-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rbs+VQIy3TCVOTsuObQ0LUQErQgpdzp8knBtj8bxOJkslUlBI44EoTjffEa1WXeC KFYEVINpygwsuMoz86Uc9A== 0000950123-98-010816.txt : 19981228 0000950123-98-010816.hdr.sgml : 19981228 ACCESSION NUMBER: 0000950123-98-010816 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LUCENT TECHNOLOGIES INC CENTRAL INDEX KEY: 0001006240 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 223408857 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11639 FILM NUMBER: 98773803 BUSINESS ADDRESS: STREET 1: 600 MOUNTAIN AVE CITY: MURRAY HILL STATE: NJ ZIP: 07974 BUSINESS PHONE: 9085828500 MAIL ADDRESS: STREET 1: 600 MOUNTAIN AVE CITY: MURRAY HILL STATE: NJ ZIP: 07974 FORMER COMPANY: FORMER CONFORMED NAME: NS MPG INC DATE OF NAME CHANGE: 19960124 10-K 1 LUCENT TECHNOLOGIES INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 001-11639 LUCENT TECHNOLOGIES INC. A DELAWARE I.R.S. EMPLOYER CORPORATION NO. 22-3408857
600 MOUNTAIN AVENUE, MURRAY HILL, NEW JERSEY 07974 TELEPHONE NUMBER 908-582-8500 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: SEE ATTACHED SCHEDULE A. SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At November 30, 1998, the aggregate market value of the voting stock held by non-affiliates was approximately $113,500,000,000. At November 30, 1998, 1,318,615,011 common shares were outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the registrant's annual report to security holders for the fiscal year ended September 30, 1998 (Part II) (2) Portions of the registrant's definitive proxy statement dated December 22, 1998, issued in connection with the annual meeting of shareholders (Part III) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 SCHEDULE A Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED - ------------------- ---------------------------- Common Stock (Par Value $.01 Per New York Stock Exchange Share) 6.90% Notes due July 15, 2001 New York Stock Exchange 7.25% Notes due July 15, 2006 New York Stock Exchange 6.50% Debentures due January 15, New York Stock Exchange 2028 5.50% Notes due November 15, 2008 New York Stock Exchange
1 3 TABLE OF CONTENTS
ITEM DESCRIPTION PAGE - ---- ----------- ---- PART I 1. Business.................................................... 3 2. Properties.................................................. 22 3. Legal Proceedings........................................... 22 4. Submission of Matters to a Vote of Security-Holders......... 22 PART II 5. Market for Registrant's Common Equity and Related 22 Stockholder Matters......................................... 6. Selected Financial Data..................................... 22 7. Management's Discussion and Analysis of Financial Condition 22 and Results of Operations................................... 8. Financial Statements and Supplementary Data................. 22 9. Changes in and Disagreements with Accountants on Accounting 22 and Financial Disclosure.................................... PART III 10. Directors and Executive Officers of the Registrant.......... 23 11. Executive Compensation...................................... 23 12. Security Ownership of Certain Beneficial Owners and 23 Management.................................................. 13. Certain Relationships and Related Transactions.............. 23 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 24 8-K.........................................................
This Report contains trademarks, service marks and registered marks of the Company and its subsidiaries, and other companies, as indicated. 2 4 PART I ITEM 1. BUSINESS. GENERAL Lucent Technologies Inc. ("Lucent" or the "Company") was incorporated in Delaware in November 1995. The Company has its principal executive offices at 600 Mountain Avenue, Murray Hill, New Jersey 07974 (telephone number 908-582-8500). 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. As used herein, references to the "Company" or "Lucent" include the historical operating results and activities of the business and operations transferred to the Company in the Separation. In 1996, the Company changed its fiscal year to begin October 1 and end September 30, and reported audited financial results for a short fiscal period beginning January 1, 1996 and ending September 30, 1996. Accordingly, unless the context otherwise requires, references herein to "fiscal 1996" or similar terms mean the nine-month period January 1, 1996 through September 30, 1996 and references to 1998 or this year refer to the fiscal year ended September 30, 1998. The Company is one of the world's leading designers, developers and manufacturers of communications systems, software and products. The Company is a global leader in the sale of public communications systems, and is a supplier of systems or software to most of the world's largest network operators. The Company is also a global leader in the sale of business communications systems and in the sale of microelectronic components for communications applications to manufacturers of communications systems and computers. The Company's research and development activities are conducted through Bell Laboratories ("Bell Labs"), one of the world's foremost industrial research and development organizations. The communications industry is undergoing a revolution driven by technology, global changes in government regulation, the needs of service providers and enterprises, and customer demand. Communications technology is moving from voice networking to data networking, and from circuit switching to packet switching. This revolution is bringing about a convergence of voice and data, wired and wireless, optical and electronic, audio and video, and the Internet. SYSTEMS FOR NETWORK OPERATORS The Company designs, develops, manufactures and services systems and software which enable network operators and other service providers (together referred to as "service providers"), to provide wireline and wireless access, local, long distance and international voice, data and video services and cable television service. The Company's networks, which include switching, transmission and cable systems, are packaged and customized with application software, operations support systems and associated professional services. Systems and Services Communications Networking Systems. The Company designs, develops, manufactures and services advanced communications networking systems, which include equipment, software and associated professional services. These systems connect, route, manage and store voice, data and video in any combination, and are used for: wireline access; local and long distance switching; intelligent network services and signaling; wireless communications, including both cellular and personal communications services ("PCS"); and high-speed, broadband multifunctional communications. 3 5 The Company supplies each of the five broad elements that comprise communications networks: switching systems, which route information through the network; transmission systems, which provide the communications path through the network that carries information between points in the network; operation support systems, which enable service providers to manage the work flow, planning, surveillance, management, provisioning and continuous testing of their networks; intelligent network/application software, which enables service providers to offer a broad array of enhanced and differentiated services; and cable systems, which provide the transport media between points in a network. These systems collectively comprise the infrastructure that enables telecommunications network operators to provide traditional narrowband voice and data services and that enables both new and traditional network operators to offer broadband multimedia services. The Company has a wireline local access installed base (the number of access lines serviced by switches manufactured by the Company) of approximately 120 million lines. The Company's primary switching products are the 5ESS(R) switch for local and long distance switching and international gateways and the 4ESS(TM) Digital Switch for long distance and international switching. The 5ESS switch is used throughout the world to provide a combination of network applications, including local and long distance switching and international gateways, operator services, network signaling, intelligent networking and wireless switching. The 5ESS switch, with the Company's 5E12 AnyMedia(TM) software, enables network operators to offer a large number of new data services and local number portability, as well as simultaneous wireline and wireless, local, long distance and international services. The Company has announced new products, with expected 1999 deliveries, to address the convergence of voice and data in the network including the AnyMedia FAST Access System which provides both narrowband and wideband services, and the PacketStar(TM) Gateway Solution for converged voice/data networks. The AnyMedia Fast Access System can be deployed throughout the world to provide low cost telephony and ATM-based broadband services. The AnyMedia FAST Access System will deliver more bandwidth to the subscriber. The PacketStar Gateway Solution provides a single virtual transport system to interconnect voice capable edge elements and to implement both toll and tandem voice feature sets for both data and voice applications. The key elements of the PacketStar Gateway Solution include the PacketStar Voice Gateway to combine voice traffic on a data network; the PacketStar Connection Gateway which provides interface and connection management, and the PacketStar Feature Server which provides call services in a converged voice/data network. The Company designs, develops, manufactures and services a broad range of transmission access and transport systems. Network operators use these systems to transport any combination of voice, data and video between subscribers and the central office or between points within a network engaged in local, national or international communications. Most transmission systems currently comply with one of two similar standards designed to promote the implementation of maximum transmission capacity with the greatest simplicity and lowest cost for network operators. The Synchronous Optical Network ("SONET") standard has been widely adopted in North America. The Synchronized Digital Hierarchy ("SDH") predominates throughout the rest of the world. The Company markets systems supporting both standards. The Company offers a broad line of transmission access systems for the provision of a wide range of services, including traditional telecommunications service and broadband multifunctional services. Transmission access systems transport information between the subscriber and the central office. The Company's products include SLC(R)-2000, which extends fiber-based optical transmission into the local loop. The Company's products also include the SDV-2000, a switched digital video system which extends fiber to the curb, and ASOS, which enables network operators to manage the work flow, planning, surveillance, provisioning and continuous testing of their multifunctional networks. The Company's transmission transport systems are utilized for high capacity communications between points within a communications network. Many of these products are primarily digital and provide for the movement of any combination of voice, data, and video across fiber, coaxial and microwave based media. The 4 6 Company's products include fiber transport systems (FT 2000), digital multiplexer systems (DDM 2000) and digital access and cross connect systems (DACS family of products). In 1998, Lucent announced the Wavestar(TM) OLS 400G system, which combines up to 80 optical channels over a single fiber as well as the Wavestar Bandwidth Manager, which routes voice, Asynchronous Transfer Mode ("ATM"), Internet protocol and video traffic using significantly less equipment and space. The Company offers data networking intelligent switching products such as its PacketStar(TM) ATM Core Switch and application systems such as its PacketStar Internet Telephony System. The Company's operation support systems enhance a network operator's ability to activate, manage and maintain its networks. These systems continuously monitor network performance and activity level, and allow for rapid trouble identification, load balancing and planning for network utilization. The Company's systems support the efforts of network operators to reduce operating costs and minimize labor by automating labor intensive tasks. The Company's network management systems offer a broad array of modular software, including element managers designed for traditional telephony, video and wireless; network managers that monitor, test and optimize the utilization of a network; service managers that manage work flow; and business managers that include customer service systems. For example, the Company's NetMinder system is an advanced network management routing system that mitigates network congestion through efficient call routing and completion. The Company's A-I-NET(R) intelligent network products enable network operators to offer new services that can be created, deployed or managed by themselves, the Company, or third parties. Services created with A-I-NET products include toll free calling (800 and 888 service in the United States), call forwarding, call waiting, voice dialing and messaging. The Company has introduced products to address the growing demand for emerging broadband multifunctional services which permit the simultaneous transmission of any combination of voice, data and video, such as its high capacity switching product ATM, the GLOBEVIEW(R)-2000 Broadband System. In addition, the Company designs, develops, manufactures and services cable systems, which include optical fiber, fiber optic cable, and apparatus for both fiber and copper cable systems. The Company's cable systems are used to connect various devices in a network and terminal devices to public and private networks. These cable systems are deployed for outside plant and central office wiring, and for traditional telephony, cable television, wireless networks and broadband applications. The Company also supplies fiber optic cable systems, high strength, high performance fiber for underseas cablers and outside plant turn-key systems, which are generally large capital projects in emerging markets for the engineering and construction of telecommunications infrastructure. The Company's TRUEWAVE(R) optical fiber enables network operators to reduce their costs by increasing the distance between optical amplifiers. Wireless Network Systems. The Company designs, develops, manufactures and services wireless network infrastructure systems, which include the 5ESS switch, base stations, wireless network software and operation support systems. These systems provide network operators with the capability to offer a wide range of cellular and other wireless communications services, including PCS, wireless data and fixed wireless access. The Company's wireless cellular or PCS systems are in operation in 49 of the top 50 United States Metropolitan Statistical Areas. The Company's primary wireless system is the AUTOPLEX(R) System 1000 product family, which includes the high capacity Series II base station. The base station contains the radio transceiver that establishes wireless communications with a mobile telephone. Base stations are arranged geographically so that mobile customers can be "handed off" seamlessly from one base station to the next as they travel. The network intelligence to accomplish this is housed in the Company's Mobile Switching Center, which includes the 5ESS switch and which connects the base stations to the public telephone network. The Company also offers base stations for start-up applications and smaller markets, a minicell product for rural and international markets and a microcell for congested, high traffic areas. Wireless technology is evolving 5 7 from analog to digital. The Company provides networks based on a variety of the leading air interface standards: AMPS, CDMA, TDMA and GSM. In addition, the Company designs, develops, manufactures and services fixed wireless access systems. The Company offers the AIRLOOP(R) Wireless Local Loop system, which utilizes CDMA technology, as well as systems based on the DECT (digital enhanced cordless telephone) standard. Both systems enable service providers to expand their networks in markets where traditional wireline systems are not cost justified and to provide telephone services as an alternative to traditional network operators. The Company designs, develops, manufactures, and services CDPD-based wireless data systems which enable wireless network operators to offer data services as an overlay to their existing analog voice infrastructure without acquiring additional spectrum or upgrading to a digital network. These systems offer the increased reliability and efficiency of switched digital packet data systems. Due to the complexity of wireless systems, the Company also offers a broad range of professional services, which include project management, site acquisition, radio frequency engineering, microwave relocation, construction management, cellular optimization and wireless data support. During fiscal year 1998, Lucent acquired Livingston Enterprises, Inc., Yurie Systems, Inc., JNA Telecommunications Limited and MassMedia Communications Inc. Livingston and Yurie develop and provide remote access and ATM technologies which increase Lucent's data networking product offerings to network operators. JNA, an Australia based manufacturer and system integrator, gives Lucent added sales and support capabilities and technology in the Asia/Pacific region. MassMedia, a developer of next-generation network interoperability software will add enhanced voice, data and video internetworking capabilities to Lucent's data networking portfolio. Markets The principal customers for the Company's systems are network operators that provide wireline and wireless local, long distance and international telecommunications services, including local, long distance and international telecommunications companies, cable television companies and internet service providers. The Company's systems for network operators are installed to expand the capacity and features offered by existing networks, to replace older technology in existing networks and to establish new networks for entrants into deregulated or previously unserved markets. See "Outlook -- Reliance on Major Customers/Multi-Year Contracts." As a result of structural, public policy and technological changes, since the mid-1980's the telecommunications industry has undergone a period of significant growth in the number of lines in service and applications offered. In developed markets, deregulation has permitted new market entrants to construct networks in previously monopolistic markets. In response, existing network operators have expanded beyond traditional franchises and are offering new services. In emerging markets, privatization, competition and economic expansion have increased demand for networking systems. At the same time, technological advances also have increased demand by reducing operating costs and facilitating new applications, including multifunctional services. The Company markets and sells its products worldwide primarily through a direct sales force due to the complexity of these systems. Most of the Company's sales of systems for network operators are made pursuant to general purchase agreements, which establish the terms and conditions and provide for price determination to be made on a contract bid basis. In addition, certain of the large infrastructure projects are conducted under long-term, fixed-price contracts. See "Outlook -- Reliance on Major Customers/Multi-Year Contracts" and "-- Seasonality." As a result of the increased complexity of systems for network operators and the high cost of developing and maintaining in-house expertise, network operators typically demand complete, integrated and turn-key projects. Network operators increasingly are seeking overall network or systems solutions that require an increased software content which would enable them to deploy rapidly new and differentiable services. In response, the Company has formed an organization focused on turn-key network engineering projects for both 6 8 public and private sector customers. The Company markets integrated solutions for the project, and engineers, designs and installs the network, including equipment and software manufactured by both the Company and third parties. Increasingly, as a result of the financial demands of major network deployments, network operators are looking to their suppliers to arrange for financing. The ability to provide financing is a requirement to conduct business in certain emerging U.S. and foreign markets, and in some cases the Company furnishes or guarantees financing for customers. As a result, the Company works with its customers to structure and place financing packages. See "Outlook -- Future Capital Requirements." In order to market its product line worldwide, the Company has established wholly owned subsidiaries and joint ventures with local companies in many countries. Competition The Company believes that its key competitive factors are its broad product line, large installed base, relationship with key customers, technological expertise and new product development capabilities. The Company's primary competitors in the market for telecommunications systems are four very large European and North American companies which have substantial technological and financial resources and which offer similar broad product catalogs. These competitors are Alcatel Alsthom, Northern Telecom Limited, Siemens AG and Telefonaktiebolaget LM Ericsson ("Ericsson"). In 1997, the Company and these four competitors collectively accounted for about 40% of the world's public network systems sales, with the Company's sales accounting for about 10% of world sales. In addition, in all of the Company's product areas, the Company faces significant competition from other companies which do business in one or a number of such product areas. For example, in wireless systems, Northern Telecom Limited, Telefonaktiebolaget LM Ericsson, Motorola, Inc. and Nokia Corporation, which are very large companies with substantial technological and financial resources, are significant competitors. In transmission and cable systems, competition in the markets includes hundreds of smaller competitors. The Company is also encountering competition from companies that design and manufacture data network equipment such as Cisco Systems Inc. BUSINESS COMMUNICATIONS SYSTEMS The Company designs, develops, manufactures and services communications systems and products for large and small business customers, home offices and government agencies. The Company's business communications systems can be upgraded regularly with new software releases, support local and wide area voice and data networking and are often integral components of global enterprise networks. The Company's systems primarily are customer premises-based private switching systems and products, call center systems, voice processing systems, which include voice messaging and voice response systems, and the associated application software and professional support services. In addition, the Company has begun to participate in the emerging multi-media products business. The Company serves over 1.4 million business locations in the United States and approximately 100,000 business locations in over 90 other countries. Systems and Services The Company's core business communications system products are private switching systems, generally PBXs and key systems, usually located at the customer's premises, that permit a number of local telephones or terminals to communicate with one another, with or without use of the public telephone network. The Company offers wired and wireless communications systems, including the DEFINITY(R) family of products for large customers and the MERLIN LEGEND(R) and PARTNER(R) systems for smaller businesses and home offices. The DEFINITY Enterprise Communication Server provides real-time voice and mixed-media call processing. The FREEWORKS(TM) family of business mobility solutions enables communication throughout the workplace with full freedom of movement. 7 9 The Company's messaging and response systems store and forward voice, data and images and conduct initial call processing, which integrates PBX and computer functions. In addition, the Company is a technological leader in the development of speech recognition algorithms, which have been incorporated into both public and private call processing applications, such as operator services. The Company's principal systems include the INTUITY(TM), AUDIX(R) and DEFINITY(R) voice messaging systems and Octel Messaging Division systems, for use with the Company's or a competitor's PBX; INTUITY(TM) CONVERSANT(R), a multi-lingual interactive voice response system which can recognize speech in nine languages/dialects; and the INTUITY Multimedia Messaging System, a system that combines voice messaging and voice-response technology into a single desktop application. In September 1997, the Company acquired Octel Communications Corporation, a provider and developer of voice, fax and electronic messaging technologies that complement those offered by the Company. Octel's enterprise voice mail products, including unified messaging, work behind almost all types and models of PBX, central office and wireless switches and can be networked together. The Company's call center systems integrate the hardware and software associated with computing, telephony, and multimedia messaging and response applications. Call centers are the initial entry point for customers to access a business' telephone sales and support operation. The Company's systems permit the routing and administration of a large volume of incoming calls, and the integration with business databases of customer and product information. The Company's call center systems are used by companies in diverse industries such as financial services, retailing and transportation. The call center environment in which these companies operate is characterized by hundreds of telephone service agents located in geographically dispersed networked sites, processing tens of thousands of calls per hour. For example, using these systems, businesses can provide their customers with the ability to check balances or order status, to place orders, and to receive additional information and support. In September 1997, the Company introduced an enhanced portfolio of intelligent switching, access and network management products to improve data network performance. In addition, the Company introduced DEFINITY ATM to meet customer demand for voice-over-ATM solutions. In 1998, the Company acquired Prominet Corporation, a developer of Gigabit Ethernet networking technologies, SDX Business Systems plc, a United Kingdom provider of business communication servers and LANNET, an Israeli based networking company. Prominet enables Lucent to incorporate switching and data networking applications into its private branch exchange product lines. SDX and LANNET provide sales and distribution channels for Lucent products in Europe, Africa and Asia. In addition, the Company's SYSTIMAX(R) structured wiring system for business customers provides broadband multifunctional LAN interconnections within a building or campus. These systems are comprised of fiber optic and copper cable and associated apparatus. The Company offers NetCare(R) Services, a wide range of professional service options, including call center design, voice and data network engineering, training, remote diagnostics and dedicated on-site technicians. Their on-demand services involve routine testing and diagnostics, maintenance and repair, moves and rearrangements, and software and hardware upgrade installations. The Company's remote diagnostics and repair capability permits the Company to monitor, test, maintain and resolve problems from its regional service centers. Many of the Company's systems are designed with intelligent software which establishes a real-time link between the customer premises and a regional service center's expert system. This permits the customer to reduce its system down-time and enables the Company to automate many maintenance and repair tasks. Markets The Company markets its systems and services to large and small businesses and government agencies through a large, direct sales force and through a network of agents, dealers and distributors. In the United States, the Company effects these sales primarily through the direct sales force, while sales elsewhere occur through the efforts of dealers and distributors as well as the direct sales force. The Company's systems are 8 10 deployed in applications for customer sales and service, conferencing and collaboration, mobility and distributed work force, messaging and enterprise networking. The Company fields a large group of application specialists to design call center, distance learning and other customized applications. The Company believes that premises-based communications is transforming from distinct voice and data networks to multimedia networks that will be able to support any combination of voice, video and data communications simultaneously. The Company is designing certain business communications systems to enable its customers to simplify their premises networks by combining separate voice, video and data networks into a single architecture. Competition The Company considers its working relationships with its customers and knowledge of their individual business needs to be important competitive factors. The Company competes principally with three other large companies with substantial technological and financial resources in the sale of business communication systems. These competitors are Alcatel Alsthom, Northern Telecom Limited and Siemens AG. Together with the Company, in 1997 these competitors accounted for approximately 42% of the sales of business communications systems globally, with the Company accounting for approximately 9%. In addition, as the market transforms to multimedia systems, the Company is starting to encounter competition from companies that design and manufacture data network equipment. The Company believes that key competitive factors in this market are service support, the ability to upgrade existing systems for new applications, price and reliability. MICROELECTRONICS PRODUCTS The Company designs, manufactures and sells integrated circuits ("ICs"), electronic power systems and optoelectronic components for communications and computer applications. The Company supplies these components to manufacturers of communications systems and computers and also provides these components for many of the Company's own systems and products. The Company offers products in several IC product areas critical to communications applications, including digital signal processors ("DSPs") for digital cellular phones and modems and standard-cell application specific integrated circuits ("ASICs"). Products The Company's ICs are designed to provide advanced communications and control functions for a wide variety of electronic products and systems. The Company focuses on IC products that are used in communications and computing and that require high-performance and low power chip architectures; complex large-scale chip design in digital, analog and mixed-signal technologies; DSP architectures and algorithms; high-frequency and high-voltage technologies; and high speed data and signal processing. The Company offers a wide variety of standard, semi-custom and custom products for cellular equipment, communications networks, computers and computer peripherals, modems and consumer communications products. Products include DSPs, ASICs, field programmable gate arrays and communications ICs. The Company's products are manufactured using a variety of technologies, from low-power, low-voltage submicron CMOS (complementary metal oxide semiconductors) to high-frequency and high-voltage bipolar processes. The Company designs, develops and manufactures energy systems, electronic power supplies and associated magnetic components for the telecommunications and electronic data processing industries. These products serve applications ranging from modems for personal computers to large telephone central offices. Products include DC/DC converters, AC/DC switching power supplies, transformers, inductors and energy systems that provide alarm, control, and backup power management. The Company designs, develops and manufactures optoelectronic products which convert electricity to light (emitters) and light to electricity (detectors), thereby facilitating optical transmission of information. These products include semiconductor lasers, photodetectors, integrated transmitters and receivers, and advanced-technology erbium-doped fiber amplifiers. The Company provides these products worldwide to 9 11 manufacturers serving the telecommunications, cable television and network computing markets. Optoelectronic products extend the transmission capacity of fiber to meet the requirements of such applications as internet access video-on-demand, interactive video, teleconferencing, image transmission and remote database searching. The Company markets a number of advanced products, including critical optoelectronic components that support telecommunication transmission; long-wavelength optical data modules for data networking; and analog lasers for use in cable television fiber optic transmission. The Company believes that its optoelectronic products have higher photonics reliability than those of its competitors due to their low field failure rate and the Company's evaluation methodologies in manufacturing that allow the detection and elimination of early failures. The Company and Motorola have established a joint development center to design architectures and circuit implementations (cores) for future DSP products. In addition, the Company and Furukawa Electric Co. Ltd. have formed a partnership between two of their subsidiaries to manufacture optoelectronic components. The Company also is part of the DTV team currently consisting of the Company, Microsoft Corporation, Intel Corporation and Compaq Computer Corporation, which is an informal arrangement with the objective of accelerating the development of digital broadcast technology. In 1998, Lucent acquired Optimay GmbH, a German developer of software and chip sets for GSM cellular phones. Also in 1998, the Company made an equity investment in Chip Express Corporation, a developer of programmable logic ICs that enable quick delivery of products for their customers. In December 1996, the Company sold its operations for the design and manufacture of printed circuit boards and backplanes. Markets The Company's microelectronic products are sold globally to manufacturers of communications systems and computers. In addition, the Company's energy power systems are sold directly to U.S. and foreign telephone companies. The Company's customers are competing in markets characterized by rapid technological changes, decreasing product life cycles, price competition and increased user applications. These markets have experienced significant expansion in the number and types of products they offer to end-users, particularly in personal computing and portable access communication devices. As a result, the Company's customers continue to demand components which are smaller, require less power, are more complex, provide greater functionality, and are produced with shorter design cycles and less manufacturing lead time. Since 1995, the Company has also introduced a succession of GSM hardware platforms based upon a highly integrated multiple-chip design for digital cellular phones that performs all the key handset functions between the microphone and the antenna in both voice and data services. The Company also sells the associated software product elements necessary to support the GSM standard. In addition to the revenues from sales to third parties included in the Company's consolidated financial results, the Company's microelectronics products are also key components of its systems for network operators and business communications systems. The Company's microelectronics products compete with products of third-party manufacturers for inclusion in the Company's systems and products. Competition The Company considers its technological leadership, product leadership, and relationships with key customers to be important competitive factors. The market for microelectronic products is global and generally highly fragmented. The Company's competitors differ widely among product categories. The Company's competitors in certain IC product categories include Texas Instruments Incorporated, Rockwell International Corporation and LSI Logic Corp.; in electronic power systems include Astec Industries, Inc. and Unitech plc (through its subsidiary, NEMEC-Lambda); and in optoelectronics include Fujitsu Limited and Northern Telecom Limited. The Company believes that key competitive factors in the microelectronics marketplace are the early involvement in customers' future applications requirements, the speed of product and technological innova- 10 12 tion, price, customer service, and manufacturing capacity. Other important competitive factors include quality, reliability and local manufacturing presence. OTHER SYSTEMS AND PRODUCTS Other systems and products include products, services and integrated solutions provided to the United States Government for military and civilian use. In October 1997, the Company sold its Advanced Technology Systems ("ATS") unit. ATS designed and manufactured custom defense systems for the United States government. The Company sold its subsidiary, Paradyne, which designed and manufactured modems and other data communications equipment, in July 1996, and in December 1996 sold its Custom Manufacturing Services business. BELL LABORATORIES The Company has been and will continue to be supported by the technological expertise provided by Bell Labs, one of the world's foremost industrial research and development organizations. Bell Labs provides support for the businesses of the Company and conducts basic research. Bell Labs has made significant discoveries and advances in communications science and technology, software design and engineering, and networking. These contributions include the invention of the transistor and the design and development of ICs and many types of lasers. Areas of Bell Labs research and development work in recent years include: networking software; data networking; lightwave transmission, especially the wavelength division multiplexing systems which offer greater transmission capacity than other transmission systems; electronic switching technology, which enables rapid call processing, increased reliability and reduced network costs; and microelectronics components, which bring the latest advantages of very large scale integration to the full range of products offered by the Company. Bell Labs' research and development activities continue to focus on the core technologies critical to the Company's success, which are software, network design and engineering, microelectronics, photonics, data networking and wireless/cellular. Bell Labs is a leader in software research, development and engineering for communications applications. For example, its innovations in fault-tolerant software have enabled the Company to achieve a level of system reliability with off-the-shelf commercial processors that allows the Company to reduce its reliance on custom microprocessors. Bell Labs has contributed many innovations in voice quality, is a leader in the development of digital signal processing, and has developed a number of innovative algorithms for high-quality speech and audio. These innovations have contributed to the Company's implementation of speech processing applications which include text-to-speech synthesis, speech recognition and automatic translation of speech from one language to another. They are used in many of the Company's products, including the elemedia(R) products for Internet applications and are sold to outside customers. Bell Labs also has led in the development of software-based networking technologies that support the Company's systems and products. Recently, it has developed systems for digital cellular, PCS, mobile computing and wireless LANs, and its research in ATM led to the Company's offering of the first large ATM switch in 1993. Bell Lab's technology has allowed the recent introduction of data networking products such as the Internet Telephony Server SP, PacketStar IP switch, PacketStar IP Services platform and the Wavestar(TM) 400G high capacity WDM optical networking system. Similarly, Bell Labs' advances extend to the microlasers used in today's broadband multifunctional transmission systems, and to today's optical amplifiers and TRUEWAVE fiber. Current photonic research includes work on passive optical networks, photonic switching and quantum wire lasers. RECENT DEVELOPMENT 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 11 13 communications products. On October 22, 1998, Lucent and Philips announced their intention to end the venture in PCC. It is expected that Lucent and Philips will each regain control of the original businesses they contributed to the venture. Lucent plans to sell or close its portions of PCC. BACKLOG The Company's backlog, calculated as the aggregate of the sales price of orders received from customers less revenue recognized, was approximately $9,856 million and $12,141 million on September 30, 1998 and 1997, respectively. The decrease in backlog is due to completion of a majority of the milestones related to the Sprint Spectrum Holding LP ("Sprint PCS") purchase contract referred to under Outlook -- Future Capital Requirements below and a large long-term contract with the Ministry of Post and Telecommunications of Saudi Arabia. Approximately $3,400 million of the orders included in the September 30, 1998 backlog are scheduled for delivery after September 30, 1999. However, all orders are subject to possible rescheduling by customers. Although the Company believes that the orders included in the backlog are firm, some orders may be canceled by the customer without penalty, and the Company may elect to permit cancellation of orders without penalty where management believes that it is in the Company's best interest to do so. About $3,900 million of the amount at September 30, 1998 is under large, multi-year contracts of which about $3,000 million is scheduled for delivery after September 30, 1999 and is included in the $3,400 million referred to above. Of the $3,900 million under large, long-term contracts, the majority of the amount is with the Ministry of Post and Telecommunications of Saudi Arabia which require annual appropriations by the Saudi Arabian government. SOURCES AND AVAILABILITY OF MATERIALS The Company makes significant purchases of electronic components, copper, glass, silicon, and other materials and components from many domestic and foreign sources. The Company has been able to obtain sufficient materials and components from sources around the world to meet its needs. The Company also develops and maintains alternative sources for essential materials and components. Occasionally, additional inventories of specific components are maintained to minimize the effects of potential shortages. The Company does not have a concentration of sources of supply of materials, labor or services that, if suddenly eliminated, could severely impact its operations. See also Outlook -- Readiness for Year 2000. PATENTS AND TRADEMARKS From October 1, 1997 to September 30, 1998, the Company was issued 917 patents in the United States and 1,507 in foreign countries. The Company owns approximately 9,260 patents in the United States and 16,426 in foreign countries. These foreign patents are, for the most part, counterparts of the Company's United States patents. Many of the patents owned by the Company are licensed to others and the Company is licensed to use certain patents owned by others. In connection with the Separation, the Company has entered into an extensive cross-licensing agreement with AT&T and NCR Corporation ("NCR"). See "Separation Agreements -- Patent Licenses and Related Matters." The Company markets its products primarily under its own name and mark. The Company considers its many trademarks to be valuable assets. Most of its trademarks are registered throughout the world. OUTLOOK Forward Looking Statements This Outlook section and other sections of this Form 10-K report contain forward-looking statements, 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 12 14 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 outcome and impact of Year 2000 issues; 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. For a further description of Future Factors that could cause actual results to differ materially from such forward-looking statements, see the remainder of this Outlook section, including the other sections referred to in this section. Competition 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 Alcatel Alsthom, Cisco Systems, Inc., Ericsson, Northern Telecom Limited, 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. Dependence on New Product Development New product development is being driven by the communications revolution described under GENERAL, above. 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. 13 15 Reliance on Major Customer/Multi-Year Contracts The purchasing behavior of Lucent's largest customers has increasingly been characterized by the use of fewer, larger contracts. Lucent has significant contracts for the sale of infrastructure systems to network operators which extend over a multi-year period, and expects to enter into similar contracts in the future. These contracts typically involve longer negotiating cycles, require the dedication of substantial amounts of working capital and other resources, and in general require costs that may substantially precede recognition of associated revenues. Moreover, in return for larger, longer-term purchase commitments, customers often demand more stringent acceptance criteria, which can also cause revenue recognition delays. Lucent has increasingly provided or arranged long-term financing for customers as a condition to obtain or bid on infrastructure projects. Certain multi-year contracts involve new technologies that may not have been previously deployed on a large-scale commercial basis. On its multi-year contracts, Lucent may incur significant initial cost overruns and losses that are recognized in the quarter in which they become ascertainable. Further, profit estimates on such contracts are revised periodically over the lives of the contracts, and such revisions can have a significant impact on reported earnings in any one quarter. See also discussion below under Future Capital Requirements. 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, computer manufacturers and internet service providers. 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 service providers such as 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. In terms of total revenues, the Company's largest customer has been AT&T, although other large customers may purchase more of any particular system or product line. The contribution of AT&T to the Company's total revenues and percentage of total revenues for the two years and nine months ended September 30, 1998, 1997 and 1996 were $3,775 million (12.5%), $3,731 million (14.2%), and $1,970 million (12.4%), respectively. In addition, sales to seven network operators including AT&T (reduced from 9 in 1996 due to merger), some of which may vary from year to year, constituted approximately 35.4%, 37.5%, and 38% of total revenues in the twelve months ended September 30, 1998, 1997 and 1996, respectively. 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. 14 16 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. Currently, approximately 60% of Lucent's information technology infrastructure has been determined to be Year 2000 ready and is deployed for use. Approximately, 45% of the applications requiring Year 2000 remediation 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 the Company, with a special emphasis on the early identification of any areas where progress to-date could indicate difficulty in meeting the Company'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 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 15 17 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. European Monetary Union -- Euro On January 1, 1999, several member countries of the European Union will establish fixed conversion rates between their existing sovereign currencies, and adopt the Euro as their new common legal currency. As of that date, the Euro will trade 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 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. Seasonality 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 16 18 large customers historically delay a disproportionate percentage of their capital expenditures until the fourth quarter of the calendar year (Lucent's first fiscal quarter). Future Capital Requirements The Company's working capital requirements and cash flow provided by (or used in) operating activities can vary greatly from quarter to quarter, depending on the volume of production, the timing of deliveries, the build-up of inventories, the payment terms offered to customers, and the extension of credit to customers. Network operators, 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, Lucent closed transactions to lay off $500 million of loans and undrawn commitments and $300 million of undrawn commitments under the $1,800 million credit facility 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. In November 1998, Sprint PCS repaid the entire outstanding loan balance and canceled the remaining undrawn commitments. 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. 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. The Company believes that its credit facilities, cash flow from operations and long- and short-term debt financings, will be sufficient to satisfy its future working capital, capital expenditure, research and development and debt service requirements. The Company has a shelf registration statement to register the possible offering from time to time of long-term debt of which $1,160 million remains available at September 30, 1998 after deducting $500 million of 10-year 5.5% Notes sold by Lucent on November 19, 1998. The Company believes that it will be able to access the capital markets on terms and in amounts that will be satisfactory to it, and that it will be able to obtain bid and performance bonds, to arrange or provide customer financing as necessary, and 17 19 to engage in hedging transactions on commercially acceptable terms, although there can be no assurance that the Company will be successful in this regard. Growth Outside the United States, Foreign Exchange and Interest Rates Lucent intends to continue to pursue growth opportunities in markets outside the United States. In many markets outside the United States, long-standing relationships between potential customers of Lucent and their local providers, and protective regulations, including local content requirements and type approvals, create barriers to entry. In addition, pursuit of such growth opportunities outside the United States may require significant investments for an extended period before returns on such investments, if any, are realized. Such projects and investments could be adversely affected by reversals or delays in the opening of foreign markets to new competitors, exchange controls, currency fluctuations, investment policies, repatriation of cash, nationalization, social and political risks, taxation, and other factors, depending on the country in which such opportunity arises. Difficulties in foreign financial markets and economies, and of foreign financial institutions, could adversely affect demand from customers in the affected countries. Lucent is exposed to market risk from changes in foreign currency exchange rates and interest rates, which could impact its results of operations and financial condition. Lucent manages its exposure to these market risks through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. A significant change in the value of the dollar against the currency of one or more countries where Lucent sells products to local customers or makes purchases from local suppliers may materially adversely affect Lucent's results. Lucent attempts to mitigate any such effects through the use of foreign currency contracts, although there can be no assurances that such attempts will be successful. While Lucent hedges 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. Legal Proceedings and Environment See discussion below under Environmental Matters and Item 3. Legal Proceedings. Employee Relations See discussion below under Employee Relations. Intellectual Property The Company relies on patent, trademark, trade secret and copyright laws both to protect its proprietary technology and to protect the Company against claims from others. The Company believes that it has direct intellectual property rights or rights under cross-licensing arrangements covering substantially all of its material technologies. Given the technological complexity of the Company's systems and products, however, there can be no assurance that claims of infringement will not be asserted against the Company or against the Company's customers in connection with their use of the Company's systems and products, nor can there be any assurance as to the outcome of any such claims. The Company was assigned ownership of the substantial majority of AT&T's patents in connection with the Separation. Pursuant to the patent license agreement entered into among the Company, AT&T and NCR, the Company has been given rights, subject to specified limitations, to pass through to its customers certain rights under approximately 400 patents retained by AT&T. There can be no assurance that the Company's customers and potential customers will be satisfied with the pass-through rights available to them under the patents retained by AT&T or with any indemnification commitments the Company may be willing to provide in connection therewith. See "Separation Agreements -- Patent Licenses and Related Matters" and "-- Technology Licenses and Related Matters." 18 20 OPERATING REVENUE, RESEARCH AND DEVELOPMENT EXPENSE AND FOREIGN AND DOMESTIC OPERATIONS For information about the consolidated operating revenues contributed by the Company's major classes of products and services, consolidated research and development expenses, and foreign and domestic operations, see revenue tables and discussion on pages 38 through 41, Consolidated Statements of Income on page 49 and Note 11 thereto on pages 62-63 of the Company's annual report to security holders for the fiscal year ended September 30, 1998. Such information is incorporated herein by reference pursuant to General Instruction G(2). EMPLOYEE RELATIONS On September 30, 1998, Lucent employed approximately 141,600 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"). During 1998, Lucent signed new five-year agreements with the CWA and IBEW expiring May 31, 2003. 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. On November 16, 1998, Lucent signed a Consent Order with the Pennsylvania Department of Environmental Protection settling alleged violations resulting from etching equipment being installed in 1991 and 1992 without undergoing the proper state air permit with payment of a civil penalty of approximately $294,000, a portion of which will be devoted to the creation of community environmental projects. 19 21 SEPARATION AGREEMENTS For the purposes of governing certain of the relationships between the Company and AT&T (including NCR) following the Separation, the Company, AT&T and NCR entered into the Separation and Distribution Agreement and the Ancillary Agreements to which they are parties (collectively, the "Separation Agreements"). The Ancillary Agreements include the Employee Benefits Agreement; the Brand License Agreement; the Patent License Agreement and other patent-related agreements; the Technology License Agreement and other technology-related agreements; and the Tax Sharing Agreement and other tax-related agreements. Certain of the Separation Agreements, including certain of the Agreements summarized below, are exhibits to this Form 10-K. Reference is made to such exhibits for the full text of the provisions of those Agreements, and the agreement summaries below are qualified in their entirety by reference to the full text of such Agreements. Capitalized terms used in this section and not otherwise defined in this Form 10-K shall have their respective meanings set forth in the Separation and Distribution Agreement (except that the term "Company" is used in lieu of the term "Lucent") or other Separation Agreement. Separation and Distribution Agreement Under the Separation and Distribution Agreement, the Company assumed or agreed to assume, and agreed to perform and fulfill, all the "Lucent Liabilities" (as defined in such Agreement) in accordance with their respective terms. Without limitation, the Lucent Liabilities generally include all liabilities and contingent liabilities relating to Lucent's present and former business and operations, and contingent liabilities otherwise assigned to Lucent; contingent liabilities related to AT&T's discontinued computer operations (other than those of NCR) were assigned to the Company. The Separation and Distribution Agreement provides for the sharing of contingent liabilities not allocated to one of the parties in specified proportions, and also provides that each party will share specified portions of contingent liabilities related to the business of any of the other parties that exceed specified levels. Ability to Terminate Certain Rights. The Separation and Distribution Agreement provides that certain rights granted to the Company and the members of the Company Group will be subject to the following provisions. Except as otherwise expressly provided, in the event that, at any time prior to February 1, 2001, the Company or any member of the Company Group offers, furnishes or provides any Telecommunications Services of the type offered by the AT&T Services Business as of the Closing Date, then AT&T may, in its sole discretion: (a) terminate all or any portion of the rights granted by AT&T under the Brand License Agreement; (b) terminate all or any remaining portion of the purchase commitments made by AT&T and the members of the AT&T Group in the General Purchase Agreement; (c) exercise the right to require the Company to transfer to AT&T certain personnel, information, technology and software under the Supplemental Agreements; (d) terminate all or any portion of the rights to patents and technology of AT&T or any member of the AT&T Group granted to the Company and the members of the Company Group pursuant to the Patent License Agreement and the Technology License Agreement; and (e) direct the Company and the members of the Company Group to reconvey to AT&T all interests in any and all patents and technology in which the Company or any member of the Company Group was granted an undivided one-half interest pursuant to the Patent Assignments or the Technology Assignment and Joint Ownership Agreements. The Company and the members of the Company Group will not be deemed to offer, furnish or provide any Telecommunications Services (and the foregoing provisions will not apply) solely by virtue of certain specified investments in Persons that offer, furnish or provide Telecommunications Services or by virtue of offering, furnishing or providing Telecommunications Services below a specified de minimis amount. Employee Benefits Agreement AT&T and the Company entered into the Employee Benefits Agreement that governs the employee benefit obligations of the Company, including both compensation and benefits, with respect to active employees and retirees assigned to the Company. Pursuant to the Employee Benefits Agreement, the Company assumed and agreed to pay, perform, fulfill and discharge, in accordance with their respective terms, 20 22 all Liabilities (as defined) to, or relating to, former employees of AT&T or its affiliates employed by the Company and its affiliates and certain former employees of AT&T or its affiliates (including retirees) who either were employed in the Company Business (as defined) or who otherwise are assigned to the Company for purposes of allocating employee benefit obligations (including all retirees of Bell Labs). Patent Licenses and Related Matters The Company, AT&T and NCR executed and delivered assignments and other agreements, including a patent license agreement, related to patents then owned or controlled by AT&T and its subsidiaries. The patent assignments divided ownership of patents, patent applications and foreign counterparts among the Company, AT&T and NCR, with the substantial portion of those then owned or controlled by AT&T and its subsidiaries (other than NCR) being assigned to the Company. A small number of the patents assigned to the Company are jointly owned with either AT&T or NCR. Certain of the patents that the Company jointly owns with AT&T are subject to a joint ownership agreement under which each of the Company and AT&T has full ownership rights in the patents. The other patents that the Company jointly owns with AT&T, and the patents that the Company jointly owns with NCR, are subject to defensive protection agreements with AT&T and NCR, respectively, under which the Company holds most ownership rights in the patents exclusively. Under these defensive protection agreements, AT&T or NCR, as the case may be, has the ability, subject to specified restrictions, to assert infringement claims under the patents against companies that assert patent infringement claims against them, and has consent rights in the event the Company wishes to license the patents to certain third parties or for certain fields of use under specified circumstances. The defensive protection agreements also provide for one-time payments from AT&T and NCR to the Company. The patent license agreement entered into by the Company, AT&T and NCR provides for cross-licenses to each company, under each of the other company's patents that are covered by the licenses, to make, use, lease, sell and import any and all products and services of the businesses in which the licensed company (including specified related companies) is now or hereafter engaged. The cross-licenses also permit each company, subject to specified limitations, to have third parties make items under the other companies' patents, as well as to pass through to customers certain rights under the other companies' patents with respect to products and services furnished to customers by the licensed company. In addition, the rights granted to the Company and AT&T include the right to license third parties under each of the other company's patents to the extent necessary to meet existing patent licensing obligations as of March 29, 1996, and AT&T has the right, subject to specified restrictions and procedures, to ask the Company to license third parties under a limited number of identified patents that were assigned to the Company. Technology Licenses and Related Matters The Company, AT&T and NCR executed and delivered assignments and other agreements, including the Technology License Agreement, related to technology then owned or controlled by AT&T and its subsidiaries. Technology includes copyrights, mask works and other intellectual property other than trademarks, trade names, trade dress, service marks and patent rights. The technology assignments divide ownership of technology among the Company, AT&T and NCR, with the Company and AT&T owning technology that was developed by or for, or purchased by, the Company's business or AT&T's services business, respectively, and NCR owning technology that was developed by or for, or purchased by, NCR. Technology that is not covered by any of these categories is owned jointly by the Company and AT&T or, in the case of certain specified technology, owned jointly by the Company, AT&T and NCR. The Technology License Agreement entered into by the Company, AT&T and NCR provides for royalty-free cross-licenses to each company to use the other companies' technology existing as of April 10, 1996, except for specified portions of each company's technology as to which use by the other companies is restricted or prohibited. 21 23 ITEM 2. PROPERTIES. At September 30, 1998, the Company operated 30 manufacturing sites, of which 14 were located in the United States, occupying in excess of 19.0 million square feet, of which approximately 1.0 million square feet were leased. The remaining 16 sites were located in 10 countries. At September 30, 1998, the Company operated 228 warehouse sites, of which 192 were located in the United States, occupying in excess of 6.0 million square feet, substantially all of which were leased. The remaining 30 sites were located in 21 countries. At September 30, 1998, the Company operated 835 office sites (administration, sales, field service), of which 614 were located in the United States, occupying in excess of 20.0 million square feet, half of which were leased. The remaining 221 sites were located in 56 countries. At September 30, 1998, the Company operated additional sites in 19 cities, of which 7 were located in the United States, with significant research and development activities, occupying in excess of 9.0 million square feet, of which approximately 1.4 million square feet were leased. The Company believes its plants and facilities are suitable and adequate, and have sufficient productive capacity, to meet its current needs. ITEM 3. LEGAL PROCEEDINGS. In the normal course of business, the Company is subject to proceedings, lawsuits and other claims, including proceedings under laws and regulations related to environmental and other matters. (Also see Item 1. "Business -- Separation Agreements -- Separation and Distribution Agreement" regarding the assumption by the Company of certain liabilities and contingent liabilities.) All such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, the Company is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at September 30, 1998. While these matters could affect operating results of any one quarter when resolved in future periods and, while there can be no assurance with respect thereto, it is management's opinion that after final disposition, any monetary liability or financial impact to the Company beyond that provided in the consolidated balance sheet at September 30, 1998 would not be material to the Company's annual consolidated financial statements. See also the discussion in Item 1. "Business -- Environmental Matters" for additional legal proceedings, and environmental matters and proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. During the fourth quarter of the fiscal year covered by this report on Form 10-K, no matter was submitted to a vote of Shareowners. PART II ITEMS 5. THROUGH 8. The information required by these items is included in pages 34 through 67 of the Company's annual report to security holders for the fiscal year ended September 30, 1998. The referenced pages of the Company's annual report to security holders have been filed as Exhibit 13 to this document. Such information is incorporated herein by reference, pursuant to General Instruction G(2). The New York Stock Exchange is the principal market for the Company's Common Shares. As of November 30, 1998, there were approximately 1,764,000 shareholders of record. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 22 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding executive officers required by Item 401 of Regulation S-K is furnished in this separate disclosure because the Company did not furnish such information in its definitive proxy statement prepared in accordance with Schedule 14A. EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF DECEMBER 1, 1998)
BECAME LUCENT EXECUTIVE NAME AGE OFFICER ON ---- ----- ------------- Richard A. McGinn......................... 52 Chairman of the Board and 2-96 Chief Executive Officer Donald K. Peterson........................ 49 Executive Vice President and 2-96 Chief Financial Officer Richard J. Rawson......................... 46 Senior Vice President, 2-96 General Counsel and Secretary Patricia F. Russo......................... 46 Executive Vice President, 2-96 Corporate Staff Operations Daniel C. Stanzione....................... 53 Executive Vice President and 2-96 Chief Operating Officer Bernardus J. Verwaayen.................... 46 Executive Vice President and 9-97 Chief Operating Officer
All of the above executive officers have held high level managerial positions with the Company and prior thereto with AT&T or its affiliates for more than the past five years, except in the case of Messrs. Peterson and Verwaayen who have held such positions since September 1, 1995 and September 1, 1997, respectively. Prior to joining AT&T, Mr. Peterson held various senior executive positions at Northern Telecom, Inc., a telecommunications equipment company, which included President of Nortel Communications Systems, Inc. (from January 1993 to September 1995), Vice President of Finance of Northern Telecom, Inc. (from January 1991 to January 1993) and Group Vice President of Northern Telecom, Inc. (from September 1987 to January 1991). Mr. Verwaayen joined the Company after serving as President of PTT Telecom, the national telecommunications operator of the Netherlands since May 1988. He was a co-founder of Unisource, the pan-European alliance of Telia of Sweden, Swiss Telecom and PTT Telecom. Officers are not elected for a fixed term of office but hold office until their successors have been elected. The other information required by Item 10 is included in the Company's definitive proxy statement dated December 22, 1998, on pages 12 through 15. Such information is incorporated herein by reference, pursuant to General Instruction G(3). ITEMS 11. THROUGH 13. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Company's Directors and officers to file reports of holdings and transactions in the Company's Common Shares with the Securities and Exchange Commission ("SEC") and the New York Stock Exchange. Based on Company records and other information, the Company believes that all SEC filing requirements applicable to its Directors and officers with respect to the Company's fiscal year ending September 30, 1998 were complied with. The other information required by Items 11 through 13 is included in the Company's definitive proxy statement dated December 22, 1998, on pages 8 through 11 and pages 35 through page 44. Such information is incorporated herein by reference, pursuant to General Instruction G(3). 23 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed as a part of Form 10-K:
PAGES ----- (1) Management's Discussion and Analysis of Results of Operations and Financial Condition................................... * (2) Report of Management.......................... * (3) Report of Independent Accountants............. * (4) Financial Statements: (i) Consolidated Statements of Income....... * (ii) Consolidated Balance Sheets............. * (iii) Consolidated Statements of Changes in Shareowners' Equity........................... * (iv) Consolidated Statements of Cash Flows... * (v) Notes to Consolidated Financial Statements.................................... * (5) Financial Statement Schedules: (i) Report of Independent Accountants........ 27 (ii) Schedule II -- Valuation and Qualifying Accounts...................................... 28
Separate financial statements of subsidiaries not consolidated and 50 percent or less owned persons are omitted since no such entity constitutes a "significant subsidiary" pursuant to the provisions of Regulation S-X, Article 3-09. - --------------- * Incorporated herein by reference to the appropriate portions in pages 34 through 67 of the Company's annual report to security holders for the fiscal year ended September 30, 1998. (See Part II and Exhibit 13.) 24 26 (6) Exhibits: The following documents are filed as Exhibits to this report on Form 10-K or incorporated by reference herein. Any document incorporated by reference is identified by a parenthetical referencing the SEC filing which included such document.
EXHIBIT NUMBER - ------- (3)(i) Articles of Incorporation of the registrant, as amended April 8, 1996 (Exhibit 3(i) to Form 8-K dated July 18, 1996, File No. 001-11639). (3)(ii) By-Laws of the registrant, as amended July 17, 1996 (Exhibit 3(ii) to Form 8-K dated July 18, 1996, File No. 001-11639). (4)(i) Indenture dated as of April 1, 1996 between Lucent Technologies Inc. and the Bank of New York, as Trustee (Exhibit 4A to Registration Statement on Form S-3 No. 333- 01223). (4)(iii) Other instruments in addition to Exhibit 4(i) which define the rights of holders of long term debt, of the registrant and all of its consolidated subsidiaries, are not filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. (10)(i)1 Separation and Distribution Agreement by and among Lucent Technologies Inc., AT&T Corp. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit 10.1 to Registration Statement on Form S-1 No. 333-00703). (10)(i)2 Tax Sharing Agreement by and among Lucent Technologies Inc., AT&T Corp. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit 10.6 to Registration Statement on Form S-1 No. 333-00703). (10)(i)3 Employee Benefits Agreement by and between AT&T and Lucent Technologies Inc., dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit 10.2 to Registration Statement on Form S-1 No. 333-00703). (10)(i)4 Rights Agreement between Lucent Technologies Inc. and First Chicago Trust Company of New York, as Rights Agent, dated as of April 4, 1996 (Exhibit 4.2 to Registration Statement on Form S-1 No. 333-00703). (10)(i)5 Amendment to Rights Agreement between Lucent Technologies Inc. and First Chicago Trust Company of New York, dated as of February 18, 1998. (10)(ii)(B)1 General Purchase Agreement by and between AT&T Corp. and Lucent Technologies Inc., dated February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit 10.3 to Registration Statement on Form S-1 No. 333-00703). (10)(ii)(B)2 Interim Services and Systems Replication Agreement by and among AT&T, Lucent Technologies Inc. and NCR, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit 10.4 to Registration Statement on Form S-1 No. 333-00703). (10)(ii)(B)3 Brand License Agreement by and between Lucent Technologies Inc. and AT&T, dated as of February 1, 1996 (Exhibit 10.5 to Registration Statement on Form S-1 No. 333-00703). (10)(ii)(B)4 Patent License Agreement among AT&T, NCR and Lucent Technologies Inc., effective as of March 29, 1996 (Exhibit 10.7 to Registration Statement on Form S-1 No. 333-00703).
25 27
EXHIBIT NUMBER - ------- (10)(ii)(B)5 Amended and Restated Technology License Agreement among AT&T, NCR and Lucent Technologies Inc., effective as of March 29, 1996 (Exhibit 10.8 to Registration Statement on Form S-1 No. 333-00703). (10)(iii)(A)(1) Lucent Technologies Inc. Short Term Incentive Program (Exhibit (10)(iii)(A)(2) to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998).* (10)(iii)(A)2 Lucent Technologies Inc. 1996 Long Term Incentive Program (Exhibit(10)(iii)(A)1 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998).* (10)(iii)(A)3 Lucent Technologies Inc. Deferred Compensation Plan.* (10)(iii)(A)4 Pension Plan for Lucent Non-Employee Directors (Exhibit 10.11 to Registration Statement on Form S-1 No. 333-00703).* (This plan has been terminated) (10)(iii)(A)5 Lucent Technologies Inc. Stock Retainer Plan for Non-Employee Directors.* (10)(iii)(A)6 Lucent Technologies Inc. Excess Benefit and Compensation Plan (Exhibit (10)(iii)(A)5 to Annual Report on Form 10-K for Transition Period ended September 30, 1996).* (10)(iii)(A)7 Lucent Technologies Inc. Mid-Career Pension Plan (Exhibit (10)(iii)(A)6 to Annual Report on Form 10-K for Transition Period ended September 30, 1996).* (10)(iii)(A)8 Lucent Technologies Inc. Non-Qualified Pension Plan (Exhibit (10)(iii)(A)7 to Annual Report on Form 10-K for Transition Period ended September 30, 1996).* (10)(iii)(A)9 Lucent Technologies Inc. Officer Long-Term Disability and Survivor Protection Plan (Exhibit (10)(iii)(A)8 to the Annual Report on Form 10-K for Transition Period ended September 30, 1996).* (10)(iii)(A)10 Employment Agreement of Mr. Verwaayen dated June 12, 1997 (Exhibit (10)(iii)(A)(1)) to the Annual Report on Form 10-K for the period ended September 30, 1997).* (10)(iii)(A)11 Employment Agreement of Mr. Peterson dated August 8, 1995 (Exhibit (10)(iii)(A)(9) to the Annual Report on Form 10-K for the period ended September 30, 1997).* (10)(iii)(A)12 Consulting Agreement of Mr. Schacht, effective March 1, 1998 (Exhibit (10)(iii)(A)5 to the Quarterly Report on Form 10-Q for the period ended March 31, 1998).* (10)(iii)(A)13 Description of the Lucent Technologies Inc. Supplemental Pension Plan.* (10)(iii)(A)14 Lucent Technologies Inc. 1999 Stock Compensation Plan for Non-Employee Directors.* (10)(iii)(A)15 Lucent Technologies Inc. Voluntary Life Insurance Plan. (12) Computation of Ratio of Earnings to Fixed Charges. (13) Specified portions (pages 34 through 67) of the Company's Annual Report to security holders for the year ended September 30, 1998. (21) List of subsidiaries of Lucent Technologies Inc. (23) Consent of PricewaterhouseCoopers LLP (24) Powers of Attorney executed by officers and directors who signed this report. (27) Financial Data Schedule.
- --------------- * Management contract or compensatory plan or arrangement. The Company will furnish, without charge, to a security holder upon request a copy of the annual report to security holders and the proxy statement, portions of which are incorporated herein by reference thereto. The Company will furnish any other exhibit at cost. (b) Reports on Form 8-K: No Reports on Form 8-K were filed by the Company during the last quarter of the fiscal year covered by this Report on Form 10-K. 26 28 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareowners of Lucent Technologies Inc.: Our report on the consolidated financial statements of Lucent Technologies Inc. and subsidiaries has been incorporated by reference in this Form 10-K from page 48 of the 1998 Annual Report to the Shareowners of Lucent Technologies Inc. In connection with our audits of such financial statements, we have also audited the related consolidated financial statement schedule listed in the index on page 24 of this Form 10-K. In our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. PricewaterhouseCoopers LLP New York, New York October 21, 1998 27 29 LUCENT TECHNOLOGIES INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ----------------------------------- ------------ ------------------------ ---------- --------- ADDITIONS ------------------------ BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING OF COSTS & OTHER AT END DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - ----------- ------------ ---------- ---------- ---------- --------- Year 1998 Allowance for doubtful accounts...................... 352 113 (59) 16(a) 390 Reserves related to business restructuring and facility consolidation................. 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
- --------------- (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 Consolidated Financial Statements for background information. (c) Relates to net asset additions and net liability reductions from AT&T. See Note 1 of the Notes to Consolidated Financial Statements for background information. (d) Certain prior year amounts have been reclassified to conform to the 1998 presentation. 28 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. By /s/ JAMES S. LUSK --------------------------------------------- James S. Lusk Vice President and Controller (attorney-in-fact)* December 22, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Principal Executive Officer Richard A. McGinn Chief Executive Officer and President Principal Financial Officer Donald K. Peterson Executive Vice President and Chief Financial Officer Principal Accounting Officer By /s/ JAMES S. LUSK James S. Lusk --------------------------------------------- Vice President James S. Lusk Vice President and Controller (attorney-in-fact)* December 22, 1998 Directors Paul A. Allaire Carla A. Hills Drew Lewis Richard A. McGinn Paul H. O'Neill Donald S. Perkins Henry B. Schacht Franklin A. Thomas John A. Young - ------------------------------------------ * As Principal Accounting Officer and by power of attorney
29 31 EXHIBIT INDEX The following documents are filed as Exhibits to this report on Form 10-K or incorporated by reference herein. Any document incorporated by reference is identified by a parenthetical referencing the SEC filing which included such document.
EXHIBIT NUMBER - ------- (3)(i) Articles of Incorporation of the registrant, as amended April 8, 1996 (Exhibit 3(i) to Form 8-K dated July 18, 1996, File No. 001-11639). (3)(ii) By-Laws of the registrant, as amended July 17, 1996 (Exhibit 3(ii) to Form 8-K dated July 18, 1996, File No. 001-11639). (4)(i) Indenture dated as of April 1, 1996 between Lucent Technologies Inc. and the Bank of New York, as Trustee (Exhibit 4A to Registration Statement on Form S-3 No. 333- 01223). (4)(iii) Other instruments in addition to Exhibit 4(i) which define the rights of holders of long term debt, of the registrant and all of its consolidated subsidiaries, are not filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. (10)(i)1 Separation and Distribution Agreement by and among Lucent Technologies Inc., AT&T Corp. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit 10.1 to Registration Statement on Form S-1 No. 333-00703). (10)(i)2 Tax Sharing Agreement by and among Lucent Technologies Inc., AT&T Corp. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit 10.6 to Registration Statement on Form S-1 No. 333-00703). (10)(i)3 Employee Benefits Agreement by and between AT&T and Lucent Technologies Inc., dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit 10.2 to Registration Statement on Form S-1 No. 333-00703). (10)(i)4 Rights Agreement between Lucent Technologies Inc. and First Chicago Trust Company of New York, as Rights Agent, dated as of April 4, 1996 (Exhibit 4.2 to Registration Statement on Form S-1 No. 333-00703). (10)(i)5 Amendment to Rights Agreement between Lucent Technologies Inc. and First Chicago Trust Company of New York, dated as of February 18, 1998. (10)(ii)(B)1 General Purchase Agreement by and between AT&T Corp. and Lucent Technologies Inc., dated February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit 10.3 to Registration Statement on Form S-1 No. 333-00703). (10)(ii)(B)2 Interim Services and Systems Replication Agreement by and among AT&T, Lucent Technologies Inc. and NCR, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit 10.4 to Registration Statement on Form S-1 No. 333-00703). (10)(ii)(B)3 Brand License Agreement by and between Lucent Technologies Inc. and AT&T, dated as of February 1, 1996 (Exhibit 10.5 to Registration Statement on Form S-1 No. 333-00703). (10)(ii)(B)4 Patent License Agreement among AT&T, NCR and Lucent Technologies Inc., effective as of March 29, 1996 (Exhibit 10.7 to Registration Statement on Form S-1 No. 333-00703).
32
EXHIBIT NUMBER - ------- (10)(ii)(B)5 Amended and Restated Technology License Agreement among AT&T, NCR and Lucent Technologies Inc., effective as of March 29, 1996 (Exhibit 10.8 to Registration Statement on Form S-1 No. 333-00703). (10)(iii)(A)(1) Lucent Technologies Inc. Short Term Incentive Program (Exhibit (10)(iii)(A)(2) to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998).* (10)(iii)(A)2 Lucent Technologies Inc. 1996 Long Term Incentive Program (Exhibit(10)(iii)(A)1 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998).* (10)(iii)(A)3 Lucent Technologies Inc. Deferred Compensation Plan.* (10)(iii)(A)4 Pension Plan for Lucent Non-Employee Directors (Exhibit 10.11 to Registration Statement on Form S-1 No. 333-00703).* (This plan has been terminated) (10)(iii)(A)5 Lucent Technologies Inc. Stock Retainer Plan for Non-Employee Directors.* (10)(iii)(A)6 Lucent Technologies Inc. Excess Benefit and Compensation Plan (Exhibit (10)(iii)(A)5 to Annual Report on Form 10-K for Transition Period ended September 30, 1996).* (10)(iii)(A)7 Lucent Technologies Inc. Mid-Career Pension Plan (Exhibit (10)(iii)(A)6 to Annual Report on Form 10-K for Transition Period ended September 30, 1996).* (10)(iii)(A)8 Lucent Technologies Inc. Non-Qualified Pension Plan (Exhibit (10)(iii)(A)7 to Annual Report on Form 10-K for Transition Period ended September 30, 1996).* (10)(iii)(A)9 Lucent Technologies Inc. Officer Long-Term Disability and Survivor Protection Plan (Exhibit (10)(iii)(A)8 to the Annual Report on Form 10-K for Transition Period ended September 30, 1996).* (10)(iii)(A)10 Employment Agreement of Mr. Verwaayen dated June 12, 1997 (Exhibit (10)(iii)(A)(1)) to the Annual Report on Form 10-K for the period ended September 30, 1997).* (10)(iii)(A)11 Employment Agreement of Mr. Peterson dated August 8, 1995 (Exhibit (10)(iii)(A)(9) to the Annual Report on Form 10-K for the period ended September 30, 1997).* (10)(iii)(A)12 Consulting Agreement of Mr. Schacht effective March 1, 1998 (Exhibit (10)(iii)(A)5 to the Quarterly Report on Form 10-Q for the period ended March 31, 1998).* (10)(iii)(A)13 Description of the Lucent Technologies Inc. Supplemental Pension Plan.* (10)(iii)(A)14 Lucent Technologies Inc. 1999 Stock Compensation Plan for Non-Employee Directors.* (10)(iii)(A)15 Lucent Technologies Inc. Voluntary Life Insurance Plan. (12) Computation of Ratio of Earnings to Fixed Charges. (13) Specified portions (pages 34 through 67) of the Company's Annual Report to security holders for the year ended September 30, 1998. (21) List of subsidiaries of Lucent Technologies Inc. (23) Consent of PricewaterhouseCoopers LLP (24) Powers of Attorney executed by officers and directors who signed this report. (27) Financial Data Schedule.
- --------------- * Management contract or compensatory plan or arrangement. EX-10.I.5 2 AMENDMENT TO RIGHTS AGREEMENT 1 Exhibit 10(i)(5) AMENDMENT The Rights Agreement dated as of April 4, 1996 between Lucent Technologies Inc. and The Bank of New York, Successor Rights Agent, was amended as of February 18, 1998 by deleting the period at the end of Subsection 25(a)and adding the following: ; provided that, prior to the Distribution Date, any notice in regard to a declaration or payment of any dividend on the Common Shares payable in Common Shares or to effect a subdivision, combination or consolidation of the Common Shares (by reclassification or otherwise than by payment of dividends in Common Shares) shall be adequately given if given within a reasonable time after the issuance date for such stock dividend or effective date of such subdivision, combination or consolidation. EX-10.III.A.3 3 DEFERRED COMPENSATION PLAN 1 Exhibit 10(iii)(A)3 LUCENT TECHNOLOGIES INC. DEFERRED COMPENSATION PLAN Revised through July 15, 1998 Preamble Effective October 1, 1996, Lucent Technologies Inc. (the "Company") established the Lucent Technologies Inc. Officer Incentive Award Deferral Plan and the Lucent Technologies Inc. Deferred Compensation Plan for Non-Employee Directors, each of which was merged into the Lucent Technologies Inc. Deferred Compensation Plan (the "Plan") in July 1997. The Plan is intended to constitute an unfunded, deferred compensation plan maintained primarily for a select group of management or highly compensated employees and for members of the Board of Directors who are not employees of the Company. The purpose of the Plan is to provide a means by which eligible employees and non-employee Directors may defer the receipt of certain forms of compensation while at the same time giving the Company the present use of the compensation so deferred. The Plan is intended to be an employee pension benefit plan within the meaning of Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended. The Plan is not a qualified plan under Section 401(a) of the Internal Revenue Code of 1986, as amended. Benefits under the Plan are paid directly by the Company out of its general assets when due. The Plan has been amended and restated as set forth herein effective as of July 15, 1998. DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below: (a) "1996 Program" shall mean the Lucent Technologies Inc. 1996 Long Term Incentive Program. (b) "Account" shall mean, for each Participant, such Participant's Deferred Cash Equivalent Account and Deferred Share Equivalent Account. (c) "Administrator" shall mean the Senior Vice President Human Resources of the Company. (d) "Affiliate" shall mean (i) any Person that directly, or through one or more intermediaries, controls, or is controlled by, or is under common control with, the 2 LUCENT TECHNOLOGIES INC. DEFERRED COMPENSATION PLAN Company or (ii) any entity in which the Company has a significant equity interest, as determined by the Committee. (e) "Beneficiary Election" shall mean a written instrument, in a form prescribed by the Administrator, relating to elections under Section 5. (f) "Board" shall mean the Board of Directors of the Company. (g) "Change in Control" shall mean the happening of any of the following events: (1) An acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (an "Entity") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); excluding, however, the following: (1) any acquisition directly from the Company, other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Company, (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (4) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (3) of this Section 1(g); or (2) A change in the composition of the Board during any two year period such that the individuals who, as of the beginning of such two year period, constitute the Board (such Board shall be hereinafter referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that for purposes of this definition, any individual who becomes a member of the Board subsequent to the beginning of the two year period, whose election, or nomination for election by the Company's shareowners, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; and provided, further however, that any such individual whose initial assumption of office occurs as a result of or in connection with either an actual -2- 3 LUCENT TECHNOLOGIES INC. DEFERRED COMPENSATION PLAN or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of an Entity other than the Board shall not be so considered as a member of the Incumbent Board; or (3) The approval by the shareowners of the Company of a merger, reorganization or consolidation or sale or other disposition of all or substantially all of the assets of the Company (each, a "Corporate Transaction") or, if consummation of such Corporate Transaction is subject, at the time of such approval by shareowners, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding however, such a Corporate Transaction pursuant to which (A) all or substantially all of the individuals and entities who are the beneficial owners of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of the outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation or other Person which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries (a "Parent Company")) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, (B) no Entity (other than the Company, any employee benefit plan (or related trust) of the Company, such corporation resulting from such Corporate Transaction or, if reference was made to equity ownership of any Parent Company for purposes of determining whether clause (A) above is satisfied in connection with the applicable Corporate Transaction, such Parent Company) will beneficially own, directly or indirectly, 20% or more of the outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors unless such ownership resulted solely from ownership of securities of the Company prior to the Corporate Transaction, and (C) individuals who were members of the Incumbent Board will immediately after the consummation of the Corporate Transaction constitute at least a majority of the members of the board of directors of the corporation -3- 4 LUCENT TECHNOLOGIES INC. DEFERRED COMPENSATION PLAN resulting from such Corporate Transaction (or, if reference was made to equity ownership of any Parent Company for purposes of determining whether clause (A) above is satisfied in connection with the applicable Corporate Transaction, of the Parent Company); or (4) The approval by the shareowners of the Company of a complete liquidation or dissolution of the Company. (h) "Change in Control Election" shall mean a written instrument, in a form prescribed by the Administrator, relating to elections under Section 7. (i) "Code" shall mean the Internal Revenue Code of 1986, as amended. (j) "Committee" shall mean the Corporate Governance and Compensation Committee of the Board (or any successor committee). (k) "Company" shall mean Lucent Technologies Inc. (l) "Deferral Election" shall mean a written election, in a form prescribed by the Administrator, to defer receipt of Incentive Awards, Retainer Payments or salary otherwise payable to a Participant. (m) "Deferred Cash Equivalent Account" shall mean a book-entry account in the name of a Participant maintained in the Company's records with entries denominated in dollars. (n) "Deferred Share Equivalent Account" shall mean a book-entry account in the name of a Participant maintained in the Company's records with entries denominated in Share equivalents. (o) "Director" shall mean any non-employee member of the Board. (p) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (q) "Eligible Member" shall mean an Officer, a Director, Other Participant or a participant in either Predecessor Plan or another person who is designated by the Administrator as an Eligible Member. (r) "Fiscal Year" shall mean the period commencing October 1 and ending on the next succeeding September 30, or such other period as the Company may from time to time adopt as its fiscal year. -4- 5 LUCENT TECHNOLOGIES INC. DEFERRED COMPENSATION PLAN (s) "Incentive Award" shall mean any award under the Short Term Plan, any other bonus payment, any performance awards, stock unit awards or other awards under the 1996 Program (other than options) and any dividend equivalent payment under the 1996 Program. (t) "NYSE" shall mean the New York Stock Exchange, Inc. (u) "Officer" shall mean any employee of the Company or any of its Affiliates holding a position evaluated or classified above the executive ("E-band") level or its equivalent, and identified in the Company's records as an officer of the Company (including an Officer who was a participant in any Predecessor Plan). (v) "Other Participant" shall mean any employee of the Company or any of its Affiliates (1) holding a position evaluated or classified at or above the "D-Band" level or its equivalent, and identified in the Company's records as affected by the limitations on covered compensation described in Section 401(a)(17) of the Code or the limitations on benefits described in Section 415 of the Code or who has an Account with a positive balance, or (2) holding a position evaluated or classified at or above the "E-Band" level or its equivalent, in either case, only if the Administrator determines that such group of employees shall be eligible to participate in the Plan. (w) "Participant" shall mean an Eligible Member who delivers a Deferral Election to the Company or who receives a Savings Plan Make-Up Credit. A person shall not cease being a Participant if the person ceases being an Eligible Member, if the person has an Account with a positive balance. (x) "Participating Company" shall mean the Company and any of its Affiliates. (y) "Payment Election" shall have the meaning set forth in Section 6(a). (z) "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, limited liability company, other entity or government or political subdivision thereof. (aa) "Plan" shall mean this Lucent Technologies Inc. Deferred Compensation Plan. (bb) "Plan Year" shall mean each twelve (12) consecutive month period commencing January 1 and ending on December 31 of the same calendar year. (cc) "Potential Change in Control" shall mean: -5- 6 LUCENT TECHNOLOGIES INC. DEFERRED COMPENSATION PLAN (1) the commencement of a tender or exchange offer by any third person which, if consummated, would result in a Change in Control; (2) the execution of an agreement by the Company, the consummation of which would result in the occurrence of a Change in Control; (3) the public announcement by any person (including the Company) of an intention to take or to consider taking actions which if consummated would constitute a Change in Control other than through a contested election for directors of the Company; or (4) the adoption by the Board, as a result of other circumstances, including, without limitation, circumstances similar or related to the foregoing, of a resolution to the effect that a Potential Change in Control has occurred. A Potential Change in Control shall be deemed to be pending until the earliest of (i) the second anniversary thereof, (ii) the occurrence of a Change in Control and (iii) the occurrence of a subsequent Potential Change in Control. (dd) "Predecessor Plans" shall mean the Lucent Technologies Inc. Officer Incentive Award Deferral Plan and the Lucent Technologies Inc. Deferred Compensation Plan for Non-Employee Directors. (ee) "Retainer Payments" shall mean any amounts payable to a Director for service as a Director. (ff) "Savings Plan" shall mean the Lucent Technologies Inc. Long Term Savings Plan for Management Employees. (gg) "Savings Plan Make-Up Credit" shall mean, for any Eligible Member and any Plan Year, an amount equal to the excess, if any, of the value of the contribution that would have been made by the Company for the applicable Plan Year on behalf of the Eligible Member under Section 4.4 of the Savings Plan or any similar provision under any similar plan of the Company, without regard to any limitation imposed by Sections 401(a)(17), 401(m)(2)(A) or 415 of the Code, over the contribution actually made to the Savings Plan pursuant to such Section 4.4, or to such other plan pursuant to such similar provision, for the applicable Plan Year. (hh) "Shares" shall mean the shares of common stock, $.01 par value, of the Company. (ii) "Short Term Plan" shall mean the Lucent Technologies Inc. Short Term Incentive Plan. -6- 7 LUCENT TECHNOLOGIES INC. DEFERRED COMPENSATION PLAN SECTION 2. DEFERRAL ELECTIONS. (a) DELIVERY AND EFFECTIVENESS OF DEFERRAL ELECTIONS. A Participant may elect to defer receipt of Incentive Awards, Retainer Payments or salary otherwise payable to the Participant in future Fiscal Years by delivering a Deferral Election to the Participant's employing Participating Company not later than June 30 preceding the Fiscal Year in which the Deferral Election is to become effective or such other time as the Administrator shall determine. A Deferral Election shall become irrevocable for a Fiscal Year at the end of the last day of the preceding Fiscal Year or, if later, on the date made. A deferral election under a Predecessor Plan that has not been terminated shall be deemed a Deferral Election for purposes of the Plan. During the period that a Deferral Election is effective, the Participant shall not be entitled to receive currently payments covered by such Deferral Election. The Company shall instead make credits to the Participant's Account in accordance with Section 3. (b) CONTENTS OF DEFERRAL ELECTIONS. Each Deferral Election shall specify the types of compensation which shall be subject to such Deferral Election and the effective date of the Deferral Election and shall contain the Participant's Payment Election. A Deferral Election may also contain the date on which the Deferral Election is to terminate. (c) MODIFICATION AND RENEWAL OF DEFERRAL ELECTIONS. A Deferral Election shall remain effective until the Participant terminates or modifies such election by written notice to the Company. Any such termination or modification shall become effective immediately following the end of the Fiscal Year in which such notice is given. A Participant who has terminated a Deferral Election may, so long as such Participant remains an Eligible Member or has an Account with a positive balance, thereafter file a new Deferral Election in accordance with Section 2(a). (d) DEFERRAL OF INCENTIVE AWARDS. A Deferral Election may relate to all or any portion of the Incentive Awards otherwise payable to a Participant. If the amount of the part of any Incentive Award (other than dividend equivalent payments) subject to a Deferral Election is less than $1,000 (based on a valuation at the time the award would otherwise be paid), that Incentive Award will be paid currently and no credit relating to such Incentive Award will be made under the Plan. (e) DEFERRAL OF SALARY. A Deferral Election may relate to all or part of a Participant's salary; provided, however, that a Participant may not elect to defer salary in any Fiscal Year unless the Participant has elected to defer all of his or her awards under the Short Term Plan and any other bonus payments for such Fiscal Year. (f) DEFERRAL OF RETAINER PAYMENTS. A Director's Deferral Election may relate to all or part of the Retainer Payments otherwise payable to the Director. -7- 8 LUCENT TECHNOLOGIES INC. DEFERRED COMPENSATION PLAN Notwithstanding Section 2(a), a newly-elected Director may deliver a Deferral Election to the Company within 30 days after his or her election, which Deferral Election shall be effective for all Retainer Payments after the date on which the Deferral Election is delivered to the Company. SECTION 3. PARTICIPANT ACCOUNTS. (a) DEFERRED CASH EQUIVALENT ACCOUNT. (i) There shall be credited to a Participant's Deferred Cash Equivalent Account the following: (A) portions of Incentive Awards otherwise payable in cash and for which a Deferral Election specifies crediting under the Plan; (B) that portion of a Director's Retainer Payment for which a Deferral Election specifies crediting to the Participant's Deferred Cash Equivalent Account; (C) amounts related to salary for which a Deferral Election specifies crediting under the Plan; (D) amounts previously deferred into cash equivalent accounts under the Predecessor Plans and credited under this Plan, and (E) Savings Plan Make-Up Credits. (ii) If the Savings Plan Make-up Credit for an Eligible Member for any Plan Year shall be greater than zero, the Deferred Cash Equivalent Account of such Eligible Member shall be credited with an amount equal to such Savings Plan Make-Up Credit at such time as the Administrator shall determine. (iii) Amounts credited to the Participant's Deferred Cash Equivalent Account shall bear interest as provided in Section 4 from the date the Incentive Award, Retainer Payment, salary or Savings Plan Make-Up Credits would otherwise have been paid to the Participant or paid or credited to the Savings Plan, as applicable. Interest shall be credited to Deferred Cash Equivalent Accounts at the end of each fiscal quarter of the Company. (b) DEFERRED SHARE EQUIVALENT ACCOUNT. (i) There shall be credited to a Participant's Deferred Share Equivalent Account the following: (A) portions of Incentive Awards otherwise payable in Shares and for which a Deferral Election specifies crediting under the Plan; -8- 9 LUCENT TECHNOLOGIES INC. DEFERRED COMPENSATION PLAN (B) that portion of a Director's Retainer Payment for which a Deferral Election specifies crediting to the Participant's Deferred Share Equivalent Account; and (C) amounts previously deferred into share equivalent accounts under the Predecessor Plans and credited under this Plan. (ii) Cash amounts credited to a Participant's Deferred Share Equivalent Account shall be converted to the number of Share equivalents determined by dividing such cash amount by the Conversion Price. In addition, the Participant's Deferred Share Equivalent Account shall be credited on each dividend payment date for Shares, with an amount equal to the number of Shares that could be purchased at the Conversion Price with dividends that would have been payable on the number of Shares equal to the number of Share equivalents in the Participant's Deferred Share Equivalent Account on the record date for such dividend. "Conversion Price" means the average of the daily high and low sale prices of Shares on the NYSE for the period of five trading days ending on the date such amount otherwise would have been paid to the Participant or, in the case of a dividend equivalent, on the dividend payment date, or the period of five trading days immediately preceding such applicable date if the NYSE is closed on such applicable date. (iii) In the event of any change in outstanding Shares by reason of any stock dividend or stock split, recapitalization, merger, consolidation, combination or exchange of shares or other similar corporate change, the Board shall make such adjustments, if any, that it deems appropriate in the number of Share equivalents then credited to Participants' Deferred Share Equivalent Accounts. Any and all such adjustments shall be within the sole discretion of the Board and its decision in regard to such adjustments shall be conclusive, final and binding upon all parties concerned. (c) LIFE INSURANCE PLAN. A Participant may direct the Committee to apply all or a portion of the Participant's Account toward the satisfaction of the Participant's obligations under Section 3.02 of the Lucent Technologies Inc. Voluntary Life Insurance Plan. Any such direction (i) must be made at least twelve (12) months before the date on which the portion of the Participant's Account so directed would otherwise be payable under the terms of the governing Payment Election or Redeferral Election, (ii) must be made first from any available interest in the Deferred Cash Equivalent Account, and only then from any available interest in the Deferred Share Equivalent Account, (iii) shall be irrevocable upon delivery to the Administrator; and (iv) shall reduce the amount credited to a Participant's Account and the Company's obligation under this Plan to the extent of such satisfaction. The Participant's interest in the Deferred Share Equivalent Account shall be applied in accordance with this Section 3(c) on the basis of the Conversion Price determined on the date of such application. -9- 10 LUCENT TECHNOLOGIES INC. DEFERRED COMPENSATION PLAN SECTION 4. DEFERRED CASH EQUIVALENT ACCOUNT INTEREST RATE. (a) INTEREST RATE GENERALLY. The interest rate to be accrued on a Participant's Deferred Cash Equivalent Account shall be such rate as is determined, from time to time, by the Board. Such rate may be applied by the Board to a Participant's existing balance in a Deferred Cash Equivalent Account or to amounts subsequently credited to such Participant's Account. The determination by the Board pursuant to this Section 4 shall be within its sole discretion and its decision shall be conclusive, final and binding upon all parties concerned. (b) INTEREST RATE FOLLOWING TERMINATION WITHOUT THE COMPANY'S CONSENT. Notwithstanding Section 4(a), with respect to amounts credited to the Deferred Cash Equivalent Accounts of Officers and Other Participants who terminate employment (other than by death or disability) under circumstances that the Administrator determines are not in the interests of the Company, the effective annual rate of interest following the date of such termination of employment shall be the one-year U.S. Treasury note rate. SECTION 5. PAYMENTS FOLLOWING DEATH. (a) FORM OF PAYMENT. A Participant may deliver a Beneficiary Election to the Administrator electing that, in the event the Participant should die before full payment of all amounts credited to the Participant's Account, the balance of the Account shall be distributed in one payment or in some other number of approximately equal annual installments (not exceeding five (5)) to the person(s) designated in the Beneficiary Election. In the event that a Participant fails to designate such a beneficiary, or the beneficiary(ies) predecease(s) him, payment following the death of the Participant shall be made to the Participant's surviving spouse or, if there is no surviving spouse, to the Participant's estate. The first installment (or the single payment if the Participant has so elected) shall be paid on the first day of the calendar quarter next following the month of death; provided, however, that the Administrator may, in his or her sole discretion, direct that the first installment (or the single payment) shall be paid on the first day of the Fiscal Year next following the date of death. (b) CHANGE OF BENEFICIARY DESIGNATION. The elections referred to in Section 5(a), including the designation of a beneficiary or beneficiaries, may be changed by a Participant at any time by delivering a new Beneficiary Election to the Administrator. SECTION 6. PAYMENTS. -10- 11 LUCENT TECHNOLOGIES INC. DEFERRED COMPENSATION PLAN (a) COMMENCEMENT OF BENEFITS. (i) At the time a Participant makes a Deferral Election, the Participant shall also make an election under Section 6(a)(ii) with respect to the distribution of the amounts credited to such Participant's Account pursuant to such Deferral Election (each such election, a "Payment Election"). Any similar election related to the distribution of deferred amounts under the Predecessor Plans which has not been modified or terminated shall be deemed a Payment Election under this Plan. A Participant may, at any time earlier than twelve (12) months prior to the date on which a distribution of a portion (or all) of a Participant's Account would be payable under the terms of such Payment Election, submit a written election to the Company requesting that the initial distribution date be further deferred (hereinafter a "Redeferral Election"). A Participant may make a single Redeferral Election with respect to each Payment Election, and the Redeferral Election shall supersede the Payment Election and be irrevocable upon delivery to the Administrator. (ii) Each Payment Election shall specify whether payments related to Account balances other than Savings Plan Make-Up Credits shall commence (i) on the first day of the calendar quarter next following the month in which the Participant attains the age specified in such election, which age shall not be earlier than 55 or later than 70, (ii) on the first day of the calendar quarter next following the month in which the Participant retires from a Participating Company or otherwise terminates employment (including termination of service as a member of the Board) with any Participating Company (except for a transfer to another Participating Company); provided, however, that the Administrator may, in his or her sole discretion, direct that the Participant's benefits shall commence on the first day of the Fiscal Year next following the date of retirement or other termination of employment, or (iii) on the first day (the "First Day") of the calendar year next following the calendar year in which the Participant retires from a Participating Company or otherwise terminates employment (including termination of service as a member of the Board) with any Participating Company (except for a transfer to another Participating Company); provided, however, that the Administrator may, in his or her sole discretion, direct that the Participant's benefits shall commence on the first day of the Fiscal Year next following the First Day. (iii) Notwithstanding the foregoing, amounts credited to a Participant's Account as Savings Plan Make-Up Credits or earnings thereon shall be distributed in one payment following the Participant's termination of employment. (b) FORM OF DISTRIBUTIONS. Amounts credited to a Participant's Deferred Cash Equivalent Account shall be distributed in cash. Amounts credited to a Participant's Deferred Share Equivalent Account as Share equivalents shall be distributed in the form of an equal number of Shares, unless the Company shall determine that payment of an equivalent cash amount is necessary or convenient for its purposes. (c) PAYMENT PERIOD. (i) A Participant may elect in a Payment Election to receive the amounts credited to the Participant's Account other than Savings Plan -11- 12 LUCENT TECHNOLOGIES INC. DEFERRED COMPENSATION PLAN Make-Up Credits in one payment or in some other number of approximately equal annual installments (not exceeding ten (10) or such longer period as approved by the Committee, in individual cases), provided, however, that the number of annual installments may not extend beyond the life expectancy of the Participant, determined as of the date the first installment is paid. (ii) Installments subsequent to the first installment to the Participant, or to a beneficiary or to the Participant's estate, shall be paid on the first day of the applicable calendar quarter in each succeeding calendar year until the entire amount credited to the Participant's Account shall have been paid. Prior to distribution, Accounts shall continue to receive credits under Section 3(a)(ii) and Section 3(b)(ii). (d) ACCELERATION OF PAYMENT FOR SEVERE FINANCIAL HARDSHIP. In the event a Participant, or the Participant's beneficiary after the Participant's death, incurs a severe financial hardship, the Administrator may, in his or her sole discretion, accelerate or otherwise revise the payment schedule for the Participant's Account to the extent reasonably deemed necessary to eliminate or alleviate the severe financial hardship. For the purpose of this Section 6(d) a severe financial hardship must have been caused by an accident, illness or other event beyond the control of the Participant or, if applicable, the beneficiary. (e) IMMEDIATE DISTRIBUTION OF DEFERRED CASH EQUIVALENT ACCOUNT BALANCE. A Participant may at any time elect to receive a distribution of all or any portion of the balance in his or her Deferred Cash Equivalent Account. Amounts credited to Deferred Share Equivalent Accounts shall not be available for distribution under this Section 6(e). Requests for distributions shall be submitted in writing (on a form prescribed by the Administrator for such purpose) to the Administrator. Distributions from the Participant's Deferred Cash Equivalent Account pursuant to this Section 6(e) will at all times be subject to (i) reduction for applicable tax withholdings pursuant to Section 9(h), and (ii) a reduction in the amount paid equal to six percent (6%) of the amount requested. Distributions pursuant to this Section 6(e) shall be payable in a single lump sum, in cash, within thirty (30) days of submission of the completed form. (f) IMMEDIATE DISTRIBUTION OF ACCOUNT BALANCE FOLLOWING CERTAIN TERMINATIONS OF EMPLOYMENT. Notwithstanding any contrary election pursuant to this Section 6, the entire amount then credited to a Participant's Account shall be paid immediately in a single payment (A) if the Participant is discharged for cause by his or her Participating Company, (B) if the Administrator determines that the Participant engaged in misconduct in connection with the Participant's employment with the Participating Company, (C) if the Participant terminates employment under circumstances that the Administrator determines are not in the interest of the Company, or (D) if the Participant without the consent of the board of directors of his or her Participating Company, during either the Participant's period of employment with a Participating Company or the nine (9) month period following termination for any -12- 13 LUCENT TECHNOLOGIES INC. DEFERRED COMPENSATION PLAN reason of the Participant's employment with a Participating Company, on behalf of any competitor of the Company (x) renders any services relating to: (1) strategic planning, research and development, manufacturing, marketing, or selling with respect to any product, process, material or service which resembles, competes with, or is the same as a product, process, material or service of the Company about which the Participant gained any proprietary or confidential information or on which the Participant worked during the three (3) years prior to termination of employment, or (2) any actual or potential customer of Lucent about whom the Participant gained any proprietary or confidential knowledge or with whom the Participant worked during the three (3) years prior to termination of employment, or (y) solicits or offers, or induces or encourages others to solicit or offer, employment to any employee of the Company. SECTION 7 . CHANGE IN CONTROL. (a) Notwithstanding any Payment Election, a Participant may, prior to the earlier of a Change in Control or September 30, 1998, deliver a Change in Control Election to the Administrator, electing to have the aggregate amount credited to the Participant's Account both before and after the filing of such Change in Control Election paid in one lump-sum payment as soon as practicable following a Change in Control, but in no event later than 90 days after such Change in Control. Notwithstanding any Payment Election, any person who becomes a Participant after September 30, 1998, may file a written notice with the Administrator within 90 days of becoming a Participant, electing to have the aggregate amount credited to the Participant's Account paid in one lump-sum payment as soon as practicable following a Change in Control, but in no event later than 90 days after such Change in Control. (b) A Participant may, prior to the earlier of a Change in Control or the beginning of the Fiscal Year in which the election is to take effect, deliver a Change in Control Election to the Administrator, electing to have the aggregate amount credited to the Participant's Account, in all Fiscal Years commencing with the first Fiscal Year beginning after the date the Change in Control Election is delivered to the Administrator, paid in one lump-sum payment as soon as practicable following a Change in Control, but in no event later than 90 days after such Change in Control. Amounts credited to the Participant's Account prior to the effective date of such Change in Control Election shall not be affected by such Change in Control Election and shall be distributed following a Change in Control in accordance with any prior Change in Control Election or, if the Participant has not made a Change in Control Election, in accordance with the Plan. (c) A Participant may, prior to the earlier of a Change in Control or the beginning of any Fiscal Year, deliver a written notice to the Administrator revoking any Change in Control Election with respect to amounts credited to the Participant's Account in Fiscal Years commencing after the written notice is delivered. Amounts credited to the Participant's Account prior to the effective date of the written notice -13- 14 LUCENT TECHNOLOGIES INC. DEFERRED COMPENSATION PLAN delivered pursuant to this Section 7(c) shall not be affected by such written notice and shall be distributed following a Change in Control in accordance with any existing Change in Control Election or, if the Participant has not made a Change in Control Election, in accordance with the Plan. SECTION 8. ADMINISTRATION. (a) ADMINISTRATION. The Administrator shall have the authority to administer and to interpret the Plan. (b) RESPONSIBILITIES AND POWERS OF THE ADMINISTRATOR. In administering the Plan, the Administrator shall have the following responsibilities: (1) To administer the Plan in accordance with the terms hereof, and to exercise all powers specifically conferred upon the Administrator hereby or necessary to carry out the provisions hereof; (2) To construe this Plan, which construction shall be conclusive, correct any defects, supply omissions, and reconcile inconsistencies to the extent necessary to effectuate the Plan; (3) To determine in his or her sole discretion the amount of benefits payable to Participants under the Plan. Any interpretation or determination made by the Plan Administrator pursuant to its discretionary authority shall be final and binding on the Company, any Participant, and any other affected party; and (4) To keep all records relating to Participants and such other records as are necessary for proper operation of the Plan. (c) ACTIONS OF THE ADMINISTRATOR. In carrying out the responsibilities set forth in Section 8(b): (1) The Administrator may adopt rules and regulations necessary for the administration of the Plan which are consistent with the provisions hereof. (2) All acts and decisions of the Administrator shall apply uniformly to all Participants in like circumstances. Written records shall be kept of all acts and decisions. -14- 15 LUCENT TECHNOLOGIES INC. DEFERRED COMPENSATION PLAN (3) The Administrator may delegate, in writing, any of his or her responsibilities and powers with respect to the Plan to another individual or individuals. (d) The Administrator shall have the right to hire, at the expense of the Company, such professional assistants and consultants as he or she, in his or her sole discretion, deems necessary or advisable, including but not limited to accountants, actuaries, consultants, counsel and such clerical assistance as is necessary for proper discharge of his or her duties hereunder. SECTION 9. MISCELLANEOUS. (a) BENEFITS PAYABLE BY THE COMPANY. All benefits payable under this Plan constitute an unfunded obligation of the Company. Payments shall be made, as due, from the general funds of the Company or, in the case of Share payments, from newly issued Shares, Shares purchased in the market, treasury Shares or otherwise. The Company may, at its option, maintain one or more bookkeeping reserve accounts to reflect its obligations under the Plan and may make such investments as it may deem desirable to assist it in meeting its obligations. Any such investments shall be assets of the Company subject to the claims of its general creditors. No person eligible for a benefit under this Plan shall have any right, title to, or interest in any such investments. Nothing contained in this Section 9(a) shall limit the ability of the Company to pay benefits through one or more grantor trusts as provided in Section 9(b). Participants are general, unsecured creditors of the Company. This Plan constitutes a mere promise to pay benefits in the future. (b) GRANTOR TRUSTS. (i) The Company shall create a grantor trust or utilize an existing grantor trust to assist it in accumulating the shares of Common Stock and cash needed to fulfill its obligations under this Plan to Directors (including former Directors), to which it shall be obligated to make contributions, no later than the date upon which any Potential Change in Control occurs, of a number of Shares and an amount of cash such that the assets of such trust are sufficient to discharge all of the Company's obligations under this Plan to Directors (including former Directors) accrued as of the date of the Potential Change in Control. While a Potential Change in Control is pending and after any Change in Control, the Company shall be obligated to make additional contributions at least once each fiscal quarter to the extent necessary to ensure that the assets of such trust remain sufficient to discharge all such obligations accrued as of the last day of such fiscal quarter. If a Potential Change in Control occurs but ceases to be pending without the occurrence of a Change in Control or a subsequent Potential Change in Control then the Company shall be permitted (but not required) to cause the trustee of such trust to distribute any or all of the assets of the Trust to the Company. -15- 16 LUCENT TECHNOLOGIES INC. DEFERRED COMPENSATION PLAN (ii) The Company may create a grantor trust or utilize an existing grantor trust to assist it in accumulating the Shares and cash needed to fulfill its obligations under this Plan to Participants who are not Directors (or former Directors). The Board shall determine whether it is necessary or desirable to create such a trust and to deposit Shares and cash in such trust to enable the Company to meets its obligations under this Plan and the extent of any such deposit to such trust. (iii) Participants shall have no beneficial or other interest in any trust referred to in this Section 9(b) and the assets thereof, and their rights under the Plan shall be as general creditors of the Company, unaffected by the existence of any trust, except that payments to Participants from any such trust shall, to the extent thereof, be treated as satisfying the Company's obligations under this Plan. (c) OBLIGATION FOR PAYMENT OF BENEFITS. The obligation to make a distribution of amounts credited to a Participant's Account shall be borne by the Participating Company which otherwise would have paid such amounts currently. However, the obligation to make a distribution with respect to Accounts which are related to amounts credited under a Predecessor Plan, and with respect to which no Participating Company would otherwise have paid the related award or deferred amount currently, shall be borne by the Participating Company to which the Participant was assigned on October 1, 1996. (d) AMENDMENT OR TERMINATION. (i) The Board may amend the Plan or terminate the Plan at any time, but such amendment or termination shall not adversely affect the rights of any Participant, without his or her consent, to any benefit under the Plan to which such Participant may have previously become entitled prior to the effective date of such amendment or termination. The Administrator with the concurrence of the General Counsel of the Company or his delegate shall be authorized to make minor or administrative changes to the Plan, as well as amendments required by applicable federal or state law (or authorized or made desirable by such statutes). Any amendment to the Plan by the Board shall be made in writing, with or without a meeting, or shall be made in writing by the Administrator, to the extent of the aforementioned authorization. (ii) If the Plan is terminated, a valuation shall be made of each Participant's Account balance as of the Plan termination date. The amount of such Account balance shall be payable to the Participant at the time it would have been payable under Section 5 and Section 6 had the Plan not been terminated; provided, however, that the Committee may elect instead to immediately distribute all Participants' Account balances in lump sums upon termination of the Plan. (e) ENTIRE AGREEMENT. This Plan constitutes the entire agreement of the Company with respect to the benefits provided herein and cannot be modified orally or in any writing other than as set forth in Section 9(d). -16- 17 LUCENT TECHNOLOGIES INC. DEFERRED COMPENSATION PLAN (f) PAYMENTS TO INCOMPETENTS. If a Participant entitled to receive any benefits hereunder is adjudged to be legally incapable of giving valid receipt and discharge for such benefits, they will be paid to the duly appointed guardian of such Participant or to such other legally appointed person as the Administrator may designate. Such payment shall, to the extent made, be deemed a complete discharge of any liability for such payment under the Plan. (g) BENEFITS NOT TRANSFERABLE. The right of any person to any benefit or payment under the Plan shall not be subject to voluntary or involuntary transfer, alienation or assignment and, to the fullest extent permitted by law, shall not be subject to attachment, execution, garnishment, sequestration or other legal or equitable process. In the event a person who is receiving or is entitled to receive benefits under the Plan attempts to assign, transfer or dispose of such right, or if an attempt is made to subject said right to such process, such assignment, transfer, or disposition shall be null and void. (h) TAX WITHHOLDING. The Company is authorized to withhold from any Account or payment due under the Plan the amount of applicable withholding taxes in respect of such payment or Account and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such federal, -17- 18 LUCENT TECHNOLOGIES INC. DEFERRED COMPENSATION PLAN state or other governmental entity tax obligation. (i) GOVERNING LAW. The provisions of the Plan shall be construed in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the Company has caused this Plan, as amended, to be executed on this __ day of _________, 1998. For Lucent Technologies Inc. By: __________________________ Curtis R. Artis Senior Vice President, Human Resources -18- EX-10.III.A.5 4 STOCK RETAINER PLAN 1 Exhibit 10(iii)(A)5 LUCENT TECHNOLOGIES INC. AMENDED AND RESTATED STOCK RETAINER PLAN FOR NON-EMPLOYEE DIRECTORS (ADOPTED APRIL 3, 1996; AMENDED JULY 16, 1997 AND FEBRUARY 18, 1998) 1. NAME OF PLAN. This plan shall be known as the "Lucent Technologies Inc. Stock Retainer Plan for Non-Employee Directors" and is hereinafter referred to as the "Plan." 2. PURPOSE OF PLAN. The purpose of the Plan is to enable Lucent Technologies Inc., a Delaware corporation (the "Company"), to attract and retain qualified persons to serve as directors, to enhance the equity interest of directors in the Company, and to solidify the common interests of its directors and stockholders in enhancing the value of the Company's common stock, par value $0.01 per share (the "Common Stock"). The Plan seeks to encourage the highest level of director performance by providing such directors with a proprietary interest in the Company's performance and progress by paying a portion of their annual retainer in the form of Common Stock. 3. EFFECTIVE DATE AND TERM. The Plan shall be effective as of the date on which the Company's Registration Statement on Form S-1 (No. 333-00703) filed under the Securities Act of 1933, as amended (the "Securities Act") with respect to the Common Stock is declared effective by the Securities and Exchange Commission (the "Effective Date"). 4. ELIGIBLE PARTICIPANTS. Each member of the Board of Directors of the Company (the "Board") from time to time who is not a full-time employee of the Company or any of its subsidiaries or of any controlling affiliate or its subsidiaries (including AT&T Corp., a New York Corporation, and its subsidiaries during such time as they are affiliated with the Company) shall be a participant ("Participant") in the Plan. 5. DELIVERY OF SHARES. (a) Commencing on the Effective Date, payments to each Participant for service as a Director of the Company (all such payments, the "Retainer"), shall be made in cash and/or shares of Common Stock (such shares, the "Stock Retainer") in such proportions as shall be directed by the Board or, if permitted by the Board, in such proportions as shall be elected by the Participant; provided that at least 50% of all retainers paid to a participant in any calendar year shall be paid in Common Stock. The Stock Retainer shall consist of that number of shares of common stock having a Fair Market Value (as defined below) as of the date of payment, equal to the portion of the Retainer to be paid in Common Stock. If the number of shares that would otherwise be delivered to any Participant under this Section 5(a) includes a fractional share, such number shall be rounded down to the nearest whole number of shares and the Fair Market Value of such fractional share shall instead be paid in cash. A Participant may elect to have all or a portion of the shares otherwise deliverable under this Section 5(a) credited to the deferred compensation account of such Participant under the Company's Deferred Compensation Plan to be held in the Company Shares portion of such account. The payment of all Stock Retainers shall be made subject to any applicable restrictions set forth in Section 6 hereof. 2 (b) The "Fair Market Value" of a share of Common Stock as of any date of determination shall mean the average of the closing prices of a share of Common Stock over the five consecutive trading days immediately preceding the date of the valuation. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other system then in use, or, if on any such date the Common Stock is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Stock. 6. SHARE CERTIFICATES; VOTING AND OTHER RIGHTS; RESTRICTIONS. (a) All Stock Retainers (other than Stock Retainers deferred pursuant to Section 5 (a)) shall be paid by delivering to the Participant share certificates issued in the name of the Participant, and upon such delivery the Participant shall be entitled to all rights of a stockholder with respect to Common Stock for all such shares issued in his or her name, including the right to vote the shares, and the participant shall receive all dividends and other distributions paid or made with respect thereto. (b) Notwithstanding any other provision of the Plan, the Company shall not be required to issue or deliver any certificate or certificates for shares of Common Stock under the Plan prior to fulfillment of all of the following conditions: (i) Any registration or other qualification of such shares of Common Stock under any state or federal law or regulation, or the maintaining in effect of any such registration or other qualification which the Company shall, in its absolute discretion upon the advice of Counsel, deem necessary or advisable; and (ii) Obtaining any other consent, approval, or permit from any state or federal governmental agency which the Company shall, in its absolute discretion after receiving the advice of counsel, determine to be necessary or advisable. (c) Nothing contained in the Plan shall prevent the Company from adopting other or additional compensation arrangements for the Participants. 7. SHARES AVAILABLE (a) Subject to Section 7 (b) below, the maximum number of shares of Common Stock which may be delivered as Stock Retainers pursuant to the Plan is 275,000. Shares of Common Stock issuable under the Plan shall be taken from authorized but unissued or treasury shares of the Company as shall from time to time be necessary for issuance pursuant to the Plan. 2 3 (b) In the event of any change in the Common Stock by reason of any stock dividend, stock split, combination of shares, exchange of shares, warrants or rights offering to purchase Common Stock at a price below its fair market value, reclassification, recapitalization, spin-off, merger, consolidation or other change in capitalization, appropriate adjustment shall be made in the number and kind of shares or other securities subject to the Plan. 8. AMENDMENT. (a) The Board may from time to time make such amendments to the Plan as it may deem proper and in the best interest of the Company without further approval of the Company's stockholders; provided, that to the extent required to qualify transactions under the Plan for exemption under Rule 16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") no amendment to the Plan shall be adopted without the approval of the Company's stockholders; and, provided further, that no amendment to the Plan shall be made more than once in any six-month period other than to comply with changes in the Internal Revenue Code of 1986, as amended, the Exchange Act, the Employee Retirement Income Security Act of 1974, as amended, or the regulations thereunder. (b) The Board may terminate the Plan at any time, effective on at least six months and one day advance notice. (c) This Plan shall terminate on the earlier of April 1, 2006 or the date on which all shares provided for under Section 7 have been issued and delivered to Participants. 9. MISCELLANEOUS. (a) Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any director for reelection by the Company's stockholders or to limit the rights of the stockholders to remove any director. (b) The Company shall have the right to require, prior to the issuance or delivery of any shares of Common Stock pursuant to the Plan, payment by a Participant to the Company of any taxes required by law to be withheld with respect to the issuance or delivery of such shares. 10. GOVERNING LAW. The Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the undersigned has executed this Amended and Restated Lucent Technologies Inc. Stock Retainer Plan for Non-Employee Directors effective as of February 18, 1998. By: _______________________________ Curtis R. Artis Senior Vice President, Human Resources 3 EX-10.III.A.13 5 DESCRIPTION OF SUPPLEMENTAL PENSION PLAN 1 Exhibit 10 (iii)(A) 13 Description of the Lucent Technologies Inc. Supplemental Pension Plan The Company has adopted, effective for employees retiring on or after January 1, 1998, the Lucent Technologies Inc. Supplemental Pension Plan (the "Plan"). The Plan will replace the Lucent Technologies Inc. Non-Qualified Pension Plan, the Lucent Technologies Inc. Excess Benefit and Compensation Plan and the Lucent Technologies Inc. Officer Long-Term Disability and Survivor Protection Plan. The Plan is intended to provide benefits which may not be provided under the Lucent Technologies Inc. Management Pension Plan (the "MPP") because of limitations in the Internal Revenue Code of 1986. The Plan also provides for a minimum pension for executive officers and supplemental pension benefits for certain management employees. The Plan is a non-qualified, non-contributory plan and benefits paid under the Plan are paid from the Company's general assets. Annual pension benefits are computed on an adjusted career average pay basis. For retirements on or after January 1 , 1999, a participant's adjusted career average pay is equal to 1.4% of the sum of the individual's (a) average annual pay for the five years ending December 31, 1998 (excluding the annual bonus award paid in December 1997), times the number of years of service prior to January 1, 1999, plus (b) pay subsequent to December 31, 1998 (including the annual bonus paid in December 1997), plus (c) annual bonus award paid in December 1997. Under the Plan, pay consists of base salary and annual bonus awards, to the extent that such amounts are not considered for purposes of determining benefits under the MPP. The normal retirement age under the Plan is 65; however, retirement before age 65 can be elected. Employees who are at least age 50 with at least 15 years of service are eligible to retire with reduced benefits. If an employee's age (must be 50 or older) plus years of service, when added together, is equal to or greater than 75, the employee may retire with unreduced pension benefits. A reduction equal to 3% is made for each year age plus service is less than 75. The Plan also provides executive officers with minimum pension benefits. Eligible retired executive officers and surviving spouses may receive an annual minimum pension equal to 15% of the sum of final base salary plus annual bonus awards, subject to reduction for pensions paid under other Company plans. The Plan also provides a supplemental pension benefit to certain management employees who were hired at age 35 or over at specified levels and who terminate with at least five years service at such level. The plan provides additional pension credits equal to the difference between age 35 and the maximum possible years of service attainable at age 65, but not to exceed actual net credited service, at one-half the rate in the Management Pension Plan. EX-10.III.A.14 6 1999 STOCK COMPENSATION PLAN 1 Exhibit 10(iii)(A)14 LUCENT TECHNOLOGIES INC. 1999 STOCK COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS Effective February 19, 1999 SECTION 1. PURPOSE. The purpose of the Lucent Technologies Inc. 1999 Stock Compensation Plan for Non-Employee Directors (the "Plan") is to enable Lucent Technologies Inc., a Delaware corporation (the "Company"), to attract and retain qualified persons to serve as directors, to enhance the equity interest of directors in the Company, and to solidify the common interests of its directors and shareholders in enhancing the value of the Company's common stock. The Plan seeks to encourage the highest level of director performance by providing directors with a proprietary interest in the Company's performance and progress. SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below: (a) "Affiliate" shall mean (i) any Person that directly, or through one or more intermediaries, controls, or is controlled by, or is under common control with, the Company or (ii) any entity in which the Company has a significant equity interest, as determined by the Committee. (b) "Annual Meeting" shall mean the Company's annual, general meeting of shareholders. (c) "Annual Term" shall mean the twelve calendar-month period beginning on the March 1 following each Annual Meeting. (d) "Agreement" shall mean the written agreement evidencing an Option granted under the Plan. (e) "Board" shall mean the Board of Directors of the Company. (f) "Business Day" means any day on which the New York Stock Exchange is open for transaction of business. (g) "Change in Control" shall mean the happening of any of the following events: (i) An acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (an "Entity") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); excluding, however, the following: (1) any acquisition directly from the Company, other 2 -2- than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Company, (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (4) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 2(g); or (ii) A change in the composition of the Board during any two year period such that the individuals who, as of the beginning of such two year period, constitute the Board (such Board shall be hereinafter referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that for purposes of this definition, any individual who becomes a member of the Board subsequent to the beginning of the two year period, whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; and provided further, however, that any such individual whose initial assumption of office occurs as a result of or in connection with either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of an Entity other than the Board shall not be so considered as a member of the Incumbent Board; or (iii) The approval by the shareholders of the Company of a merger, reorganization or consolidation or sale or other disposition of all or substantially all of the assets of the Company (each, a "Corporate Transaction") or, if consummation of such Corporate Transaction is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding however, such a Corporate Transaction pursuant to which (A) all or substantially all of the individuals and entities who are the beneficial owners of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of the outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation or other Person which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries (a "Parent Company")) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, (B) no Entity (other than the Company, any employee benefit plan (or related trust) of the Company, such corporation resulting from such Corporate Transaction or, if reference was made to equity ownership of any Parent Company for purposes of determining whether 3 -3- clause (A) above is satisfied in connection with the applicable Corporate Transaction, such Parent Company) will beneficially own, directly or indirectly, 20% or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors unless such ownership resulted solely from ownership of securities of the Company prior to the Corporate Transaction, and (C) individuals who were members of the Incumbent Board will immediately after the consummation of the Corporate Transaction constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction (or, if reference was made to equity ownership of any Parent Company for purposes of determining whether clause (A) above is satisfied in connection with the applicable Corporate Transaction, of the Parent Company); or (iv) The approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (h) "Committee" shall mean the Corporate Governance and Compensation Committee of the Board (or any successor committee consisting of two or more members of the Board). (i) "Company" shall mean Lucent Technologies Inc., a Delaware corporation. (j) "Deferral Plan" shall mean the Company's Deferred Compensation Plan, as amended, and any successor or replacement plan then in effect with respect to Participants. (k) "Exercise Date" shall have the meaning prescribed by Section 6(f). (l) "Fair Market Value" shall mean, with respect to Shares, the average of the highest and lowest reported sales prices, regular way, of Shares in transactions reported on the New York Stock Exchange on the date of determination of Fair Market Value, or if no sales of Shares are reported on the New York Stock Exchange for that date, the comparable average sales price for the last previous day for which sales were reported on the New York Stock Exchange. (m) "Grant Date" means the date on which an Option or Stock Retainer is granted under the Plan. (n) "Option" shall mean a non-statutory stock option granted under Section 6 of the Plan. (o) "Participant" shall mean each member of the Board from time to time who is not a full-time employee of the Company or any of its Affiliates. 4 -4- (p) "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, limited liability company, other entity or government or political subdivision thereof. (q) "Retainer" shall mean the retainer paid to each Participant as compensation for services as a member of the Board or any committee of the Board with respect to each Annual Term, but shall not include any reimbursement for expenses. (r) "Shares" shall mean the shares of common stock, $.01 par value, of the Company. (s) "Stock Retainer" shall mean that portion of a Participant's Retainer which, pursuant to Section 5 of this Plan, such Participant has elected, or is required, to receive in Shares. SECTION 3. ADMINISTRATION. The Plan shall be administered by the Committee. The Committee shall have full power and authority, subject to such resolutions not inconsistent with the provisions of the Plan as may from time to time be adopted by the Board, to (i) interpret and administer the Plan and any instrument or agreement entered into under the Plan; (ii) establish such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (iii) make any other determination and take any other action that the Committee deems necessary or desirable for administration of the Plan. Decisions of the Committee shall be final, conclusive and binding upon all Persons, including the Company, any Participants or any shareholder. SECTION 4. SHARES SUBJECT TO THE PLAN. (a) Subject to adjustment as provided in Section 4(b), the total number of Shares available for Options and Stock Retainers granted under the Plan on and after February 19, 1999 and on or prior to February 1, 2004 shall be five hundred thousand (500,000) Shares; provided, that if any Shares are subject to an Option that is forfeited, expires, or otherwise is terminated without issuance of Shares, the Shares subject to such Option shall again be available for Options and Stock Retainers under the Plan. (b) In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, reverse stock split, spin-off or similar transaction or other change in corporate structure affecting the Shares, such adjustments and other substitutions shall be made to the Plan and to Options as the Committee in its sole discretion deems equitable or appropriate, including without limitation such adjustments in the aggregate number, class and kind of Shares which may be delivered under the Plan, and in the number, class, kind and option or exercise price of Shares subject to outstanding Options as the Committee may determine to be appropriate in its sole discretion to prevent dilution or enlargement of rights; provided that the number of Shares or other securities subject to any Option shall always be a whole number. 5 -5- SECTION 5. STOCK RETAINER. (a) Commencing with the Annual Term beginning March 1, 1999, each Participant will receive fifty percent (50%) of his or her Retainer for each Annual Term in the form of a Stock Retainer and may elect to receive all or any portion of the remaining fifty percent (50%) of such Retainer in the form of either a Stock Retainer or in cash; provided, that, each Participant may elect to receive in lieu of any or all of any amount to be paid as a Stock Retainer a payment in the form of an Option for the number of Shares determined pursuant to Section 6(b). (b) If any Participant fails to notify the Secretary of the Company in writing by December 31 of the preceding Annual Term of the desired form of payment of the Retainer for the next Annual Term, then such Participant shall be deemed to have elected a Stock Retainer for fifty percent (50%) of the value of such Retainer, with the remaining 50% in cash. Any such election shall be filed on a form prescribed by the Company for this purpose and such election (or failure to elect) shall be irrevocable as of the last date by which such election was due to be filed with the Company. (c) Any Shares constituting a Stock Retainer shall be payable automatically on March 1 of each Annual Term (or, if March 1 is not a Business Day, on the next succeeding Business Day), commencing March 1, 1999. Payments for the cash portion, if any, of the Annual Retainer shall be made on the same day. A Participant's Stock Retainer shall consist of the largest number of whole Shares having a Fair Market Value as of the date of payment, equal to the portion of the Retainer to be paid in Shares. The Fair Market Value of any fractional share shall be paid in cash. A Participant may elect to have all or a portion of the Shares or cash otherwise deliverable under this Section 5 credited to the deferred compensation account of such Participant under the Deferral Plan to be held in, respectively, the Company Shares and cash portions of such account. (d) This Section 5 shall apply to any person who becomes a Participant other than at the beginning of an Annual Term (or the immediately preceding Annual Meeting) with respect to the Retainer determined by the Committee to be payable for such portion of such Annual Term which follows his or her appointment to the Board. Such person shall make the election prescribed by Section 5(a) no later than the 30th day following the effective date of his or her appointment to the Board. The payment date for any cash portion of the Retainer and the Grant Date for any Option or Stock Retainer shall be the first Business Day which occurs at least fifteen (15) calendar days after receipt by the Company of such election. SECTION 6. OPTIONS. (a) Commencing with the Annual Term beginning March 1, 1999, there shall be granted automatically to each Participant, on March 1 of each Annual Term (or, if 6 -6- March 1 is not a Business Day, on the next succeeding Business Day) an Option to purchase two thousand five hundred (2,500) Shares on the terms and conditions described in this Plan. There shall be granted automatically to each Person who becomes a Participant subsequent to such date and during such Annual Term an Option for 2,500 Shares (or such lesser number determined by the Committee) on the terms and conditions described in this Plan on the Grant Date prescribed in Section 5(d). (b) Commencing with the Annual Term beginning March 1, 1999, there shall be automatically granted on March 1 of each Annual Term (or, if March 1 is not a Business Day, on the next succeeding Business Day) to each Participant who has elected, pursuant to Section 5, payment of all or any portion of the Retainer in the form of an Option, an Option, on the terms and conditions described in this Plan, to purchase the largest number of whole Shares obtained by applying the following formula: Dollar Amount of Retainer to be paid as an Option X 3 = Number of Shares - -------------------------------------------------------- Fair Market Value of a Share on March 1* *Or, if March 1 is not a Business Day, on the next succeeding Business Day. The value of any fractional share shall be paid in cash. (c) Any Option granted under the Plan shall be evidenced by an Agreement in such form as the Committee may from time to time approve. Options shall be subject to the terms and conditions set forth in this Plan and to such additional terms and conditions, not inconsistent with the provisions of this Plan, as the Committee shall deem desirable. (d) The exercise price per Share under an Option shall be the Fair Market Value of a Share on the Grant Date, subject to adjustment as prescribed in Section 4(b). (e) The term of each Option shall be ten years from the Grant Date. (f) Options shall be vested and non-forfeitable on the Grant Date and be fully exercisable on the earliest of (i) the date which is six (6) months after the Grant Date, (ii) the occurrence of a Change in Control and (iii) the death of a Participant (any of the foregoing the "Exercise Date"). (g) Except as provided in this Section 6(g), an Option is not transferable other than by will or the laws of descent and distribution, and during the lifetime of the Participant may be exercised only by such Participant or his or her guardian or legal representative. The Option may be transferred by the Participant, in accordance with rules established by the Company, to one or more members of the Participant's immediate family, to a partnership of which the only partners are members of such 7 -7- immediate family or to a trust established by the Participant for the benefit of one or more members of such immediate family (each such transferee a "Permitted Transferee"). For purposes of this Section 6(g), "immediate family" means a Participant's spouse, parents, children, grandchildren and spouses of children and grandchildren (including adopted children and grandchildren, as the case may be). A Permitted Transferee may not further transfer the Option. An Option transferred pursuant to this Section 6(g) shall remain subject to all of the provisions of the Plan and any Agreement with respect to such Option and may not be exercised by a Permitted Transferee unless and until all legal or regulatory approvals, listings, registrations, qualifications or other clearances as determined by the Company to be required or appropriate have been obtained. (h) A Participant may, in accordance with procedures established by the Company, designate one or more beneficiaries to receive all of his or her rights to any unexercised Option and may change or revoke such designation at any time. In the event of the death of the Participant, any Option or portion thereof which is subject to such a designation shall be exercisable (to the extent such designation is determined by the Company to be valid, effective and enforceable) by the designated person or persons in accordance with this Plan and any Agreement. Such determination by the Company shall be final and binding on all Persons, and the Company shall have no liability with respect to any Person with respect to such determination. (i) Any Option may be exercised by the Participant in whole or in part at any time on or after the Exercise Date and before the expiration of such Option. The Participant shall make payment of the Option price in cash or in Shares with a Fair Market Value equivalent to the exercise price for all of the Shares to be purchased upon exercise of the Option. The Committee may permit the deferral under the Deferral Plan of any gain upon the exercise of an Option by a Participant who then is actively serving on the Board, subject to such rules and procedures as it may establish to be held in the Company Shares portion of such Participant's account. SECTION 7. AMENDMENTS AND TERMINATION. The Board may amend, alter or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made that would impair the rights of a Participant under an Option theretofore granted, without the Participant's consent, or that without the approval of the shareholders would: (a) except as is provided in Section 4(b) of the Plan, increase the total number of shares reserved for the purpose of the Plan; or (b) change the Participants eligible to participate in the Plan. SECTION 8. GENERAL PROVISIONS. 8 -8- (a) Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any director for reelection by the Company's shareholders or to limit the rights of the shareholders to remove any director. (b) The Company shall have the right to require, prior to the issuance or delivery of any Shares pursuant to the Plan, payment by a Participant to the Company of any taxes required by law to be withheld with respect to the issuance or delivery of such Shares. (c) Shares issued or delivered under the Plan shall be in either book entry form or in certificate form pursuant to instructions given by the Participant to the Company. All Shares delivered under the Plan shall be subject to such stop-transfer orders and other restrictions as the Company may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed, and any applicable Federal or state securities law, and the Company may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (d) The issuance or delivery of any Shares under this Plan may be postponed by the Company for such period as may be required to comply with any applicable requirements under the Federal securities laws, any applicable listing requirements of any national securities exchange and requirements under any other law or regulation applicable to the issuance or delivery of such Shares, and the Company shall not be obligated to issue or deliver any Shares if the issuance or delivery of such Shares shall constitute a violation of any provision of any law or of any regulation of any governmental authority or any national securities exchange. (e) The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Delaware without regard to principles of conflicts of laws. (f) If any provision of this Plan is or becomes or is deemed invalid, illegal or unenforceable in any jurisdiction, or would disqualify the Plan or any Award under any law deemed applicable by the Company, such provision shall be construed or deemed amended to conform to applicable laws or if it cannot be construed or deemed amended without, in the determination of the Company, materially altering the intent of the Plan, it shall be stricken and the remainder of the Plan shall remain in full force and effect. SECTION 9. EFFECTIVE DATE OF PLAN. The Plan first becomes effective on February 19, 1999, and shall thereupon supersede and replace the Lucent Technologies Inc. Amended and Restated Stock Retainer Plan for Non-Employee Directors. 9 -9- SECTION 10. TERM OF PLAN. No Option or Stock Retainer shall be granted pursuant to the Plan after February 1, 2004, but any Option theretofore granted may extend beyond that date. IN WITNESS WHEREOF, the undersigned have executed this Amended and Restated Lucent Technologies Inc. 1999 Stock Compensation Plan for Non-Employee Directors effective as of February 19, 1999. EX-10.III.A.15 7 VOLUNTARY LIFE INSURANCE PLAN 1 EXHIBIT 10(iii)(A)15 LUCENT TECHNOLOGIES INC. VOLUNTARY LIFE INSURANCE PLAN (AS AMENDED EFFECTIVE AUGUST 1, 1998) 1. PURPOSE The purpose of the Lucent Technologies Inc. Voluntary Life Insurance Plan for Non-Employee Directors and Officers (the "Plan") is to provide each member of the Board of Directors of Lucent Technologies Inc. (the "Company") who is not an employee of the Company or any of its subsidiaries and each Officer of the Company an opportunity for insurance coverage pursuant to a split-dollar life insurance arrangement. The Plan was originally adopted by the Company as the Lucent Technologies Inc. Officer Life Insurance Option Plan effective as of December 18, 1996, and has been amended and restated as set forth herein effective as of August 1, 1998. 2. DEFINITIONS For purposes of this Plan, the following terms have the meanings set forth below: 2.01 AGREEMENT means the Agreement executed by Participant (or Assignee) and Company implementing the terms of this Plan. 2.02 ALTERNATIVE DEATH BENEFIT AMOUNT means, with respect to a Participant, an amount that, after subtracting any Company federal, state, and local income tax savings resulting from the deductibility of the payment for corporate tax purposes, is equal to the Participant's Coverage Amount. The Alternative Death Benefit Amount shall be determined at the time the payment is to be made, based on Company's federal, state and local income tax rate (calculated at the highest marginal tax rate then applicable to Company, but net of any federal deduction for state and local taxes) at the time of the payment, and shall be determined by Company. 2.03 ASSIGNEE means that person or entity to whom the Participant has assigned his/her interest in the Policy by designating said Assignee on forms provided by Company. If the Participant's Policy is a Survivorship Policy and if the Participant has not designated an Assignee, then, after the Participant's death, if the Participant's spouse survives, the Assignee shall be that person or entity who succeeds to the Participant's interest in the Participant's Policy after the death of the Participant. 2 Voluntary Life Insurance Plan 2.04 CHANGE IN CONTROL means a Change in Control of Company, as such term is defined in the Lucent Technologies Inc. 1996 Long Term Incentive Program, as amended from time to time, or any successor plan to such Program. 2.05 COMMITTEE means the Corporate Governance and Compensation Committee of the Board of Directors of Company. 2.06 COMPANY means Lucent Technologies Inc., a Delaware corporation. 2.07 COMPANY DEATH BENEFIT means the portion of the Policy's death benefit payable to Company as indicated in the Participant's Agreement. 2.08 DEFERRAL PLAN means the Lucent Technologies Inc. Deferred Compensation Plan as the same may be amended from time to time. 2.09 DIRECTOR means a member of the Board of Directors of the Company who is not an employee of the Company or any of its subsidiaries. 2.10 EFFECTIVE DATE means December 18, 1996. 2.11 INSURER means, with respect to a Participant's Policy, the insurance company issuing the Policy on the Participant's life (or on the lives of the Participant and a Participant's spouse, in the case of a Survivorship Policy) pursuant to the provisions of the Plan. 2.12 OFFICER means an employee of the Company who is an officer, as determined by the Committee. 2.13 PARTICIPANT means an eligible Officer or Director who elects to participate in the Plan. 2.14 PARTICIPANT'S COVERAGE AMOUNT means the portion of the Policy's death benefit payable to the beneficiary(ies) of the Participant (or Assignee). 2.15 POLICY means the life insurance coverage acquired on the life of the Participant (or on the lives of the Participant and a Participant's spouse, in the case of a Survivorship Policy) by Company. 2.16 POLICY OWNER means the Company. 2.17 POLICY VESTING DATE means the date the Participant completes his or her commitment under Section 3.02. 2 3 Voluntary Life Insurance Plan 2.18 PREMIUM means, with respect to a Policy on the life of any Participant (and/or the lives of any Participant and a Participant's spouse, as the case may be), the amount Company is obligated, pursuant to the terms of the Agreement, to pay to the Insurer with respect to such Policy. 2.19 RETAINER means the dollar amount of compensation payable by the Company to a Director Participant with respect to his or her services as a Director. 2.20 SURVIVORSHIP POLICY means a Policy insuring the lives of the Participant and a Participant's spouse, with the death benefit payable at the death of the last survivor of the Participant and his/her spouse. 3. PARTICIPATION 3.01 ELIGIBILITY. Each Officer and Director of the Company shall be eligible to participate in the Plan. 3.02 ELECTION TO FOREGO COMPENSATION. As a condition of participating in the Plan, each Participant will be required to provide a dollar amount specified in the Agreement toward the Participant's interest in the Plan by making an election or elections in a form acceptable to the Committee: (i) to commit to forego the receipt of an amount of compensation for a period of up to four years beginning on the Policy's effective date (as specified in the Agreement) with such election to remain in effect until the first to occur of: (a) the completion of the commitment to forego compensation; (b) the date on which an Officer Participant terminates employment with Company for any reason; (c) the date on which the Participant is demoted to a position ineligible to participate in the Plan; (d) the date on which a Director Participant is no longer a Director; or (e) the date on which the Agreement terminates. The Participant shall make such election by execution of an "Election to Forego Compensation" prior to the Policy's effective date. Any foregone compensation will, depending upon the Participant's election, reduce the payout to the Participant under the Lucent Technologies Inc. Short Term Incentive Plan or successor to such Plan and/or the Participant's salary during that period in the case of an Officer Participant, and will reduce the Retainer in the case of a Director Participant. A Participant's election to forego compensation shall be irrevocable, provided, however, that the election may be modified at any time with respect to compensation not yet earned by a written document 3 4 Voluntary Life Insurance Plan delivered to the Company. The amounts that a Participant agrees to forego pursuant to such election, unless precluded by tax or other laws to the contrary, shall be included in determining a Participant's compensation for purposes of any benefit plans maintained by the Company, or (ii) to apply toward the dollar amount specified by the Committee part or all of the Participant's account in the Deferral Plan, in accordance with the terms and conditions of that Plan. 4. AMOUNT AND TYPE OF COVERAGE The amount and type of coverage provided under the Policy shall be that amount and type specified in the Agreement. 5. PAYMENT OF PREMIUMS 5.01 COMPANY PAYMENTS. The amount, timing, and duration of Premiums to be paid by Company shall be specified in the Agreement. 5.02 PARTICIPANT PAYMENTS. Unless otherwise provided in an Agreement, a Participant (or Assignee) shall not be required to pay any portion of the Premium due on the Policy. However, if the Participant's Election to Forego Compensation is no longer in effect under Section 3.02 because of the Participant's termination of employment or ceasing to serve as a Director, as the case may be, then the Participant (or Assignee) may, within thirty (30) days of the Participant's termination of employment or ceasing to serve, elect to pay to Company as a premium payment the difference (or some portion thereof) between the compensation the Participant elected to forego and the premiums paid by Company up to such date (hereinafter referred to as the "Participant Special Contribution"). 5.03 TERMINATION EVENTS. Except as provided in Section 5.04, Company's obligation to pay Premiums with respect to a Policy shall terminate: a. Automatically upon the death of the Participant (or upon the death of the survivor of the Participant and the Participant's spouse, if the Policy is a Survivorship Policy). b. Upon the written action of the Committee, if the Participant terminates employment with Company or ceases to be a Director for any reason other than death prior to the Policy Vesting Date. 4 5 Voluntary Life Insurance Plan c. Upon the mutual written agreement of Company and Participant (or Assignee). 5.04 IRREVOCABLE OBLIGATION. Notwithstanding any other provision of the Plan, (a) Company's obligation to pay Policy Premiums, unless the Participant is demoted to a position ineligible to participate in the Plan, shall be irrevocable while such person is employed by Company or is actively serving as a Director, and shall remain irrevocable thereafter unless the Participant terminates employment with Company or ceases to be a Director for any reason other than death prior to the Policy Vesting Date and (b) Company's obligation to pay Policy Premiums for a Participant who obtains an irrevocable right pursuant to the provisions of Section 9 hereof relating to Change in Control thereafter shall be irrevocable. 6. POLICY OWNERSHIP 6.01 OWNERSHIP. Company shall be the owner of any Policy and shall be entitled to exercise the rights of ownership, except that the following rights shall be exercisable by the Participant (or Assignee): (i) the right to designate the beneficiary(ies) to receive payment of that portion of the death benefit under such Policy equal to the Participant's Coverage Amount unless there is an election for Alternative Death Benefit in effect; (ii) the right to increase or decrease the face amount of the Policy (subject to any conditions or restrictions imposed by the Insurer); and (iii) the right to assign any part or all of the Participant's rights under the Policy to any person, entity or trust by the execution of a written instrument prescribed by Company that is delivered to Company. Except as set forth in Section 7, Company shall not borrow from, hypothecate, withdraw cash value from, surrender in whole or in part, cancel, or in any other manner encumber a Policy without the prior written consent of the Participant (or Assignee). Company shall not take any other action with respect to a Policy that may reduce the Participant's Coverage Amount without the prior written consent of the Participant (or Assignee). The claim of the Participant, Assignee, or any beneficiary to the portion of the death benefit under the Policy, up to but not in excess of the amount of the Company Death Benefit, which is attributable to the cash values of the Policies shall be an unsecured claim against the general assets of the Company and no provision contained in the Plan shall be construed to give any Participant, Assignee, or beneficiary a security interest in such cash values. If the Company becomes insolvent, the Company's creditors shall have the right to exercise all rights of ownership of the Policy conferred on the 5 6 Voluntary Life Insurance Plan Company. Company shall be considered "insolvent" for purposes of this Plan if (i) Company is unable to pay its debts as they become due, or (ii) Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. 6.02 POSSESSION OF POLICY. Company shall keep possession of the Policy. Company agrees to make the Policy available to the Participant (or Assignee) or to the Insurer at such times, and on such terms as Company determines for the sole purposes of endorsing or filing any change of beneficiary or assignment on the Policy. 6.03 INVESTMENT OF CASH VALUES. If the Policy provides the Policy owner with a choice of investment funds for the cash values, Company shall invest the cash values in the funds selected by and in the proportions specified by the Participant (or Assignee). Company agrees to make any investment election within 30 days of receipt of a written investment request by the Participant (or Assignee). 7. TERMINATION OF EMPLOYMENT/SERVICE AS DIRECTOR 7.01 IMPACT OF TERMINATION OR DEMOTION. If, prior to the Policy Vesting Date, (i) a Participant who is an Officer terminates employment with Company or is demoted to a position ineligible to participate in the Plan, or (ii) a Participant who is a Director ceases to be a Director, then: a. Company's obligation to pay premiums with respect to a Participant's Policy shall terminate as provided in Sections 5.03 and 5.04. b. Participant's obligation to forego compensation or apply accounts under the Deferral Plan pursuant to an election made under Section 3.02 shall terminate. c. The Policy's face amount shall be reduced to an amount determined by multiplying the initial face amount by a fraction, the numerator of which is the amount of premiums paid by Company plus any Participant Special Contribution under Section 5.02, and the denominator of which is the total premium payments Company agreed to pay under the terms of the Agreement. The Participant (or Assignee) and Company agree to execute an amendment to the Agreement and to complete any forms required by the Insurer to implement these changes. 6 7 Voluntary Life Insurance Plan 7.02 NON-COMPETITIVE PROVISION. Notwithstanding any other provisions of this Plan or Agreement to the contrary, if a Participant terminates employment with Company (including a termination after the Policy Vesting Date) and, without consent of the Committee, establishes a relationship with a competitor of Company or engages in any competitive activity as set forth in the Agreement, then: a. The Agreement with the Participant (or Assignee) shall immediately terminate. b. Company shall withdraw from the cash values of the Policy an amount equal to its cumulative premium payments and, following the withdrawal, shall transfer ownership of the Policy to the Participant (or Assignee). 7.03 ALLOCATION OF DEATH BENEFIT. In the event of a termination due to the death of the Participant (or the death of the survivor of the Participant and the Participant's spouse, if the Policy is a Survivorship Policy), the death benefit under the Policy shall be divided as follows: a. Company shall be entitled to receive an amount equal to the Company Death Benefit. If the Policy provides for a death benefit equal to the sum of the face amount of the Policy and any account or accumulation value, any Company Death Benefit should first be paid from the account or accumulation value portion of the death benefit. b. The beneficiary(ies) of the Participant (or Assignee) shall be entitled to receive the Participant's Coverage Amount, which shall consist of the excess, if any, of the Policy's death benefit over the Company Death Benefit. Company agrees to execute an endorsement to the Policy issued to it by the Insurer providing for the division of the Policy's death benefit in accordance with the provisions of this Section. Notwithstanding the provisions of this Section, if the Policy's death benefit becomes payable while there is an Alternative Death Benefit Election in effect for the Participant (or Assignee) pursuant to Section 8, then the entire Policy's death benefit shall be paid to Company. 8. ALTERNATIVE DEATH BENEFIT ELECTION. A Participant (or Assignee) may elect to receive an Alternative Death Benefit in lieu of the insurance benefit provided under the Plan. The Alternative Death 7 8 Voluntary Life Insurance Plan Benefit shall be paid by Company from the general funds of Company, and shall not constitute an insurance benefit. It shall be paid by Company to Participant's (or Assignee's) beneficiary(ies) at the time Participant's death benefit would have been paid (at Participant's death for single life coverage, or at the death of the survivor of the Participant and the Participant's spouse for survivorship coverage). The amount of the payment shall be equal to the Alternative Death Benefit Amount. As long as an Alternative Death Benefit Election is in effect, the beneficiary(ies) of the Participant (or Assignee) shall receive only the Alternative Death Benefit, and shall not be entitled to receive any portion of any death benefits that would become payable under the Participant's Policy, and the Participant (or Assignee) shall cooperate with Company in effecting a change of beneficiary of the Participant's Policy to achieve such result. 9. CHANGE IN CONTROL If there is a Change in Control: a. the Plan and Company's obligation to pay Policy Premiums hereunder shall become irrevocable for all Participants in the plan at the time of the Change in Control; b. Company immediately shall transfer the ownership of all Participants' Policies to an irrevocable trust to: (i) pay any premiums projected to be payable on all Policies after the Change in Control and (ii) pay any Alternative Death Benefit that becomes payable under Section 8 of this Plan; and c. Company immediately shall fund such irrevocable trust with an amount sufficient to pay all necessary projected future premiums for all Participants' Policies. Notwithstanding the creation and funding of an irrevocable trust in accordance with the provisions of this Section, Company or its successor shall continue to be responsible for the Premium costs associated with the Participants' Policies and any Alternative Death Benefits payable under Section 8 if such amounts are not paid by the trust for any reason, or if the trust's assets become insufficient to pay any required amounts. 10. COMPANY DEFAULT 10.01 COMPANY DEFAULT. A Company Default shall be deemed to have occurred with respect to a Policy if Company fails to pay a Premium on the Policy as required under the terms of the Agreement within 30 days 8 9 Voluntary Life Insurance Plan after the due date for such Premium, or if Company processes or attempts to process a policy loan, or a complete or partial surrender, or a cash value withdrawal without prior written approval from Participant (or Assignee). 10.02 RIGHTS UPON COMPANY DEFAULT. In the event of Company Default as described in Section 10.01, the Participant (or Assignee) shall have the right to require Company to cure the Company Default by notifying the Company in writing within sixty (60) days after the Company Default occurs, or if later, within thirty (30) days after the Participant (or Assignee) becomes aware of the Company Default. If the Company fails to cure the Company Default within sixty (60) days after being notified by the Participant (or Assignee) of the Company Default, the Participant (or Assignee) shall have the right to require the Company to transfer its interest in the Participant's Policy to Participant (or Assignee). The Participant (or Assignee) may exercise this right by notifying Company, in writing, within sixty (60) days after the Company fails to cure the Company Default. Upon receipt of such notice, Company shall immediately transfer its rights in the Policy to the Participant (or Assignee) and Company shall thereafter have no rights with respect to such Policy. A Participant's (or Assignee's) failure to exercise its rights under this Section shall not be deemed to release Company from any of its obligations under the Plan, and shall not preclude the Participant (or Assignee) from seeking other remedies with respect to the Company Default. Also, a Participant's (or Assignee's) failure to exercise its rights under this Section will not preclude the Participant (or Assignee) from exercising such rights upon later Company Default. 11. GOVERNING LAWS & NOTICES 11.01 GOVERNING LAW. This Plan shall be governed by and construed in accordance with the substantive law of the State of New Jersey without giving effect to the choice of law rules of the State of New Jersey. 9 10 Voluntary Life Insurance Plan 11.02 NOTICES. All notices hereunder shall be in writing and sent by first class mail with postage prepaid. Any notice to Company shall be addressed to the Attention of Vice President, Compensation and Benefits at Lucent Technologies Inc., 600 Mountain Avenue, Murray Hill, NJ 07929. Any notice to the Participant (or Assignee) shall be addressed to the Participant (or Assignee) at the address following such party's signature on his/her Agreement. Any party may change its address by giving written notice of such change to the other party pursuant to this Section. 12. MISCELLANEOUS PROVISIONS 12.01 This Plan and any Agreement executed hereunder (i) shall not be deemed to constitute a contract of employment between any Officer and Company, nor shall any provision restrict the right of Company to discharge any Officer, or to restrict the right of any Officer to terminate employment; and (ii) shall not constitute an agreement between the Company and any Director to engage such person as a Director or to nominate such person for election as a Director. 12.02 The masculine pronoun includes the feminine and the singular includes the plural where appropriate for valid construction. 12.03 In order to be eligible to participate in this Plan, the Participant (and, in the case of a Survivorship Policy, the Participant's spouse) shall cooperate with the Insurer by furnishing any and all information requested by the Insurer in order to facilitate the issuance of the policy, including furnishing such medical information and taking such physical examinations as the Insurer may deem necessary. In the absence of such cooperation, Company shall have no further obligation to the Participant to allow him/her to participate in the Plan. 12.04 If a Participant (or a Participant's spouse, if the Policy is a Survivorship Policy) commits suicide within two years of the Participant's Policy's issue, or if the Participant (or Participant's spouse, if the Policy is a Survivorship Policy) makes any material misstatement of information or nondisclosure of medical history pertaining to the Policy's issue and dies within two years of the Policy's issue, then no benefits will be payable to the beneficiary(ies) of such Participant (or Assignee, where applicable). 10 11 Voluntary Life Insurance Plan 12.05 In the event of any inconsistency between the terms of this Plan as described herein and the terms of any Policy purchased hereunder or any related Agreement, the terms of such Policy or Agreement shall be controlling as to that Participant, his/her Assignee (if any), his successor-in-interest (if any) and his/her beneficiary or beneficiaries. 13. AMENDMENT, TERMINATION, ADMINISTRATION, AND SUCCESSORS 13.01 AMENDMENT. The Plan may be modified or amended by Company at any time, but an amendment which is adverse to a Participant (or Assignee) will not apply to such Participant (or Assignee) unless such Participant (or Assignee) consents, in writing, to the amendment. 13.02 TERMINATION. Company may terminate the Plan at any time, but any such termination will not affect the rights of any Participant (or Assignee) unless such Participant (or Assignee) consents, in writing, to such termination. 13.03 ADMINISTRATION. This Plan shall be administered by the Committee. The Committee, in its sole discretion, shall have the authority to make, amend, interpret, and enforce all rules and regulations for the administration of the Plan, and to decide or resolve all questions, including interpretation of the Plan, as may arise in connection with the Plan. In the administration of this Plan, the Committee may employ agents and delegate to them or to others (including employees of the Company) such administrative duties as it sees fit. The Committee may consult with counsel, who may be counsel to Company. The decision or action of the Committee (or its designee) with respect to any question arising out of, or in connection with, the administration, interpretation and application of this Plan shall be final and conclusive and binding upon all persons having any interest in the Plan. 13.04 SUCCESSORS. The terms and conditions of this Plan shall inure to the benefit of and bind Company and the Participant and their successors, assignees (including any Assignee), and representatives. The Company shall have the right to absolutely and irrevocably assign its rights, title and interest in a Policy without the consent of the Participant (or Assignee). 11 12 Voluntary Life Insurance Plan 14. CLAIMS PROCEDURE Any controversy or claim arising out of or relating to this Plan shall be filed with the Committee which shall make all determinations concerning such claim. Any decision by the Committee denying such claim shall be in writing and shall be delivered to all parties in interest in accordance with the notice provisions of Section 11.02 herein. Such decision shall set forth the reasons for denial in plain language. Pertinent provisions of the Plan shall be cited and, where appropriate, an explanation as to how the claimant can perfect the claim will be provided. This notice of denial of benefits will be provided within ninety (90) days of the Committee's receipt of the claim for benefits. If the Committee fails to notify the claimant of its decision regarding the claim, the claim shall be considered denied, and the claimant then shall be permitted to proceed with an appeal as provided for in this Section. A claimant who has been completely or partially denied a benefit shall be entitled to appeal this denial of his/her claim by filing a written statement of his/her position with the Committee no later than sixty (60) days after receipt of the written notification of such denial. The Committee shall schedule an opportunity for a full and fair review of the issue within thirty (30) days of receipt of the appeal. The decision on review shall set forth specific reasons for the decision, and shall cite specific references to the pertinent Plan provisions on which the decision is based. Following the review of any additional information submitted by the claimant, either through the hearing process or otherwise, the Committee shall render a decision on the review of the denied claim in the following manner: a. The Committee shall make its decision regarding the merits of the denied claim within sixty (60) days following receipt of the request for review (or within 120 days after such receipt, in a case where there are special circumstances requiring extension of time for reviewing the appealed claim). The Committee shall deliver the decision to the claimant in writing. If an extension of time for reviewing the appealed claim is required because of special circumstances, written notice of the extension shall be furnished to the claimant prior to the commencement of the extension. If the decision on review is not furnished within the prescribed time, the claim shall be deemed denied on review. b. The decision on review shall set forth specific reasons for the decision, and shall cite specific references to the pertinent Plan provisions on which the decision is based. IN WITNESS WHEREOF, the Company has caused this Plan to be effective on 12 13 Voluntary Life Insurance Plan August 1, 1998, and to be executed on this ___ day of August, 1998. For Lucent Technologies Inc. By: _____________________________________ Curtis R. Artis Senior Vice President - Human Resources 13 EX-12 8 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT (12) LUCENT TECHNOLOGIES INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN MILLIONS) (UNAUDITED)
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 1997 1996 1995 1994 -------------- -------------- ------------- ------------ ------------ Earnings Before Income Taxes...... $2,306 $1,467 $367 $(1,138) $ 784 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................. 497 456 311 327 338 ------ ------ ---- ------- ------ Total Earnings.......... $2,775 $1,906 $663 $ (827) $1,094 ====== ====== ==== ======= ====== Fixed Charges Total Interest Expense Including Capitalized Interest............ $ 361 $ 348 $250 $ 257 $ 277 Interest Portion of Rental Expenses........................ 136 108 61 70 61 ------ ------ ---- ------- ------ Total Fixed Charges..... $ 497 $ 456 $311 $ 327 $ 338 ====== ====== ==== ======= ====== Ratio of Earnings to Fixed Charges......................... 5.6 4.2 2.1 (A) 3.2 ====== ====== ==== ======= ======
- --------------- (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 $1,154. EX-13 9 PORTIONS OF THE ANNUAL REPORT TO SHAREHOLDERS 1 Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION HIGHLIGHTS For the year ended September 30, Lucent Technologies Inc. ("Lucent" or the "Company") reported the following: 1998 - - Net income of $970 million, $0.73 per share (diluted) EXCLUDING CERTAIN ONE-TIME EVENTS: - - Net income of $2,287 million, $1.72 per share (diluted) 1997 - - Net income of $541 million, $0.42 per share (diluted) EXCLUDING CERTAIN ONE-TIME EVENTS: - - Net income of $1,507 million, $1.17 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. NET INCOME GROWTH EXCLUDING CERTAIN ONE-TIME EVENTS [NET INCOME GROWTH CHART] - --------------- (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. 1 2 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. 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. 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. - In September 1998, Lucent acquired JNA, an Australian telecom equipment manufacturer, reseller and system integrator. - In August 1998, Lucent acquired LANNET, an Israeli-based supplier of Ethernet and asynchronous transfer mode ("ATM") switching solutions. - 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. - In May 1998, Lucent acquired Yurie, a provider of ATM access technology and equipment for data, voice and video networking. - 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. - In January 1998, Lucent acquired Prominet, a participant in the emerging Gigabit Ethernet networking industry. - In December 1997, Lucent acquired Livingston, a global provider of equipment used by Internet service providers to connect their subscribers to the Internet. - 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. It is expected that Lucent and Philips will each regain control of the original businesses they contributed to the venture. Lucent plans to close down the wireless handset business it previously contributed to PCC and to sell the consumer product and leasing businesses. - In October 1997, Lucent completed the sale of its ATS unit. - In December 1996, Lucent sold its interconnect products and Custom Manufacturing Services ("CMS") businesses. - In July 1996, Lucent completed the sale of its Paradyne subsidiary. 2 3 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. 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. 3 4 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. 4 5 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES FIVE-YEAR SUMMARY
YEAR ENDED YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED DECEMBER 31, (TWELVE MONTHS) SEPTEMBER 30, (TWELVE MONTHS) ----------------------------- ------------------ ------------------ 1998 1997 1996 1996(1) 1995 1995 1994 ------- ------- ------- ------- ------- ------- ------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) RESULTS OF OPERATIONS Revenues........................... $30,147 $26,360 $23,286 $15,859 $13,986 $21,413 $19,765 Gross margin....................... 13,991 11,462 8,894 6,569 6,143 8,468 8,428 Depreciation and amortization expense.......................... 1,334 1,450 1,326 937 1,104 1,493 1,311 Operating income (loss)............ 2,461 1,631 (947) 487 434 (1,000) 971 Net income (loss).................. 970 541 (793) 224 150 (867) 482 Earnings (loss) per common share -- basic(2)(3)...................... 0.74 0.42 (0.69) 0.19 0.14 (0.83) n/a Earnings (loss) per common share -- diluted(2)(3).................... 0.73 0.42 (0.69) 0.19 0.14 (0.83) n/a Earnings (loss) per common share -- pro forma(3)(4).................. n/a n/a (0.62) 0.18 0.12 (0.68) n/a Dividends per common share(3)...... 0.155 0.1125 0.075 0.075 -- -- n/a FINANCIAL POSITION Total assets....................... $26,720 $23,811 $22,626 $22,626 $18,219 $19,722 $17,340 Working capital.................... 3,650(8) 1,763 2,068 2,068 188 (384) 246 Total debt......................... 4,640 4,203 3,997 3,997 4,192 4,014 3,164 Shareowners' equity................ 5,534 3,387 2,686 2,686 2,783 1,434 2,476 OTHER INFORMATION Selling, general and administrative expenses as a percentage of revenues......................... 21.3% 21.9% 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............ 46.4 43.5 38.2 41.4 43.9 39.5 42.6 Return on assets................... 9.3(5) 6.5(6) 5.3(7) n/a n/a n/a n/a Ratio of total debt to total capital (debt plus equity)....... 45.6 55.4 59.8 59.8 60.1 73.7 56.1 Capital expenditures............... $ 1,626 $ 1,635 $ 1,432 $ 939 $ 784 $ 1,277 $ 878 EXCLUDING CERTAIN ONE-TIME EVENTS Net income......................... $ 2,287(5) $ 1,507(6) $ 1,054(7) $ 224 $ 150 $ 980(7) $ 482 Earnings per common share -- diluted(2)(3).................... 1.72(5) 1.17(6) 0.83(4,7) 0.19 0.14 0.93(7) n/a
- --------------- (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. (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 1,273,323,862 shares (636,661,931 shares on a pre-split basis) 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. 5 6 (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 $30,147 million, or 14.4% 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 20.3% 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 11.9% compared with the same period in 1997. Sales outside the United States increased 22.2% compared with the same period in 1997. These sales represented 25.7% of total revenues compared with 24.1% in 1997. Excluding revenues from Lucent's Consumer Products, ATS and CMS businesses, sales within the United States increased 19.6% compared with the same period in 1997. GLOBAL REVENUE GROWTH PERFORMANCE CHART - --------------- * Excluding the revenues from Lucent's Consumer Products, ATS and CMS businesses, total revenues increased 20.3% compared with the same period in 1997. 6 7 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:
TWELVE MONTHS ENDED SEPTEMBER 30, ----------------------------------------------------- AS A PERCENTAGE AS A PERCENTAGE 1998 OF TOTAL REVENUE 1997 OF TOTAL REVENUE ------- ---------------- ------------- ---------------- (DOLLARS IN MILLIONS) Systems for Network Operators......... $18,752 62% $15,614 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....................... $30,147 100% $26,360 100%
Revenues from SYSTEMS FOR NETWORK OPERATORS increased $3,138 million, or 20.1% 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 20.4% 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 19.3% 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 24.9% of revenues for 1998 compared with 25.1% 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. 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. - --------------- (R) Registered trademark of Lucent 7 8 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. Lucent plans to close down the wireless handset business it previously contributed to PCC and to sell the remaining businesses. Lucent expects that these activities will be completed during the first calendar quarter of 1999. 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 $1,258 million, or 8.4% compared with the same period in 1997 due to the increase in sales volume. Gross margin percentage increased to 46.4% from 43.5% 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 21.3% 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 was 20.9%, a decrease of 0.9 percentage points from the same period in 1997. Selling, general and administrative expenses increased $652 million, or 11.3% 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. 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 $655 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. Other Income, Interest Expense and Provision for Income Taxes Other income -- net increased $22 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 - --------------- (a) Source: World Semiconductor Trade Statistics, Inc. 8 9 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 $318 million for the 1998 fiscal year, an increase of $13 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 57.9% for 1998 decreased from the effective income tax rate of 63.1% 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 36.0% for 1998, a decrease from the year-ago rate of 37.2%. This decrease was primarily due to a reduced state effective tax rate and increased research tax credits. Cash Flows Cash provided by operating activities was $1,366 million in 1998, a decrease of $580 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 $2,808 million from $3,121 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 $1,626 million and $1,635 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 $838 million compared with $295 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. TWELVE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS TWELVE MONTHS ENDED SEPTEMBER 30, 1996 Revenues Total revenues increased $3,074 million or 13.2% for 1997 compared with 1996, primarily due to gains in sales from Systems for Network Operators, Business Communications Systems and Microelectronic Products. The overall revenue growth was partially offset by the expected decline in revenue from Consumer Products and Other Systems and Products. Revenues for Lucent's three core businesses increased 17.9% for 1997 compared with 1996. Revenue growth continued to be generated from sales both within and outside the United States. Sales outside the United States increased 11.9% compared with 1996 and represented 24.1% 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 9 10 Lucent's revenues by product line, and the related percentage of total revenues for the twelve months ended September 30, 1997 and 1996:
TWELVE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------- AS A PERCENTAGE OF TOTAL AS A PERCENTAGE 1997 REVENUE 1996 OF TOTAL REVENUE ------- --------------- ------------- ---------------- (DOLLARS IN MILLIONS) Systems for Network Operators.......... $15,614 59% $13,192 57% Business Communications Systems........ 6,411 24 5,509 24 Microelectronic Products............... 2,755 11 2,315 10 Consumer Products...................... 1,013 4 1,431 6 Other Systems and Products............. 567 2 839 3 ------- --- ------- --- Total........................ $26,360 100% $23,286 100% ======= === ======= ===
Revenues from SYSTEMS FOR NETWORK OPERATORS increased $2,422 million or 18.4% compared with 1996. The increase resulted from higher sales of both switching and wireless systems with associated software, fiber-optic cable and professional services. Demand for second lines in businesses and residences for Internet services and data connectivity contributed to the revenue growth for 1997. 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 8.2% 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 25.1% 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. 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. 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 - --------------- (R) Registered trademark of Lucent 10 11 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 43.5% from 38.2% in 1996 primarily due to the restructuring charges recorded in the quarter ended December 31, 1995. Excluding restructuring charges, gross margin for 1996 was 42.0%. The increase in gross margin percentage for 1997 was due to an overall favorable mix of higher margin product revenues and the benefits associated with Lucent's business productivity improvement initiatives. Operating Expenses Selling, general and administrative expenses decreased $1,506 million or 20.7% compared with 1996. Excluding the $1,645 million of restructuring charges recorded in December 1995, selling, general and administrative expenses increased $139 million compared with 1996. This increase was due to expenditures associated with higher sales levels, investment in growth initiatives, and the implementation of SAP, an integrated software platform. These increases were partially offset by the reversal of $174 million of business restructuring liabilities in 1997, the lower start-up costs incurred in 1997, and business productivity improvement initiatives, including lower expenses since some businesses were exited in fiscal 1997 and 1996. Selling, general and administrative expenses as a percentage of revenue declined 2.3 percentage points to 21.9% of revenues compared with 24.2% of revenues, excluding restructuring charges in 1996. Research and development expenses increased $472 million or 18.5% compared with 1996. Excluding the impact of restructuring charges recorded in the quarter ended December 31, 1995, research and development expenses increased by $736 million, primarily due to expenditures in support of wireless infrastructure, microelectronic products and advanced multimedia communications systems as well as a $127 million write-down of special-purpose Bell Labs assets no longer being used. Research and development expenses represented 11.5% of revenues as compared with 11.0% of revenues in 1996. Research and development expenses as a percentage of revenues increased 1.7 percentage points from 9.8%, excluding restructuring charges in 1996. Purchased in-process research and development for 1997 reflects one-time write-offs totaling $1,024 million of in-process research and development in connection with the acquisitions of Octel 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 $77 million compared with 1996. This decrease was largely due to gains recognized on the sale of certain investments and insurance recoveries in 1996, offset in part by increased interest income in 1997. Interest expense increased $12 million compared with 1996 due primarily to replacing a portion of commercial paper with long-term debt in July 1996. - --------------- (TM) Trademark of Lucent 11 12 The effective tax rate of 63.1% for 1997 increased from the effective tax rate of 22.4% for the same period of 1996 due to the 1997 write-offs of 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 37.2%, a decrease of 3.6 percentage points from the 1996 effective tax rate of 40.8% before considering the effects of restructuring charges incurred in 1996. This decrease is primarily attributable to the tax impact of foreign earnings. Cash Flows Cash provided by operating activities was $1,946 million in 1997, an increase of $967 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 $3,121 million from $1,638 million primarily due to the acquisition of Octel. Capital expenditures were $1,635 million and $1,432 million for 1997 and 1996, respectively. Capital expenditures include expenditures for equipment and facilities used in manufacturing and research and development, including expansion of manufacturing capacity and international growth. Cash provided by financing activities for 1997 was $295 million compared 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. Financial Condition, Liquidity and Capital Resources Total assets as of September 30, 1998 increased $2,909 million, or 12.2%, from September 30, 1997. This increase was primarily due to increases in accounts receivable and other assets of $1,566 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 $762 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 $1,887 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 12 13 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. 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 13 14 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. 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 45.6% at September 30, 1998 compared with 55.4% 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. 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 9.3%. This represents a 2.8 percentage point increase over the prior year return on assets of 6.5%, 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, 14 15 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. 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 15 16 circumstances change. The amounts provided for in Lucent's consolidated financial statements in respect to environmental reserves are the gross undiscounted amount of such reserves, without deductions for insurance or third party indemnity claims. In those cases where insurance carriers or third party indemnitors have agreed to pay any amounts and management believes that collectibility of such amounts is probable, the amounts are reflected as receivables in the financial statements. Although Lucent believes that its reserves are adequate, there can be no assurance that the amount of capital and other expenditures that will be required relating to remedial actions and compliance with applicable environmental laws will not exceed the amounts reflected in Lucent's reserves or will not have a material adverse effect on Lucent's financial condition, results of operations or cash flows. 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 ob ligation 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 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. 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 16 17 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 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. Currently, approximately 60% of Lucent's information technology infrastructure has been determined to be Year 2000 ready and is deployed for use. Approximately, 45% of the applications requiring Year 2000 remediation 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 the Company, with a special emphasis on the early identification of any areas where progress to-date could indicate difficulty in meeting the Company'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 17 18 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 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. European Monetary Union -- Euro: On January 1, 1999, several member countries of the European Union will establish fixed conversion rates between their existing sovereign currencies, and adopt the Euro as their new common legal currency. As 18 19 of that date, the Euro will trade 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 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. Employee Relations: On September 30, 1998, Lucent employed approximately 141,600 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. 19 20 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. 20 21 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 this page. /s/ RICHARD A. MCGINN /s/ DONALD K. PETERSON - -------------------------------------------------- -------------------------------------------------- Chairman and Executive Vice President and Chief Executive Officer Chief Financial Officer
21 22 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareowners of Lucent Technologies Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and changes in shareowners' equity and of cash flows present fairly, in all material respects, the financial position of Lucent Technologies Inc. and its subsidiaries at September 30, 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. PricewaterhouseCoopers LLP New York, New York October 21, 1998 22 23 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED (TWELVE MONTHS) SEPTEMBER 30, ----------------------------- ----------------- 1998 1997 1996 1996 ------- ------- ------- ----------------- (DOLLARS IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) (UNAUDITED) Revenues.................................... $30,147 $26,360 $23,286 $15,859 Costs....................................... 16,156 14,898 14,392 9,290 Gross margin................................ 13,991 11,462 8,894 6,569 Operating expenses Selling, general and administrative......... 6,436 5,784 7,290 4,244 Research and development.................... 3,678 3,023 2,551 1,838 Purchased in-process research and development............................... 1,416 1,024 -- -- Total operating expenses.................... 11,530 9,831 9,841 6,082 Operating income (loss)..................... 2,461 1,631 (947) 487 Other income -- net......................... 163 141 218 96 Interest expense............................ 318 305 293 216 Income (loss) before income taxes........... 2,306 1,467 (1,022) 367 Provision (benefit) for income taxes........ 1,336 926 (229) 143 Net income (loss)........................... $ 970 $ 541 $ (793) $ 224 Earnings (loss) per common share -- basic... $ 0.74 $ 0.42 $ (0.69) $ 0.19 Earnings (loss) per common share -- diluted.......................... $ 0.73 $ 0.42 $ (0.69) $ 0.19 Dividends per common share.................. $ 0.155 $0.1125 $ 0.075 $ 0.075
See Notes to Consolidated Financial Statements. 23 24 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30, 1998 1997 ------------- ------------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) ASSETS Cash and cash equivalents................................... $ 685 $ 1,350 Accounts receivable less allowances of $390 in 1998 and $352 in 1997................................................... 6,939 5,373 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........................................ 491 473 Total current assets........................................ 14,078 12,501 Property, plant and equipment -- net........................ 5,403 5,147 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................................................ $26,720 $23,811 LIABILITIES Accounts payable............................................ $ 2,040 $ 1,931 Payroll and benefit-related liabilities..................... 2,511 2,178 Postretirement and postemployment benefit liabilities....... 187 239 Debt maturing within one year............................... 2,231 2,538 Other current liabilities................................... 3,459 3,852 Total current liabilities................................... 10,428 10,738 Postretirement and postemployment benefit liabilities....... 6,380 6,073 Long-term debt.............................................. 2,409 1,665 Other liabilities........................................... 1,969 1,948 Total liabilities........................................... $21,186 $20,424 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: 1,316,394,169 at September 30, 1998; 1,284,125,312 at September 30, 1997..................................... 13 13 Additional paid-in capital.................................. 4,485 3,047 Guaranteed ESOP obligation.................................. (49) (77) Foreign currency translation................................ (279) (191) Retained earnings........................................... 1,364 595 Total shareowners' equity................................... $ 5,534 $ 3,387 Total liabilities and shareowners' equity................... $26,720 $23,811
See Notes to Consolidated Financial Statements. 24 25 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
YEAR ENDED YEAR ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 NINE MONTHS ENDED (TWELVE MONTHS) (TWELVE MONTHS) SEPTEMBER 30, 1996 ------------------ ------------------ ------------------ (DOLLARS IN MILLIONS) 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......... 3,047 2,595 1,406 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 Other.................................. (8) 36 -- Balance at end of period............... 4,485 3,047 2,595 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................ $5,534 $3,387 $ 2,686
See Notes to Consolidated Financial Statements. 25 26 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED (TWELVE MONTHS) SEPTEMBER 30, --------------------------- ----------------- 1998 1997 1996 1996 ------- ------- ------- ----------------- (DOLLARS IN MILLIONS) (UNAUDITED) OPERATING ACTIVITIES: Net income (loss).............................. $ 970 $ 541 $ (793) $ 224 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................ 1,334 1,450 1,326 937 Provision for uncollectibles................. 130 127 73 54 Deferred income taxes........................ 113 9 (996) (251) Purchased in-process research and development............................... 1,416 1,024 -- -- Increase in accounts receivable -- net....... (1,987) (389) (3,114) (1,506) Increase in inventories and contracts in process................................... (365) (273) (309) (524) Increase (decrease) in accounts payable...... 170 (16) 1,021 629 Changes in other operating assets and liabilities............................... 133 (315) 1,040 537 Other adjustments for noncash items -- net... (448) (92) (77) (111) Net cash provided by (used in) operating activities................................... 1,366 1,946 979 (4) INVESTING ACTIVITIES: Capital expenditures........................... (1,626) (1,635) (1,432) (939) 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.......... (2,808) (3,121) (1,638) (1,066) 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) 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...... 838 295 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.................................. (665) (891) 1,828 1,793 Cash and cash equivalents at beginning of period....................................... 1,350 2,241 413 448 Cash and cash equivalents at end of period..... $ 685 $ 1,350 $ 2,241 $ 2,241
See Notes to Consolidated Financial Statements. 26 27 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES 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 consolidated financial statements as of and for the nine months ended September 30, 1996, 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. 27 28 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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.
JNA LANNET MASSMEDIA SDX YURIE OPTIMAY PROMINET LIVINGSTON OCTEL (1) (2) (3) (4) (5) (6) (7) (8) (9) ---- ------ --------- ---- ------- ------- -------- ---------- ------- Acquisition Date............... 9/98 8/98 7/98 7/98 5/98 4/98 1/98 12/97 9/97 Purchase Price................. $67 $115 N/S $207 $1,056 $64 $199 $610 $1,819 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 research & development 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
- --------------- (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 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. 28 29 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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. 29 30 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Amortization of capitalized software development costs begins when the product is available for general release. Amortization is provided on a product-by-product basis on either the straight-line method over periods not exceeding two years or the sales ratio method. Unamortized capitalized software development costs determined to be in excess of net realizable value of the product are expensed immediately. Cash and Cash Equivalents All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. Inventories Inventories are stated at the lower of cost (determined principally on a first-in, first-out basis) or market. Contracts in Process Contracts in process are valued at cost plus accrued profits less progress billings. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is determined using 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. 30 31 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Reclassifications Certain prior year amounts have been reclassified to conform to the 1998 presentation. 3. RECENT PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS 133 requires 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. This pronouncement identifies the characteristics of internal use 31 32 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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
NINE MONTHS YEAR ENDED YEAR ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1996 --------------- --------------- ------------- (TWELVE MONTHS) (TWELVE MONTHS) INCLUDED IN COSTS Amortization of software development costs...... $ 234 $ 380 $218 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................................. $ 919 $1,008 $674 OTHER INCOME -- NET Interest income................................. $ 83 $ 132 $ 71 Minority interests in earnings of subsidiaries.................................. (24) (35) (21) Net equity losses from investments.............. (209) (64) (26) Increase in cash surrender value of life insurance..................................... 52 54 35 Loss on foreign currency transactions........... (44) (12) (4) Gains on businesses sold........................ 208 -- -- Miscellaneous -- net............................ 97 66 41 ----- ------ ---- Total other income -- net....................... $ 163 $ 141 $ 96 DEDUCTED FROM INTEREST EXPENSE Capitalized interest............................ $ 17 $ 14 $ 14
32 33 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Supplementary Balance Sheet Information
SEPTEMBER 30, SEPTEMBER 30, 1998 1997 ------------- ------------- 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.................................. 3,130 2,852 Machinery, electronic and other equipment................... 8,354 8,403 ------- ------- Total property, plant and equipment......................... 11,785 11,554 Less: Accumulated depreciation and amortization............. (6,382) (6,407) ------- ------- Property, plant and equipment -- net........................ $ 5,403 $ 5,147 OTHER CURRENT LIABILITIES Advance billings and customer deposits...................... $ 515 $ 844
Supplementary Cash Flow Information
NINE MONTHS YEAR ENDED YEAR ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1996 --------------- --------------- ------------- (TWELVE MONTHS) (TWELVE MONTHS) Interest payments, net of amounts capitalized.... $ 319 $ 307 $209 Income tax payments.............................. $ 714 $ 781 $142 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
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. 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. 33 34 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The statement of cash flows for the nine-month period ended September 30, 1996 excludes $2,000 of customer accounts receivable retained by AT&T as well as net asset transfers of $239 received from AT&T. These transactions have not been reflected on the consolidated statement of cash flows because they were noncash events accounted for as changes in paid-in capital. 5. 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. The following table reconciles the number of shares utilized in the earnings per share calculations:
YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED -------------------- SEPTEMBER 30, 1998 1997 1996 -------- -------- ----------------- (TWELVE MONTHS) Net income.................................... $ 970 $ 541 $ 224 Earnings per common share -- basic............ $ 0.74 $ 0.42 $ 0.19 Earnings per common share -- diluted.......... $ 0.73 $ 0.42 $ 0.19 NUMBER OF SHARES (IN MILLIONS) Common shares -- basic........................ 1,304.6 1,278.4 1,191.5 Effect of dilutive securities: Stock options............................... 26.8 9.9 0.0 Other....................................... 2.0 0.1 0.2 Common shares -- diluted...................... 1,333.4 1,288.4 1,191.7
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. 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 34 35 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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:
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998 SEPTEMBER 30, TYPE OF COST 1996 BALANCE DEDUCTIONS 1997 BALANCE DEDUCTIONS 1998 BALANCE ------------ ------------- ---------- ------------- ---------- ------------- 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
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. 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:
NINE YEAR ENDED YEAR ENDED MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1996 --------------- --------------- ------------- (TWELVE MONTHS) (TWELVE MONTHS) 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................. (0.5) (1.5) 3.5 ---- ---- ---- Effective income tax rate before purchased in-process research and development costs...................... 36.0% 37.2% 39.0% Purchased in-process research and development costs...................... 21.9 25.9 0.0 ---- ---- ---- Effective income tax rate................ 57.9% 63.1% 39.0% ==== ==== ====
35 36 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents the United States and foreign components of income before income taxes and the provision for income taxes:
NINE YEAR ENDED YEAR ENDED MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1996 --------------- --------------- ------------- (TWELVE MONTHS) (TWELVE MONTHS) INCOME BEFORE INCOME TAXES United States............................ $1,942 $ 873 $ 101 Foreign.................................. 364 594 266 ------ ------ ----- Income before income taxes............... $2,306 $1,467 $ 367 ====== ====== ===== PROVISION FOR INCOME TAXES CURRENT Federal.................................. $ 823 $ 464 $ 242 State and local.......................... 141 129 53 Foreign.................................. 205 226 98 ------ ------ ----- Sub-Total................................ 1,169 819 393 ------ ------ ----- DEFERRED Federal.................................. 113 35 (198) State and local.......................... 43 77 (45) Foreign and other........................ 11 (5) (7) ------ ------ ----- Sub-Total................................ 167 107 (250) ------ ------ ----- Provision for income taxes............... $1,336 $ 926 $ 143 ====== ====== =====
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:
SEPTEMBER 30, SEPTEMBER 30, 1998 1997 ------------- ------------- 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................................................... 462 664 ------ ------ Total deferred income tax assets.......................... $3,150 $3,313 ====== ====== DEFERRED INCOME TAX LIABILITIES Property, plant and equipment........................... $ 397 $ 478 Other................................................... 380 240 ------ ------ Total deferred income tax liabilities..................... $ 777 $ 718 ====== ======
36 37 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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
SEPTEMBER 30, SEPTEMBER 30, 1998 1997 ------------- ------------- DEBT MATURING WITHIN ONE YEAR Commercial paper (net of $495* expected to be refinanced)............................................. $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%
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.
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 expected to be refinanced................ 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. 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. 37 38 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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:
PENSION POSTRETIREMENT SEPTEMBER 30 SEPTEMBER 30 ------------------ ------------------ 1998 1997 1998 1997 ------- ------- ------- ------- 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 ======= ======= ======= =======
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. 38 39 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table shows the components of pension and postretirement costs for the periods indicated:
NINE MONTHS YEAR ENDED YEAR ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1996 --------------- --------------- ------------- (TWELVE MONTHS) (TWELVE MONTHS) PENSION COST 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 ======= ======= =======
- --------------- (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. 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. 39 40 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 $311 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. 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. 40 41 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 re cognition 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:
NINE YEAR ENDED YEAR ENDED MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1996 --------------- --------------- ------------- (TWELVE MONTHS) (TWELVE MONTHS) Net income As reported............................ $ 970 $ 541 $ 224 Pro forma.............................. $ 799 $ 444 $ 202 ----- ----- ----- Earnings per share -- basic As reported............................ $0.74 $0.42 $0.19 Pro forma.............................. $0.61 $0.35 $0.17 Earnings per share -- diluted As reported............................ $0.73 $0.42 $0.19 Pro forma.............................. $0.58 $0.34 $0.17 ----- ----- -----
- --------------- 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:
LUCENT AT&T WEIGHTED AVERAGE ASSUMPTIONS -------------------- ---- - ---------------------------- (1) (2) (3) (4) 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
- --------------- (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. 41 42 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 42 43 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes the status of Lucent's stock options outstanding and exercisable at September 30, 1998:
STOCK OPTIONS OUTSTANDING STOCK OPTIONS --------------------------------- EXERCISABLE WEIGHTED ------------------ AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF SHARES CONTRACTUAL EXERCISE SHARES EXERCISE 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:
NINE MONTHS YEAR ENDED YEAR ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1996 --------------- --------------- ------------- (TWELVE MONTHS) (TWELVE MONTHS) 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
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 25.7% and 24.1% 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. 43 44 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NINE YEAR ENDED YEAR ENDED MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1996 --------------- --------------- ------------- (TWELVE MONTHS) (TWELVE MONTHS) REVENUES United States.................................... $24,416 $21,807 $13,334 Other geographic areas........................... 5,731 4,553 2,525 ------- ------- ------- $30,147 $26,360 $15,859 ======= ======= ======= 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.................................... $ 2,328(1) $ 1,514(2) $ 940 Other geographic areas........................... 525 410 (108) Corporate, eliminations and nonoperating......... (547) (457) (465) ------- ------- ------- Income before income taxes....................... $ 2,306 $ 1,467 $ 367 ======= ======= ======= ASSETS (END OF PERIOD) United States.................................... $19,665 $17,054 $16,492 Other geographic areas........................... 6,755 5,600 3,912 Corporate assets................................. 1,282 1,778 2,744 Eliminations..................................... (982) (621) (522) ------- ------- ------- $26,720 $23,811 $22,626 ======= ======= =======
- --------------- (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. 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 $3,775 and $3,731 for the years ended September 30, 1998 and 1997, respectively, and $1,970 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. 44 45 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. FINANCIAL INSTRUMENTS The carrying values and estimated fair values of financial instruments, including derivative financial instruments were as follows:
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 ------------------ ------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------ -------- ------ 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
- --------------- (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:
FINANCIAL INSTRUMENT VALUATION METHOD - -------------------- ---------------- Long-term debt Market quotes for instruments with similar terms and maturities Foreign currency forward exchange Market quotes contracts/purchased options Letters of credit Fees paid to obtain the obligations
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. 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. 45 46 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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. 46 47 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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.................................. $ 804 $ 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. 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 47 48 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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. 48 49 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Lease Commitments Lucent leases land, buildings and equipment under agreements that expire in various years through 2016. Rental expense under operating leases was $408 and $324 for the years ended September 30, 1998 and 1997, respectively, and $182 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 $876.
YEAR ENDED SEPTEMBER 30 --------------------------------------------- LATER 1999 2000 2001 2002 2003 YEARS ---- ---- ---- ---- ---- ----- Operating leases....................... $250 $188 $113 $74 $55 $196
14. QUARTERLY INFORMATION (UNAUDITED)
FISCAL YEAR QUARTERS --------------------------------------------------- FIRST SECOND THIRD FOURTH TOTAL ------- ------ ------- ------- ------- Year Ended September 30, 1998 Revenues........................ $ 8,724 $6,157 $ 7,228 $ 8,038 $30,147 Gross margin.................... 4,205 2,724 3,279 3,783 13,991 Net income (loss)............... 792(a) 23(b) (233)(c) 388(d) 970(a,b,c,d) Earnings(loss) per common share -- basic................ $ 0.62(a) $ 0.02(b) $ (0.18)(c) $ 0.30(d) $ 0.74(a,b,c,d) Earnings (loss) per common share -- diluted.............. $ 0.61(a) $ 0.02(b) $ (0.18)(c) $ 0.29(d) $ 0.73(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........................ $ 7,938 $5,149 $ 6,340 $ 6,933 $26,360 Gross margin.................... 3,642 2,168 2,600 3,052 11,462 Net income (loss)............... 859 66 213 (597)(e) 541(e) Earnings (loss) per common share -- basic................ $ 0.67 $ 0.05 $ 0.17 $ (0.47)(e) $ 0.42(e) Earnings (loss) per common share -- diluted.............. $ 0.67 $ 0.05 $ 0.17 $ (0.47)(e) $ 0.42(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
- --------------- (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. 49 50 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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. 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. Lucent plans to close down the wireless handset business it previously contributed to PCC and to sell the remaining businesses. Lucent expects that these activities will be completed during the first calendar quarter of 1999. 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. 50 EX-21 10 LIST OF SUBSIDIARIES OF LUCENT TECHNOLOGIES INC. 1 Exhibit 21 LUCENT TECHNOLOGIES INC. SUBSIDIARIES
Name Jurisdiction of Organization - ---- ---------------------------- Lucent Technologies Argentina S.A. Argentina (Lucent Technologies Sociedad Anonima Argentina) Lucent Technologies Australia Pty. Ltd. Australia Lucent Technologies Austria Ges.m.b.H. Austria Lucent Technologies Middle East W.L.L. Bahrain Lucent Technologies Foreign Sales Corporation Barbados Lucent Technologies Belgium S.A./N.V. Belgium Lucent Technologies Network Systems Belgium S.A./N.V. Belgium Lucent Technologies (Bermuda) Ltd. Bermuda Lucent Technologies Network Systems do Brasil S.A. Brazil Lucent Technologies Brasil Ltda. Brazil SID Telecommunicacoes E Controles, S.A. Brazil Lucent Technologies World Services, Inc. (Brunei branch) Brunei Lucent Technologies Eurasia Ltd. (Bulgaria) Bulgaria Lucent Technologies Canada Inc. Canada Octel Communications Canada, Inc. Canada TKM Communications Inc. Canada TKM Tele-Collections Management Corp Canada Lucent Technologies (Chile) Limitada Chile Lucent Technologies Colombia S.A. Colombia Lucent Technologies de Costa Rica S.A. Costa Rica Lucent Technologies s.r.o. Czech. Republic Lucent Technologies EMEA B.V. (Czech. branch) Czech. Republic Lucent Technologies Denmark A/S Denmark Lucent Technologies Dominicana C. por A. Dominican Republic EcuaLucent Technologies S.A. Ecuador Lucent Technologies International Inc. (Egypt branch) Egypt Lucent Technologies El Salvador S.A. de C.V. El Salvador Lannet B.V. (France Branch) France Lucent Technologies BCS S.A. France Octel Communications S.A. France TRT Lucent Technologies France Lannet B. V. (Germany Branch) Germany Triple C Call Center Communications Germany Lucent Technologies Business Communications Systems and Microelectronics GmbH Germany Lucent Technologies Fibre Cables GmbH Germany Lucent Technologies Network Systems GmbH Germany Octel Communications GmbH (Germany) Germany Optimay GmbH Germany Lucent Technologies EMEA B.V. Greece Lucent Technologies de Guatemala S.A. Guatemala
2 Lucent Technologies World Services, Inc. (Honduras Branch Office) Honduras Lucent Technologies de Honduras S.A. Honduras Lannet Asia Ltd. Hong Kong Lucent Technologies Asia/Pacific Inc. (Hong Kong Branch) Hong Kong Lucent Technologies Korea Ltd. (Hong Kong branch) Hong Kong Lucent Technologies Asia/Pacific Ltd. Hong Kong Octel Communications Pacific Ltd. (Hong Kong) Hong Kong Lucent Technologies Hungary Ltd./Lucent Technologies Magyarorszag Kft. Hungary Lucent Technologies India Pvt. Ltd. India Lucent Technologies Network Systems Nederland B.V. (Indonesia) Indonesia Lucent Technologies World Services Inc. (Indonesia Project Office) Indonesia Lucent Technologies Asia/Pacific Inc. (Indonesia Rep. Office) Indonesia Lucent Technologies Ireland Ltd. Ireland Lucent Technologies GCM Sales Limited Ireland Lannet Ltd. Israel Lucent Technologies Belgium S.A./N.V. (Israel) Israel Lannet B.V. (Italy Branch) Italy Lucent Technologies Italia S.p.A. Italy Octel Communications Services Limited (Italian Branch) Italy Lannet Asia Ltd. (Japan Branch) Japan Lucent Technologies Japan Ltd. Japan Octel Communications K. K. (Japan) Japan Lucent Technologies EMEA B.V. (Kazakstan Rep. Office) Kazakstan Lucent Technologies Eurasia Ltd. (Kazakstan Rep. Office) Kazakstan Lannet Korea Ltd. Korea Lucent Technologies Korea Ltd. Korea Lucent Technologies World Services Inc. (Kuwait branch office) Kuwait Lucent Technologies Eurasia Ltd. (Lithuania Rep. Office) Lithuania Lucent Technologies (Malaysia) Sdn. Bhd. Malaysia Lucent Technologies BCS de Mexico, S.A. de C.V. Mexico Lucent Technologies de Mexico S.A. de C.V. Mexico Lucent Technologies Holdings de Mexico S.A. de C.V. Mexico Lucent Technologies Microelectronica de Mexico S.A. de C.V. Mexico Lucent Technologies Microelectronica de Monterrey, S.A. de C.V. Mexico Octel Communications Latin America, S.A. de C.V. (Mexico) Mexico Lannet B.V. Netherlands Lucent Technologies Nederland B.V. Netherlands Lucent Technologies EMEA Services B.V. Netherlands Lucent Technologies Network Systems Nederland B.V. Netherlands Lucent Technologies Nederland B.V. Netherlands Lucent Technologies EMEA B.V. Netherlands Lucent Technologies (NZ) Limited New Zealand Lucent Technologies Nicaragua S.A. Nicaragua Lannet Asia Ltd. (China Branch) People's Republic of China Lucent Technologies Qingdao Power Systems Company, Ltd. People's Republic of
3 China Lucent Technologies (China) Co., Ltd. People's Republic of China Lucent Technologies (Shanghai) International Enterprises, Ltd. People's Republic of China Telecommunications Radioelectriques et Telephoniques (TRT) (Pakistan branch) Pakistan Lucent Technologies World Services, Inc. (Panama branch) d/b/a Lucent Technologies de Panama Panama Lucent Technologies del Peru S.A. Peru Telecommunications Radioelectriques et Telephoniques (TRT) (Philippines branch) Philippines Lucent Technologies Philippines Inc. Lucent Technologies Poland S.A. Poland Lucent Technologies Polska Spolka z o.o. Poland Lucent Technologies International Inc. (Secursal en Portugal) Portugal Lucent Technologies World Services Inc. (Puerto Rico branch) Puerto Rico Lucent Technologies Puerto Rico Inc. Puerto Rico Lucent Technologies Eurasia Ltd. (Romania branch) Romania Lannet B.V. (Russa Branch) Russian Federation Lucent Technologies EMEA B.V. (Moscow Rep. Office) Russian Federation Lucent Technologies Eurasia Ltd. (Russia Moscow Rep. Office) Russian Federation ZAO Lucent Technologies Russian Federation Lucent Technologies International Inc. (Saudi Arabia branch) Saudi Arabia Lucent Technologies Consumer Products Pte. Ltd. Singapore Lucent Technologies Investments Pte. Ltd. Singapore Lucent Technologies Microelectronics Pte. Ltd. Singapore Lucent Technologies Singapore Pte. Ltd. Singapore Octel Communications Asia Pte. Ltd. (Singapore) Singapore Lucent Technologies Slovensko s.r.o. Slovak Republic Lannet B.V. (South African Branch) South Africa Lucent Technologies South Africa (Proprietary) Ltd. South Africa Lannet B.V. (Spain Branch) Spain Lucent Technologies World Services, Inc. (Spain branch) Spain Lucent Technologies Microelectronica S.A. Spain Lucent Technologies Network Systems Espana S.A. Spain Octel Communications Services Limited, Sucuvsal En Espana (Spanish Branch) Spain Lucent Technologies Asia/Pacific Inc. (Sri Lanka branch) Sri Lanka Lannet B.V. (Sweden Branch) Sweden Lucent Technologies Sweden AB. Sweden Lannet B.V. (Switzerland Branch) Switzerland Lucent Technologies A.G. Switzerland Lucent Technologies International Purchasing Company (Taiwan branch) Taiwan Lucent Technologies Taiwan Inc. (Taiwan branch) Taiwan Lucent Technologies Thailand Inc. (Thailand branch) Thailand Lucent Technologies Microelectronics Thailand Ltd. Thailand
4 Lucent Technologies International Inc. (U.A.E. branch) UAE (United Arab Emirates) AT&T Business Communications Europe Ltd. United Kingdom Lannet B.V. (UK Branch) United Kingdom Lucent Technologies Network Systems UK Ltd. United Kingdom Lucent Technologies UK Limited United Kingdom Octel Communications Limited UK United Kingdom Octel Communications Services Limited (UK) United Kingdom Rhetorex Europe Limited (UK) United Kingdom SDX Business Systems Ltd. (UK) United Kingdom Telectron Systems Ltd. United Kingdom Western Electric Company, Ltd. United Kingdom MX (UK) Limited United Kingdom Lucent Technologies EMEA B.V. (Kiev-Ukraine) Ukraine AG Communications Systems Corp. Delaware Agile Networks, Inc. Delaware ATOR Corporation New York Bell Laboratories, Inc. Delaware Bell Telephone Laboratories Inc. Delaware Day Investment Corp. Delaware Lannet, Inc. California Litespec, Inc. Delaware Livingston Enterprises Inc. California Loose Tube Inc. Delaware L.T. Funding, LLC Delaware LTI Corporation Delaware Lucent Cable Communications Inc. Delaware Lucent Consumer Communications, LLC Delaware Lucent Technologies Americas Inc. Delaware Lucent Technologies Asia/Pacific Inc. Delaware Lucent Technologies Construction Services, Inc. Delaware Lucent Technologies Eastern Ventures Inc. Delaware Lucent Technologies Engineering Inc. Delaware Lucent Technologies Eurasia Ltd. Delaware Lucent Technologies Guardian Corporation Delaware Lucent Technologies GRL Corporation Delaware Lucent Technologies Holdings Inc. Delaware Lucent Technologies International Inc. Delaware Lucent Technologies International Purchasing Company Delaware Lucent Technologies Kazakhstan Ltd. Delaware Lucent Technologies Management Services Inc. Delaware Lucent Technologies Maquiladoras Inc. Delaware Lucent Technologies Opto Inc. Delaware Lucent Technologies Realty Inc. New Jersey Lucent Technologies Services Company Inc. Delaware Lucent Technologies Systems & Technology Africa Inc. Delaware Lucent Technologies of Tampa Inc. Delaware Lucent Technologies Taiwan Inc. Delaware Lucent Technologies Technical Services Company, Inc. Delaware Lucent Technologies Thailand Inc. Delaware
5 Lucent Technologies Ventures Inc. Delaware Lucent Technologies Western Investments Inc. Delaware Lucent Technologies World Services Inc. Delaware Lucent Venture Partners Delaware Mass Media Communications Inc. Massachusetts Morris County Aircraft Leasing Inc. Delaware Nassau Metals Corporation New York NCS OSP Development Corp. Delaware NCS Ventures, Inc. Delaware Octel Communications Corporation Delaware Optimay Corporation Delaware Prominet Corporation Delaware Quadritek Systems Inc. Pennsylvania Telecommunications Technology Middle East Inc. Delaware Western Electric Company, Incorporated Delaware Western Electric International Incorporated North Carolina Yurie Systems Inc. Delaware Lucent Technologies Venezuela S.A. Venezuela Lucent Technologies Asia/Pacific Inc. (Vietnam Rep. Office) Vietnam Octel Communications International Corporation (US Virgin Islands) US Virgin Islands
EX-23 11 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Lucent Technologies Inc. on Form S-3 (File No. 333-01223), and Forms S-8 (File No.'s 333-45253, 333-64525, 333-46589, 333-52799, 333-01223, 333-52805, 333-56133, 333-08775, 333-37041, 333-33943, 333-18975, 333-18977, 333-08783, and 333-42475), of our reports dated October 21, 1998, on our audits of the consolidated financial statements and financial statement schedule of Lucent Technologies Inc. and subsidiaries as of September 30, 1998 and 1997 and for the year ended September 30, 1998 and 1997 and the nine-month period ended September 30, 1996, which reports are included in this Form 10-K. PricewaterhouseCoopers LLP New York, New York December 22, 1998 EX-24 12 POWERS OF ATTORNEY 1 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, Lucent Technologies Inc., a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, a Form 10-K for the fiscal year ended September 30, 1998; and WHEREAS, the undersigned is a Director (and Officer) of the Company, as indicated below following the signature: NOW, THEREFORE, the undersigned hereby constitutes and appoints Donald K. Peterson and James S. Lusk and each of them, as attorneys for and in the name, place and stead of the undersigned, and in the capacity of the undersigned as a Director (and Officer) of the Company, to execute and file such Form 10-K and any amendments or supplements thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 16th day of December, 1998. By /s/ RICHARD A. MCGINN By /s/ DONALD S. PERKINS - -------------------------------------------- -------------------------------------------- Name: Richard A. McGinn Name: Donald S. Perkins Title: Chairman of the Board and Chief Title: Director Executive Officer By /s/ PAUL A. ALLAIRE By /s/ HENRY B. SCHACHT - -------------------------------------------- -------------------------------------------- Name: Paul A. Allaire Name: Henry B. Schacht Title: Director Title: Director By /s/ CARLA A. HILLS By /s/ FRANKLIN A. THOMAS - -------------------------------------------- -------------------------------------------- Name: Carla A. Hills Name: Franklin A. Thomas Title: Director Title: Director By /s/ DREW LEWIS By /s/ JOHN A. YOUNG - -------------------------------------------- -------------------------------------------- Name: Drew Lewis Name: John A. Young Title: Director Title: Director By /s/ PAUL H. O'NEILL - -------------------------------------------- Name: Paul H. O'Neill Title: Director
2 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, Lucent Technologies Inc., a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, a Form 10-K for the fiscal year ended September 30, 1998; and WHEREAS, the undersigned is an Officer of the Company, as indicated below following the signature: NOW, THEREFORE, the undersigned hereby constitutes and appoints Donald K. Peterson as attorney for and in the name, place and stead of the undersigned, and in the capacity of the undersigned as an Officer of the Company, to execute and file such Form 10-K and any amendments or supplements thereto, hereby giving and granting to said attorney, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorney may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 10th day of December, 1998. By: /s/ JAMES S. LUSK ------------------------------------ Name: James S. Lusk Title: Vice President and Controller 3 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, Lucent Technologies Inc., a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, a Form 10-K for the fiscal year ended September 30, 1998; and WHEREAS, the undersigned is an Officer of the Company, as indicated below following the signature: NOW, THEREFORE, the undersigned hereby constitutes and appoints James S. Lusk as attorney for and in the name, place and stead of the undersigned, and in the capacity of the undersigned as an Officer of the Company, to execute and file such Form 10-K and any amendments or supplements thereto, hereby giving and granting to said attorney, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorney may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 10th day of December, 1998. By: /s/ DONALD K. PETERSON ------------------------------------ Name: Donald K. Peterson Title: Executive Vice President and Chief Financial Officer EX-27 13 FINANCIAL DATA SCHEDULE
5 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. 12-MOS SEP-30-1998 OCT-01-1997 SEP-30-1998 685 0 7,329 390 3,081 14,078 11,785 6,382 26,720 10,428 2,409 0 0 13 5,521 21,186 30,147 30,147 16,156 16,156 11,530 130 318 2,306 1,336 970 0 0 0 970 .74 .73
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