooling of interests" under generally accepted accounting
principles.
Included under Item 7 of this Report on Form 8-K are (i) supplemental
consolidated financial information, including restated consolidated financial
statements, as of September 30, 1998 and 1997 and for the years ended September
30, 1998 and 1997 and the nine months ended September 30, 1996 and
(ii)supplemental financial information, including restated condensed
consolidated financial statements, as of December 31, 1998 and for the three
months ended December 31, 1998 and 1997, in each case giving retroactive effect
to the Merger for all periods presented. The supplemental consolidated financial
statements will become, in all material respects, the historical financial
statements of Lucent.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Not applicable
(b) Not applicable
(c) The following exhibits are included with this Report:
Exhibit 12.1 Ratio of Earnings to Fixed Charges for the years
ended September 30, 1998 and 1997, the nine months
ended September 30, 1996 and the years ended
December 31, 1995 and 1994
Exhibit 12.2 Ratio of Earnings to Fixed Charges for the Three
Months Ended December 31, 1998
Exhibit 23 Consent of PricewaterhouseCoopers LLP
Exhibit 27.1 Financial Data Schedule at or for the Twelve Months
ended September 30, 1998
Exhibit 27.2 Financial Data Schedule at or for the Three Months
December 31, 1998
Exhibit 99.1 Supplemental financial information as of
September 30, 1998 and 1997 and for the years ended
September 30, 1998 and 1997 and the nine months ended
September 30, 1996
Exhibit 99.2 Supplemental financial information as of December 31,
1998 and for the three months ended December 31, 1998
and 1997
Exhibit 99.3 Schedule II - Valuation and Qualifying Accounts
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Lucent Technologies Inc.
Dated: March 5, 1999
By: /s/ James S. Lusk
-------------------------------
By James S. Lusk
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit 12.1 Ratio of Earnings to Fixed Charges for the years ended
September 30, 1998 and 1997, the nine months ended September
30, 1996 and the years ended December 31, 1995 and 1994
Exhibit 12.2 Ratio of Earnings to Fixed Charges for the Three Months
Ended December 31, 1998
Exhibit 23.1 Consent of PricewaterhouseCoopers LLP
Exhibit 27.1 Financial Data Schedule at or for the Twelve Months ended
September 30, 1998
Exhibit 27.2 Financial Data Schedule at or for the Three Months
December 31, 1998
Exhibit 99.1 Supplemental financial information as of September 30, 1998
and 1997 and for the years ended September 30, 1998 and 1997
and the nine months ended September 30, 1996
Exhibit 99.2 Supplemental financial information as of
December 31, 1998 and for the three months ended
December 31, 1998 and 1997
Exhibit 99.3 Schedule II - Valuation and Qualifying Accounts
<PAGE>
EXHIBIT 12.1
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 NINE FOR THE FOR THE
MONTHS ENDED MONTHS ENDED MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1998 (B) 1997 (B) 1996 (B) 1995 1994
------------ ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Earnings Before
Income Taxes ............ $2,396 $1,503 $375 $(1,136) $ 783
Less Interest
Capitalized During
the Period ............. 17 14 14 14 7
Less Undistributed
Earnings of
Less than 50%
Owned Affiliates ....... 11 3 1 2 21
Add Fixed Charges ........ 498 457 311 327 338
------ ------ ---- ------- ------
Total Earnings .......... $2,866 $1,943 $671 $ (825) $1,093
Fixed Charges
Total Interest Expense
Including
Capitalized Interest..... $ 297 $ 281 $209 $ 257 $ 277
Interest Portion of Rental
Expenses ............... 137 109 61 70 61
------ ------ ---- ------- ------
Total Fixed Charges...... $ 434 $ 390 $270 $ 327 $ 338
Ratio of Earnings to Fixed
Charges ................ 6.6 5.0 2.5 (A) 3.2
</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 $1,152.
(B) Certain prior year amounts have been reclassified to conform to the current
year presentation.
<PAGE>
EXHIBIT 12.2
Lucent Technologies Inc.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
For the Three
Months Ended
December 31, 1998
Income Before Income Taxes............................. $2,152
Less Interest Capitalized during
the Period........................................... 5
Less Undistributed Earnings of Less than 50%
Owned Affiliates..................................... 1
Add Fixed Charges...................................... 117
Total Earnings ........................................ $2,263
Fixed Charges
Total Interest Expense Including Capitalized Interest.. $ 80
Interest Portion of Rental Expense..................... 37
Total Fixed Charges................................ $ 117
Ratio of Earnings to Fixed Charges..................... 19.3
<PAGE>
EXHIBIT 23.1
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to the incorporation by reference in the registration statements of
Lucent Technologies Inc. (the "Company") on Form S-3 (File No. 333-01223), and
Forms S-8 (File No.'s 333-45253, 333-46589, 333-52799, 333-52805, 333-56133,
333-08775, 333-37041, 333-33943, 333-18975, 333-18977, 333-08783, 333-42475,
333-23043 and 333-72425,) of our report, dated February 26, 1999 on our audit of
the supplemental consolidated financial statements of Lucent Technologies Inc.
and subsidiaries at September 30, 1998 and 1997 and for each of the two years in
the period ended September 30, 1998 and for the nine- month period ended
September 30, 1996, which report appears in this Current Report on Form 8-K.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
March 5, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
balance sheet of Lucent at September 30, 1998 and the audited consolidated
statement of income for the year ended September 30, 1998 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-1-1997
<PERIOD-END> SEP-30-1998
<CASH> 712
<SECURITIES> 0
<RECEIVABLES> 7,406
<ALLOWANCES> 392
<INVENTORY> 3,081
<CURRENT-ASSETS> 14,182
<PP&E> 11,802
<DEPRECIATION> 6,392
<TOTAL-ASSETS> 26,831
<CURRENT-LIABILITIES> 10,458
<BONDS> 2,409
0
0
<COMMON> 13
<OTHER-SE> 5,602
<TOTAL-LIABILITY-AND-EQUITY> 26,831
<SALES> 30,328
<TOTAL-REVENUES> 30,328
<CGS> 16,171
<TOTAL-COSTS> 16,171
<OTHER-EXPENSES> 11,607
<LOSS-PROVISION> 132
<INTEREST-EXPENSE> 254
<INCOME-PRETAX> 2,396
<INCOME-TAX> 1,341
<INCOME-CONTINUING> 1,055
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,055
<EPS-PRIMARY> .80
<EPS-DILUTED> .78
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited balance sheet of Lucent at December 31, 1998 and the unaudited
consolidated statement of income for the three month period ended December 31,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 967
<SECURITIES> 0
<RECEIVABLES> 9,608
<ALLOWANCES> 348
<INVENTORY> 3,778
<CURRENT-ASSETS> 17,455
<PP&E> 12,548
<DEPRECIATION> 6,896
<TOTAL-ASSETS> 31,752
<CURRENT-LIABILITIES> 12,471
<BONDS> 2,404
0
0
<COMMON> 13
<OTHER-SE> 8,505
<TOTAL-LIABILITY-AND-EQUITY> 31,752
<SALES> 9,264
<TOTAL-REVENUES> 9,264
<CGS> 4,398
<TOTAL-COSTS> 4,398
<OTHER-EXPENSES> 952
<LOSS-PROVISION> (15)
<INTEREST-EXPENSE> 78
<INCOME-PRETAX> 2,152
<INCOME-TAX> 724
<INCOME-CONTINUING> 1,428
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,308
<NET-INCOME> 2,736
<EPS-PRIMARY> 2.06
<EPS-DILUTED> 2.01
</TABLE>
<PAGE>
PAGE 1 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion of the results of operations and financial condition of
Lucent Technologies Inc. ("Lucent" or the "Company") and the accompanying
supplemental consolidated financial information has been prepared to give
retroactive effect to the merger of a subsidiary of Lucent and Kenan Systems
Corporation. The supplemental consolidated financial information has been
derived by combining the financial information of Lucent for the twelve month
periods ended September 30, 1998, 1997 and 1996, with the financial information
of Kenan for the twelve month periods ended December 31, 1998, 1997 and 1996,
respectively. This Management's Discussion and Analysis addresses the periods
covered by the financial statements contained in this Exhibit 99.1.
HIGHLIGHTS
For the year ended September 30, Lucent Technologies Inc. ("Lucent" or the
"Company") reported the following:
1998 1997
o Net income of $1,055 million, $0.78 o Net income of $574 million, $0.44
per share (diluted) per share (diluted)
EXCLUDING CERTAIN ONE-TIME EVENTS: EXCLUDING CERTAIN ONE-TIME EVENTS:
o Net income of $2,372 million, $1.76 o Net income of $1,540 million, $1.18
per share (diluted) per share(diluted)
ONE-TIME EVENTS in 1998 include $1,416 million ($1,412 million after tax) of
purchased in-process research and development charges related to the
acquisitions of Livingston Enterprises Inc., Prominet Corporation, Yurie
Systems, Inc., Optimay GmBH, SDX Business Systems plc, MassMedia Communications
Inc., LANNET and JNA Telecommunications Limited, as well as a $95 million after
tax gain on the sale of Lucent's Advanced Technology Systems
("ATS") unit.
ONE-TIME EVENTS in 1997 include a purchased in-process research and development
charge and other charges of $979 million ($966 million after tax) related to the
acquisition of Octel Communications Corporation.
The earnings per share data discussed above have been adjusted to reflect the
two-for-one split of Lucent's common stock which became effective April 1, 1998.
NET INCOME GROWTH-For the twelve months ended September 30, EXCLUDING CERTAIN
ONE-TIME EVENTS
(Dollars in billions)
Year Net Income
- ---- ----------
1996 $1.059 (a)
1997 $1.540 (b)
1998 $2.372 (c)
- ----------------
(a) Excludes impact of $2,801 million ($1,847 million after tax) of business
restructuring and other charges incurred in December 1995.
(b) Excludes one-time charges of $979 million ($966 million after tax) related
to the acquisition of Octel.
(c) Excludes one-time charges of $1,416 million ($1,412 million after tax)
related to the acquisitions of Livingston, Prominet, Yurie, Optimay, SDX,
MassMedia, LANNET, and JNA and a gain of $95 million (after tax) on the sale
of ATS.
<PAGE>
COMMUNICATIONS REVOLUTION
The communications industry is going through a revolution, centered on rapidly
growing demand by commercial and residential users for voice, data, Internet and
wireless services. As a result, the industry has undergone a global
consolidation of key players, including traditional telecommunications network
manufacturers and data networking companies, which compete in the same markets
as Lucent. This consolidation -- driven by the need for key technologies, new
distribution channels in untapped markets, economies of scale and global
expansion -- is expected to continue into the near future.
<PAGE>
PAGE 2 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Lucent continues to evaluate its presence and product offerings in the
marketplace and may use acquisitions to enhance those offerings where that makes
good business sense. These acquisitions may occur through the use of cash, or
the issuance of debt or common stock, or any combination of the three.
ACQUISITIONS AND DIVESTITURES
As part of Lucent's efforts to focus on the fastest growing markets in the
communications industry, the Company has acquired a number of businesses,
complementing its existing product lines and its internal product development
efforts.
1. In September 1998, Lucent acquired JNA, an Australian telecom equipment
manufacturer, reseller and system integrator.
2. In August 1998, Lucent acquired LANNET, an Israeli-based supplier of Ethernet
and asynchronous transfer mode ("ATM") switching solutions.
3. In July 1998, Lucent acquired both SDX, a United Kingdom-based provider of
business communications systems, and MassMedia, a developer of
next-generation network interoperability software.
4. In May 1998, Lucent acquired Yurie, a provider of ATM access technology and
equipment for data, voice and video networking.
5. In April 1998, Lucent acquired Optimay, a developer of software products and
services for chip sets to be used for Global System for Mobile Communications
("GSM") cellular phones.
6. In January 1998, Lucent acquired Prominet, a participant in the emerging
Gigabit Ethernet networking industry.
7. In December 1997, Lucent acquired Livingston, a global provider of equipment
used by Internet service providers to connect their subscribers to the
Internet.
8. In September 1997, Lucent acquired Octel, a provider of voice, fax and
electronic messaging technologies that complement those offered by Lucent.
Lucent has also sought to divest itself of non-core businesses.
On 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 currently looking for opportunities to sell its remaining consumer
products business.
o In October 1997, Lucent completed the sale of its ATS unit.
o In December 1996, Lucent sold its interconnect products and Custom
Manufacturing Services ("CMS") businesses.
o In July 1996, Lucent completed the sale of its Paradyne subsidiary.
<PAGE>
PAGE 3 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 (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.
Lucent's consolidated financial statements for periods prior to February 1, 1996
reflect the financial position, results of operations and cash flows of the
operations transferred to Lucent from AT&T in the Separation and were carved out
from the financial statements of AT&T using the historical results of operations
and historical basis of the assets and liabilities of the business. Management
believes the assumptions underlying these financial statements are reasonable,
although these financial statements may not necessarily reflect the results of
operations or financial position had Lucent been a separate, stand-alone entity.
In 1996, Lucent changed its fiscal year to begin October 1 and end September 30.
Due to this change, Lucent reported 1996 audited consolidated financial results
for a short fiscal period beginning on January 1, 1996 and ending on September
30, 1996. For comparability to the audited consolidated financial statements,
Lucent has provided unaudited consolidated statements of income and cash flows
for the twelve months ended September 30, 1996.
<PAGE>
PAGE 4 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 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 may include Cisco Systems, Inc., Nortel Networks,
Ericsson, Alcatel Alsthom and Siemens AG. As a result, Lucent's management
periodically assesses market conditions and redirects the Company's resources to
meet the challenges of competition. Steps Lucent may take include acquiring 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.
Lucent has taken measures to manage the seasonality of its business by changing
the date on which its fiscal year ends and its compensation programs for
employees. As a result, Lucent has achieved a more uniform distribution of
revenues -- accompanied by a related redistribution of earnings -- throughout
the year. Revenues and earnings still remain higher in the first fiscal quarter
primarily because many of Lucent's large customers historically delay a
disproportionate percentage of their capital expenditures until the fourth
quarter of the calendar year (Lucent's first fiscal quarter).
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 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.
Lucent has been successful in diversifying its customer base and seeking out new
types of customers globally. These new types of customers include competitive
access providers, competitive local exchange carriers, wireless service
providers, cable television network operators and computer manufacturers.
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, as well as other large carriers such as Sprint Spectrum
Holding LP ("Sprint PCS"), and the Regional Bell Operating Companies ("RBOCs").
The loss of any of these customers, or any substantial reduction in orders by
any of these customers, could materially adversely affect the Company's
operating results.
<PAGE>
PAGE 5 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following summary financial data has been prepared giving effect to the
merger between a subsidiary of Lucent and Kenan Systems Corporation under the
pooling of interests method of accounting. The summary combined financial
information is derived from the financial information of Lucent at or for the
twelve months ended September 30, 1998, 1997 and 1996, and the years ended
December 31, 1995 and 1994 and the financial information of Kenan at or for the
twelve month periods ended December 31, 1998, 1997, 1996, 1995 and 1994,
respectively. The summary combined information at or for the nine month periods
ended September 30, 1996 and 1995 is derived from the financial information of
Lucent at or for the nine month periods ended September 30, 1996 and 1995 and
the financial information of Kenan at or for the twelve month periods ended
December 31, 1996 and 1995, respectively.
Lucent Technologies Inc. and Subsidiaries
Five-Year Summary
(Dollars in millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, September 30, Year Ended December 31,
(Twelve Months) (Twelve Months)
-------------------------- ------------------ --------------------
1998 1997 1996 1996 1995 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS (1)
Revenues $30,328 $26,444 $23,324 $15,897 $14,004 $21,431 $19,777
Gross margin 14,157 11,539 8,927 6,602 6,158 8,483 8,436
Depreciation and
amortization expense 1,338 1,453 1,328 939 1,106 1,495 1,313
Operating income(loss) 2,550 1,666 (939) 495 436 (998) 970
Net income(loss) 1,055 574 (788) 229 151 (866) 481
Earnings(loss) per common
share - basic (2)(3) 0.80 0.44 (0.67) 0.19 0.14 (0.82) n/a
Earnings(loss) per common
share - diluted (2)(3) 0.78 0.44 (0.67) 0.19 0.14 (0.82) n/a
Earnings(loss) per common
share - pro forma(3)(4) n/a n/a (0.61) 0.18 0.12 (0.67) n/a
Dividends per common share(3) 0.155 0.1125 0.075 0.075 - - n/a
FINANCIAL POSITION
Total assets 26,831 $23,868 $22,650 $22,650 $18,232 $19,735 $17,348
Working capital 3,724(8) 1,782 2,074 2,074 191 (382) 248
Total debt 4,640 4,203 3,997 3,997 4,192 4,014 3,164
Shareowners' equity 5,615 3,410 2,695 2,695 2,787 1,438 2,480
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER INFORMATION
Selling, general and administrative
expenses as a
percentage of revenues 21.4% 22.0% 31.3% 26.8% 28.9% 33.1% 27.1%
Research and development expenses
as a percentage
of revenues 12.2 11.5 11.0 11.6 12.0 11.1 10.6
Gross margin percentage 46.7 43.6 38.3 41.5 44.0 39.6 42.7
Return on assets 9.6(5) 6.6(6) 5.3(7) n/a n/a n/a n/a
Ratio of total debt
to total capital
(debt plus equity) 45.2 55.2 59.7 59.7 60.1 73.6 56.1
Capital expenditures $1,634 $1,639 $1,435 $ 942 $ 785 $ 1,278 $ 878
EXCLUDING CERTAIN ONE-TIME EVENTS
Net income $ 2,372(5)$ 1,540(6) $1,059(7) $ 229 $ 151 $ 981(7) $ 481
Earnings per common
share - diluted (2)(3) 1.76(5) 1.18(6) 0.82(4,7) 0.19 0.14 0.92(7) n/a
</TABLE>
(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 1,049,249,788 shares
(524,624,894 shares on a pre-split basis) owned by AT&T on April 10, 1996.
<PAGE>
PAGE 6 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(3) All per share data has been restated to reflect the two-for-one split of
Lucent's common stock which became effective on April 1, 1998.
(4) The calculation of earnings (loss) per share on a pro forma basis assumes
that all 1,286,202,650 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) Excludes one-time charges of $1,412 (after tax) of purchased in-process
research and development costs from acquisitions of Livingston, Prominet,
Optimay, Yurie, SDX, MassMedia, LANNET and JNA, as well as a $95 (after tax)
gain on the sale of ATS.
(6) Excludes one-time acquisition charges of $966 (after tax), including $945 of
purchased in-process research and development costs, from the acquisition of
Octel.
(7) Excludes pre-tax restructuring and other charges of $2,801 ($1,847 after
tax) recorded as $892 of costs, $1,645 of selling, general and
administrative expenses and $264 of research and development expenses.
(8) 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 ten-year notes.
n/a Not applicable
TWELVE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS TWELVE MONTHS ENDED SEPTEMBER 30,
1997
REVENUES
Total revenues increased to $30,328 million, or 14.7% compared with the same
period in 1997, primarily due to increases in sales from Systems for Network
Operators, Business Communications Systems and Microelectronic Products. The
overall revenue growth was impacted by the elimination of the Consumer Products
sales as a component of total revenue as well as lower revenues from Other
Systems and Products. The decline in Other Systems and Products was due
primarily to the sale of Lucent's ATS and CMS businesses in October 1997 and in
December 1996, respectively. Excluding revenues from Lucent's Consumer Products,
ATS and CMS businesses, total revenues increased 20.6% compared with the same
period in 1997. Revenue growth was driven by sales increases globally. For
fiscal year 1998, sales within the United States grew 12.0% compared with the
same period in 1997. Sales outside the United States increased 23.1% compared
with the same period in 1997. These sales represented 25.9% of total revenues
compared with 24.2% in 1997. Excluding revenues from Lucent's Consumer Products,
ATS and CMS businesses, sales within the United States increased 19.7% compared
with the same period in 1997.
GLOBAL REVENUE GROWTH-For the twelve months ended September 30,
(Dollars in billions)
Year Revenues
- ---- --------
1996 $23.3
1997 $26.4
1998 $30.3*
- -----------------
* Excluding the revenues from Lucent's Consumer Products, ATS and CMS
businesses, 1998 total revenues increased 20.6% compared with the same period
in 1997.
<PAGE>
PAGE 7 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table presents Lucent's revenues by product line, and the
approximate percentage of total revenues for the twelve months ended September
30, 1998 and 1997:
<TABLE>
<CAPTION>
Twelve Months Ended
September 30,
Dollars in Millions ----------------------------------------
As a Percentage As a Percentage
1998 of Total Revenue 1997 of Total Revenue
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Systems for Network Operators........ $18,933 62% $15,698 59%
Business Communications Systems...... 8,093 27 6,411 24
Microelectronic Products............. 3,027 10 2,755 11
Consumer Products.................... - - 1,013 4
Other Systems and Products........... 275 1 567 2
Total................................ $30,328 100% $26,444 100%
</TABLE>
Revenues from SYSTEMS FOR NETWORK OPERATORS increased $3,235 million, or 20.6%
compared with the same period in 1997. The increase resulted from higher sales
of switching and wireless systems with associated software, optical networking
systems, communications software, and data networking systems for service
providers - including those provided by recently acquired Livingston. Demand for
those products was driven in part by second line subscriber growth in businesses
and residences for Internet services and data traffic.
Revenues from Systems for Network Operators in the United States increased by
20.6% over the year-ago period. The revenue increase in the United States was
led by sales to RBOCs, competitive local exchange carriers, wireless service
providers and long distance carriers. Revenues generated outside the United
States for 1998 increased 20.7% compared with the same period in 1997 due to
revenue growth in the Europe/Middle East/Africa, Canada, China and
Caribbean/Latin America regions. Revenues generated outside the United States
represented 25.3% of revenues for 1998 compared with 25.2% in the same period of
1997.
For 1998, sales of wireless infrastructure increased significantly compared with
1997 as customers accepted networks for commercial service in 1998 using various
digital technologies. These technologies include Code Division Multiple Access
("CDMA"), GSM and Time Division Multiple Access ("TDMA"). The Lucent digital
technologies continue to show acceptance in markets both within and outside the
United States.
Revenues from BUSINESS COMMUNICATIONS SYSTEMS increased $1,682 million, or 26.2%
compared with the same period in 1997. This increase was led by sales of
messaging systems, including systems provided by recently acquired Octel,
SYSTIMAX(R) structured cabling, enterprise data networking systems and services.
Revenues generated outside the United States increased by 53.9% due to growth in
all international regions, led by the Europe/Middle East/Africa region. Revenues
generated outside the United States represented 19.2% of the revenues for 1998
compared with 15.8% in the same period in 1997. For 1998, sales within the
United States increased 21.1% compared with the same period in 1997.
- --------------------------------------
(R) Registered trademark of Lucent
<PAGE>
PAGE 8 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Revenues from MICROELECTRONIC PRODUCTS increased $272 million, or 9.9% for 1998
compared with the same period in 1997 due to higher sales of chips for computing
and communications, including components for broadband and narrowband networks,
data networking, wireless telephones and infrastructure, high-end workstations,
optoelectronic components, power systems and the licensing of intellectual
property. Sales within the United States increased 11.9% compared with the same
period in 1997. Revenues generated outside the United States increased 8.0%
compared with the same period in 1997. The increase in revenues generated
outside the United States was driven by sales in all international regions, led
by the Caribbean/Latin America region. Revenues generated outside the United
States represented 50.5% of sales compared with 51.3% for the same period in
1997.
Despite a nearly 8.0%(a) decline in the world semiconductor market,
Microelectronic Products achieved revenue growth of 9.9% for 1998.
On October 1, 1997, Lucent contributed its CONSUMER PRODUCTS unit to PCC in
exchange for 40% ownership of PCC. On October 22, 1998, Lucent and Philips
announced they would end their PCC venture. The venture was terminated in late
1998. In December 1998, Lucent sold certain assets of its wireless handset
business to Motorola. Lucent is currently looking for opportunities to sell its
remaining consumer products business.
Revenues from sales of OTHER SYSTEMS AND PRODUCTS decreased $292 million, or
51.5% compared with the same period in 1997. The reduction in revenues was
primarily due to the sale of Lucent's ATS and CMS businesses. ATS designed and
manufactured custom defense systems for the United States government.
COSTS AND GROSS MARGIN
Total costs increased $1,266 million, or 8.5% compared with the same period in
1997 due to the increase in sales volume. Gross margin percentage increased to
46.7% from 43.6% in the year-ago period. The increase in gross margin percentage
for the current period was due to an overall favorable mix of higher margin
products and services sales.
OPERATING EXPENSES
Selling, general and administrative expenses as a percentage of revenues were
21.4% for 1998, a decrease of 0.6 percentage points from the same period in
1997. Excluding the amortization expense associated with goodwill and existing
technology for both years, selling, general and administrative expenses as a
percentage of revenues were 21.0%, a decrease of 0.9 percentage points from the
same period in 1997.
Selling, general and administrative expenses increased $682 million, or 11.7%
compared with the same period in 1997. This increase is attributed to the higher
sales volume, investment in growth initiatives, amortization expense associated
with goodwill and existing technology as well as the implementation of SAP, an
integrated software platform. Amortization expense associated with goodwill and
existing technology was $147 million for the year ended September 30, 1998, an
increase of $115 million from the same year-ago period. These increases were
offset by the reversal of $66 million of 1995 business restructuring charges. In
addition, the 1997 period included a $174 million reversal of 1995 business
restructuring charges.
<PAGE>
Research and development expenses represented 12.2% of revenues for the period
as compared with 11.5% of revenues from the same period in 1997.
Research and development expenses increased $660 million compared with the same
period in 1997. This was primarily due to increased expenditures in support of
wireless, data networking, optical networking and software as well as switching
and access systems and microelectronic products.
The purchased in-process research and development expenses for 1998 were $1,416
million, reflecting the charges associated with the acquisitions of Livingston,
Prominet, Yurie, Optimay, SDX, MassMedia, LANNET and JNA compared with $1,024
million related to the acquisitions of Octel and Agile Networks, Inc. for the
same period in 1997.
(a) Source: World Semiconductor Trade Statistics, Inc.
<PAGE>
PAGE 9 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES
Other income -- net increased $25 million for 1998 compared with the same period
in 1997. This increase was primarily due to gains recorded on the sale of
certain business operations, including $149 million associated with the sale of
Lucent's ATS business. These gains were 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 was $254 million for the 1998 fiscal year, an increase of $16
million compared with the same period in 1997. The increase in interest expense
is due to higher debt levels in 1998 as compared with the prior year.
The effective income tax rate of 56.0% for 1998 decreased from the effective
income tax rate of 61.8% in the same year-ago period. Excluding the impact of
the purchased in-process research and development expenses associated with
Livingston, Prominet, Yurie, Optimay, SDX, LANNET and JNA acquisitions, as well
as the similar impact of the Octel and Agile acquisitions in 1997, the effective
income tax rate was 35.3% for 1998, a decrease from the year-ago rate of 36.8%.
This decrease was primarily due to a reduced state effective tax rate and
increased research tax credits. The effective income tax rate does not include a
federal income tax provision for Kenan since Kenan was an S-Corporation for 1997
and 1998.
CASH FLOWS
Cash provided by operating activities was $1,412 million in 1998, a decrease of
$563 million compared with the same period in 1997. This decrease in cash was
largely due to the increase in accounts receivable, 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. Of the 23,000
positions that Lucent announced it would eliminate in connection with the 1995
restructuring charges, approximately 19,900 positions had been eliminated
through September 30, 1998. Actual experience in employee separations, combined
with redeploying employees into other areas of the business, resulted in lower
separation costs than originally anticipated. Lucent expects employee reductions
in positions to be substantially complete by September 1999.
Comparing 1998 and 1997, cash used in investing activities decreased to $2,816
million from $3,125 million primarily due to a decrease in cash used for
acquisitions as well as an increase in cash received from dispositions. In 1998,
cash was used in the acquisitions of Yurie, Optimay, SDX, LANNET and JNA. The
acquisitions of Livingston 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. In 1997,
Lucent acquired Octel and Agile and disposed of its interconnect products and
CMS businesses.
Capital expenditures were $1,634 million and $1,639 million for 1998 and 1997,
respectively. Capital expenditures include expenditures for equipment and
facilities used in manufacturing and research and development, including
expansion of manufacturing capacity and international growth.
Cash provided by financing activities for 1998 was $812 million compared with
$276 million in 1997. The increase in cash provided by financing activities was
due to higher debt levels and increased issuances of common stock when compared
with the prior period.
<PAGE>
PAGE 10 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
TWELVE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS TWELVE MONTHS ENDED SEPTEMBER 30,
1996
REVENUES
Total revenues increased $3,120 million or 13.4% for 1997 compared with 1996,
primarily due to gains in sales from Systems for Network Operators, Business
Communications Systems and Microelectronic Products. The overall revenue growth
was partially offset by the expected decline in revenue from Consumer Products
and Other Systems and Products. Revenues for Lucent's three core businesses
increased 18.1% for 1997 compared with 1996. Revenue growth continued to be
generated from sales both within and outside the United States. Sales outside
the United States increased 12.6% compared with 1996 and represented 24.2% of
total revenues in 1997. The increased sales outside of the United States
reflected Lucent's targeted approach toward revenue expansion outside the United
States for increased profitability. The following table presents Lucent's
revenues by product line, and the related percentage of total revenues for the
twelve months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Twelve Months Ended
September 30,
Dollars in Millions ----------------------------------------
As a Percentage As a Percentage
1997 of Total Revenue 1996 of Total Revenue
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Systems for Network Operators........ $15,698 59% $13,230 57%
Business Communications Systems...... 6,411 24 5,509 24
Microelectronic Products............. 2,755 11 2,315 10
Consumer Products.................... 1,013 4 1,431 6
Other Systems and Products........... 567 2 839 3
Total................................ $26,444 100% $23,324 100%
</TABLE>
Revenues from SYSTEMS FOR NETWORK OPERATORS increased $2,468 million or 18.7%
compared with 1996. The increase resulted from higher sales of both switching
and wireless systems with associated software, fiber-optic cable and
professional services. Demand for second lines in businesses and residences for
Internet services and data connectivity contributed to the revenue growth for
1997.
Sales from Systems for Network Operators in the United States increased 22.2%.
The revenue increase in the United States was led by sales to traditional
service providers and non-traditional customers such as personal communications
services ("PCS") wireless providers, competitive access providers and cable
television companies. Sales outside the United States increased 9.3% compared
with 1996, resulting from increased sales in the Europe/Middle East/Africa,
Asia/Pacific and Caribbean/Latin America regions. Sales outside the United
States represented 25.2% of Systems for Network Operators revenues for 1997.
For 1997, sales of wireless infrastructure increased significantly compared with
the same period in 1996 primarily due to PCS contracts as customers accepted
networks for commercial service in 1997 using various digital technologies.
These technologies include CDMA, GSM and TDMA. The Lucent digital technologies
continue to show acceptance in markets both within and outside the United
States.
<PAGE>
Revenues from BUSINESS COMMUNICATIONS SYSTEMS increased $902 million or 16.4%
compared with the same period in 1996. This increase was led by sales of
DEFINITY(R) products, SYSTIMAX structured cabling, messaging systems, integrated
offers such as call centers and higher revenues from service contracts. This
increase was partially offset by the continued erosion of the rental base.
Revenues in the United States increased 17.0% compared with 1996. Revenues
outside the United States increased by 13.2%, reflecting growth in all
international regions. The increases both within and outside the United States
were primarily due to sales of DEFINITY products, call centers and messaging
systems. In addition, higher sales of SYSTIMAX structured cabling contributed to
the revenue growth in the United States. Sales outside the United States
represented 15.8% of revenue for 1997.
- --------------------------------------
(R) Registered trademark of Lucent
<PAGE>
PAGE 11 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales of MICROELECTRONIC PRODUCTS increased $440 million or 19.0% compared with
1996, due to higher sales of customized chips for computing and communications,
including components for local area networks, data networking, high-end computer
workstations and wireless telephones. Higher sales of power systems and
optoelectronic components also contributed to the increase for 1997. Sales
within the United States increased 12.5% compared with 1996, led by sales to
original equipment manufacturers ("OEMs"). The 25.9% growth in revenues outside
the United States was driven by application specific integrated circuits
("ASICs") sales in the Asia/Pacific region as well as the growth of wireless and
multimedia integrated circuits and power products sold to customers in Europe
for cellular applications. Sales outside the United States represented 51.3% of
the Microelectronic Products sales for 1997. Microelectronic Products continued
to bring to market new technologies, such as the introduction of the K56flex(TM)
modem technology.
Revenues from CONSUMER PRODUCTS decreased $418 million or 29.2% compared with
1996. The decline in revenues was primarily due to decreased product sales
related to the closing of the Phone Center Stores, the discontinuation of
unprofitable product lines and the continued decrease in phone rental revenues.
Lucent's Consumer Products unit was contributed to the venture between Lucent
and Philips on October 1, 1997.
Revenues from OTHER SYSTEMS AND PRODUCTS decreased $272 million or 32.4%
compared with 1996. The decrease is largely due to the sale of Lucent's CMS
business in fiscal year 1997 and its Paradyne subsidiary in fiscal year 1996.
GROSS MARGIN
Gross margin percentage increased to 43.6% from 38.3% in 1996 primarily due to
the restructuring charges recorded in the quarter ended December 31, 1995.
Excluding restructuring charges, gross margin for 1996 was 42.1%. The increase
in gross margin percentage for 1997 was due to an overall favorable mix of
higher margin product revenues and the benefits associated with Lucent's
business productivity improvement initiatives.
- --------------------------------------
(TM) Trademark of Lucent
<PAGE>
PAGE 12 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OPERATING EXPENSES
Selling, general and administrative expenses decreased $1,490 million or 20.4%
compared with 1996. Excluding the $1,645 million of restructuring charges
recorded in December 1995, selling, general and administrative expenses
increased $155 million compared with 1996. This increase was due to expenditures
associated with higher sales levels, investment in growth initiatives, and the
implementation of SAP, an integrated software platform. These increases were
partially offset by the reversal of $174 million of business restructuring
liabilities in 1997, the lower start-up costs incurred in 1997, and business
productivity improvement initiatives, including lower expenses since some
businesses were exited in fiscal 1997 and 1996. Selling, general and
administrative expenses as a percentage of revenue declined 9.3 percentage
points to 22.0% of revenues compared with 31.3% of revenues, due to
restructuring charges in 1996.
Research and development expenses increased $473 million or 18.5% compared with
1996. Excluding the impact of restructuring charges recorded in the quarter
ended December 31, 1995, research and development expenses increased by $737
million, primarily due to expenditures in support of wireless infrastructure,
microelectronic products and advanced multimedia communications systems as well
as a $127 million write-down of special-purpose Bell Labs assets no longer being
used. Research and development expenses represented 11.5% of revenues as
compared with 11.0% of revenues in 1996. Research and development expenses as a
percentage of revenues increased 1.7 percentage points from 9.8%, excluding
restructuring charges in 1996.
Purchased in-process research and development for 1997 reflects one-time
write-offs totaling $1,024 million of in-process research and development in
connection with the acquisitions of Octel and Agile. Agile is a provider of
advanced intelligent data switching products acquired by Lucent in October 1996.
OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES
Other income-net decreased $88 million compared with 1996. This decrease was
largely due to gains recognized on the sale of certain investments and insurance
recoveries in 1996, offset in part by increased interest income in 1997.
Interest expense was flat compared with 1996.
The effective tax rate of 61.8% for 1997 increased from the effective tax rate
of 22.3% for the same period of 1996 due to the 1997 write-offs of purchased
in-process research and development costs and the tax impact of restructuring
charges incurred in 1996. Excluding charges related to the acquisitions of Agile
and Octel, the effective tax rate for 1997 was 36.8%, a decrease of 3.9
percentage points from the 1996 effective tax rate of 40.7% before considering
the effects of restructuring charges incurred in 1996. This decrease is
primarily attributable to the tax impact of foreign earnings.
<PAGE>
PAGE 13 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CASH FLOWS
Cash provided by operating activities was $1,975 million in 1997, an increase of
$989 million compared with the same period in 1996. This increase in cash was
largely due to the retention of $2,000 million of customer accounts receivable
by AT&T in 1996 as well as the increase in cash collections associated with
higher sales. This was offset by changes in accounts payable due to the end of
payments to AT&T related to the Separation and the change in other operating
assets and liabilities over 1996. The change in other operating assets and
liabilities was primarily due to the receipt of a $500 million cash advance made
to Lucent in April 1996 by AT&T and the utilization by AT&T of that advance in
1997.
Cash payments of $483 million were charged against the December 1995 business
restructuring reserves in 1997. As of September 30, 1997, the workforce had been
reduced by approximately 17,900 positions in connection with business
restructuring. In addition, approximately 1,000 employees left Lucent's
workforce as part of the sale of Paradyne in 1996. Actual experience in employee
separations, combined with redeploying employees into other areas of the
business, has resulted in lower separation costs than originally anticipated.
Comparing 1997 and 1996, cash used in investing activities increased to $3,125
million from $1,641 million primarily due to the acquisition of Octel.
Capital expenditures were $1,639 million and $1,435 million for 1997 and 1996,
respectively. Capital expenditures include expenditures for equipment and
facilities used in manufacturing and research and development, including
expansion of manufacturing capacity and international growth.
Cash provided by financing activities for 1997 was $276 million compared with
$2,503 million in 1996. This decrease was primarily due to the proceeds received
from the IPO in the year-ago period.
In 1995, Lucent relied on AT&T to provide financing for its operations. The cash
flows from financing activities for the year ended September 30, 1996 reflect
changes in the Company's assumed capital structure. These cash flows are not
necessarily indicative of the cash flows that would have resulted if Lucent had
been a stand-alone entity.
<PAGE>
PAGE 14 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total assets as of September 30, 1998 increased $2,963 million, or 12.4%, from
September 30, 1997. This increase was primarily due to increases in accounts
receivable and other assets of $1,603 million and $1,001 million, respectively.
The increase in accounts receivable was primarily due to higher sales. The
increase in other assets was largely due to the increase in goodwill and
existing technology associated with the Livingston, Prominet, Yurie, Optimay,
SDX, LANNET and JNA acquisitions, and an increase in equity investments as a
result of Lucent's contribution of its Consumer Products business to PCC.
Total liabilities increased $758 million, or 3.7%, from September 30, 1997. This
increase was largely due to the increases in payroll and benefit-related
liabilities and postretirement and postemployment benefit liabilities. These
increases are primarily related to the increase in employee headcount as a
result of Lucent's recent acquisitions as well as year end payroll and benefit
accruals.
Working capital, defined as current assets less current liabilities, increased
$1,942 million from fiscal year end 1997 primarily resulting from the increase
in accounts receivable, and the following reclassification of $500 million ($495
million net of unamortized costs) from short-term debt to long-term debt. On
November 19, 1998, Lucent sold $500 million of ten-year notes 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.
For the year ended September 30, 1998, Lucent's inventory turnover ratio was 4.6
times compared with 4.0 times for the year ended September 30, 1997. The
increase was primarily due to improved inventory management at the factories and
in the distribution channels. Inventory turnover is defined as cost of sales
(excluding costs related to long-term contracts) divided by average inventory
during the year.
Accounts receivable were outstanding an average of 64 days for the years ended
September 30, 1998 and 1997, respectively.
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 1998 and which is expected to continue in the near
term.
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, 1998, Lucent maintained approximately $5,200 million in credit
facilities, of which a portion is used to support Lucent's commercial paper
program. At September 30, 1998, approximately $4,850 million 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, and
short- and long-term debt financings will be adequate to satisfy its future cash
requirements, although there can be no assurance that this will be the case.
<PAGE>
PAGE 15 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Network operators, 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 other financial institutions and investors. This enables Lucent
to reduce the amount of its commitments and free up additional financing
capacity.
As of September 30, 1998, Lucent had made commitments or entered into an
agreement to extend credit to certain customers, including Sprint PCS, up to an
aggregate of approximately $2,300 million. As of September 30, 1998,
approximately $400 million had been advanced and was outstanding. Included in
the $2,300 million is approximately $1,230 million to six other PCS or wireless
network operators (including fixed wireless) for possible future sales. As of
September 30, 1998, approximately $130 million had been advanced under four of
these arrangements. In addition, Lucent had made commitments or entered into
agreements to extend credit up to an aggregate of approximately $370 million for
two network operators other than PCS or wireless network operators. As of
September 30, 1998, no amount was advanced under either of these agreements. In
November 1998, a commitment for $110 million, included in the $370 million, was
terminated.
In October 1996, Lucent entered into a credit agreement to provide Sprint PCS
long-term financing of $1,800 million for purchasing Lucent's equipment and
services for its PCS network. In May 1997, under the $1,800 million credit
facility provided by Lucent to Sprint PCS, Lucent closed transactions to lay off
$500 million of loans and undrawn commitments and $300 million of undrawn
commitments to a group of institutional investors and Sprint Corporation (a
partner in Sprint PCS), respectively. As of September 30, 1998, all of these
commitments were drawn down by Sprint PCS. On June 8, 1998, Lucent sold $645
million of loans in a private sale. As of September 30, 1998, Lucent has $253
million of undrawn commitments and $226 million of drawn loans outstanding.
As part of the revenue recognition process, Lucent has assessed the
collectibility of the accounts receivable relating to the Sprint PCS purchase
contract in light of its financing commitment to Sprint PCS. Lucent has
determined that the receivables under the contract are reasonably assured of
collection based on various factors among which was the ability of Lucent to
sell the loans and commitments without recourse. Lucent intends to continue
pursuing opportunities for the sale of the $226 million of loans outstanding,
and the future loans and commitments to Sprint PCS.
On October 22, 1998, Lucent announced that it had entered into a five-year
agreement with WinStar Communications, Inc. to provide WinStar with a fixed
wireless broadband telecommunications network in major domestic and
international markets. In connection with this agreement, Lucent entered into a
credit agreement with WinStar to provide up to $2,000 million in equipment
financing to fund the buildout of this network. The maximum amount of credit
that Lucent is obligated to extend to WinStar at any one time is $500 million.
<PAGE>
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.
The ratio of total debt to total capital (debt plus equity) was 45.2% at
September 30, 1998 compared with 55.2% at September 30, 1997. The decrease in
the ratio was primarily due to the increase in shareowners' equity, which
resulted from net income and the issuance of common stock, partially offset by
the increase in debt.
<PAGE>
PAGE 16 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Excluding the one-time charges related to the acquisitions of Livingston,
Prominet, Optimay, Yurie, SDX, MassMedia, LANNET and JNA as well as the gain on
the sale of ATS in 1998, the return on assets was 9.6%. This represents a 3.0
percentage point increase over the prior year return on assets of 6.6%,
excluding the Octel acquisition charges in 1997.
RISK MANAGEMENT
Lucent is exposed to market risk from changes in foreign currency exchange rates
and interest rates, which could impact its results of operations and financial
condition. Lucent manages its exposure to these market risks through its regular
operating and financing activities and, when deemed appropriate, through the use
of derivative financial instruments. 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 purchased options to reduce its exposure to the risk that the eventual
net cash inflows and outflows resulting from the sale of products to foreign
customers and purchases from foreign suppliers will be adversely affected by
changes in exchange rates. Foreign currency exchange contracts are designated
for firmly committed or forecasted purchases and sales. The use of these
derivative financial instruments allows Lucent to reduce its overall exposure to
exchange rate movements, since the gains and losses on these contracts
substantially offset losses and gains on the assets, liabilities and
transactions being hedged. As of September 30, 1998, Lucent's primary net
foreign currency market exposures include Deutsche marks and British pounds. As
of September 30, 1997, Lucent's primary net foreign currency market exposures
included Deutsche marks, Japanese yen and Dutch guilders. Lucent has not changed
its policy regarding how such exposures are managed since the year ended
September 30, 1997. 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, 1998 and 1997, a 10%
appreciation in foreign currency exchange rates from the prevailing market rates
would increase the related net unrealized gain by $11 million and $27 million,
respectively. Conversely, a 10% depreciation in these currencies from the
prevailing market rates would decrease the related net unrealized gain by $18
million and $35 million, as of September 30, 1998 and 1997 respectively.
Unrealized gains/losses in foreign currency exchange contracts are defined as
the difference between the contract rate at the inception date of the foreign
currency exchange contract and the current market exchange rates. Consistent
with the nature of the economic hedge of such foreign currency exchange
contracts, such unrealized gains or losses would be offset by corresponding
decreases or increases, respectively, of the underlying instrument or
transaction being hedged.
While Lucent hedges actual and anticipated transactions with customers, the
decline in value of the Asia/Pacific currencies or currencies in other regions
may, if not reversed, adversely affect future product sales because Lucent
products may become more expensive for customers to purchase in their local
currency.
<PAGE>
PAGE 17 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Lucent manages its ratio of fixed to floating rate debt with the objective of
achieving a mix that management believes is appropriate. To manage this mix in a
cost-effective manner, Lucent, from time to time, enters into interest rate swap
agreements, in which it agrees to exchange various combinations of fixed and/or
variable interest rates based on agreed upon notional amounts. Lucent had no
material interest rate swap agreements in effect as of September 30, 1998 and
1997. The strategy employed by Lucent to manage its exposure to interest rate
fluctuations is unchanged from September 30, 1997. Management does not foresee
or expect any significant changes in its exposure to interest rate fluctuations
or in how such exposure is managed in the near future.
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 upon a hypothetical
immediate 150 basis point increase in interest rates at September 30, 1998 and
1997, the market value of Lucent's fixed rate long-term debt would be impacted
by a net decrease of $209 million and $113 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,
1998 and 1997 of $247 million and $121 million, respectively. As a result of the
change in market conditions in 1998, Lucent used a hypothetical 150 basis point
change, versus 100 basis points used in the fiscal year 1997 presentation, to
determine the change in market value of this debt.
OTHER
Lucent's current and historical operations are subject to a wide range of
environmental protection laws. In the United States, these laws often require
parties to fund remedial action regardless of fault. Lucent has remedial and
investigatory activities underway at 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,
among AT&T, Lucent and NCR Corporation dated as of February 1, 1996, as amended
and restated, Lucent is responsible for all liabilities primarily resulting from
or related to the operation of Lucent's business as conducted at any time prior
to or after the Separation including related businesses discontinued or disposed
of prior to the Separation, and Lucent's assets including, without limitation,
those associated with these sites. In addition, under the Separation and
Distribution Agreement, Lucent is required to pay a portion of contingent
liabilities paid out in excess of certain amounts by AT&T and NCR, including
environmental liabilities.
It is often difficult to estimate the future impact of environmental matters,
including potential liabilities. Lucent records an environmental reserve when it
is probable that a liability has been incurred and the amount of the liability
is reasonably estimable. This practice is followed whether the claims are
asserted or unasserted. Management expects that the amounts reserved will be
paid out over the period of remediation for the applicable site which ranges
from 5 to 30 years. Reserves for estimated losses from environmental remediation
are, depending on the site, based primarily upon internal or third party
environmental studies, and estimates as to the number, participation level and
financial viability of any other PRPs, the extent of the contamination and the
nature of required remedial actions. Accruals are adjusted as further
information develops or circumstances change. The amounts provided for in
Lucent's consolidated financial statements in respect to environmental reserves
are the gross undiscounted amount of such reserves, without deductions for
insurance or third party indemnity claims.
<PAGE>
PAGE 18 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In those cases where insurance carriers or third party indemnitors have agreed
to pay any amounts and management believes that collectibility of such amounts
is probable, the amounts are reflected as receivables in the financial
statements. Although Lucent believes that its reserves are adequate, there can
be no assurance that the amount of capital and other expenditures that will be
required relating to remedial actions and compliance with applicable
environmental laws will not exceed the amounts reflected in Lucent's reserves or
will not have a material adverse effect on Lucent's financial condition, results
of operations or cash flows. Any amounts of environmental costs that may be
incurred in excess of those provided for at September 30, 1998 cannot be
determined.
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
which constitute forward-looking statements may be made by or on behalf of the
Company. Words such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions ("Future Factors") which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward-looking statements. The Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
Future Factors include increasing price and product/services competition by
foreign and domestic competitors, including new entrants; rapid technological
developments and changes and the Company's ability to continue to introduce
competitive new products and services on a timely, cost-effective basis; the mix
of products/services; the achievement of lower costs and expenses; the ability
to successfully integrate the operations and business of Ascend Communications,
Inc., Kenan and other acquired companies; the outcome and impact of Year 2000;
domestic and foreign governmental and public policy changes which may affect the
level of new investments and purchases made by customers; changes in
environmental and other domestic and foreign governmental regulations;
protection and validity of patent and other intellectual property rights;
reliance on large customers; technological, implementation and cost/financial
risks in the increasing use of large, multi-year contracts; the cyclical nature
of the Company's business; the outcome of pending and future litigation and
governmental proceedings and continued availability of financing, financial
instruments and financial resources in the amounts, at the times and on the
terms required to support the Company's future business. These are
representative of the Future Factors that could affect the outcome of the
forward-looking statements. In addition, such statements could be affected by
general industry and market conditions and growth rates, general domestic and
international economic conditions including interest rate and currency exchange
rate fluctuations and other Future Factors.
<PAGE>
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 international
and domestic standards-setting bodies.
Reliance on Major Customers:
See discussion above under KEY BUSINESS CHALLENGES.
<PAGE>
PAGE 19 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Readiness for Year 2000:
Lucent is engaged in a major effort to minimize the impact of the Year 2000 date
change on Lucent's products, information technology systems, facilities and
production infrastructure. Lucent has targeted June 30, 1999 for completion of
these efforts.
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.
Lucent is completing programs to make its new commercially available products
Year 2000 ready and has developed evolution strategies for customers who own
non-Year 2000 ready Lucent products. The majority of the upgrades and new
products needed to support customer migration are already generally available.
By the end of 1998, all but a few of these products are targeted for general
availability.
Lucent has launched extensive efforts to alert customers who have non-Year 2000
ready products, including direct mailings, phone contacts and participation in
user and industry groups. Recently, Lucent has set up 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 continues to monitor
customer response and will take steps to improve customer responsiveness, as
necessary. Also, Lucent has begun contingency planning to address potential
spikes in demand for customer support resulting from the Year 2000 date change.
These plans are targeted for completion by April 30, 1999.
Lucent has largely completed the inventory and assessment phases of the program
with respect to its factories, information systems, and facilities.
Approximately, two-thirds of the production elements included in the factory
inventory were found to be Year 2000 ready. The factories have commenced the
remediation phase of their effort through a combination of product upgrades and
replacement. Plans have been developed to facilitate the completion of this
work, as well as the related testing and deployment, by June 30, 1999.
<PAGE>
Currently, approximately 65% of Lucent's information technology infrastructure
has been determined to be Year 2000 ready and is deployed for use.
Approximately, 65% of our business applications lines of code that are supported
by Lucent's information technology group are now Year 2000 ready and have been
deployed or are awaiting deployment. LYPO is monitoring the progress of
readiness efforts across Lucent, with a special emphasis on the early
identification of any areas where progress to-date could indicate difficulty in
meeting Lucent's June 1999 internal readiness target date. Lucent is developing
specific contingency plans, as appropriate.
Lucent is also assessing the Year 2000 readiness of the large number of
facilities that it owns or leases world-wide. Priority is being placed on
Lucent-owned facilities, leased facilities that Lucent manages and other
critical facilities that house large numbers of employees or significant
operations. Based on the results of these assessment activities, Lucent plans to
complete remediation efforts by March 31, 1999 and complete development of
applicable contingency plans by May 31, 1999.
<PAGE>
PAGE 20 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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. Follow-up efforts have commenced to
obtain feedback from critical suppliers. To supplement this effort, Lucent plans
to conduct 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. Almost
all of Lucent's suppliers are still deeply engaged in executing their Year 2000
readiness efforts and, as a result, Lucent cannot, at this time, fully evaluate
the Year 2000 risks to its supply chain. Lucent will continue to monitor the
Year 2000 status of its suppliers to minimize this risk and will develop
appropriate contingent responses as the risks become clearer.
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 or 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 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
$535 million, of which an estimated $210 million has been spent as of September
30, 1998. 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 and deployment 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.
<PAGE>
PAGE 21 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
European Monetary Union - Euro:
On January 1, 1999, several 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. Since that date, the Euro has
traded on currency exchanges. 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 begun planning for the Euro's introduction. For this purpose, Lucent
has in place a joint European-United States team representing affected functions
within the Company.
The Euro conversion may affect cross-border competition by creating cross-border
price transparency. Lucent is assessing its pricing/marketing strategy in order
to insure that it remains competitive in a broader European market. Lucent is
also assessing its information technology systems to allow for transactions to
take place in both the legacy currencies and the Euro and the eventual
elimination of the legacy currencies, and reviewing whether certain existing
contracts will need to be modified. Lucent's currency risk and risk management
for operations in participating countries may be reduced as the legacy
currencies are converted to the Euro. Final accounting, tax and governmental
legal and regulatory guidance generally has not been provided in final form.
Lucent will continue to evaluate issues involving introduction of the Euro.
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, results of operations, cash flows or financial condition.
<PAGE>
PAGE 22 Exhibit 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Employee Relations:
On September 30, 1998, Lucent employed approximately 142,300 persons, including
78.9% 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 signed
new five-year agreements with the CWA and IBEW expiring May 31, 2003.
Multi-Year Contracts:
Lucent has significant contracts for the sale of infrastructure systems to
network operators which extend over a multi-year period, and expects to enter
into similar contracts in the future, with 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 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES, and KEY
BUSINESS CHALLENGES.
Seasonality:
See discussion above under KEY BUSINESS CHALLENGES.
Future Capital Requirements:
See discussion above under FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES.
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.
See discussion above under RISK MANAGEMENT with respect to foreign exchange and
interest rates. 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.
Legal Proceedings and Environmental:
See discussion above under OTHER.
<PAGE>
PAGE 23 Exhibit 99.1
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 which are estimates based upon currently available information
and management's judgment of current conditions and circumstances.
To provide reasonable assurance that assets are safeguarded against loss from
unauthorized use or disposition and that accounting records are reliable for
preparing financial statements, management maintains a system of accounting and
other controls, including an internal audit function. Even an effective internal
control system, no matter how well designed, has inherent limitations -
including the possibility of circumvention or overriding of controls - and
therefore can provide only reasonable assurance with respect to financial
statement presentation. The system of accounting and other controls is improved
and modified in response to changes in business conditions and operations and
recommendations made by the independent public accountants and the internal
auditors.
The Audit and Finance Committee of the Board of Directors, which is composed of
directors who are not employees, meets periodically with management, the
internal auditors and the independent auditors to review the manner in which
these groups of individuals are performing their responsibilities and to carry
out the Audit and Finance Committee's oversight role with respect to auditing,
internal controls and financial reporting matters. Periodically, both the
internal auditors and the independent auditors meet privately with the Audit and
Finance Committee and have access to its individual members.
Lucent engaged PricewaterhouseCoopers LLP, independent public accountants, to
audit the consolidated financial statements in accordance with generally
accepted auditing standards, which include consideration of the internal control
structure. Their report appears on the following page.
/s/ Richard A. McGinn /s/ Donald K. Peterson
- ------------------------------------ -------------------------------
Chairman and Chief Executive Officer Executive Vice President and
Chief Financial Officer
<PAGE>
PAGE 24 Exhibit 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of Lucent Technologies Inc.:
In our opinion, the accompanying supplementary consolidated balance sheets and
the related supplementary 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, 1998 and 1997, and the results of their operations and their cash
flows for each of the two years in the period ended September 30, 1998 and for
the nine-month period ended September 30, 1996, in conformity with generally
accepted accounting principles. 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 generally accepted auditing
standards 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.
As described in Note 1, on February 26, 1999, Lucent Technologies Inc. merged
with Kenan Systems Corporation in a transaction accounted for as a pooling of
interests. The accompanying supplementary consolidated financial statements give
retroactive effect to the merger. Generally accepted accounting principles
proscribe giving effect to a consummated business combination accounted for by
the pooling of interests method in financial statements that do not include the
date of consummation. These financial statements do not extend through the date
of consummation; however, they will become the historical consolidated financial
statements of Lucent Technologies Inc. and subsidiaries after financial
statements covering the date of consummation of the business combination are
issued.
PricewaterhouseCoopers LLP
New York, New York
February 26, 1999
<PAGE>
PAGE 25 Exhibit 99.1
Lucent Technologies Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions, Except Per-Share Amounts)
<TABLE>
<CAPTION>
Year Ended
September 30, Nine Months Ended
(twelve months) September 30,
----------------------------------- --------------
1998 1997 1996 1996
- --------------------------------------------------------------------------------------
UNAUDITED
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $30,328 $26,444 $23,324 $15,897
Costs 16,171 14,905 14,397 9,295
Gross margin 14,157 11,539 8,927 6,602
Operating expenses
Selling, general
and administrative 6,502 5,820 7,310 4,264
Research and development 3,689 3,029 2,556 1,843
Purchased in-process
research and development 1,416 1,024 - -
Total operating expenses 11,607 9,873 9,866 6,107
Operating income (loss) 2,550 1,666 (939) 495
Other income - net 100 75 163 55
Interest expense 254 238 238 175
Income (loss) before
income taxes 2,396 1,503 (1,014) 375
Provision (benefit) for
income taxes 1,341 929 (226) 146
Net income (loss) $ 1,055 $ 574 $ (788) $ 229
Earnings (loss) per
common share - basic $ 0.80 $ 0.44 $ (0.67) $ 0.19
Earnings (loss) per
common share - diluted $ 0.78 $ 0.44 $ (0.67) $ 0.19
Dividends per
common share $ 0.155 $ 0.1125 $ 0.075 $ 0.075
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PAGE 26 Exhibit 99.1
Lucent Technologies Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions, Except Per Share Amounts)
September 30, September 30,
1998 1997
------------- ------------
ASSETS
Cash and cash equivalents $ 712 $ 1,365
Accounts receivable less allowances
of $392 in 1998 and $352 in 1997 7,014 5,411
Inventories 3,081 2,926
Contracts in process (net of progress
billings of $3,036 in 1998 and
$2,003 in 1997) 1,259 1,046
Deferred income taxes - net 1,623 1,333
Other current assets 493 473
Total current assets 14,182 12,554
Property, plant and equipment - net 5,410 5,151
Prepaid pension costs 3,754 3,172
Deferred income taxes - net 750 1,262
Capitalized software development costs 298 293
Other assets 2,437 1,436
Total assets $ 26,831 $ 23,868
LIABILITIES
Accounts payable $ 2,044 $ 1,933
Payroll and benefit-related liabilities 2,515 2,180
Postretirement and postemployment
benefit liabilities 187 239
Debt maturing within one year 2,231 2,538
Other current liabilities 3,481 3,882
Total current liabilities 10,458 10,772
Postretirement and postemployment
benefit liabilities 6,380 6,073
Long-term debt 2,409 1,665
Other liabilities 1,969 1,948
Total liabilities $ 21,216 $ 20,458
Commitments and contingencies
SHAREOWNERS' EQUITY
Preferred stock - par value $1 per share
Authorized 250,000,000 shares $ - $ -
Issued and outstanding shares: none
Common stock - par value $.01 per share
Authorized shares: 3,000,000,000
Issued and outstanding shares:
1,329,272,957 at September 30, 1998;
1,297,004,100 at September 30, 1997 13 13
Additional paid-in capital 4,566 3,070
Guaranteed ESOP obligation (49) (77)
Foreign currency translation (279) (191)
Retained earnings 1,364 595
Total shareowners' equity $ 5,615 $ 3,410
Total liabilities and shareowners' equity $ 26,831 $ 23,868
See Notes to Consolidated Financial Statements.
<PAGE>
PAGE 27 Exhibit 99.1
Lucent Technologies Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREOWNERS' EQUITY
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, 1998 September 30, 1997 Nine Months Ended
(twelve months) (twelve months) September 30, 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
PREFERRED STOCK - - -
COMMON STOCK
Balance at beginning of period $ 13 $ 13 $ -
Issuance of common stock - - 6
Two-for-one common stock split - - 7
Balance at end of period 13 13 13
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period 3,070 2,604 1,410
Issuance of common stock 608 260 2,881
Issuance of common stock for
acquisitions 689 - -
Conversion of stock options
related to acquisitions 186 116 -
Net loss from 1/1/96 through 1/31/96 - - (72)
Dividends declared - - (7)
Accounts receivable holdback
by AT&T - - (2,000)
Unrealized (loss) gain on investments (37) 40 15
Acceptance of ESOP - - 120
Other contributions from AT&T - - 252
Reclass of undistributed earnings
of S-Corp 84 33 5
S-Corp distributions (26) (19) 0
Other (8) 36 -
Balance at end of period 4,566 3,070 2,604
GUARANTEED ESOP OBLIGATION
Balance at beginning of period (77) (106) -
Acceptance of ESOP - - (120)
Amortization of ESOP obligation 28 29 14
Balance at end of period (49) (77) (106)
FOREIGN CURRENCY TRANSLATION
Balance at beginning of period (191) (16) 28
Translation adjustments (88) (175) (44)
Balance at end of period (279) (191) (16)
RETAINED EARNINGS
Balance at beginning of period 595 200 -
Net income 970 541 -
Net income from 2/1/96
through 9/30/96 - - 296
Two-for-one common stock split - - (7)
Dividends declared (201) (146) (89)
Balance at end of period 1,364 595 200
TOTAL SHAREOWNERS' EQUITY $ 5,615 $ 3,410 $ 2,695
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PAGE 28 Exhibit 99.1
Lucent Technologies Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended
September 30, Nine Months Ended
(twelve months) September 30,
----------------------------- -----------------
1998 1997 1996 1996
- -----------------------------------------------------------------------------------------
UNAUDITED
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Activities:
Net income(loss) $ 1,055 $ 574 $ (788) $ 229
Adjustments to reconcile
net income(loss)
to net cash provided by
(used in) operating activities,
net of effects from
acquisitions of businesses:
Business restructuring
(reversal) charge (100) (201) 2,515 (98)
Asset impairment
and other charges - 81 293 105
Depreciation and
amortization 1,338 1,453 1,328 939
Provision for
uncollectibles 132 127 73 54
Deferred income taxes 113 9 (996) (251)
Purchased in-process
research and development 1,416 1,024 - -
Increase in accounts
receivable - net (2,026) (417) (3,120) (1,512)
Increase in inventories
and contracts in process (365) (273) (309) (524)
Increase(decrease) in
accounts payable 172 (12) 1,021 629
Changes in other operating
assets and liabilities 125 (298) 1,046 543
Other adjustments for
noncash items - net (448) (92) (77) (111)
Net cash provided by(used in)
operating activities 1,412 1,975 986 3
Investing Activities:
Capital expenditures (1,634) (1,639) (1,435) (942)
Proceeds from the sale or
disposal of property, plant
and equipment 57 108 119 15
Purchases of
equity investments (212) (149) (96) (46)
Sales of equity investments 71 12 102 102
Dispositions of businesses 329 181 58 58
Acquisitions of businesses -
net of cash acquired (1,347) (1,568) (234) (234)
Other investing
activities - net (80) (70) (155) (22)
Net cash used in
investing activities (2,816) (3,125) (1,641) (1,069)
</TABLE>
See Notes to Consolidated Financial Statements.
(CONT'D)
<PAGE>
PAGE 29 Exhibit 99.1
Lucent Technologies Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONT'D)
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended
September 30, Nine Months Ended
(twelve months) September 30,
----------------------------- -----------------
1998 1997 1996 1996
- ------------------------------------------------------------------------------------------
UNAUDITED
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financing Activities:
Repayments of long-term debt (93) (16) (53) (39)
Issuance of long-term debt 375 52 1,499 1,499
Proceeds from issuance
of common stock 608 260 2,887 2,887
Dividends paid (201) (192) (48) (48)
S-Corp distribution
to stockholder (26) (19) - -
Increase (decrease) in
short-term borrowings - net 149 191 (1,525) (1,436)
Repayments of
debt sharing
agreement - net - - (67) -
Transfers (to) from AT&T - - (190) 13
Net cash provided by
financing activities 812 276 2,503 2,876
Effect of exchange rate
changes on cash
and cash equivalents (61) (11) (16) (13)
Net (decrease)increase
in cash and
cash equivalents (653) (885) 1,832 1,797
Cash and cash equivalents
at beginning of period 1,365 2,250 418 453
Cash and cash equivalents
at end of period $ 712 $ 1,365 $ 2,250 $ 2,250
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PAGE 30 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
Lucent Technologies Inc. ("Lucent" or the "Company") was formed from the systems
and technology units of AT&T Corp. and the associated assets and liabilities of
those units, including Bell Laboratories (the "Separation"). Lucent was
incorporated on November 29, 1995 with 1,000 shares of common stock ("Common
Stock"), authorized and outstanding, all of which were owned by AT&T. On April
2, 1996, AT&T obtained an additional 524,623,894 shares (pre-split basis) of
Common Stock and on April 10, 1996, Lucent issued 112,037,037 shares (pre-split
basis) in an Initial Public Offering. On September 30, 1996, AT&T distributed to
its shareowners all of its remaining interest in Lucent (the "Distribution").
BASIS OF PRESENTATION
The supplemental consolidated financial statements of Lucent have been prepared
to give retroactive effect to the merger with Kenan Systems Corporation on
February 26, 1999. Under the terms of the merger agreement, Kenan will receive
12.88 million shares of Lucent common stock. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for under the pooling-of-interests method in financial statements that
do not include the date of consummation. These financial statements do not
extend through the date of the consummation; however, they will become the
historical consolidated financial statements of Lucent after the financial
statements covering the date of consummation of the business combination are
issued.
The supplemental consolidated financial statements reflect the combination of
the historical consolidated financial statements of Lucent at or for the fiscal
years ended September 30, 1998 and 1997, and for the nine month period ended
September 30, 1996, with the historical financial statements of Kenan at or for
the fiscal years ended December 31, 1998, 1997 and 1996, respectively.
The supplemental consolidated financial statements as of and for the nine months
ended September 30, 1996 also reflect the results of operations, changes in
shareowners' equity and cash flows, and the financial position of the business
that was transferred to Lucent from AT&T as if Lucent were a separate entity.
The consolidated financial statements have been prepared using the historical
basis of the assets and liabilities and historical results of operations of
these businesses. Additionally, the aforementioned financial statements include
an allocation of certain AT&T corporate headquarters assets, liabilities and
expenses related to the businesses that were transferred to Lucent from AT&T.
Management believes the allocations reflected in the consolidated financial
statements are reasonable. The aforementioned financial statements may not
necessarily reflect Lucent's consolidated results of rations, financial
position, changes in shareowners' equity or cash flows in the future or what
they would have been had Lucent been a separate, stand-alone company during such
period.
On April 1, 1998, a two-for-one split of Lucent's common stock became effective.
Shareowners' equity has been restated to give retroactive recognition to the
stock split for all periods presented by reclassifying from retained earnings to
common stock the par value of the additional shares arising from the split. 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 this stock split.
On November 19, 1998, Lucent sold $500 ($495 net of unamortized costs) of
10-year notes 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.
<PAGE>
PAGE 31 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
ACQUISITIONS
The following table presents information about certain acquisitions by Lucent in
the fiscal years ended September 30, 1998 and 1997. All charges were recorded in
the quarter in which the transaction was completed.
<TABLE>
<CAPTION>
JNA LANNET MassMedia SDX YURIE OPTIMAY PROMINET LIVINGSTON OCTEL
(1) (2) (3) (4) (5) (6) (7) (8) (9)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Acquisition
Date 9/98 8/98 7/98 7/98 5/98 4/98 1/98 12/97 9/97
Purchase $67 $115 N/S $207 $1,056 $64 $199 $610 $1,819
price cash cash cash cash & cash stock & stock & cash &
options options options options
Goodwill 37 2 1 96 292 1 35 114 181
Existing
technology 18 15 0 16 40 18 23 69 186
Purchased in-process
R&D costs
(after tax) 3 67 8 82 620 48 157 427 945
Amortization period-
goodwill (years) 10 7 5 10 7 5 5 5 7
Amortization period-
existing technology
(years) 10 5 N/A 5 5 5 6 8 5
</TABLE>
(1) JNA Telecommunications Limited was an Australian telecom manufacturer,
reseller and system integrator.
(2) LANNET, a subsidiary of Madge Networks N.V., was an Israeli-based supplier
of Ethernet and asynchronous transfer mode ("ATM") switching solutions for
local area networks.
(3) MassMedia Communications, Inc., was a privately held start-up developer of
highly-reliable, next-generation network interoperability software.
(4) SDX Business Systems plc was a United Kingdom-based provider of business
communications systems.
(5) Yurie Systems, Inc. was a provider of ATM access technology and equipment
for data, voice and video networking.
(6) Optimay GmbH specialized in the development of software products and
services for chip sets to be used for Global System for Mobile
Communications cellular phones.
(7) 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.
(8) Livingston Enterprises, Inc. was a global provider of equipment used by
Internet service providers to connect their subscribers to the Internet.
(9) Octel Communications Corporation was a provider of voice, fax and
electronic messaging technologies.
N/A Not applicable
N/S Not significant
<PAGE>
All the above acquisitions were accounted for under the purchase method of
accounting. The fair market value of the assets and liabilities acquired were
independently determined and included in the balance sheet as of the quarter in
which the acquisition was completed.
For all the above acquisitions, the acquired technology valuation included both
existing technology and purchased in-process research and development. The
valuation of these technologies was made by applying the income forecast method,
which considers the present value of cash flows by product lines.
<PAGE>
PAGE 32 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
Included in the purchase price for the above acquisitions, was purchased
in-process research and development, which was a noncash charge to earnings as
this technology had not reached technological feasibility and had no future
alternative use. This technology will require varying additional development,
coding and testing efforts over the next year before technological feasibility
can be determined. The remaining purchase price was allocated to tangible assets
and intangible assets, including goodwill and existing technology, less
liabilities assumed.
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 when
accounting for long-term contracts, allowance for uncollectible accounts
receivable, inventory obsolescence, product warranty, depreciation, employee
benefits, taxes, restructuring reserves and contingencies, among others.
FOREIGN CURRENCY TRANSLATION
For operations outside the United States that prepare financial statements in
currencies other than the United States dollar, results of operations and cash
flows are translated at average exchange rates during the period, and assets and
liabilities are translated at end of period exchange rates. Translation
adjustments are included as a separate component of shareowners' equity.
REVENUE RECOGNITION
Revenue is generally recognized when all significant contractual obligations
have been satisfied and collection of the resulting receivable is reasonably
assured. Revenue from product sales of hardware and software is recognized at
time of delivery and acceptance, and after consideration of all the terms and
conditions of the customer contract. Sales of services are recognized at time of
performance and rental revenue is recognized proportionately over the contract
term. Revenues and estimated profits on long-term contracts are 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.
<PAGE>
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.
<PAGE>
PAGE 33 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
CASH AND CASH EQUIVALENTS
All highly liquid investments with original maturities of three months or less
are considered to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (determined principally on a
first-in, first-out basis) or market.
CONTRACTS IN PROCESS
Contracts in process are valued at cost plus accrued profits less progress
billings.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is determined using primarily the unit and group methods. The unit
method is used for manufacturing and laboratory equipment and large computer
systems. The group method is used for other depreciable assets. When assets that
were depreciated using the unit method are sold or retired, the gains or losses
are included in operating results. When assets that were depreciated using the
group method are sold or retired, the original cost is deducted from the
appropriate account and accumulated depreciation. Any gains or losses are
applied against accumulated depreciation.
The accelerated depreciation method is used for certain high technology computer
processing equipment. All other facilities and equipment are depreciated on a
straight-line basis over their estimated useful lives.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
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
nonderivative 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
<PAGE>
PAGE 34 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
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 an entity to measure all derivatives at
fair value and to recognize them in the balance sheet as an asset or liability,
depending on the entity's rights or obligations under the applicable derivative
contract. Lucent will designate each derivative as belonging to one of several
possible categories, based on the intended use of the derivative. The
recognition of changes in fair value of a derivative that affect the income
statement will depend on the intended use of the derivative. If the derivative
does not qualify as a hedging instrument, the gain or loss on the derivative
will be recognized currently in earnings. If the derivative qualifies for
special hedge accounting, the gain or loss on the derivative will either (1) be
recognized in income along with an offsetting adjustment to the basis of the
item being hedged or (2) be deferred in other comprehensive income and
reclassified to earnings in the same period or periods during which the hedged
transaction affects earnings. SFAS 133 will be effective for Lucent no later
than the quarter ending December 31, 1999. SFAS 133 may not be applied
retroactively to financial statements of prior periods. SFAS 133 is not expected
to have a material impact on Lucent's consolidated results of operations,
financial position or cash flows.
In February 1998, FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises
employers' disclosures about pension and other postretirement benefit plans.
SFAS 132 is effective for fiscal years beginning after December 15, 1997.
Restatement of disclosures for earlier periods provided for comparative purposes
is required unless the information is not readily available. Lucent is in the
process of evaluating the disclosure requirements. The adoption of SFAS 132 will
have no impact on Lucent's consolidated results of operations, financial
position or cash flows.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS 131 is effective for financial statements for fiscal years beginning after
December 15, 1997. Financial statement disclosures for prior periods are
required to be restated. Lucent is in the process of evaluating the disclosure
requirements. The adoption of SFAS 131 will have no impact on Lucent's
consolidated results of operations, financial position or cash flows.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in the financial statements. SFAS 130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
Lucent is in the process of determining its preferred format. The adoption of
SFAS 130 will have no 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.
<PAGE>
PAGE 35 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
This pronouncement identifies the characteristics of internal use software and
provides guidance on new cost recognition principles. SOP 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998. Lucent
currently expenses its costs of computer software developed or obtained for
internal use and is evaluating the impacts of adopting SOP 98-1.
In October 1997, the AICPA issued Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"). SOP 97-2 provides guidance on when revenue should be
recognized and in what amounts for licensing, selling, leasing or otherwise
marketing computer software. SOP 97-2 is effective for financial statements for
fiscal years beginning after December 15, 1997. During March 1998, the AICPA
issued Statement of Position 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition",("SOP 98-4"). SOP 98-4
defers for one year the limitation of what is considered vendor-specific
objective evidence of the fair value of the various elements in a
multiple-element arrangement, a requirement to recognize revenue for elements
delivered early in the arrangement. Effective October 1, 1998, Lucent has
adopted SOP 97-2 and the adoption is not expected to have a material impact on
Lucent's consolidated results of operations, financial position or cash flows.
4. SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
Nine
Year Ended Year Ended Months Ended
September 30, September 30, September 30,
1998 1997 1996
(Twelve Months) (Twelve Months)
<S> <C> <C> <C>
INCLUDED IN COSTS
Amortization of software development costs......$ 234 $ 380 $ 219
INCLUDED IN SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
Amortization of goodwill and existing
technology....................................$ 147 $ 32 $ 25
INCLUDED IN COSTS AND OPERATING EXPENSES
Depreciation and amortization of property,
plant and equipment...........................$ 923 $1,011 $ 675
OTHER INCOME -- NET
Interest income.................................$ 84 $ 133 $ 71
Minority interests in earnings of subsidiaries.. (24) (35) (21)
Net equity losses from investments.............. (209) (64) (26)
Net decrease in cash surrender value
of life insurance............................. (12) (13) (6)
Loss on foreign currency transactions........... (44) (12) (4)
Gains on businesses sold........................ 208 - -
Miscellaneous -- net............................ 97 66 41
------- ------- -------
Total other income -- net.......................$ 100 $ 75 $ 55
</TABLE>
<PAGE>
PAGE 36 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
DEDUCTED FROM INTEREST EXPENSE
<S> <C> <C> <C>
Capitalized interest........................... $ 17 $ 14 $ 14
</TABLE>
SUPPLEMENTARY BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
INVENTORIES
Completed goods......................................... $ 1,578 $ 1,611
Work in process and raw materials....................... 1,503 1,315
-------- -------
Inventories............................................. $ 3,081 $ 2,926
PROPERTY, PLANT AND EQUIPMENT -- NET
Land and improvements................................... $ 301 $ 299
Buildings and improvements.............................. 3,132 2,853
Machinery, electronic and other equipment............... 8,369 8,411
------- -------
Total property, plant and equipment..................... 11,802 11,563
Less: Accumulated depreciation and amortization......... (6,392) (6,412)
-------- -------
Property, plant and equipment -- net.................... $ 5,410 $ 5,151
OTHER CURRENT LIABILITIES
Advance billings and customer deposits $ 517 $ 844
</TABLE>
SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine
Year Ended Year Ended Months Ended
September 30, September 30, September 30,
1998 1997 1996
(twelve months) (twelve months)
------------ ------------- -----------
<S> <C> <C> <C>
Interest payments, net of amounts capitalized $ 319 $ 307 $ 209
Income tax payments ......................... $ 716 $ 781 $ 145
Acquisitions of businesses:
Fair value of assets acquired................ $2,341 $1,812 $ 527
Less: Fair value of liabilities assumed...... $ 994 $ 244 $ 293
------ ------ ------
Acquisitions of businesses .................. $1,347 $1,568 $ 234
</TABLE>
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"). For the year ended
September 30, 1998, the statement of cash flows excludes Lucent's contribution
of its Consumer Products business.
<PAGE>
PAGE 37 Exhibit 99.1
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
Labs Design Automation Group.
For the year ended September 30, 1998, the statement of cash flows excludes the
issuance of common stock related to the acquisitions of Livingston and Prominet
and the conversion of stock options related to the acquisitions of Livingston,
Prominet, Yurie and Optimay.
For the year ended September 30, 1997, the statement of cash flows excludes the
conversion of stock options related to the acquisition of Octel. For information
on the 1998 and 1997 acquisitions, see Note 1.
For the year ended September 30, 1997, research and development costs include a
$127 write-down of special purpose Bell Labs assets no longer being used.
The statement of cash flows for the nine-month period ended September 30, 1996
excludes $2,000 of customer accounts receivable retained by AT&T as well as net
asset transfers of $239 received from AT&T. These transactions have not been
reflected on the consolidated statement of cash flows because they were noncash
events accounted for as changes in paid-in capital.
<PAGE>
PAGE 38 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
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 common shares
had been issued.
Included in the calculation of the weighted-average shares is the retroactive
recognition to January 1, 1996 of the 1,049.2 million shares (524.6 million
shares on a pre-split basis) owned by AT&T and the 12.88 million shares issued
on February 26, 1999 in connection with the Kenan merger. The following table
reconciles the number of shares utilized in the earnings per share calculations:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, September 30,
1998 1997 1996
(twelve months)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 1,055 $ 574 $ 229
Earnings per common share - basic $ 0.80 $ 0.44 $ 0.19
Earnings per common share - diluted $ 0.78 $ 0.44 $ 0.19
Number of shares (in millions)
- ---------------------------------
Common shares - basic 1,317.5 1,291.3 1,204.4
Effect of dilutive securities:
Stock options 26.8 9.9 0.0
Other 2.0 0.1 0.2
Common shares - diluted 1,346.3 1,301.3 1,204.6
</TABLE>
6. 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 restructuring Lucent's
Consumer Products business, including closing all of the Company-owned retail
Phone Center Stores; consolidating and re-engineering numerous corporate and
business unit operations; and selling the Microelectronics' interconnect and
Paradyne businesses.
The 1995 business restructuring charge of $2,613 included restructuring
liabilities of $1,774, asset impairments of $497 and $342 of benefit plan
losses. Benefit plan losses were related to pension and other employee benefit
plans and primarily represented losses in 1995 from the actuarial changes that
otherwise might have been amortized over future periods.
<PAGE>
PAGE 39 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
The pre-tax total charge for restructuring, impairments and other charges of
$2,801 for 1995 was recorded as $892 of costs, $1,645 of selling, general and
administrative expenses, and $264 of research and development expenses. The
charges included $1,509 for employee separations; $627 for asset write-downs;
$202 for closing, selling and consolidating facilities; and $463 for other
items. The total charges reduced net income by $1,847.
The restructuring charge of $2,613 incorporated the separation costs, both
voluntary and involuntary, for nearly 22,000 employees. As of September 30,
1998, the work force had been reduced by approximately 19,900 positions due to
business restructuring. In addition, approximately 1,000 employees left Lucent's
work force as part of the sale of Paradyne in 1996. Actual experience in
employee separations, combined with redeploying employees into other areas of
the business, has resulted in lower separation costs than originally
anticipated. Lucent expects employee reductions in positions to be substantially
complete by September 1999.
The following table displays a rollforward of the liabilities for business
restructuring from September 30, 1996 to September 30, 1998:
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1998 September 30,
Type of Cost 1996 Balance Deductions 1997 Balance Deductions 1998 Balance
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Employee Separation $ 766 $(418) $ 348 $ (235) $ 113
Facility Closing 175 (109) 66 (23) 43
Other 348 (193) 155 (60) 95
Total $ 1,289 $(720) $ 569 $(318) $ 251
</TABLE>
Management believes that the remaining reserves for business restructuring are
adequate to complete its plan.
Total deductions to Lucent's business restructuring reserves were $318 and $720
for the years ended September 30, 1998 and 1997, respectively. Included in these
deductions were cash payments of $176 and $483 and noncash related charges of
$42 and $36 for the years ended September 30, 1998 and 1997, respectively. The
noncash related charges were primarily associated with asset write-offs that
were charged against the business restructuring reserves. In addition, Lucent
reversed $100 and $201 of business restructuring reserves primarily related to
favorable experience in employee separations for the years ended September 30,
1998 and 1997, respectively.
<PAGE>
PAGE 40 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
7. 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 Year Ended Nine
September 30, September 30, Months Ended
1998 1997 September 30,
(twelve months) (twelve months) 1996
------------ ------------- -----------
<S> <C> <C> <C>
United States federal statutory
income tax rate......................... 35.0% 35.0% 35.0%
------- ------- -------
State and local income taxes, net of
federal income tax effect............... 3.2 5.4 1.4
Foreign earnings and dividends taxed at
different rates......................... 1.1 0.9 4.1
Research credits.......................... (2.8) (2.6) (5.0)
Other differences - net................... (1.2) (1.9) 3.5
------- ------- -------
Effective income tax rate before purchased
in-process research and development costs. 35.3% 36.8% 39.0%
Purchased in-process research and
development costs....................... 20.7 25.0 0.0
------- ------- -------
Effective income tax rate................. 56.0% 61.8% 39.0%
======= ======= =======
</TABLE>
<PAGE>
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 Year Ended Nine
September 30, September 30, Months Ended
1998 1997 September 30,
(twelve months) (twelve months) 1996
------------ ------------- -----------
<S> <C> <C> <C>
INCOME BEFORE INCOME TAXES
United States............................. $ 2,043 $ 911 $ 110
Foreign................................... 353 592 265
------- ------ -------
Income before income taxes $ 2,396 $ 1,503 $ 375
======= ====== =======
PROVISION FOR INCOME TAXES
CURRENT
Federal................................... $ 823 $ 464 $ 244
State and local........................... 143 131 53
Foreign................................... 208 226 98
------- ------ -------
Sub-Total 1,174 821 395
------- ------ -------
DEFERRED
Federal................................... 113 36 (197)
State and local........................... 43 77 ( 45)
Foreign and other......................... 11 ( 5) ( 7)
------- ------ -------
Sub-Total 167 108 (249)
------- ------ -------
Provision for income taxes................ $ 1,341 $ 929 $ 146
======= ====== =======
</TABLE>
<PAGE>
PAGE 41 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
As of September 30, 1998, Lucent had tax credit carryforwards of $32 and
federal, state and local, and foreign net operating loss carryforwards (tax
effected) of $179, all of which expire primarily after the year 2000.
The components of deferred tax assets and liabilities at September 30, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
DEFERRED INCOME TAX ASSETS
Employee pensions and other benefits - net........ $ 1,510 $ 1,777
Business restructuring............................ 165 112
Reserves and allowances........................... 1,063 887
Net operating loss/credit carryforwards........... 211 107
Valuation allowance............................... (261) (234)
Other............................................. 463 664
------- -------
Total deferred income tax assets.................... $ 3,151 $ 3,313
======= =======
DEFERRED INCOME TAX LIABILITIES
Property, plant and equipment..................... $ 397 $ 478
Other............................................. 380 240
------ -------
Total deferred income tax liabilities............... $ 777 $ 718
====== =======
</TABLE>
Lucent has not provided for United States deferred income taxes or foreign
withholding taxes on $2,432 of undistributed earnings of its non-United States
subsidiaries as of September 30, 1998, since these earnings are intended to be
reinvested indefinitely.
8. DEBT OBLIGATIONS
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
DEBT MATURING WITHIN ONE YEAR
Commercial paper (net of $495*
refinanced after September 30, 1998) $ 2,106 $ 2,364
Long-term debt........................ 39 25
Other................................. 86 149
------ ------
Total debt maturing within one year... $ 2,231 $ 2,538
WEIGHTED AVERAGE INTEREST RATES
Commercial paper...................... 5.6% 5.5%
Long-term debt and other.............. 7.9% 6.3%
</TABLE>
Lucent had revolving credit facilities at September 30, 1998 aggregating $5,211
(a portion of which is used to support Lucent's commercial paper program),
$4,000 with domestic lenders and $1,211 with foreign lenders. At September 30,
1998, $4,000 with domestic lenders and $855 with foreign lenders were available.
<PAGE>
PAGE 42 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
September 30, September 30,
1998 1997
------------- -------------
LONG-TERM DEBT
6.90% notes due July 15, 2001 $ 750 $ 750
7.25% notes due July 15, 2006 750 750
6.50% debentures due January 15, 2028 300 -
Commercial paper refinanced after
September 30, 1998 495* -
Long-term lease obligations 1 2
Other 164 198
Less: Unamortized discount 12 10
------ ------
Total long-term debt 2,448 1,690
Less: Amounts maturing within one year 39 25
------ ------
Net long-term debt $ 2,409 $ 1,665
====== ======
Lucent has an effective shelf registration statement for the issuance of debt
securities up to $3,500, of which $1,160* remains available at September 30,
1998, giving effect to the refinancing.
This table shows the maturities, by year, of the $2,448 in total long-term debt
obligations:
September 30,
----------------------------------------------
1999 2000 2001 2002 2003 Later Years
$39 $71 $773 $14 $14 $1,537*
* 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.
<PAGE>
PAGE 43 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
9. EMPLOYEE BENEFIT PLANS
PENSION AND POSTRETIREMENT BENEFITS
Lucent maintains noncontributory defined benefit pension plans covering the
majority of its employees and retirees, and postretirement benefit plans for the
majority of its retirees that include health care benefits and life insurance
coverage. Prior to October 1, 1996, Lucent's financial statements reflect
estimates of the costs experienced for its employees and retirees while they
were included in AT&T pension and postretirement plans.
Pension-related benefits for management employees are based principally on
career-average pay while benefits for nonmanagement employees are not directly
pay-related. Pension contributions are determined principally using the
aggregate cost method and are made primarily to trust funds held for the sole
benefit of plan participants.
The following table shows the Lucent plans' funded status reconciled with
amounts reported in Lucent's consolidated balance sheets, and the assumptions
used in determining the actuarial present value of the benefit obligation:
<TABLE>
<CAPTION>
Pension Postretirement
Benefits Benefits
September 30, September 30,
1998 1997 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Plan assets at fair value $ 36,191 $ 36,204 $ 3,959 $ 4,152
Less: benefit obligation 27,846 23,187 9,193 7,939
- -----------------------------------------------------------------------------------
Funded(Unfunded) status of the plan 8,345 13,017 (5,234) (3,787)
Unrecognized prior service costs 1,509 1,048 533 261
Unrecognized transition asset (944) (1,244) - -
Unrecognized net gain (5,175) (9,669) (408) (1,256)
Net minimum liability of nonqualified
plans (27) (23) - -
- -----------------------------------------------------------------------------------
Prepaid(Accrued) benefit cost $ 3,708 $ 3,129 $(5,109) $(4,782)
===================================================================================
Accumulated pension benefit obligation $ 26,799 $ 22,669 n/a n/a
Vested pension benefit obligation $ 25,112 $ 21,246 n/a n/a
- ----------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees n/a n/a $ 6,662 $ 5,902
Fully eligible active plan
participants n/a n/a 1,131 777
Other active plan participants n/a n/a 1,400 1,260
- ----------------------------------------------------------------------------------
Accumulated postretirement benefit
obligation n/a n/a $ 9,193 $ 7,939
==================================================================================
Assumptions:
Weighted average discount rate 6.00% 7.25% 6.00% 7.25%
Rate of increase in future
compensation levels 4.50% 4.50% n/a n/a
==================================================================================
</TABLE>
<PAGE>
PAGE 44 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
Pension plan assets consist primarily of listed stocks (of which $126 and $73
represent Lucent common stock at September 30, 1998 and 1997, respectively).
Postretirement plan assets include listed stocks (of which $11 and $2 represent
Lucent common stock at September 30, 1998 and 1997, respectively). Assets in
both plans also include corporate and governmental debt, and cash and cash
equivalents. Pension plan assets also include real estate investments, and
postretirement plan assets also include life insurance contracts.
The prepaid pension benefit costs shown above are net of pension liabilities for
plans where accumulated plan benefits exceed assets. Such liabilities are
included in other liabilities in the consolidated balance sheets.
The following table shows the components of pension and postretirement costs for
the periods indicated:
<TABLE>
<CAPTION>
Year Ended Year Ended Nine
September 30, September 30, Months Ended
1998 1997 September 30,
PENSION COST (twelve months) (twelve months) 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits
earned during the period $ 331 $ 312 $ 277
Interest cost on projected
benefit obligation 1,631 1,604 1,172
Expected return on plan
assets (1) (2,384) (2,150) (1,589)
Amortization of unrecognized
prior service costs 164 149 113
Amortization of transition
asset (300) (300) (222)
Charges(credits) for plan
curtailments (2) - 56 (16)
- ---------------------------------------------------------------------------------------
Net pension credit $ (558) $ (329) $ (265)
=======================================================================================
POSTRETIREMENT COST
- ---------------------------------------------------------------------------------------
Service cost-benefits earned
during the period $ 63 $ 57 $ 51
Interest cost on accumulated
postretirement benefit
obligation 540 554 408
Expected return on plan
assets (3) (263) (264) (189)
Amortization of unrecognized
prior service costs 53 35 53
Amortization of net loss (gain) 3 (15) 8
Charges(credits) for plan
curtailments(2) - 26 (2)
- ---------------------------------------------------------------------------------------
Net postretirement benefit cost $ 396 $ 393 $ 329
=======================================================================================
</TABLE>
<PAGE>
(1) A 9.0% long-term rate of return on pension plan assets was assumed for 1998,
1997 and 1996. The actual return on plan assets was $1,914 and $8,523 for
the years ended September 30, 1998 and 1997, respectively, and $2,204 for
the nine-month period ended September 30, 1996.
(2) The 1997 pension and postretirement charges for plan curtailments of $56 and
$26, respectively, reflect the final determination of 1996 curtailment
effects.
(3) A 9.0% long-term rate of return on postretirement plan assets was assumed
for 1998, 1997 and 1996. The actual return on plan assets was $349 and
$1,040 for the years ended September 30, 1998 and 1997, respectively, and
$219 for the nine-month period ended September 30, 1996.
<PAGE>
PAGE 45 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
Pension cost was computed using the projected unit credit method. Lucent is
amortizing over approximately 16 years the unrecognized pension transition asset
related to the adoption of SFAS No. 87, "Employers' Accounting for Pensions," in
1986. Prior service pension costs are amortized primarily on a straight-line
basis over the average remaining service period of active employees.
For postretirement benefit plans, Lucent assumed a 5.5% annual rate of increase
in the per capita cost of covered health care benefits (the health care cost
trend rate) for 1999, gradually declining to 4.9% by the year 2005, after which
the costs would remain level. This assumption has a significant effect on the
amounts reported. Increasing the assumed trend rate by 1% in each year would
increase Lucent's accumulated postretirement benefit obligation as of September
30, 1998 by $358 and the interest and service cost by $30 for the year then
ended.
SAVINGS PLANS
Lucent's savings plans allow employees to contribute a portion of their pre-tax
and/or after tax income in accordance with specified guidelines. Lucent matches
a percentage of employee contributions up to certain limits. Beginning in 1998,
Lucent changed its savings plan for management employees to provide for both a
fixed and a variable matching contribution. The fixed match is 50% of qualified
management employee contributions and the variable match is based on Company
performance. For 1998, Lucent's total match of qualified management employee
contributions is 109%, as compared with 66 2/3% in prior years. Qualified
nonmanagement employee contributions continued to be matched at a 66 2/3% rate.
Savings plan expense amounted to $312 and $180 for the years ended September 30,
1998 and 1997, respectively, and $131 for the nine-month period ended September
30, 1996.
EMPLOYEE STOCK OWNERSHIP PLAN
Lucent's leveraged Employee Stock Ownership Plan ("ESOP")funds the employer's
contributions to the Long Term Savings and Security Plan ("LTSSP") for
nonmanagement 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, 1998, the ESOP contained 10.4 million shares of Lucent's common
stock. Of the 10.4 million shares, 8.2 million have been allocated to the LTSSP
and 2.2 million were unallocated. As of September 30, 1998, the unallocated
shares had a fair value of $154.
<PAGE>
PAGE 46 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
10. STOCK COMPENSATION PLANS
Lucent has stock-based compensation plans under which certain employees receive
stock options and other equity-based awards. Effective October 1, 1996, any AT&T
awards held by Lucent employees were replaced by substitute awards under the
Lucent Technologies Inc. 1996 Long Term Incentive Program ("1996 LTIP").
The 1996 LTIP provides for the grant of stock options, stock appreciation
rights, performance awards, restricted stock awards and other stock unit awards.
Awards under the 1996 LTIP are generally made to executives. Lucent also awards
stock options to selected employees below executive levels under the Lucent
Technologies Inc. 1997 Long-Term Incentive Plan ("1997 LTIP"). In addition, the
Company has made special, broad-based grants under the Lucent Technologies Inc.
Founders Grant Stock Option Plan ("FGP")(1996 world-wide option grants) and the
Lucent Technologies Inc. 1998 Global Stock Option Plan ("GSOP")(1998 world-wide
option grants to management employees).
Stock options are granted with an exercise price equal to or greater than 100%
of market value at the date of grant, generally have a ten-year term and vest
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 1996 LTIP is 64 million shares between
February 1998 and February 2003. Under the 1997 LTIP, the number of shares
authorized for option grants in each calendar year is 1.3% of the total number
of outstanding shares of Common Stock as of the first day of the calendar year.
The total number of shares of Common Stock originally authorized for grant under
the FGP and GSOP are 30 million and 18 million, respectively.
In connection with several of Lucent's acquisitions (see Note 1), outstanding
stock options held by employees of acquired companies will become exercisable,
according to their terms, for Lucent common stock effective at the acquisition
date. The fair value of these options was included as part of the purchase price
related to the acquisition. These options did not reduce the shares available
for grant under any of Lucent's other option plans.
Lucent established an Employee Stock Purchase Plan (the "ESPP") effective
October 1, 1996. Under the terms of the ESPP, eligible employees may have up to
10% of eligible compensation deducted from their pay to purchase Common Stock
through June 30, 2001. On the date of exercise, which is the last trading day of
each month, the per share purchase price is 85% of the average high and low per
share trading price of Common Stock on the New York Stock Exchange on that date.
The amount that may be offered pursuant to this plan is 100 million shares. In
1998 and 1997, 4.2 million and 6.2 million shares, respectively, were purchased
under the ESPP at a weighted average price of $49.02 and $25.15, respectively.
<PAGE>
PAGE 47 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
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
$73 and $36 for the years ended September 30, 1998 and 1997, respectively, and
$11 for the nine months ended September 30, 1996. If Lucent had elected to adopt
the optional recognition provisions of SFAS No. 123 for its stock option plans
and the ESPP, net income and earnings per share would have been changed to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended Year Ended Nine
September 30, September 30, Months Ended
1998 1997 September 30,
(twelve months) (twelve months) 1996
-----------------------------------------------
<S> <C> <C> <C>
Net income
As reported........................ $1,055 $574 $229
Pro forma.......................... $884 $477 $207
-----------------------------------------------
Earnings per share - basic
As reported........................ $0.80 $0.44 $0.19
Pro forma.......................... $0.67 $0.37 $0.17
Earnings per share - diluted
As reported........................ $0.78 $0.44 $0.19
Pro forma.......................... $0.64 $0.36 $0.17
----------------------------------------------
</TABLE>
Note: The pro forma disclosures shown include the incremental fair value of the
Lucent stock options that were substituted for AT&T stock options at the time of
the Distribution and may not be representative of the effects on net income and
earnings per share in other years.
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>
- ------------------------------------------------------------------------------
Lucent AT&T
-------------------- ------
Weighted Average Assumptions (1) (2) (3) (4)
- -----------------------------
<S> <C> <C> <C> <C>
Dividend yield 0.26% 0.65% 0.75% 2.4%
Expected volatility 28.2% 22.4% 22.4% 19.4%
Risk-free interest rate 5.5% 6.4% 6.1% 6.4%
Expected holding period(in years) 4.7 5.1 4.5 5.0
- ------------------------------------------------------------------------------
</TABLE>
(1) Assumptions for Lucent options awarded during 1998.
(2) Assumptions for Lucent options awarded during 1997.
(3) Assumptions for Lucent options substituted for AT&T options effective
October 1, 1996.
(4) Assumptions for AT&T options awarded in 1996.
<PAGE>
PAGE 48 Exhibit 99.1
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, 1998 and 1997. Also shown
is a summary of the status of the AT&T stock options held by Lucent's employees
and the related transactions for the nine months ended September 30, 1996.
Weighted
Average
Shares Exercise
(000's) Price
- -----------------------------------------------------------------------
AT&T options outstanding at December 31, 1995 12,784 $ 23.72
- -----------------------------------------------------------------------
Granted 3,380 32.91
Exercised (366) 19.14
Forfeited/Expired (6) 31.59
- -----------------------------------------------------------------------
AT&T options outstanding at September 30, 1996 15,792 25.68
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Lucent options substituted for AT&T options, and
outstanding at October 1, 1996 19,572 20.72
- -----------------------------------------------------------------------
Granted(1)(2) 51,245 23.19
Exercised (4,044) 16.78
Forfeited/Expired (1,960) 23.80
- -----------------------------------------------------------------------
Lucent options outstanding at September 30, 1997 64,813 22.83
- -----------------------------------------------------------------------
Granted (2)(3) 41,613 58.07
Exercised (10,781) 17.63
Forfeited/Expired (2,045) 24.12
- -----------------------------------------------------------------------
Lucent options outstanding at September 30, 1998 93,600 $39.06
- -----------------------------------------------------------------------
(1) Includes options covering 25,506 shares of Common Stock granted under the
FGP in 1996 (at a weighted average exercise price of $22.31). No additional
options will be granted under the FGP.
(2) Includes options covering 5,192 and 4,942 shares of Common Stock, which
resulted from the conversion of options of acquired companies for the years
ended September 30, 1998 and 1997, respectively (at a weighted average
exercise price of $10.09 and $20.00, respectively). No additional options
will be granted under the converted plans of acquired companies.
(3) Includes options covering 16,178 shares of Common Stock granted under the
GSOP on September 1, 1998 (at a weighted average exercise price of $74.69).
The weighted average fair value of Lucent stock options, calculated using the
Black-Scholes option-pricing model, granted during the years ended September 30,
1998 and 1997 is $24.53 and $7.30 per share, respectively. The weighted average
fair value of AT&T stock options, calculated using the Black-Scholes
option-pricing model, granted during the nine months ended September 30, 1996 is
$7.07 per share.
<PAGE>
PAGE 49 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
The following table summarizes the status of Lucent's stock options outstanding
and exercisable at September 30, 1998:
---------------------------------- --------------------
Stock Options Stock Options
Outstanding Exercisable
- --------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Shares Contractual Exercise Shares Exercise
Prices (000's) Life(Years) Price (000's) Price
- --------------------------------------------------------------------------------
$ 0.04 to $21.30 9,561 5.2 $15.42 6,531 $16.61
$21.31 to $22.28 32,218(1) 8.0 22.28 721 22.20
$22.29 to $26.28 10,587 7.9 25.01 1,200 24.73
$26.29 to $43.33 15,414 8.5 38.68 2,845 31.64
$43.34 to $91.66 25,820 9.9 74.75 79 61.62
- --------------------------------------------------------------------------------
Total 93,600 $39.06 11,376 $21.89
- --------------------------------------------------------------------------------
(1)Note: One-half of the options granted to nonmanagement employees under the
FGP, covering approximately 3,890 shares, became exercisable on October 1, 1998.
Other stock unit awards are granted under the 1996 LTIP. Presented below is the
total number of shares of Common Stock represented by awards granted to Lucent
employees for the years ended September 30, 1998 and 1997, and the total number
of AT&T shares represented by awards granted to Lucent employees for the
nine-month period ended September 30, 1996:
Year Ended Year Ended Nine Months
September 30, September 30, Ended
1998 1997 September 30,
(twelve months) (twelve months) 1996
- --------------------------------------------------------------------------------
Lucent shares granted (000's)....... 795 4,282 n/a
AT&T shares granted (000's)......... n/a n/a 524
Weighted average market
value of shares granted
during the period.................. $44.15 $23.19 $33.12
- --------------------------------------------------------------------------------
<PAGE>
PAGE 50 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
11. SEGMENT INFORMATION
INDUSTRY SEGMENT
Lucent operates in the global communications networking industry segment. This
segment includes wire-line and wireless systems, software and products used for
voice, data and video communications.
GEOGRAPHIC SEGMENTS
Transfers between geographic areas are on terms and conditions comparable with
sales to external customers. The methods followed in developing the geographic
segment data require the use of estimates and do not take into account the
extent to which product development, manufacturing and marketing depend on each
other. Thus, the information may not be indicative of results if the geographic
areas were independent organizations.
Corporate assets are principally cash and temporary cash investments. Data on
other geographic areas pertain to operations that are located outside the United
States. Revenues from all international activities (other geographic areas
revenues plus export revenues) provided 25.9% and 24.2% of consolidated revenues
for the years ended September 30, 1998 and 1997, respectively, and 23.1% for the
nine-month period ended September 30, 1996.
<TABLE>
<CAPTION>
Year Ended Year Ended Nine
September 30, September 30, Months Ended
1998 1997 September 30,
(twelve months) (twelve months) 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
United States...............................$ 24,597 $21,891 $13,372
Other geographic areas...................... 5,731 4,553 2,525
------- ------- -------
$ 30,328 $26,444 $15,897
======= ======= =======
TRANSFERS BETWEEN GEOGRAPHIC AREAS
(Eliminated in Consolidation)
United States...............................$ 2,371 $ 1,927 $ 1,353
Other geographic areas...................... 1,544 1,267 648
------- ------- -------
$ 3,915 $ 3,194 $ 2,001
======= ======= =======
OPERATING INCOME(LOSS)
United States...............................$ 2,418(1) $ 1,550(2) $ 948
Other geographic areas...................... 525 410 (108)
Corporate, eliminations and nonoperating.... (547) (457) (465)
------- ------- -------
Income before income taxes $ 2,396 $ 1,503 $ 375
======= ======= =======
ASSETS (End of Period)
United States...............................$ 19,776 $17,111 $16,516
Other geographic areas...................... 6,755 5,600 3,912
Corporate assets............................ 1,282 1,778 2,744
Eliminations................................ (982) (621) (522)
------- ------- -------
$ 26,831 $23,868 $22,650
======= ======= =======
</TABLE>
(1) Includes charges of $1,416 of purchased in-process research and development
costs associated with the acquisitions of Livingston, Prominet, Optimay,
Yurie, SDX, LANNET, MassMedia and JNA.
(2) Includes charges of $1,024 of purchased in-process research and development
costs associated with the acquisitions of Octel and Agile.
<PAGE>
PAGE 51 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
CONCENTRATIONS
Historically, Lucent has relied on a limited number of customers for a
substantial portion of its total revenues. In terms of total revenues, Lucent's
largest customer has been AT&T, although other customers may purchase more of
any particular system or product line. Revenues from AT&T were $3,780 and $3,736
for the years ended September 30, 1998 and 1997, respectively, and $1,973 for
the nine-month period ended September 30, 1996. Lucent expects that a
significant portion of its future revenues will continue to be generated by a
limited number of customers. The loss of any of these customers or any
substantial reduction in orders by any of these customers could materially
adversely affect Lucent's operating results. Lucent does not have a
concentration of available sources of supply materials, labor, services or other
rights that, if suddenly eliminated, could severely impact its operations.
12. FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of financial instruments,
including derivative financial instruments were as follows:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
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/purchased options $ 26 $ 4 $ 28 $ 54
Letters of credit - 2 - 2
LIABILITIES
Long-term debt(1)(2) $ 2,408 $2,559 $1,663 $1,748
Derivative and Off Balance Sheet
Instruments:
Foreign currency forward exchange
contracts/purchased options 25 (4) 31 36
</TABLE>
(1) Excluding long-term lease obligations of $1 at September 30, 1998 and $2 at
September 30, 1997.
(2) 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.
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/purchased options Market quotes
Letters of credit Fees paid to obtain the obligations
</TABLE>
The carrying values of cash and cash equivalents, accounts receivable and debt
maturing within one year contained in the consolidated balance sheets
approximate fair value.
<PAGE>
PAGE 52 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
CREDIT RISK AND MARKET RISK
By their nature, all financial instruments involve risk, including credit risk
for nonperformance by counterparties. The contract or notional amounts of these
instruments reflect the extent of involvement Lucent has in particular classes
of financial instruments. The maximum potential loss may exceed any amounts
recognized in the 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.
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 multi-national basis in a wide variety of
foreign currencies. Consequently, Lucent enters into various foreign exchange
forward and purchased option contracts to manage its exposure against adverse
changes in those foreign exchange rates. The notional amounts for foreign
exchange forward and purchased option contracts represent the U.S. dollar
equivalent of an amount exchanged. Generally, foreign currency forward 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 firmly
committed transactions are deferred in other current assets and liabilities and
are not material to the consolidated financial statements at September 30, 1998
and 1997. Gains and losses on foreign currency exchange contracts that are
designated for forecasted transactions are recognized in other income as the
exchange rates change. The following table presents the gross notional amounts
of these derivative financial instruments in U.S. dollars:
Gross Notional Amount
September 30,
1998 1997
Foreign exchange forward contracts:
Singapore dollars $ 247 $ 59
Deutsche marks 189 558
British pounds 185 136
Australian dollars 142 1
Japanese yen 120 249
Spanish pesetas 113 109
Dutch guilders 110 186
Brazilian reals 82 58
French francs 81 116
Other 186 270
Total $1,455 $1,742
Foreign exchange purchased option
contracts:
Canadian dollars $ 66 $ -
Singapore dollars 60 -
Other 4 -
Total $ 130 $ -
Lucent enters into certain interest rate swap agreements to manage its risk
between long-term fixed rate and short-term variable rate instruments. Interest
rate swap agreements were not material during 1998 and 1997.
<PAGE>
PAGE 53 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
NONDERIVATIVE 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, 1998 and
1997, in management's opinion, there was no significant risk of loss in the
event of nonperformance of the counterparties to these financial instruments.
The following table presents the contract amount of Lucent's nonderivative and
off balance sheet instruments and the amounts drawn down on such instruments.
These instruments may exist or expire without being drawn upon. Therefore, the
total contract amount does not necessarily represent future cash flows.
Amounts Drawn
Down and
Contract Amount Outstanding
September 30, September 30,
1998 1997 1998 1997
Letters of credit $ 805 $ 832 $ - $ -
Commitments to extend credit 2,312 1,898 399 25
Guarantees of debt 292 309 205 118
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.
COMMITMENTS TO EXTEND CREDIT
Commitments to extend credit to third parties are legally binding, conditional
agreements generally having fixed expiration or termination dates and specific
interest rates and purposes.
Lucent may enter into credit agreements to provide long-term financing for
customers. In October 1996, Lucent entered into an agreement to extend $1,800 of
long-term financing to Sprint Spectrum Holdings LP ("Sprint PCS") for its
purchase of Lucent's equipment and services for its nationwide personal
communication services ("PCS") network. In 1997, Lucent closed transactions
under this facility to lay off $500 of loans and undrawn commitments and $300 of
undrawn commitments to a group of institutional investors and Sprint Corporation
(a partner in Sprint PCS), respectively. In 1998, Lucent sold $645 of loans in a
private sale. As of September 30, 1998 and 1997, the balance of these
commitments not yet drawn down by Sprint PCS were $253 and $146, respectively,
and the total drawn loans due were $226 and $17, respectively.
As part of the revenue recognition process, Lucent has assessed the
collectibility of the accounts receivable relating to the Sprint PCS purchase
contract in light of its financing commitment to Sprint PCS. Lucent has
determined that the receivables under the contract are reasonably assured of
collection based on various factors among which was the ability of Lucent to
sell the loans and commitments without recourse. Lucent intends to continue
pursuing opportunities for the sale of future loans and commitments.
In addition, Lucent also entered into agreements with others to extend credit up
to an aggregate of approximately $1,371 in 1998 and $850 in 1997 for possible
future sales.
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.
<PAGE>
PAGE 54 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
13. COMMITMENTS AND CONTINGENCIES
In the normal course of business, Lucent is subject to proceedings, lawsuits and
other claims, including proceedings under government laws and regulations
related to environmental and other matters. Such matters are subject to many
uncertainties, and outcomes are not predictable with assurance. Consequently,
the ultimate aggregate amount of monetary liability or financial impact with
respect to these matters at September 30, 1998 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, 1998 would not be material to the annual consolidated financial statements.
In connection with the Separation and 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.
<PAGE>
PAGE 55 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
ENVIRONMENTAL MATTERS
Lucent's current and historical operations are subject to a wide range of
environmental protection laws. In the United States, these laws often require
parties to fund remedial action regardless of fault. Lucent has remedial and
investigatory activities underway at 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 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, 1998 cannot be determined.
LEASE COMMITMENTS
Lucent leases land, buildings and equipment under agreements that expire in
various years through 2016. Rental expense under operating leases was $411 and
$326 for the years ended September 30, 1998 and 1997, respectively, and $183 for
the nine-month period ended September 30, 1996. The table below shows the future
minimum lease payments due under noncancelable operating leases at September 30,
1998. Such payments total $929.
Year Ended September 30,
Later
1999 2000 2001 2002 2003 Years
----- ----- ----- ----- ----- -----
Operating leases...... $255 $194 $118 $78 $59 $225
<PAGE>
PAGE 56 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
14. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR QUARTERS
FIRST SECOND THIRD FOURTH TOTAL
------- -------- ------ --------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended
September 30, 1998
Revenues................... $8,775 $6,184 $7,271 $8,098 $ 30,328
Gross margin............... 4,252 2,748 3,318 3,839 14,157
Net income(loss)............ 825(a) 29(b) (216)(c) 417(d) 1,055(a,b,c,d)
Earnings(loss) per
common share - basic....... $ 0.62(a) $ 0.02(b) $(0.18)(c) $ 0.30(d) $ 0.80(a,b,c,d)
Earnings(loss) per
common share - diluted..... $ 0.61(a) $ 0.02(b) $(0.18)(c) $ 0.29(d) $ 0.78(a,b,c,d)
Dividends per share......... $ 0.075 $ 0.00 $ 0.04 $ 0.04 $ 0.155
Stock price:(f)
High..................... 45 3/32 64 1/8 83 11/16 108 1/2 108 1/2
Low...................... 36 3/16 36 23/32 64 68 3/8 36 3/16
Quarter-end close........ 39 15/16 63 15/16 83 3/16 69 1/4 69 1/4
Year Ended
September 30, 1997
Revenues.................... $7,947 $5,172 $6,367 $6,958 $ 26,444
Gross margin................ 3,650 2,189 2,625 3,075 11,539
Net income(loss)............ 859 78 227 (590)(e) 574(e)
Earnings(loss) per
common share - basic....... $ 0.67 $ 0.05 $ 0.17 $(0.47)(e) $ 0.44(e)
Earnings(loss) per
common share - diluted..... $ 0.67 $ 0.05 $ 0.17 $(0.47)(e) $ 0.44(e)
Dividends per share......... $ 0.0375 $ 0.000 $ 0.0375 $ 0.0375 $ 0.1125
Stock price:(f)
High..................... 26 9/16 30 5/16 37 3/32 45 3/8 45 3/8
Low...................... 21 1/16 22 3/8 24 15/16 36 3/32 21 1/16
Quarter-end close........ 23 1/8 26 1/4 36 1/32 40 11/16 40 11/16
</TABLE>
(a) 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.
(b) 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.
(c) 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.
(d) As a result of the 1998 acquisitions of SDX, MassMedia, LANNET and JNA,
Lucent recorded a charge of $164 ($160 after tax) in the fourth quarter for
purchased in- process research and development.
(e) As a result of the 1997 acquisition of Octel, Lucent recorded a charge of
$979 ($966 after tax) in the fourth quarter for purchased in-process
research and development and other charges.
(f) Obtained from the Composite Tape. Stock prices have been restated to
reflect the two-for-one split of the Company's common stock effective April
1, 1998.
<PAGE>
PAGE 57 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
15. SUBSEQUENT EVENTS
Quadritek Systems, Inc.
- ------------------------------------
On October 1, 1998, Lucent acquired Quadritek Systems, Inc. for approximately
$50 in cash. Quadritek is a privately held start-up company which develops
next-generation Internet Protocol ("IP") network administration software
solutions. The acquisition will be accounted for using the purchase method of
accounting.
Included in the purchase price was approximately $21 ($13 after tax) of
in-process research and development which will result in a noncash charge to
earnings in the quarter ending December 31, 1998. The remaining purchase price
will be allocated to tangible assets and intangible assets, including goodwill
and existing technology, less liabilities assumed.
Philips Consumer Communications
- --------------------------------------------------------
On October 22, 1998, Lucent and Philips announced their intention to end the PCC
venture. On October 1, 1997, Lucent contributed its Consumer Products business
in exchange for 40% ownership of the PCC venture. It is expected Lucent and
Philips will each regain control of their original businesses by November 30,
1998. The venture was terminated in late 1998. In December 1998, Lucent sold
certain assets of its wireless handset business to Motorola. Lucent is currently
looking for opportunities to sell its remaining consumer products business.
WinStar Communications, Inc.
- -------------------------------------------
On October 22, 1998, Lucent announced that it had entered into a five-year
agreement with WinStar Communications, Inc. to provide WinStar with a fixed
wireless broadband telecommunications network in major domestic and
international markets. In connection with this agreement, Lucent entered into a
credit agreement with WinStar to provide up to $2,000 in equipment financing to
fund the buildout of this network. The maximum amount of credit that Lucent is
obligated to extend to WinStar at any one time is $500.
Ascend Communications, Inc.
- ---------------------------
On January 13, 1999, Lucent announced that it had entered into a definitive
agreement to merge with Ascend Communications, Inc. Under the terms of the
agreement, which was approved by each company's board of directors, each share
of Ascend common stock will be converted into 0.825 shares of Lucent common
stock. Based on Lucent's closing stock price of $107-7/8 on January 12, 1999,
the transaction would be valued at approximately $20 billion.
The transaction, which is subject to customary conditions and regulatory
approvals, is expected to be completed during Lucent's third fiscal quarter,
which ends June 30, 1999, and is expected to be accounted for as a pooling of
interests.
<PAGE>
PAGE 58 Exhibit 99.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per Share Amounts)
WaveAccess Ltd.
- ---------------
On January 22, 1999, Lucent completed the acquisition of the remaining 80
percent of WaveAccess Ltd. for $45 in cash. In May 1998, Lucent had acquired a
20 percent stake in the company. WaveAccess is a developer of high-speed systems
for wireless data communications. The acquisition will be accounted for using
the purchase method of accounting.
The purchase is expected to result in a one-time, non-tax deductible, non-cash
charge to earnings for purchased in-process research and development in the
quarter ending March 31, 1999. The amount of the charge has not yet been
determined. The remaining purchase price will be allocated to tangible assets
and intangible assets, including goodwill and existing technology, less
liabilities assumed.
Two-For-One Stock Split
- -----------------------
On February 17, 1999, Lucent's Board of Directors approved a two-for-one stock
split of its common shares. The stock split will be effective April 1, 1999, to
shareowners of record on March 5, 1999.
Accounting Change - Employee Benefit Plans
- ----------------------------------------
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, which recognized only interest and
dividends immediately, all other realized and unrealized gains and losses on
plan assets were included in the calculated market-related value over a
five-year period. The new method changes the manner in which realized and
unrealized gains and losses are included in market-related value over the
five-year period and results in a calculated market-related value of plan assets
that is closer to current fair value, while still mitigating the effects of
annual market value fluctuations. The new method also reduces the substantial
accumulation of unrecognized gains and losses created under the previous method
due to the disparity between fair value and market-related value of plan assets.
A cumulative effect of $2,150 ($1,308 after-tax) resulting from this accounting
change will be reflected as a one-time, non-cash credit to fiscal 1999 earnings.
In addition, this accounting change will result in a reduction in benefit costs
in fiscal 1999.
<PAGE>
1 Exhibit 99.2
The accompanying unaudited supplemental condensed consolidated financial
statements have been prepared to give retroactive effect to the merger of a
subsidiary of Lucent and Kenan Systems Corporation. The unaudited supplemental
condensed consolidated financial statements have been derived by combining the
unaudited condensed consolidated financial statements of Lucent for the three
month periods ended December 31, 1998 and 1997 with the unaudited condensed
financial statements of Kenan for the three month periods ended December 31,
1998 and 1997. The Management's Discussion and Analysis addresses the periods
covered by the financial statements contained in this Exhibit 99.2.
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
For the Three
Months Ended
December 31,
1998 1997
Revenues............................. $ 9,264 $ 8,748
Costs................................ 4,398 4,521
Gross margin......................... 4,866 4,227
Operating Expenses:
Selling, general and
administrative expenses............ 1,786 1,569
Research and development expenses.... 931 830
In-process research
and development expenses........... 21 427
Total operating expenses............. 2,738 2,826
Operating income..................... 2,128 1,401
Other income - net................... 102 146
Interest expense..................... 78 62
Income before income taxes........... 2,152 1,485
Provision for income taxes........... 724 686
Income before cumulative effect of
accounting change.................. 1,428 799
Cumulative effect of accounting change
(net of income taxes of $842)...... 1,308 -
Net income........................... $ 2,736 $ 799
Earnings per common share - basic:
Income before cumulative effect of
accounting change.................. $ 1.07 $ 0.61
Cumulative effect of accounting
change ............................ .99 -
Net income.......................... $ 2.06 $ 0.61
Earnings per common share - diluted:
Income before cumulative effect of
accounting change.................. $ 1.05 $ 0.61
Cumulative effect of accounting
change............................. .96 -
Net Income.......................... $ 2.01 $ 0.61
Dividends declared per common share.. $ 0.08 $ 0.075
See Notes to Consolidated Financial Statements.
<PAGE>
2 Exhibit 99.2
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
December 31, September 30,
1998 1998
ASSETS
Cash and cash equivalents.............. $ 967 $ 712
Accounts receivable less allowances
of $348 at December 31, 1998 and
$392 at September 30, 1998 ........... 9,260 7,014
Inventories............................ 3,778 3,081
Contracts in process, net of progress
billings of $3,995 at December 31, 1998
and $3,036 at September 30, 1998...... 1,060 1,259
Deferred income taxes - net............ 1,620 1,623
Other current assets................... 770 493
Total current assets................... 17,455 14,182
Property, plant and equipment, net
of accumulated depreciation of
$6,896 at December 31, 1998 and
$6,392 at September 30, 1998.......... 5,652 5,410
Prepaid pension costs.................. 6,068 3,754
Deferred income taxes - net............ - 750
Capitalized software development costs. 306 298
Other assets........................... 2,271 2,437
TOTAL ASSETS........................... $31,752 $26,831
(CONT'D)
See Notes to Consolidated Financial Statements.
<PAGE>
3 Exhibit 99.2
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
December 31, September 30,
1998 1998
LIABILITIES
Accounts payable....................... $ 2,472 $ 2,044
Payroll and benefit-related
liabilities.......................... 1,861 2,515
Postretirement and postemployment
benefit liabilities.................. 186 187
Debt maturing within one year.......... 3,763 2,231
Other current liabilities.............. 4,189 3,481
Total current liabilities.............. 12,471 10,458
Postretirement and postemployment
benefit liabilities.................. 6,413 6,380
Long-term debt ........................ 2,404 2,409
Other liabilities...................... 1,946 1,969
Total liabilities ..................... 23,234 21,216
Commitments and contingencies
SHAREOWNERS' EQUITY
Preferred stock-par value $1.00 per share
Authorized shares: 250,000,000
Issued and outstanding shares: none... - -
Common stock-par value $.01 per share
Authorized shares: 3,000,000,000
Issued and outstanding shares:
1,333,123,849 at December 31, 1998
1,329,272,957 at September 30, 1998... 13 13
Additional paid-in capital............. 4,809 4,569
Guaranteed ESOP obligation............. (49) (49)
Retained earnings...................... 3,965 1,364
Accumulated other comprehensive
income(loss).......................... (220) (282)
Total shareowners' equity.............. 8,518 5,615
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY................... $31,752 $26,831
See Notes to Consolidated Financial Statements.
<PAGE>
4 Exhibit 99.2
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
For the Three Months
Ended December 31,
1998 1997
Operating Activities
Net income............................... $2,737 $ 799
Adjustments to reconcile net income
to net cash (used in)provided by
operating activities:
Cumulative effect of
accounting change.................... (1,308) -
Depreciation and amortization......... 346 344
Provision for uncollectibles.......... (15) 54
Deferred income taxes................. 206 (22)
Purchased in-process research and
development......................... 21 427
Increase in accounts receivable - net. (2,257) (1,263)
(Increase)decrease in inventories
and contracts in process - net....... (425) 152
Increase(decrease) in
accounts payable..................... 354 (385)
Changes in other operating assets
and liabilities..................... (493) 523
Other adjustments for non-cash
items - net......................... (248) (231)
Net cash (used in)provided by
operating activities.................... (1,082) 398
Investing Activities
Capital expenditures .................... (344) (263)
Proceeds from the sale or disposal of
property, plant and equipment.......... 28 27
Purchases of equity investments.......... (17) (47)
Sales of equity investments.............. 1 25
Acquisitions of businesses,
net of cash acquired................... (115) -
Dispositions of businesses............... 57 281
Other investing activities - net......... 22 (35)
Net cash used in investing activities.... (368) (12)
Financing Activities
Repayments of long-term debt ............ (8) (20)
Issuance of long-term debt............... 495 3
Proceeds of issuance of common stock..... 239 72
Dividends paid........................... (54) (48)
S-corp distribution to stockholder....... - (8)
Increase(decrease) in short-term
borrowings - net....................... 1,041 (485)
Net cash provided by
(used in) financing activities.......... 1,713 (486)
(CONT'D)
See Notes to Consolidated Financial Statements.
<PAGE>
5 Exhibit 99.2
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(Dollars in Millions)
(Unaudited)
For the Three Months
Ended December 31,
1998 1997
Effect of exchange rate
changes on cash........................ 10 (22)
Net increase(decrease) in cash and
cash equivalents....................... 273 (122)
Cash and cash equivalents
at beginning of period................. 694 1,362
Cash and cash equivalents
at end of period....................... $ 967 $ 1,240
See Notes to Consolidated Financial Statements.
<PAGE>
6 Exhibit 99.2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by Lucent Technologies Inc. ("Lucent" or the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC") and, in
the opinion of management, include all adjustments necessary for a fair
presentation of the results of operations, financial position and cash flows for
each period shown.
The accompanying unaudited condensed consolidated financial statements have been
prepared to give retroactive effect to the merger with Kenan Systems
Corporation. The financial statements of Lucent for the three month periods
ended December 31, 1998 and 1997, have been combined with the financial
statements of Kenan for the three month periods ended December 31, 1998 and
1997, respectively.
The preparation of financial statements during interim periods requires
management to make numerous estimates and assumptions that impact the reported
amounts of assets, liabilities, revenues and expenses. Estimates and assumptions
are reviewed periodically and the effect of revisions is reflected in the
results of operations of the interim periods in which changes are determined to
be necessary. During the three months ended December 31, 1998, improved
performance on multi-year contracts and the resolution of certain contingencies
had a positive impact on the reported results of operations.
The financial statement results for interim periods are not necessarily
indicative of financial results for the full year. These unaudited consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in Exhibit 99.1 of this filing.
The financial statements presented have been restated to reflect the two-for-one
split of Lucent's common stock which became effective on April 1, 1998. Certain
prior period amounts have been reclassified to conform to the current period
presentation.
2. ACCOUNTING CHANGE - EMPLOYEE BENEFIT PLANS
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, which recognized only interest and
dividends immediately, all other realized and unrealized gains and losses on
plan assets were included in the calculated market-related value over a
five-year period. The new method changes the manner in which realized and
unrealized gains and losses are included in market-related value over the
five-year period and results in a calculated market-related value of plan assets
that is closer to current fair value, while still mitigating the effects of
annual market value fluctuations. The new method also reduces the substantial
accumulation of unrecognized gains and losses created under the previous method
due to the disparity between fair value and market-related value of plan assets.
The cumulative effect of this accounting change related to periods prior to
fiscal year 1999 of $2,150 ($1,308 after-tax, or $0.99 and $0.96 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
as a result of the change in Lucent's pension and postretirement accounting in
the three months ended December 31, 1998 that increased income by $108 ($65
after-tax, or $0.05 per basic and diluted share) as compared to the previous
accounting method. A comparison of pro forma amounts is presented below showing
the effects if the accounting change were applied retroactively:
Three Months Ended December 31,
1998 1997
-------------------------------
Net Income $1,428 $ 858
Earnings per share-basic $ 1.07 $ 0.66
Earnings per share-diluted $ 1.05 $ 0.65
<PAGE>
7 Exhibit 99.2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
3. COMPREHENSIVE INCOME
Lucent has adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" as of October 1, 1998 which requires new
standards for reporting and display of comprehensive income and its components
in the financial statements. However, it does not affect net income or total
shareowners' equity. The components of comprehensive income are as follows:
Three Months Ended
December 31,
1998 1997
----------------------------
Net income......................... $ 2,736 $ 799
Other comprehensive income(loss):
Foreign currency translation
adjustments.................... 51 (82)
Unrealized holding gains(losses)
arising during the period...... 11 (21)
Comprehensive income............... $ 2,798 $ 696
The components of accumulated other comprehensive income(loss) are as follows:
<TABLE>
<CAPTION>
Foreign Currency Total Accumulated
Translation Other Comprehensive
Adjustments Other Income(Loss)
------------- ----- -------------------
<S> <C> <C> <C>
Accumulated other comprehensive income
(loss) at September 30, 1998........ $ (279) $ (3) $ (282)
Other comprehensive income
for the period....................... 51 11 62
Accumulated other comprehensive income
(loss) at December 31, 1998......... $ (228) $ 8 $ (220)
</TABLE>
The foreign currency translation adjustments are not currently adjusted for
income taxes since they relate to indefinite investments in non-United States
subsidiaries.
4. ACQUISITION
Quadritek Systems, Inc.
- -----------------------
On October 1, 1998, Lucent completed the purchase of Quadritek Systems, Inc. for
$50 in cash. Quadritek was a privately-held company involved in the development
of Internet Protocol ("IP") network administration software solutions. The
transaction was accounted for under the purchase method of accounting and the
excess purchase price over the estimated fair value of net tangible assets was
allocated to various intangible assets, primarily consisting of developed
technology of $5 and goodwill of $24. These assets are being amortized over six
and eight years, respectively. In addition to the intangible assets acquired,
Lucent recorded a charge of $21 ($14 after-tax), representing the write-off of
in-process research and development ("IPR&D").
The allocation of $21 represents the estimated fair value related to incomplete
projects based on risk-adjusted cash flows. Lucent believes that such fair value
is reasonable and does not exceed the amount a third party would pay for these
projects. At the date of the acquisition, the projects associated with the IPR&D
efforts had not yet reached technological feasibility and had no alternative
future uses. Accordingly, these costs were expensed during the period.
<PAGE>
8 Exhibit 99.2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
At the acquisition date, Quadritek was conducting development, engineering, and
testing activities associated with the completion of a number of new product
offerings ("New Product Offerings"). The IPR&D projects were in various stages
of development. Overall, substantial progress had been made. The IPR&D projects
ranged in completion from 20% to 80%. Remaining efforts necessary to complete
the New Product Offerings relate primarily to additional coding, testing, and
addressing performance issues. In total, costs to complete the New Product
Offerings are expected to total approximately $5.
In making its purchase price allocation, Lucent relied upon an independent
third-party valuation which gave consideration to present value calculations of
income, an analysis of project accomplishments and completion costs, an
assessment of overall contributions, as well as project risks. The values
assigned to IPR&D were determined by estimating the costs to develop the
purchased technology into commercially viable products, estimating the resulting
net cash flows from each project, excluding the cash flows related to the
portion of each project that was incomplete at the acquisition date, and
discounting the resulting net cash flows to their present value. Each of the
project forecasts was based upon future discounted cash flows, taking into
account the stage of development of each in-process project, the cost to
complete that project, the expected income stream, the life cycle of the product
ultimately developed, and the associated risks. Projected future net cash flows
attributable to the in-process technology, assuming successful development of
such technologies, were discounted to their present values using a discount rate
of 20%.
The aforementioned estimates are subject to change, given the uncertainties of
the development process, and no assurance can be given that deviations from
these estimates will not occur. Management expects to continue development of
these efforts and believes there is a reasonable chance of successfully
completing such development. However, there is risk associated with the
completion of the in-process projects and there can be no assurance that any of
the projects will meet with either technological or commercial success. Failure
to successfully develop and commercialize the in-process projects would result
in the loss of the expected economic return inherent in the fair value
allocation.
<PAGE>
9 Exhibit 99.2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
5. SUPPLEMENTARY BALANCE SHEET INFORMATION
Inventories at December 31, 1998 and September 30, 1998 were as follows:
December 31, September 30,
1998 1998
------------ -------------
Completed goods ............... $ 1,777 $ 1,578
Work in process and
raw materials................ 2,001 1,503
Total inventories ............. $ 3,778 $ 3,081
6. BUSINESS RESTRUCTURING
For the three months ended December 31, 1998 and 1997, $13 and $26,
respectively, were applied to the 1995 business restructuring reserve. The
remaining reserve for business restructuring at December 31, 1998 was $238.
7. 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 common shares
had been issued.
Earnings per share amounts for the periods presented have been restated to
reflect the two-for-one split of Lucent's common stock which became effective on
April 1, 1998. The following table reconciles the number of shares utilized in
the earnings per share calculations for the three months ended December 31, 1998
and 1997:
<PAGE>
10 Exhibit 99.2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Three Months Ended
December 31,
1998 1997
-----------------------
Net income $ 2,736 $ 799
Earnings per common share - basic:
Income before cumulative effect
of accounting change $ 1.07 $ 0.61
Cumulative effect of accounting
change .99 -
Net Income $ 2.06 $ 0.61
Earnings per common share - diluted:
Income before cumulative effect
of accounting change $ 1.05 $ 0.61
Cumulative effect of accounting
change .96 -
Net Income $ 2.01 $ 0.61
Number of Shares (in millions)
- ---------------------------------
Common shares - basic 1,330.2 1,300.2
Effect of dilutive securities:
Stock options 32.4 18.4
Other 2.4 0.3
Common shares - diluted 1,365.0 1,318.9
Shares excluded from the
computation of earnings
per common share - diluted since
option exercise price was greater
than the average market price of
the common shares for the period 2.8 5.4
8. PHILIPS CONSUMER COMMUNICATIONS ("PCC")
On October 1, 1997, Lucent contributed its Consumer Products business to a new
venture formed by Lucent and Philips Electronics N.V. ("Phillips") in exchange
for 40% ownership of PCC. On October 22, 1998, Lucent and Phillips 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. The revenues are included in Other Systems and Products. In
December 1998, Lucent sold certain assets of the wireless handset portion of the
remaining businesses to Motorola. Lucent is continuing to look for opportunities
to sell the remaining consumer products businesses.
<PAGE>
11 Exhibit 99.2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, Lucent is subject to proceedings, lawsuits and
other claims, including proceedings under government laws and regulations
related to environmental and other matters. Such matters are subject to many
uncertainties, and outcomes are not predictable with assurance. Consequently,
the ultimate aggregate amount of monetary liability or financial impact with
respect to these matters at December 31, 1998 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 December 31, 1998 would
not be material to the annual consolidated financial statements.
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 successor to AT&T Corp. ("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 ("Separation and Distribution Agreement"), among Lucent, AT&T and NCR
Corporation ("NCR"), dated as of February 1, 1996 as amended and restated,
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 from AT&T of the businesses and operations transferred to form
Lucent (the "Separation") including related businesses discontinued or disposed
of prior to the Separation, and Lucent's assets including, without limitation,
those associated with these sites. In addition, under the Separation and
Distribution Agreement, Lucent is required to pay a portion of contingent
liabilities paid out in excess of certain amounts by AT&T and NCR, including
environmental liabilities.
It is often difficult to estimate the future impact of environmental matters,
including potential liabilities. Lucent records an environmental reserve when it
is probable that a liability has been incurred and the amount of the liability
is reasonably estimable. This practice is followed whether the claims are
asserted or unasserted. Management expects that the amounts reserved will be
paid out over the periods of remediation for the applicable sites which range
from 5 to 30 years. Reserves for estimated losses from environmental remediation
are, depending on the site, based primarily upon internal or third party
environmental studies, and estimates as to the number, participation level and
financial viability of any other PRPs, the extent of the contamination and the
nature of required remedial actions. Accruals are adjusted as further
information develops or circumstances change. The amounts provided for in
Lucent's consolidated financial statements for environmental reserves are the
gross undiscounted amount of such reserves, without deductions for insurance or
third party indemnity claims. In those cases where insurance carriers or third
party indemnitors have agreed to pay any amounts and management believes that
collectibility of such amounts is probable, the amounts are reflected as
receivables in the financial statements. Although Lucent believes that its
reserves are adequate, there can be no assurance that the amount of capital
expenditures and other expenses which will be required relating to remedial
actions and compliance with applicable environmental laws will not exceed the
amounts reflected in Lucent's reserves or will not have a material adverse
effect on 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 December 31, 1998 cannot be determined.
<PAGE>
12 Exhibit 99.2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
10. SUBSEQUENT EVENTS
Ascend Communications, Inc.
- ---------------------------
On January 13, 1999, Lucent announced that it had entered into a definitive
agreement to merge with Ascend Communications, Inc. Under the terms of the
agreement, which was approved by each company's board of directors, each share
of Ascend common stock will be converted into 0.825 shares of Lucent common
stock. Based on Lucent's closing stock price of $107-7/8 on January 12, 1999,
the transaction would be valued at approximately $20 billion.
The transaction, which is subject to customary conditions and regulatory
approvals, is expected to be completed during Lucent's third fiscal quarter,
which ends June 30, 1999, and is expected to be accounted for as a pooling of
interests.
WaveAccess Ltd.
- ---------------
On January 22, 1999, Lucent completed the acquisition of the remaining 80
percent of WaveAccess Ltd. for $45 in cash. In May 1998, Lucent had acquired a
20 percent stake in the company. WaveAccess is a developer of high-speed systems
for wireless data communications. The acquisition will be accounted for using
the purchase method of accounting.
The purchase is expected to result in a one-time, non-tax deductible, non-cash
charge to earnings for purchased in-process research and development in the
quarter ending March 31, 1999. The amount of the charge has not yet been
determined. The remaining purchase price will be allocated to tangible assets
and intangible assets, including goodwill and existing technology, less
liabilities assumed.
Two-For-One Stock Split
- -----------------------
On February 17, 1999, Lucent's Board of Directors approved a two-for-one stock
split of its common shares. The stock split will be effective April 1, 1999 to
shareowners of record on March 5, 1999.
<PAGE>
13 Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The accompanying unaudited supplemental condensed consolidated financial
information has been prepared to give retroactive effect to the merger of a
subsidiary of Lucent with Kenan Systems Corporation. The following unaudited
supplemental condensed financial information has been derived by combining the
historical financial information of Lucent for the three month periods ended
December 31, 1998 and 1997, with the financial information of Kenan for the
three month periods ended December 31, 1998 and 1997, respectively.
HIGHLIGHTS
Lucent reported net income of $2,736 million, or $2.01 per share (diluted) for
the quarter ended December 31, 1998. Included in net income is a $1,308 million
(or $0.96 per share-diluted) cumulative effect of an accounting change related
to Lucent's pension and postretirement benefits (see Note 2). The year-ago
quarterly net income was $799 million, or $0.61 per share (diluted). Excluding
the one-time gain from the cumulative effect of the accounting change and the
in-process research and development charge associated with the acquisition of
Quadritek, which Lucent completed during the current quarter (see Note 4),
Lucent's net income was $1,442 million, or $1.06 per share (diluted) for the
three months ended December 31, 1998. This compares to net income of $1,131
million, or $0.86 per share (diluted) for the three months ended December 31,
1997, excluding the in-process research and development charge associated with
the acquisition of Livingston and the gain on the sale of Advanced Technology
Systems ("ATS").
Gross margin increased $639 million for the quarter ended December 31, 1998
compared with the year-ago quarter. The increase in gross margin was primarily
due to higher sales volume and improved performance on multi-year contracts
compared with the same quarter last year.
Operating income of $2,128 million reflects an increase of $727 million in the
quarter compared with the same quarter in 1997 and was 23.0% of revenues. The
increase was primarily due to the increased gross margin described above and a
non-cash reduction in benefits costs of $108 million resulting from the change
in Lucent's pension and postretirement accounting as described in Note 2.
On October 1, 1998, Lucent completed the purchase of Quadritek for $50 million
in cash. The acquisition was accounted for using the purchase method of
accounting and has been included in the balance sheet at December 31, 1998.
On January 13, 1999, Lucent announced that it had entered into a definitive
agreement to merge with Ascend Communications, Inc. Under the terms of the
agreement, which was approved by each company's board of directors, each share
of Ascend common stock will be converted into 0.825 shares of Lucent common
stock. Based on Lucent's closing stock price of $107-7/8 on January 12, 1999,
the transaction would be valued at approximately $20 billion. The transaction,
which is subject to customary conditions and regulatory approvals, is expected
to be completed during Lucent's third fiscal quarter, which ends June 30, 1999,
and is expected to be accounted for as a pooling of interests.
On January 22, 1999, Lucent completed the acquisition of the remaining 80%
interest in WaveAccess for $45 million in cash. The acquisition will be
accounted for using the purchase method of accounting and will be included in
financial statements for the quarter ending March 31, 1999.
<PAGE>
14 Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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 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. As a result, Lucent's management periodically assesses market
conditions and redirects the Company's resources to meet the challenges of
competition. Steps Lucent may take include acquiring 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.
Lucent has taken measures to manage the seasonality of its business by changing
the date on which its fiscal year ends and its compensation programs for
employees. As a result, Lucent has achieved a more uniform distribution of
revenues -- accompanied by a related redistribution of earnings -- throughout
the year. Revenues and earnings still remain higher in the first fiscal quarter
primarily because many of Lucent's large customers historically delay a
disproportionate percentage of their capital expenditures until the fourth
quarter of the calendar year (Lucent's first fiscal quarter).
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 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.
Lucent has been successful in diversifying its customer base and seeking out new
types of customers globally. These new types of customers include competitive
access providers, competitive local exchange carriers, wireless service
providers, cable television network operators and computer manufacturers.
Historically, a limited number of customers have provided a substantial portion
of Lucent's total revenues. 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.
<PAGE>
15 Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
REVENUES - THREE MONTHS ENDED DECEMBER 31, 1998 VERSUS THREE MONTHS ENDED
DECEMBER 31, 1997
Total revenues increased 5.9% to $9,264 million in the quarter compared with the
same quarter of 1997, due to increases in sales from Systems for Network
Operators, Business Communications Systems, Microelectronic Products and Other
Systems and Products. For the quarter, sales within the United States decreased
by 9.5% compared with the same quarter in 1997 and sales outside the United
States increased 50.0% compared with the same quarter last year.
The following table presents Lucent's revenues by product line, and the
approximate percentage of total revenues for the three months ended December 31,
1998 and 1997:
Three Months
Ended
December 31,
Dollars in Millions --------------------------------
1998 1997
------- -------
Systems for Network Operators........ $6,175 67% $5,967 68%
Business Communications Systems...... 1,975 21 1,930 22
Microelectronic Products............. 821 9 775 9
Other Systems and Products........... 293 3 76 1
Total................................ $9,264 100% $8,748 100%
Revenues from SYSTEMS FOR NETWORK OPERATORS increased $208 million, or 3.5% in
1998 compared with the same quarter in 1997. Revenues were driven by sales of
switching systems with associated software, optical networking systems, data
networking systems for service providers, and services. Continued demand for
data services and Internet access in businesses and residences contributed to
the group's quarterly revenues.
Revenues from Systems for Network Operators in the United States decreased by
18.8% over the year-ago quarter. The revenue decrease in the United States was
primarily due to expected software revenues that were delayed into the second
and third quarters. Another factor was an exceptionally strong comparative
quarter in fiscal 1998 when Lucent benefited from revenues associated with
personal communications services ("PCS") wireless buildouts. Revenues generated
outside the United States increased 68.0% compared with the same quarter in 1997
due to revenue growth in the Europe/Middle East/Africa and Caribbean/Latin
America regions and China. Revenues generated outside the United States
represented 41.7% of revenues for the quarter compared with 25.7% for the same
quarter of 1997.
Revenues from BUSINESS COMMUNICATIONS SYSTEMS increased $45 million, or 2.3%
compared with the year-ago quarter. Increased sales of DEFINITY(R) enterprise
communication servers, including those with Call Center applications, messaging
systems, and enterprise data networking systems contributed to the increased
revenue for the quarter. Sales within the United States increased 3.2% for the
quarter compared with the same quarter of 1997. Revenues generated outside the
United States decreased by 1.7%. Revenues generated outside the United States
represented 17.9% of revenues for the quarter compared with 18.7% in the same
quarter in 1997.
- --------------------------------------
(R) Registered trademark of Lucent
<PAGE>
16 Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Revenues from MICROELECTRONIC PRODUCTS increased $46 million, or 5.9% compared
with the year-ago quarter driven by sales of chips for high-speed
communications, mass storage, data networking and optoelectronic components.
These increases were partially offset by decreased sales of power systems. Sales
within the United States decreased 7.8% compared to the same quarter in 1997.
Revenues generated outside the United States increased 20.3%. The growth in
revenues outside the United States was driven by sales in the Asia/ Pacific and
Europe/Middle East/Africa regions. Revenues generated outside the United States
represented 55.4% of sales for the quarter compared with 48.8% for the same
quarter of 1997.
Revenues from OTHER SYSTEMS AND PRODUCTS increased $217 million compared with
the year-ago quarter primarily due to the consolidation of the businesses
regained from the PCC venture (see Note 8).
COSTS AND GROSS MARGIN - THREE MONTHS ENDED DECEMBER 31, 1998 VERSUS THREE
MONTHS ENDED DECEMBER 31, 1997
Total costs decreased by $123 million, or 2.7% in 1998 compared with the same
quarter in 1997 primarily due to better performance on multi-year contracts and
improved cost management partially offset by the costs related to the high sales
volume. As a percentage of revenue, gross margin increased to 52.5% from 48.3%
in the year-ago quarter. The increase this quarter compared with the same
quarter in 1997 reflects improved performance on multi-year contracts and higher
profits on certain products offset by a delayed recognition of software
revenues. Based on current planning assumptions, Lucent expects that its full
1999 fiscal year gross margin will exceed fiscal year 1998, but at a lower level
than achieved for the first fiscal quarter.
OPERATING EXPENSES - THREE MONTHS ENDED DECEMBER 31, 1998 VERSUS THREE MONTHS
ENDED DECEMBER 31, 1997
Selling, general and administrative expenses as a percentage of revenues were
19.3% for the quarter, up 1.4 percentage points compared with 17.9% for the same
quarter in 1997. Excluding the amortization expense associated with goodwill and
existing technology for both years, selling, general and administrative expenses
as a percentage of revenues was 18.7%, an increase of 1.0 percentage points from
the same quarter in 1997.
Selling, general and administrative expenses increased $217 million, or 13.8%
compared with the same year-ago quarter. This increase was attributed to
investment in growth initiatives as well as the increase in amortization expense
associated with goodwill and existing technology. Amortization expense
associated with goodwill and existing technology was $57 million for the
quarter, an increase of $34 million from the year-ago quarter.
Research and development expenses represented 10.0% of revenues for the quarter
compared with 9.5% of revenues for the same quarter of 1997.
Research and development expenses increased $101 million during the quarter
compared with the same year-ago quarter. This was primarily due to increased
expenditures in support of wireless, data networking, optical networking and
switching and access systems.
The purchased in-process research and development expenses for the quarter were
$21 million associated with the acquisition of Quadritek compared with $427
million related to the acquisition of Livingston for the same quarter of 1997.
OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES - THREE
MONTHS ENDED DECEMBER 31, 1998 VERSUS THREE MONTHS ENDED DECEMBER 31, 1997
Other income - net decreased $44 million to $102 million for the quarter
compared with the same quarter in 1997. The decrease was primarily due to the
gain on ATS recorded in the prior quarter partially offset by lower net equity
losses and lower losses on foreign exchange in the current quarter.
<PAGE>
17 Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Interest expense for the quarter increased $16 million to $78 million compared
with the same quarter in 1997. The increase in interest expense is due to higher
debt levels for the quarter ended December 31, 1998 compared with the same
quarter in 1997.
The effective income tax rate of 33.6% for the quarter ended December 31, 1998
decreased from 46.2% for the prior year quarter. Excluding the purchased
in-process research and development expenses associated with the Quadritek
acquisition in 1998 and the Livingston acquisition in 1997, the effective income
tax rate remained at 33.6% for the quarter ended December 31, 1998 compared with
35.9% in the prior year quarter. This decrease was primarily due to increased
research and experimentation tax credits and the tax impact of foreign activity.
TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY
Total assets increased $4,921 million, or 18.3%, from fiscal year-end 1998. This
increase was largely due to increases in accounts receivable and prepaid pension
costs of $2,246 million and $2,314 million, respectively. The increase in
accounts receivable was primarily related to higher sales volume in the last
month of the quarter. Prepaid pension costs increased due to the change in
accounting for pensions.
Total liabilities increased $2,018 million, or 9.5% from fiscal year-end 1998.
This increase was due primarily to higher commercial paper balances.
Working capital, defined as current assets less current liabilities, increased
$1,260 million from September 30, 1998, primarily resulting from the increase in
accounts receivable and inventories partially offset by higher commercial paper
balances.
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 December 31, 1998, Lucent maintained approximately $5,400 million in credit
facilities of which a portion is used to support Lucent's commercial paper
program. At December 31, 1998, approximately $4,900 million 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 and
short- and long-term debt financings will be adequate to satisfy its future cash
requirements, although there can be no assurance that this will be the case.
Network operators, 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 December 31, 1998, Lucent had made commitments or entered into an
agreement to extend credit to certain network operators, including PCS and
wireless operators, for an aggregate of approximately $3,190 million. As of
December 31, 1998, approximately $440 million had been advanced and was
outstanding. Included in the $3,190 million is approximately $2,810 million to
twelve network operators for possible future sales. As of December 31, 1998,
approximately $350 million had been advanced and outstanding under seven of
these arrangements.
<PAGE>
18 Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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.
RISK MANAGEMENT
Lucent is exposed to market risk from changes in foreign currency exchange rates
and interest rates, which could impact its results of operations, financial
condition and cash flow. Lucent manages its exposure to these market risks
through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments. Derivative
financial instruments are viewed as risk management tools and are not used for
speculative or trading purposes. In addition, derivative financial instruments
are entered into with a diversified group of major financial institutions in
order to manage Lucent's exposure to nonperformance by the counterparties on
such instruments.
Lucent manages its ratio of fixed to floating rate debt with the objective of
achieving a mix that management believes is appropriate. To manage this mix in a
cost effective manner, Lucent, from time to time, enters into interest rate swap
agreements, in which it agrees to exchange various combinations of fixed and/or
variable interest rates based on agreed upon notional amounts. Lucent had no
material interest rate swap agreements in effect as of December 31, 1998 and
September 30, 1998. Management does not foresee or expect any significant
changes in its exposure to interest rate fluctuations or in how such exposure is
managed in the near future.
CASH FLOWS
Cash used in operating activities for the three months ended December 31, 1998
was $1,082 million compared with cash provided by operating activities of $398
in the same year-ago quarter. This reduction in cash was primarily due to
increases in accounts receivable and inventories, offset by a decrease in
payroll and benefit related liabilities.
Cash payments of $13 million were made for the quarter ended December 31, 1998,
for the 1995 business restructuring charge. Of the 23,000 positions that Lucent
announced it would eliminate in connection with the restructuring charges,
approximately 20,100 positions have been eliminated as of December 31, 1998.
<PAGE>
19 Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Comparing the quarters ended December 31, 1998 and 1997, cash used in investing
activities increased to $368 million from $12 million primarily due to the cash
used for acquisitions and a reduction in cash from dispositions.
Capital expenditures were $344 million and $263 million for the quarters ended
December 31, 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 international growth.
Cash provided by financing activities for the quarter ended December 31, 1998
was $1,713 million compared with $486 million used in financing activities in
the same quarter a year-ago. This increase in cash provided by financing
activities was primarily due to increased issuances of both short- and long-term
debt.
The ratio of total debt to total capital (debt plus equity) was 42.0% at
December 31, 1998 compared to 45.2% at September 30, 1998.
OTHER
Lucent's current and historical operations are subject to a wide range of
environmental protection laws. In the United States, these laws often require
parties to fund remedial action regardless of fault. Lucent has remedial and
investigatory activities underway at 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,
among AT&T, Lucent and NCR Corporation dated as of February 1, 1996, as amended
and restated, Lucent is responsible for all liabilities primarily resulting from
or related to the operation of Lucent's business as conducted at any time prior
to or after the Separation including related businesses discontinued or disposed
of prior to the Separation, and Lucent's assets including, without limitation,
those associated with these sites. In addition, under the Separation and
Distribution Agreement, Lucent is required to pay a portion of contingent
liabilities paid out in excess of certain amounts by AT&T and NCR, including
environmental liabilities.
It is often difficult to estimate the future impact of environmental matters,
including potential liabilities. Lucent records an environmental reserve when it
is probable that a liability has been incurred and the amount of the liability
is reasonably estimable. This practice is followed whether the claims are
asserted or unasserted. Management expects that the amounts reserved will be
paid out over the period of remediation for the applicable site which ranges
from 5 to 30 years. Reserves for estimated losses from environmental remediation
are, depending on the site, based primarily upon internal or third party
environmental studies, and estimates as to the number, participation level and
financial viability of any other PRPs, the extent of the contamination and the
nature of required remedial actions. Accruals are adjusted as further
information develops or 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
<PAGE>
20 Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
collectibility of such amounts is probable, the amounts are reflected as
receivables in the financial statements. Although Lucent believes that its
reserves are adequate, there can be no assurance that the amount of capital and
other expenditures that will be required relating to remedial actions and
compliance with applicable environmental laws will not exceed the amounts
reflected in Lucent's reserves or will not have a material adverse effect on
Lucent's financial condition, results of operations or cash flows. Any amounts
of environmental costs that may be incurred in excess of those provided for at
December 31, 1998 cannot be determined.
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
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 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/services; the achievement of lower costs and expenses; the ability
to successfully integrate the operations and business of Ascend, Kenan and other
acquired companies; the outcome and impact of Year 2000; domestic and foreign
governmental and public policy changes which may affect the level of new
investments and purchases made by customers; changes in environmental and other
domestic and foreign governmental regulations; protection and validity of patent
and other intellectual property rights; reliance on large customers; customer
demand for Lucent's products and services; technological, implementation and
cost/financial risks in the increasing use of large, multi-year contracts; the
cyclical nature of Lucent 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 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 domestic and international
economic conditions including interest rate and currency exchange rate
fluctuations and other Future Factors.
For a further description of Future Factors that could cause actual results to
differ materially from such forward-looking statements, see below in this report
including the other sections referred to and also see the discussion in Lucent's
Form 10-K for the year ended September 30, 1998 in Item 1 in the section
entitled "OUTLOOK-Forward Looking Statements" and the remainder of the OUTLOOK
section.
<PAGE>
21 Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Competition:
See discussion above under KEY BUSINESS CHALLENGES.
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 network operators 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 international and domestic
standards-setting bodies.
Reliance on Major Customers:
See discussion above under KEY BUSINESS CHALLENGES.
Readiness for Year 2000:
Lucent is engaged in a major effort to minimize the impact of the Year 2000 date
change on Lucent's products, information technology systems, facilities and
production infrastructure. Lucent has targeted June 30, 1999 for completion of
these efforts.
The Year 2000 challenge is a priority within Lucent at every level of Lucent.
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.
Lucent is completing programs to make its new commercially available products
Year 2000 ready and has developed evolution strategies for customers who own
non-Year 2000 ready Lucent products. The majority of the upgrades and new
products needed to support customer migration are already generally available.
By the end of 1998, all but a few of these products were generally available.
Lucent has launched 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 continues to monitor
customer response and will take steps to improve customer responsiveness, as
necessary. Also, Lucent is continuing contingency planning to address potential
spikes in demand for customer support resulting from the Year 2000 date change.
These plans are targeted for completion by April 30, 1999.
<PAGE>
22 Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Lucent has largely completed the inventory and assessment phases of the program
with respect to its factories, information systems, and facilities.
Approximately, two-thirds of the production elements included in the factory
inventory were found to be Year 2000 ready. The factories have commenced the
remediation phase of their effort through a combination of product upgrades and
replacement. Plans have been developed to facilitate the completion of this
work, as well as the related testing and deployment, by June 30, 1999.
Currently, approximately 65% of Lucent's information technology infrastructure
has been determined to be Year 2000 ready and is deployed for use.
Approximately, 65% of our business applications lines of code that are supported
by Lucent's information technology group are now Year 2000 ready and have been
deployed or are awaiting deployment. LYPO is monitoring the progress of
readiness efforts across Lucent, with a special emphasis on the early
identification of any areas where progress to-date could indicate difficulty in
meeting Lucent's June 1999 internal readiness target date. Lucent is developing
specific contingency plans, as appropriate.
Lucent is also assessing the Year 2000 readiness of the large number of
facilities that it owns or leases world-wide. Priority is being placed on
Lucent-owned facilities, leased facilities that Lucent manages and other
critical facilities that house large numbers of employees or significant
operations. Based on the results of these assessment activities, Lucent plans to
complete remediation efforts by March 31, 1999 and complete development of
applicable contingency plans by May 31, 1999.
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. Follow-up efforts have commenced to
obtain feedback from critical suppliers. To supplement this effort, Lucent is
conducting 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. Almost
all of Lucent's suppliers are still deeply engaged in executing their Year 2000
readiness efforts and, as a result, Lucent cannot, at this time, fully evaluate
the Year 2000 risks to its supply chain. Lucent will continue to monitor the
Year 2000 status of its suppliers to minimize this risk and will develop
appropriate contingent responses as the risks become clearer.
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 or 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.
<PAGE>
23 Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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
$535 million, of which an estimated $280 million has been spent as of December
31, 1998. 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 and deployment 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, 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. As of that date, the Euro is
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 begun planning for the Euro's introduction. For this purpose, Lucent
has in place a joint European-United States team representing affected functions
within the Company.
The Euro conversion may affect cross-border competition by creating cross-border
price transparency. Lucent is assessing its pricing/marketing strategy in order
to insure that it remains competitive in a broader European market. Lucent is
also assessing its information technology systems to allow for transactions to
take place in both the legacy currencies and the Euro and the eventual
elimination of the legacy currencies, and reviewing whether certain existing
contracts will need to be modified. Lucent's currency risk and risk management
for operations in participating countries may be reduced as the legacy
currencies are converted to the Euro. Final accounting, tax and governmental
legal and regulatory guidance is not available. Lucent will continue to evaluate
issues involving introduction of the Euro. 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>
24 Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Employee Relations:
On December 31, 1998, Lucent employed approximately 144,500 persons, of whom 78%
were located in the United States. Of these domestic employees, 40% are
represented by unions, primarily the Communications Workers of America
("CWA")and the International Brotherhood of Electrical Workers ("IBEW"). Lucent
has concluded new five year agreements with the CWA and IBEW expiring May 31,
2003.
Multi-Year Contracts:
Lucent has significant contracts for the sale of infrastructure systems to
network operators which extend over a multi-year period, and expects to enter
into similar contracts in the future, with 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 TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY, and KEY BUSINESS
CHALLENGES.
Seasonality:
See discussion above under KEY BUSINESS CHALLENGES.
Future Capital Requirements:
See discussion above under TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY.
Growth Outside the U.S., Foreign Exchange and Interest Rates:
Lucent intends to continue to pursue growth opportunities in markets outside the
U.S. In many markets outside the U.S., 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
U.S. 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.
See discussion above under RISK MANAGEMENT with respect to foreign exchange and
interest rates. 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 transactions with non-U.S. customers, the decline in value
of the Asia/Pacific currencies, or declines in currency values in other regions,
may, if not reversed, adversely affect future product sales because Lucent's
products may become more expensive to purchase for local customers doing
business in the countries of the affected currencies.
Legal Proceedings and Environmental:
See discussion above in Note 9 - COMMITMENTS AND CONTINGENCIES and OTHER.
<PAGE>
25 Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RECENT PRONOUNCEMENTS
In December 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-9, Modification of SOP 97-2, "Software Revenue
Recognition," with Respect to Certain Transactions ("SOP 98-9"). SOP 98-9 amends
SOP 97-2 to require recognition for multiple-element arrangements by means of
the "residual method" in certain circumstances. The provisions of SOP 98-9 that
extend the deferral of certain passages of SOP 97-2 became effective December
15, 1998. All other provisions are effective for transactions entered into in
fiscal years beginning after March 15, 1999. Earlier application for financial
statements or information that has not been issued is permitted and retroactive
application is prohibited. SOP 98-9 is not expected to have a material impact on
Lucent's consolidated results of operations, financial position or cash flows.
<PAGE>
EXHIBIT 99.3
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 at
Description Beginning of Costs & Other Accounts End
Period Expenses (net) Deductions of Period
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year 1998
Allowance for doubtful accounts 352 115 (59) 16(a) 392
Reserves related to business restructuring
and facility consolidation (d) 569 - - 318(b) 251
Deferred tax asset valuation allowance 234 31 45 49 261
Inventory valuation 637 146 30 177 636
Year 1997
Allowance for doubtful accounts 273 111 5 37(a) 352
Reserves related to business restructuring
and facility consolidation (d) 1,289 - - 720(b) 569
Deferred tax asset valuation allowance 208 86 3 63 234
Inventory valuation 644 221 19 247 637
Year 1996
Allowance for doubtful accounts 248 64 - 39(a) 273
Reserves related to business restructuring
and facility consolidation (d) 1,907 - - 618(b) 1,289
Deferred tax asset valuation allowance 142 7 102(c) 43 208
Inventory valuation 790 92 9 247 644
</TABLE>
(a) Amounts written off as uncollectible, payments or recoveries.
(b) Included in these deductions were cash payments of $176, $483 and $456 for
the years ended September 30, 1998 and 1997, and for the nine months ended
September 30, 1996, respectively. In addition, Lucent reversed $100, $201
and $98 for the years ended September 30, 1998 and 1997, and for the nine
months ended September 30, 1996, respectively. See Note 6 of the Notes to
Supplemental Consolidated Financial Statements in Exhibit 99.1 for
Background information.
(c) Relates to net asset additions and net liability reductions from AT&T. See
Note 1 of the Notes to Supplemental Consolidated Financial Statements in
Exhibit 99.1 for Background information.
(d) Certain prior year amounts have been reclassified to conform to the 1998
presentation
