-----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, AF8qhzt7OP0cjFJdMoiATda6Uhv0iy3Z26CEG2S+jsyF2KnfJhMnBbH/4S1LfEuj TVQoca9jdJx8T56gqOBMZA== 0000950123-99-011082.txt : 19991222 0000950123-99-011082.hdr.sgml : 19991222 ACCESSION NUMBER: 0000950123-99-011082 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991221 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-K405 SEC ACT: SEC FILE NUMBER: 001-11639 FILM NUMBER: 99778503 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-K405 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, 1999 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, 1999, the aggregate market value of the voting stock held by non-affiliates was approximately $233,000,000,000. At November 30, 1999, 3,141,898,168 common shares were outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the registrant's annual report to security holders for the fiscal year ended September 30, 1999 (Part II) (2) Portions of the registrant's definitive proxy statement dated December 21, 1999, issued in connection with the annual meeting of shareholders (Part III) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 Share)..................... New York Stock Exchange 6.90% Notes due July 15, 2001............................... New York Stock Exchange 7.25% Notes due July 15, 2006............................... New York Stock Exchange 6.50% Debentures due January 15, 2028....................... New York Stock Exchange 5.50% Notes due November 15, 2008........................... New York Stock Exchange 6.45% Debentures due March 15, 2029......................... New York Stock Exchange
2 3 TABLE OF CONTENTS
ITEM DESCRIPTION PAGE - ---- ----------- ---- PART I 1. Business.................................................... 4 2. Properties.................................................. 25 3. Legal Proceedings........................................... 26 4. Submission of Matters to a Vote of Security-Holders......... 26 PART II 5. Market for Registrant's Common Equity and Related 26 Stockholder Matters......................................... 6. Selected Financial Data..................................... 26 7. Management's Discussion and Analysis of Financial Condition 26 and Results of Operations................................... 8. Financial Statements and Supplementary Data................. 26 9. Changes in and Disagreements with Accountants on Accounting 26 and Financial Disclosure.................................... PART III 10. Directors and Executive Officers of the Registrant.......... 26 11. Executive Compensation...................................... 27 12. Security Ownership of Certain Beneficial Owners and 27 Management.................................................. 13. Certain Relationships and Related Transactions.............. 27 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 28 8-K.........................................................
This Report contains trademarks, service marks and registered marks of the Company and its subsidiaries, and other companies, as indicated. 3 4 PART I ITEM 1. BUSINESS. I. GENERAL Lucent Technologies Inc. ("Lucent") was incorporated in Delaware in November 1995. Lucent has its principal executive offices at 600 Mountain Avenue, Murray Hill, New Jersey 07974 (telephone number 908-582-8500). Lucent was formed from the systems and technology units that were formerly a part of AT&T Corp., including the research and development capabilities of Bell Laboratories. Prior to February 1, 1996, AT&T conducted Lucent's original business through various divisions and subsidiaries. On February 1, 1996, AT&T began executing its decision to separate Lucent into a stand-alone company (the "Separation") by transferring to Lucent the assets and liabilities related to its business. In April 1996, Lucent completed the initial public offering of its common stock ("IPO") and on September 30, 1996, became independent of AT&T when AT&T distributed to its shareowners all of its Lucent shares. References to "Lucent" include the historical operating results and activities of the business and operations transferred to Lucent in the Separation. In 1996, Lucent changed its fiscal year to begin October 1 and end September 30. Lucent is one of the world's leading designers, developers and manufacturers of communications systems, software and products. Lucent is a global leader in the sale of public and private communications systems, supplying systems and software to most of the world's largest communications network operators and service providers (together referred to as "service providers"). Lucent is also a global leader in the sale of business communications systems and in the sale of microelectronic components for communications applications to manufacturers of communications systems and computers. Lucent's research and development activities are conducted through Bell Laboratories ("Bell Labs"), one of the world's foremost industrial research and development organizations. The communications industry is experiencing rapid changes in the technologies used to service customers' needs. Traditional circuit based switching and data packet transmission are converging. This convergence of technologies is driven by the growing demands on the transmission of information using data, voice, video and fax, or any combination of these. The demand is driven by the expansion of Internet traffic over existing networks -- both wireline and wireless -- as well as the buildout of new and improved networks. Lucent's strategy is to meet its customers' needs by offering an end-to-end solutions platform, which brings together Lucent's core products with new offerings obtained through strategic acquisitions and the research and development of Bell Laboratories. This strategy brings together products related to data, voice, optical, wireless, software, services and support. Lucent has three reportable segments: Service Provider Networks ("SPN"), Enterprise Networks ("Enterprise"), and Microelectronics and Communications Technologies ("MCT"). SPN provides public networking systems and software to telecommunications service providers and public network operators around the world. Enterprise develops, manufactures, markets and services advanced communications products and data networking systems for business customers. MCT designs and manufactures high-performance integrated circuits, power systems, optical fiber and fiber cables, and optoelectronic components for applications in the communications and computing industries. The three reportable operating segments are strategic market units based on the customers and the markets served. II. SERVICE PROVIDER NETWORKS A. General Lucent designs, develops, manufactures and services systems, including software, which enable service providers to provide wireline and wireless access, local, long distance and international voice, data and video and cable services. The SPN segment includes the product groups responsible for Lucent's optical networking, switching solutions, access, wireless networks and communications software businesses. It also includes the businesses which are focused on the needs of cable television operators and data networking systems for service providers as well as the sales and support organizations responsible for offers, sales, distribution, installation and maintenance for service provider customers worldwide. 4 5 Lucent's systems connect, route, manage and store voice, data and video in any combination, and are used for: wireline access; local and long distance switching; intelligent network services and signaling; wireless communications, including both cellular and personal communications services ("PCS"); and high-speed, broadband multi-functional communications. Lucent has a wireline local access installed base (the number of access lines serviced by switches manufactured by Lucent) of approximately 150 million lines. Lucent designs, develops, manufactures, sells, and services each of the five broad elements that comprise communications networks for service providers: switching systems, which route information through the network; transmission systems (including optical networking and access products) which provide the communications path through the network that carries information between points in the network as well as to and from subscribers; operation support systems, which enable service providers to manage the work flow, planning, surveillance, management, provisioning and continuous testing of their networks; intelligent network/application software, which enables service providers to offer a broad array of enhanced and differentiated services; and cable systems, which provide the transport media between points in a network (as described below under Enterprise and MCT). These systems collectively comprise the infrastructure that enables communications service providers to provide traditional narrow band voice and data services and enables both new and traditional network operators to offer broadband multi-media services. In fiscal year 1999, Lucent acquired or merged with several companies related to the SPN segment's business, including: Nexabit, a developer of high-speed switching equipment and software that directs traffic along telecommunications networks; Ascend Communications, Inc., a developer, manufacturer and seller of wide area networking solutions; Kenan Systems Corporation, a developer of third-party billing and customer care software; Wave Access Ltd., a developer of high-speed systems for wireless data communications; and Quadritek Systems, Inc., a start-up developer of next-generation Internet protocol network administration software solutions. B. Switching Solutions Lucent manufactures, develops, markets and manages switching products and software for the service provider market. Lucent's primary switching products are the 5ESS(R) switch for local and long distance switching and international gateways, the 4ESS(TM) Digital Switch for long distance and international switching and the new 7R/E (TM) Packet Solutions switch. Lucent's primary switching solutions products include: - 5ESS(R)-2000 Switch for local, toll, international gateway and wireless network service providers around the globe. The 5ESS switch is used throughout the world to provide a combination of network applications, including local and long distance switching and international gateways, operator services, network signaling, intelligent networking and wireless switching. The 5ESS switch, with the Company's 5E12 AnyMedia(R) software, enables network operators to offer a large number of new data services and local number portability, as well as simultaneous wireline and wireless, local, long distance and international services. - 7R/E Packet Solutions portfolio (includes the 7R/E Call Feature Server) is for use by emerging or existing service providers to build new packet networks. In addition, the 7R/E Packet Driver allows existing service providers to evolve their circuit-based networks to packet networks to handle increasing data traffic as needed. It delivers both voice and data services over Internet protocol ("IP") or Asynchronous Transfer Mode ("ATM") networks. The 7R/E Packet Driver permits service providers to use a substantial percent of their existing hardware when they migrate to packet networks. The 7R/E OneLink Manager(TM) gives service providers a single tool to easily and cost-effectively handle operations, administration, management, and provisioning across all network elements. - GTD-5(R) Switch for local network service providers - 4ESS Switch for toll and international gateway applications 5 6 - Subscriber loop carrier systems, including the SLC(R)-5 and SLC-2000, sold primarily to local exchange carriers - AnyMedia(R) Access System is a global platform designed to provide network access from any medium (copper/fiber and voice/data/video) C. Optical Networking Lucent designs, manufactures and markets optical networking systems, offering a complete portfolio of optical networking products. Lucent's family of optical networking systems provides service providers with fast, efficient information transport over fiber-optic lines. The enabler of optical networking is photonics, a technology that uses light particles, or photons, to transport information over hair-thin glass fibers. Most transmission systems currently comply with one of two similar standards designed to promote the implementation of maximum transmission capacity with the greatest simplicity and lowest cost for service providers. The Synchronous Optical Network ("SONET") standard has been widely adopted in North America. The Synchronized Digital Hierarchy ("SDH") predominates throughout the rest of the world. Lucent markets transmission access systems supporting both standards. Lucent's primary optical networking products include: - Dense Wavelength Division Multiplexing ("DWDM") systems such as the WaveStar(TM) 40G OLS and 400G OLS which use prism-like technology to combine the information generated by up to 80 individual lasers onto a single strand of fiber-optic cable. - Systems that automatically route large amounts of information from fiber to fiber, such as the WaveStar Bandwidth Manager and WaveStar DACS. - Systems that combine many low-speed electronic signals into a single high-speed signal, and then convert that signal to an optical signal for transmission over fiber-optic cable. Examples include the current SONET and SDH product lines (FT 2000, DDM 2000, ISM 2000, SLM 2000) as well as the new global product line (WaveStar(TM) 2.5G, WaveStar(TM) 10G, WaveStar(TM) 40G Express). D. Wireless Networks Lucent manufactures and markets total-system solutions for the global wireless networks industry. Lucent provides end-to-end capabilities for operators to plan, deploy, operate and maintain mobile and fixed wireless networks to maximum efficiency, and to competitively meet their customers' needs. Lucent's portfolio includes Mobile Switching Centers, base station products, and network support software. Lucent also provides global customer technical support and training. Lucent's solutions for wireless network operators encompass all of the major wireless mobile network standards, including AMPS, TDMA, CDMA and GSM, spreading over a broad frequency spectrum including: 800 MHz, 900 MHz, 1800 MHz or 1900 MHz. Lucent's solutions offer scaleable platforms for wireless services that are fully compatible with the larger telecommunications environment of today, yet are able to evolve to next-generation networks. Lucent's three primary wireless product families include: - Mobile Switching centers that provide the transfer of calls within the wireless network and interface to the public switched telephone networks. - Operations and maintenance centers which are software systems allowing for the provisioning, diagnostics and administration of the wireless networks. - Base station systems that are the radio systems that transmit and receive subscriber calls and manage handoffs as customers move from cell to cell. 6 7 E. Communications Software Lucent develops open, standards-based, multi-vendor software products and services to help service providers manage their complex, converging voice and data networks. Lucent's portfolio of software solutions includes software for network and service management, billing and customer care, programmable switching, and intelligent network services for wireline (fixed), wireless (mobile), Internet, and converging networks. Lucent's solutions are modular and scalable and designed to help reduce costs. Lucent's primary communications software products include: - Operations Support Software -- Lucent's Kenan Systems provides established and growing service providers with service ready solution sets that include: convergent customer care and billing management; multiple switching software platforms; network performance and assurance; number portability; service activation, provisioning, and management; transport provisioning; and wireless/mobile network management. Some of our modular, scalable, leading-edge software products include: Arbor(R) Product Suite, Actiview(R) Service Management, ConnectVu(TM) Configuration Management, Integrated Transport Management, Mechanized Loop Testing, NetMinder(TM) System Network Performance, Network Fault Management, and OneVision(R) Network Management Solution. - Intelligent Network Services -- Lucent's Intelligent Network ("IN") provides a broad range of targeted, flexible, end-to-end solutions for wireline and wireless providers. The services run on a proven intelligent network platform that supports the world's major national and multi-national IN protocols. Our IN portfolio contains over 50 IN services including Calling Card Services, Prepaid, Number Portability and Over-the-Air Activation Function and several servers and platforms such as Service Control Point, Service Creation Environment and Compact Service Node. - Programmable Switching -- Lucent's Programmable Switching Solutions gives service providers and third parties the ability to quickly develop and deploy new advanced-type services. Our Programmable Switching Solutions include: SoftSwitch -- a Bell Labs-developed "software switch" that enables seamless connectivity between public and internet telephony networks, 7R/E -- a portfolio of ATM and IP Packet data networking solutions products delivering over 3,000 services to packet network operators, and multiple products from our recent acquisition of Excel Switching Corporation. F. Data Networking -- Service Providers and Access Lucent develops, markets, sells and services data networking solutions for service provider customers worldwide. For the service provider market, Lucent's product and services portfolio includes ATM, Frame Relay, IP, Digital Subscriber Line ("DSL"), Broadband ATM Access, Remote Access and Network Management offerings. Lucent's primary data networking and access solutions for service providers include: - Lucent's GRF multigigabit routers deliver high performance in dynamic heavy-traffic IP networking environments. Routers are network controllers that determine the best routing for data transmission between end stations. They perform their operations by looking at network layer information found in data packets and either forwarding the packets directly to a destination or sending them through a series of intermediate devices. - The GX Smart Core ATM product family includes the GX 550 Smart Core ATM Switch -- a scalable, high-capacity switching system that provides the necessary capacity, performance, and port fanout capabilities for carrier services. ATM switches incorporate a cell-based switching and multiplexing communications technology which permits transportation of substantially all traffic types (e.g., video, voice, data, interactive video, etc.). ATM is a connection-oriented technology -- i.e., before data can be transferred, a connection between the sending and receiving nodes must be established. - Lucent's NX64000 multi-terabit switch/router is an architectural innovation that provides high-speed optical interfaces and integrates substantially all of the key core requirements onto a single, carrier-class multi-service device. It provides features of ATM switches and high-capacity routers. 7 8 - B-STDX Multiservice wide area network ("WAN") switches (deployed to build core frame relay networks) are carrier-class switches which are evolving as an access point to the next-generation WAN with the addition of internetworking modules for IP and ATM services for high-speed trunking and low-speed converged access. Frame relay technology allows bits to be packaged and sent out into the network with source and destination addresses. Products include the B-STDX 8000, B-STDX 9000 and B-STDX 8200. Another Lucent multi-service WAN switch is the CBX(TM) 500 which is of greater bandwidth than the B-STDX family of products. In addition, Lucent has its MAX family of WAN access switches. - Lucent's Stinger(TM) DSL Access Concentrator is a new carrier class DSL access concentrator. Access concentrators are call aggregation devices designed for large dial-in applications such as Internet service providers. They aggregate analog and digital calls over channelized lines such as T1/E1 and T3/E3. The Stinger offers features that ATM brings to multi-service networks, including effective bandwidth management and high availability. Addressing the needs of carriers implementing cell-based backbone networks, it features high-capacity traffic aggregation capabilities and performance. Other DSL access concentrators include the DSLTNT, DSL MAX 20 and the DSL Terminator 100 Access Concentrators. G. NetCare(R) Professional Services -- Service Providers and Engineering Services Lucent's NetCare Professional Services provides a comprehensive suite of value added services in the communications industry. NetCare Professional Services includes the full lifecycle of planning, design, implementation and operations support services that allow customers to manage their networks. The NetCare Professional Services unit is focused on network planning and design, consulting, integration and support services, including remote diagnostics and around-the-clock network monitoring services. In addition, NetCare Professional Services offers specialized solutions focused on clients' network security, performance and service level management, Microsoft Windows 2000, and voice/data convergence requirements. The NetCare Professional Services unit is focused on network engineering, provisioning, installation, and warranty and post-warranty support. In addition, Netcare Professional Services offers specialized solutions for system upgrades and conversions, system health assessments, capacity planning, network optimization, and program/project management services of complex network implementations. H. Cable Communications Lucent's Cable Communications provides a set of integrated products and services that enables cable network operators to offer customers full-featured, reliable IP telephony service, high-speed data access and digital video over their existing cable networks. Marketed as Lucent CableConnect(SM) Solutions, CableConnect is part of Lucent's End to End Solution(SM)service program that includes all elements needed to upgrade existing cable networks. CableConnect Solutions include network management services (planning, implementation, and maintenance), a full portfolio of network elements including switching and access infrastructure components, cable headend products, and premises equipment for the subscriber's home, as well as provisioning, billing, and customer care software platforms. Lucent's solutions deliver IP telephony and high-speed data access via the PathStar(TM) Access Server and 7R/E. I. Markets/Sales/Distribution The principal customers for Lucent's systems in the SPN segment are service providers that provide wireline and wireless local, long distance and international telecommunications services, including local, long distance and international telecommunications companies, cable television companies and internet service providers. Lucent's systems for service providers are installed to expand the capacity and features offered by existing networks, to replace older technology in existing networks and to establish new networks for entrants into deregulated or previously unserved markets. See "Outlook -- Reliance on Major Customers/Multi-Year Contracts." 8 9 As a result of structural, public policy and technological changes since the mid-1980's, the telecommunications industry has undergone a period of significant growth in the number of lines in service and applications offered. In developed markets, deregulation has permitted new market entrants to construct networks. In response, existing service providers have expanded beyond traditional offerings and are offering new services. In emerging markets, privatization, competition and economic expansion have increased demand for the systems marketed by Lucent's SPN business and its competitors. At the same time, technological advances also have increased demand by reducing operating costs and facilitating new applications, including multi-functional services. Lucent markets and sells its SPN systems worldwide, primarily through a direct sales force. Many of Lucent's SPN sales are made pursuant to general purchase agreements, which establish the terms and conditions and provide for price determination to be made on a contract bid basis. In addition, certain of the large infrastructure projects are conducted under long-term, fixed-price contracts. See "Outlook -- Reliance on Major Customers/Multi-Year Contracts." As a result of the increasing complexity of SPN systems and the high cost of developing and maintaining in-house expertise, service providers typically demand complete, integrated turn-key projects. Service providers are increasingly seeking overall network or systems solutions that require an increased software content which would enable them to rapidly deploy new and differentiable services. In response, Lucent has formed an organization focused on turn-key network engineering projects for both public and private sector customers. Lucent markets integrated solutions for the project and engineers, designs and installs the network, including equipment and software manufactured by both Lucent and third parties. Increasingly, as a result of the financial demands of major network deployments, service providers are looking to their suppliers to arrange for financing. The ability to provide financing is a requirement to conduct business in certain emerging U.S. and non-U.S. markets and in some cases Lucent furnishes or guarantees financing for customers. As a result, Lucent works with its customers to structure and lay off financing packages. See "Outlook -- Future Capital Requirements." In order to market its product line for service products worldwide, Lucent has established wholly-owned subsidiaries and joint ventures with local companies in many countries. J. Competition Lucent believes that its key competitive assets in the SPN segment are its broad product line, large installed base, relationship with key customers, technological expertise and new product and software development capabilities. Lucent's primary competitors in the service provider market are four very large European and North American companies which have substantial technological and financial resources and which offer similar broad product catalogs. These competitors are Alcatel Alsthom, Northern Telecom Limited, Siemens AG and Telefonaktiebolaget LM Ericsson. Lucent estimates that in 1998, Lucent and these four competitors collectively accounted for approximately 39% of the world's service provider network systems sales, with Lucent's accounting for about 11% of world sales. In addition, in each of Lucent's product areas covered in the SPN segment, Lucent faces significant competition from other companies which do business in one or a number of such product areas. For example, in wireless systems, Motorola, Inc. and Nokia Corporation, which are very large companies with substantial technological and financial resources, are two additional significant competitors. In optical networking and communications software, competition in the markets includes hundreds of smaller competitors. Lucent is also encountering competition from companies that design and manufacture data networking equipment such as Cisco Systems Inc. As Lucent continues to expand its SPN business, it is likely that other competitors will arise in each new technology or market area. K. Customer Dependency Historically, a limited number of customers have provided a substantial portion of the SPN segment and total revenues. These customers include AT&T, SPN's largest customer, as well as other large service providers such as the Regional Bell Operating Companies ("RBOCs"). The communications industry is experiencing a 9 10 consolidation of both U.S. and non-U.S. companies. The loss of any of these customers, or any substantial reduction in orders by any of these customers, could materially adversely affect Lucent's operating results in the SPN segment and total results. Concurrent with this consolidation among the larger service providers, the dynamics of the marketplace have created opportunities for new competitors to enter the market. Lucent is diversifying its customer base in the SPN segment and seeking out new types of customers globally. These new customers include competitive access providers and local exchange carriers, wireless service providers, cable television network operators and internet service providers. L. Sources and Availability of Raw Materials -- See "Sources and Availability of Raw Materials" M. Seasonality Historically, revenues and earnings related to the SPN segment have been higher in the first fiscal quarter. This is primarily due to the fact many of Lucent's large customers in the SPN segment have historically delayed a disproportionate percentage of their capital expenditures until the fourth quarter of the calendar year (Lucent's first fiscal quarter). Lucent has taken measures to manage the seasonality of its business related to the SPN segment by changing the date on which its fiscal year ends as well as its compensation programs for employees, resulting in a more uniform distribution of revenues and earnings throughout the year. N. Intellectual Property -- See "Patents, Trademarks and Other Intellectual Property". O. Industry Practices Impacting Working Capital Existing industry practices affect working capital and cash flow provided by (or required for) operations include the level and variability of customer orders relative to the volume of production, vendor lead times and/or materials availability for critical high dollar parts, inventory levels held to achieve rapid customer fulfillment, the provisions of extended payment terms to customers, the provision of return/stock rotation rights for certain key customers and distributors and the extension of financing terms. Also, see "Outlook -- Future Capital Requirements". III. ENTERPRISE NETWORKS A. General Lucent designs, develops, manufactures and services voice and data communications systems and software for small, mid-sized and large multinational businesses, government agencies and schools. Enterprise primarily offers premises-based communications servers for voice and data; e-business solutions; call center and other customer relationship management software and applications; messaging systems and applications; wireless systems; conferencing systems; Internet-based and LAN and WAN products; Systimax network cabling for buildings; and network management software, such as policy management and directory services; and network design, integration and management and maintenance services. Enterprise serves more than 1 million business locations in the United States and more than 90 countries. Products are sold through Lucent's direct sales force and through a network of distributors, dealers and value added resellers. During fiscal year 1999, Lucent merged with Mosaix, Inc., a provider of software that links companies' front and back offices and helps them deliver more responsive and efficient customer service. B. Enterprise Voice Lucent's core business communications system products are enterprise communications servers and private switching systems (PBXs and key systems), primarily located at the customer's premises, that permit a number of users to access and use telephony, messaging, customer relationship management and web-based applications via telephones or terminals. Lucent's communications servers interoperate over LAN, WAN, wired and wireless networks, as well as in stand-alone applications. As a market leader in communications systems in the U.S. 10 11 market, Lucent offers wired and wireless communications systems for large customers and systems for smaller businesses and home offices through an extensive distribution network as well as through its direct sales capacity. Lucent's messaging and response systems store and forward voice, data and images and conduct initial call processing, which integrates PBX and computer functions. In addition, Lucent is a technological leader in the development of speech recognition algorithms, which have been incorporated into both public and private call processing applications, such as operator services. Lucent's Customer Relationship Management Systems (Call Centers) integrate the hardware and software associated with computing, telephony, and multimedia messaging and response applications. Call centers are the initial entry point for customers to access businesses via the telephone and the Internet. Lucent's systems permit the routing and administration of a large volume of incoming calls, and the integration with business databases of customer and product information. Lucent's call center systems are used by companies in diverse industries such as financial services, retailing and transportation. The call center environment in which these companies operate is characterized by hundreds of service agents located in geographically dispersed networked sites, processing tens of thousands of calls per day. For example, using these systems, businesses can provide their customers with the ability to check balances or order status, to place orders, and to receive additional information and support. Lucent is also a worldwide leader in providing multimedia messaging equipment and services to telephone companies, cellular service providers, businesses, governments and educational institutions in more than 90 countries. Messaging is a key productivity tool for corporations around the world. Lucent's messaging systems are used by companies around the globe. Lucent's primary voice products for enterprise networks include: - Definity(R) communications servers include the flagship Definity Enterprise Communications Server (ECS), Definity ProLogix(TM) Solutions, and Definity One. All Definity servers transport telephony over three networks: voice, IP and ATM. All three servers support a range of applications, including messaging, conferencing, call centers and wireless. The Definity One, designed for small and branch offices, runs on an NT Server and supports up to 168 ports. Definity ProLogic Solutions, designed for small and mid-sized businesses, supports up to 600 ports. The Definity ECS, designed for mid-sized and large businesses scales up to 25,000 ports. - Merlin Magix(TM) and Partner Advanced Communications System (ACS). Merlin Magix is a modular hybrid PBX system that gives small and mid-sized businesses the ability to access the Internet and public switched telephone network using a single platform. It is designed for up to 80 lines. - CentreVu(R) Customer Care Solutions comprise a broad array of systems, software and professional services that include multimedia customer care and computer telephony applications, customer relationship management software, predictive dial solutions and interactive voice response solutions. CentreVu Supervisor gives call center supervisors the ability to monitor, administer and analyze the performance of call center operations from a desktop or laptop PC; CentreVu Explorer software collects and stores historical call information; CentreVu Exchange consolidates detailed call distribution and voice response reporting from multiple sites, making it easier for managers to analyze and allocate call center resources; CentreVu Advocate software uses predictive algorithms to automatically anticipate, control and optimize the allocation of call center resources to minimize caller wait times, reduce the number of abandoned calls, lower network costs and balance agent workloads while matching callers with the agents who can best serve their needs; CentreVu Internet Solutions enables callers to browse a web site and click on an icon to talk with an agent; CentreVu Response Solutions automates telephone interactions of all types -- using built-in scripts and digitized speech, it responds to callers, prompts the caller, looks up and delivers information and routes the call for additional service; CRM Central 2000 supports multimedia customer contacts, manages and delivers critical business and customer information, automatically triggers the work required to fulfill requests and monitors service levels to ensure quality. - Lucent Messaging Solutions includes a wide range of servers and software for enterprises and service providers. Major offers for enterprises include: Intuity(TM)Audix(TM) Multimedia Messaging System, which uses industry-standard components to meet the voice, fax and e-mail integration messaging needs of 11 12 businesses of all sizes; Octel Messaging Servers that support up to 30,000 users; Octel Unified Messenger(TM), which provides a single mailbox for voice, e-mail and fax that can be accessed and managed from a PC and telephone; Octel Visual Messenger, which allows users to view and manage all of their voice and fax messages from a PC; www.messenger, a standards-based tool that lets users access their messaging mailboxes through a web browser; and OctelDesigner(TM), which allows the creation of a wide range of customized voice/fax messaging and computer telephony applications. Lucent also offers messaging systems to telecommunications service providers, which, in turn, provide voice mail services to their residential, business and wireless customers. Lucent's AnyMedia(TM) Messaging family allows subscribers to send messages from anywhere, to anyone, at anytime, with any device, on any network. C. Data Networking -- Enterprise Lucent provides a wide range of data networking solutions for enterprise networks, LAN offerings, WAN products, firewall and virtual private networking appliances, intrusion detection systems and IP address and policy management software. In addition to certain products previously described under "Data Networking -- Service Providers and Access," Lucent's primary data networking products for enterprise networks include: - CAJUN(TM) CAMPUS SWITCHES -- a comprehensive family of LAN switches designed for increasing bandwidth requirements and demands associated with the convergence of data, voice and video applications across enterprise networks. These Ethernet, ATM and multifunction products range from stackable units, to modular chassis platforms capable of moving vast amounts of backbone network traffic easily and quickly. The Cajun Campus product suite supports from hundreds to tens of thousands of connections on a network and scales in performance from four gigabits per second to 92 Gbps. - WAN SOLUTIONS -- a family of WAN solutions, including Pipeline Access Routers which provide branch offices with high-speed, secure access to the Internet, and its SuperPipe Multiservice Access Routers, which are designed for corporate telecommuters, remote offices and small businesses for Internet access, remote access, Virtual Private Networks ("VPN") and voice and video services. - LUCENT MANAGED FIREWALL -- this product lets network managers run multiple security zones for different customers or branch offices with different security policies, all from a central point, with secure remote access, centralized supervision and comprehensive management reporting. - LUCENT VPN GATEWAY -- comprised of the Lucent Managed Firewall, the IPSec client, the Security Management Server and the RealSecure intrusion-detection software, VPN Gateway allows service providers and enterprises to deliver secure networks across shared public networks. With the VPN Gateway, service providers and enterprise customers can manage hundreds of Lucent Managed Firewall appliances and thousands of IPSec clients. - POLICY MANAGEMENT AND IP ADDRESS SOFTWARE SOLUTIONS -- include RealNet(TM) Rules software, a JAVA-based, client/server policy management software application running on Windows NT and Sun Solaris, and QIP Enterprise 5.0, IP address management software. RealNet Rules platforms allow IT professionals to define specific rules, or policies, regarding how network resources will be used, by whom and at what times. RealNet Rules integrates with QIP Enterprise 5.0, an IP address management software used by network managers to automate and manage IP name and address services in mid-to-large organizations. D. NetCare Professional Services -- Enterprise Lucent offers a wide range of NetCare Professional Services options to enterprise network customers, including call center design, voice and data networking, engineering, training, remote diagnostics and dedicated on-site technicians. On-demand services involve routine testing and diagnostics, maintenance and repair, moves, rearrangements and software and hardware upgrade installations. Through Lucent's NetCare Professional Services portfolio of services, enterprise customers have access to a range of services and support for the design, integration, management, maintenance and operation of voice, video and data networks. 12 13 E. Government Solutions Lucent's Government Solutions is a sales channel representing all of Lucent's products, services and solutions to the Federal government marketplace. The organization serves more than 1,000 agencies, departments and offices of the U.S. government, both domestically and abroad. Government Solutions sells through a direct sales force, through integrators and service providers and through a growing network of distributors, dealers and value-added resellers. F. Systimax Lucent's SYSTIMAX(R), a structured connectivity system for commercial applications, provides broadband multifunctional LAN interconnections within a building or campus and is available worldwide through authorized distributors and resellers. A single SYSTIMAX copper or fiber cable is capable of carrying data, voice, video and intelligent building management applications simultaneously. Lucent's remote diagnostics and repair capability permits Lucent to monitor, test, maintain and resolve problems from its regional service centers. Many of Lucent's systems are designed with intelligent software which establishes a real-time link between the customer premises and a regional service center's expert system. This permits the customer to reduce its system down-time and enables Lucent to automate many maintenance and repair tasks. G. Markets/Sales/Distribution Lucent markets its systems and services in the Enterprise segment to large and small businesses and government agencies through a large, direct sales force and through a network of agents, dealers and distributors. In the United States, Lucent effects these sales primarily through the direct sales force, while sales elsewhere occur through dealers and distributors as well as the direct sales force. Lucent's systems for the Enterprise segment are deployed in applications for customer sales and service, conferencing and collaboration, mobility and distributed work force, messaging and enterprise networking. Lucent fields a large group of application specialists to design call center, distance learning and other customized applications. Lucent believes that premises-based communications is transforming from distinct voice and data networks to multimedia networks that will be able to support any combination of voice, video and data communications simultaneously. Lucent is designing certain business communications systems to enable its customers to simplify their premises networks by combining separate voice, video and data networks into a single architecture. H. Competition Lucent believes that key competitive assets in its Enterprise segment are service support, the ability to upgrade existing systems for new applications, price and reliability. Lucent considers its working relationships with its Enterprise customers and knowledge of their individual business needs to be important competitive advantages. Lucent competes principally with three other large companies with substantial technological and financial resources in the Enterprise segment. These competitors are Alcatel, Northern Telecom Limited, Siemens AG and Cisco. According to Phillips Infotech, in 1998 the first three of these competitors and Lucent accounted for approximately 30% of the sales of enterprise networks globally, with Lucent accounting for approximately 10%. In addition, as the market transforms to multi-media systems, Lucent is encountering competition from companies that design and manufacture data network equipment. I. Customer Dependency The Enterprise segment services well over a million customer locations worldwide that range in size from small to medium to large businesses. Enterprise's success depends on many segments of customers (small, medium, and large businesses) and our ability to serve them better than our competitors. A significant amount of the Enterprise segment's revenue comes from approximately 250 global accounts. 13 14 J. Sources and Availability of Raw Materials -- See "Sources and Availability of Raw Materials" K. Seasonality The Enterprise segment is not materially seasonal. L. Intellectual Property -- See "Patents, Trademarks and Other Intellectual Property" M. Industry Practices Impacting Working Capital -- See "Outlook -- Future Capital Requirements" IV. MICROELECTRONICS AND COMMUNICATIONS TECHNOLOGIES A. General Lucent designs, manufactures and sells integrated circuits ("ICs"), electronic power systems, optical fiber cables, and optoelectronic components for communications and computer applications. Lucent supplies these components to manufacturers of communications systems and computers and also provides these components for many of Lucent's own systems and products. Lucent offers products in several IC product areas critical to communications applications, including digital signal processors ("DSPs") for digital cellular phones and modems, ICs for voice and data communications and standard-cell application specific integrated circuits ("ASICs"). High performance cable is utilized in telephony, data and video applications. Lucent also provides energy reserve systems, power conversion products and optoelectronic products that are embedded into communications and computer systems. During fiscal year 1999, Lucent acquired or merged with the following companies related to the MCT segment's business: Spectran Corporation (acquired 61% ownership), a designer and manufacturer of specialty optical fiber and fiber optic products; the Ethernet LAN Component business of Enable Semiconductor; and Sybarus Technologies, a semiconductor design company. B. Integrated Circuits Lucent's ICs are designed to provide advanced communications and control functions for a wide variety of electronic products and systems. Lucent focuses on IC products that are used in communications and computing and that require high-performance and low-power chip architectures; complex large-scale chip design in digital, analog and mixed-signal technologies; DSP architectures and algorithms; high-frequency and high-voltage technologies; and high-speed data and signal processing. Lucent offers a wide variety of standard, semi-custom and custom products for cellular equipment, voice and data communications networks, computers and computer peripherals, modems and consumer communications products. Lucent has several GSM hardware/software platforms based upon a highly integrated multiple-chip design for digital cellular phones that performs all the key handset functions between the microphone and the antenna in both voice and data services. Lucent's primary IC product groups include: - Access Products -- products that allow users to gain access to communications networks including ICs for modems, analog line cards data network interface cards, and PC and workstation input/output (I/O). - Networks and Communications Products -- products that provide high-speed switching and transmission of voice and data signals within the communications network. - Storage and Analog Products -- products targeted at the hard disk drive market (disk controllers, read channels and associated ICs) and the analog products market (preamps, line drivers and receivers, power management and other analog functions). - Wireless Products -- products for cellular and paging networks and terminals, cordless phones and digital answering machines. 14 15 C. Optoelectronics Lucent designs, develops and manufactures optoelectronic products which convert electricity to light (emitters) and light to electricity (detectors), thereby facilitating optical transmission of information. These products include semiconductor lasers, photodetectors, integrated transmitters and receivers and advanced-technology erbium-doped fiber amplifiers. Lucent provides these products worldwide to manufacturers serving the telecommunications, cable television and network computing markets. Optoelectronic products extend the transmission capacity of fiber to meet the requirements of such applications as internet access video-on-demand, interactive video, teleconferencing, image transmission and remote database searching. Lucent markets a number of advanced products, including optoelectronic components that support telecommunication transmission; long-wavelength optical data modules for data networking; and analog lasers for use in cable television fiber optic transmission. Lucent's primary optoelectronic product groups include: - High-Speed Transport Products -- including lasers and receivers that enable fiber optic communications at speeds up to 40 Gb/s. These products support DWDM of up to 160 channels over a single optical fiber. - Fiber Amplifier Products -- amplifiers that extend the transmission distance capabilities of optical signals up to 700 kilometers. - Metro and Internetworking Products -- highly integrated modules and subsystems that enable DWDM in metropolitan areas. - Submarine Products -- high reliability products for undersea transmission system repeaters. - CATV and Enterprise Products -- products that support high-speed optical connectivity in cable TV (CATV), LAN and enterprise applications. D. Power Systems Lucent designs, develops and manufactures energy systems and electronic power supplies for the telecommunications and electronic data processing industries. These products serve applications ranging from printers to large telephone central offices. Products include AC/DC converters, AC/DC switching power supplies, and energy systems that provide alarm, control and backup power management. Lucent's primary products for power systems include: - Galaxy Power Systems (GPS) providing reliable DC power for telecommunications and data networking applications. - Board Mounted Power (BMP) modules offering regulated DC power, embedded within computer, networking and telecommunications equipment. - Titania point of load power products servicing the demanding power requirements of high speed processors. E. Fiber Optics Lucent designs, develops, and manufactures an extensive line of fiber optic products, including singlemode and multimode fiber and fiber cables. With 14 cable manufacturing facilities around the world, Lucent is one of the world's leading suppliers of optical fiber cables. Lucent's primary fiber optic products include: - Applications based fibers (TrueWave(R) optical filber family for submarine and long haul, and AllWave(TM) fiber for metropolitan networks). - AllWave Advantage -- optical end to end fiber cable and connectivity solution for metro AllWave fiber based networks. - Smart fiber monitoring and connectorization systems (Smart LGX). 15 16 F. Intellectual Property Licensing The intellectual property licensing organization has the responsibility to license, protect, and maintain Lucent's intellectual property and to enforce the company's intellectual property rights. This responsibility includes the licensing of Lucent's patents and technology to third parties and negotiating agreements regarding Lucent's licensing of intellectual property from others. G. Market/Sales/Distribution Lucent's MCT products are sold globally to service providers and manufacturers of communications systems and computers through a combination of direct sales, manufacturers' representatives and distributors. In addition, Lucent's energy power systems and fiber optics generally are sold directly to U.S. and foreign telephone companies. Lucent's MCT customers are competing in markets characterized by rapid technological changes, decreasing product life cycles, price competition and increased user applications. These markets have experienced significant expansion in the number and types of products and services they offer to end-users, particularly in personal computing, portable access communication devices and expanded networking capability. As a result, Lucent's MCT customers continue to demand products which are smaller, require less power, are more complex, provide greater functionality and are produced with shorter design cycles and less manufacturing lead time. In addition to the revenues from sales to third parties, ICs, Power Systems, optoelectronic products and fiber optics are also key components of Lucent's systems sold to the SPN and Enterprise segments. These MCT products compete with products of third party manufacturers for inclusion in Lucent's SPN and Enterprise systems and products. Lucent has traditionally sold its power products via direct sales to large service providers and OEM's. Lucent has increased market coverage to both Service Provider and OEM customers by building indirect sales channels. H. Competition Lucent considers its technological leadership product leadership, and relationships with key customers to be important competitive assets. The market for MCT products is global and generally highly fragmented. Lucent's competitors differ widely among product categories. Lucent's competitors in certain IC product categories include Texas Instruments Incorporated, Conexant Systems Incorporated, STMicroelectronics Incorporated and LSI Logic Corp.; in electronic power systems, competitors include Astec, a subsidiary of Emerson Electric Co., Artesyn Technologies Inc. and Marconi plc; in optoelectronics, competitors include Fujitsu Limited, Northern Telecom and JDS Uniphase Corporation; and in optical fiber, competitors include Corning, Siecor, Alcatel, and Societe Internationale Pirelli. Lucent believes that key competitive factors in the microelectronics and communications technology marketplace are the early involvement in customers' future applications requirements, the speed of product and technological innovation, price, customer service and manufacturing capacity. Other important competitive factors include quality, reliability and local manufacturing presence. I. Customer Dependency Lucent sells its MCT products to a wide variety of global electronic systems manufacturers and service providers. Over the past several years, the proportion of revenues gained from customers outside of Lucent has climbed significantly. Because of the high fixed-cost nature of many MCT manufacturing processes, the loss of any significant customer could have a material adverse effect on Lucent's operating results in the MCT segment. J. Sources and Availability of Raw Materials -- See "Sources and Availability of Raw Materials" 16 17 K. Seasonality The MCT segment may experience variability in revenues due to limited seasonality, changes in market conditions, the timing of product development cycles and the life cycle of major programs by customers. However, the MCT segment is not materially seasonal. L. Intellectual Property -- See "Patents, Trademarks and Other Intellectual Property" M. Industry Practices Impacting Working Capital -- See "Outlook -- Future Capital Requirements" V. BELL LABORATORIES Lucent's SPN, Enterprise and MCT segments have been and will continue to be supported by the technological expertise provided by Bell Labs, one of the world's foremost industrial research and development organizations. Bell Labs provides support for the businesses of Lucent and conducts basic research. Bell Labs has made significant discoveries and advances in communications science and technology, software design and engineering and networking. These contributions include the invention of the transistor and the design and development of ICs and many types of lasers. Areas of Bell Labs research and development work in recent years include: networking software; data networking; lightwave transmission, especially the wavelength division multiplexing systems ("WDM") which offer greater transmission capacity than other transmission systems; electronic switching technology, which enables rapid call processing, increased reliability and reduced network costs; and microelectronics components, which bring the latest advantages of very large scale integration to the full range of products offered by the Company. Bell Labs' research and development activities continue to focus on the core technologies critical to Lucent's success, which are software, network design and engineering, microelectronics, photonics, data networking and wireless/cellular. Bell Labs is a leader in software research, development and engineering for communications applications. For example, its innovations in fault-tolerant software have enabled Lucent to achieve a level of system reliability with off-the-shelf commercial processors that allows Lucent to reduce its reliance on custom microprocessors. Bell Labs has contributed many innovations in voice quality, is a leader in the development of digital signal processing, and has developed a number of innovative algorithms for high-quality speech and audio. These innovations have contributed to Lucent's implementation of speech processing applications which include text-to-speech synthesis, speech recognition and automatic translation of speech from one language to another. They are used in many of Lucent's products, including the elemedia(R) products for Internet applications, and are sold to outside customers. Bell Labs also has led in the development of software-based networking technologies that support Lucent's systems and products. Recently, it has developed systems for digital cellular, PCS, mobile computing and wireless LANs. Bell Lab's technology has allowed the recent introduction of data networking products such as the Internet Telephony Server SP, PacketStar IP switch, PacketStar IP Services platform and the WaveStar 400G high capacity WDM optical networking system. Similarly, Bell Labs' advances extend to the microlasers used in today's broadband multifunctional transmission systems, and to today's optical amplifiers and TrueWave fiber. Current photonic research includes work on passive optical networks, photonic switching and quantum wire lasers. VI. RECENT DEVELOPMENTS On October 15, 1999, Lucent merged with International Network Services (INS), a global provider of network consulting, design and integration. On November 3, 1999, Lucent merged with Excel Switching Corporation, a Hyannis, Massachusetts-based developer of programmable switches. On November 12, 1999, Lucent merged with Xedia Corporation, a privately held Acton, Massachusetts-based maker of routers for corporate networks. 17 18 VII. BACKLOG The Company's backlog, calculated as the aggregate of the sales price of orders received from customers less revenue recognized, was approximately $6,900 million and $10,200 million on September 30, 1999 and 1998, respectively. Approximately $1,800 million of the orders included in the September 30, 1999 backlog are scheduled for delivery after September 30, 2000. However, all orders are subject to possible rescheduling by customers. Although the Company believes that the orders included in the backlog are firm, some orders may be canceled by the customer without penalty, and the Company may elect to permit cancellation of orders without penalty where management believes that it is in the Company's best interest to do so. About $1,630 million of the amount at September 30, 1999 is under large, multi-year contracts of which about $790 million is scheduled for delivery after September 30, 2000 and is included in the $1,800 million referred to above. The amount under large, long-term contracts is with the Ministry of Post and Telecommunications of Saudi Arabia which requires annual appropriations by the Saudi Arabian government. VIII. PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY RIGHTS From October 1, 1997 to September 30, 1999, Lucent was issued 1,950 patents in the United States and 3,305 in foreign countries. Lucent owns approximately 9,841 patents in the United States and 16,815 in foreign countries. These foreign patents are, for the most part, counterparts of Lucent's United States patents. Many of the patents owned by Lucent are licensed to others and Lucent is licensed to use certain patents owned by others. In connection with the Separation, Lucent has entered into an extensive cross-licensing agreement with AT&T and NCR Corporation. See "Separation Agreements -- Patent Licenses and Related Matters." Lucent markets its products primarily under its own name and mark. Lucent considers its many trademarks to be valuable assets. Many of its trademarks are registered throughout the world. Lucent relies on patent, trademark, trade secret and copyright laws both to protect its proprietary technology and to protect Lucent against claims from others. Lucent believes that it has direct intellectual property rights or rights under cross-licensing arrangements covering substantially all of its material technologies. Given the technological complexity of Lucent's systems and products, however, there can be no assurance that claims of infringement will not be asserted against Lucent or against Lucent's customers in connection with their use of Lucent's systems and products, nor can there be any assurance as to the outcome of any such claims. Lucent was assigned ownership of the substantial majority of AT&T's patents in connection with the Separation. Pursuant to the patent license agreement entered into among Lucent, AT&T and NCR, Lucent has been given rights, subject to specified limitations, to pass through to its customers certain rights under approximately 400 patents retained by AT&T. IX. SOURCES AND AVAILABILITY OF RAW MATERIALS Lucent makes significant purchases of electronic components, copper, glass, silicon, and other materials and components from many U.S. and non-U.S. sources. Lucent has been able to obtain sufficient materials and components from sources around the world to meet its needs. Lucent also develops and maintains alternative sources for essential materials and components. Occasionally, additional inventories of specific components are maintained to minimize the effects of potential shortages. Lucent does not have a concentration of sources of supply of materials, labor or services that, if suddenly eliminated, could severely impact its operations. See also "Outlook -- Readiness for Year 2000." X. OUTLOOK A. Forward Looking Statements This Form 10-K report contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about the industries in which Lucent operates, management's beliefs and assumptions made by management. In addition, other written or oral statements which constitute forward-looking statements may be made by or on behalf of Lucent. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such 18 19 forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Lucent undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Future Factors include increasing price and product/services competition by foreign and domestic competitors, including new entrants; rapid technological developments and changes and Lucent's ability to continue to introduce competitive new products and services on a timely, cost-effective basis; the mix of products and services; the achievement of lower costs and expenses; customer demand for Lucent's products and services; the ability to successfully integrate acquired companies; readiness for Year 2000; the impact of Year 2000 on customer spending habits; U.S. and non-U.S. governmental and public policy changes that may affect the level of new investments and purchases made by customers; changes in environmental and other domestic and foreign governmental regulations; protection and validity of patent and other intellectual property rights; reliance on large customers; technological, implementation and cost/financial risks in the increasing use of large, multi-year contracts; the cyclical nature of Lucent's business; the outcome of pending and future litigation and governmental proceedings; the continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support Lucent's future business. These are representative of the Future Factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general U.S. and non-U.S. economic conditions including interest rate and currency exchange rate fluctuations and other Future Factors. B. General Market Competition Lucent continues to face significant competition and expects that the level of competition on pricing and product offerings will intensify. Lucent expects that new competitors will enter its markets as a result of the trend toward global expansion by foreign and domestic competitors as well as continued changes in technology and public policy. These competitors may include entrants from the telecommunications, software, data networking and semiconductor industries. Existing competitors have, and new competitors may have, strong financial capability, technological expertise, well-recognized brand names and a global presence. Such competitors include Alcatel Alsthom, Cisco Systems, Inc., Ericsson, Northern Telecom Limited, Motorola, Nokia and Siemens AG. As a result, Lucent's management periodically assesses market conditions and redirects Lucent's resources to meet the challenges of competition. Steps Lucent may take include acquiring or investing in new businesses and ventures, partnering with existing businesses, delivering new technologies, closing and consolidating facilities, disposing of assets, reducing work force levels or withdrawing from markets. See also, the "Competition" section above under "Service Provider Networks," "Enterprise Networks" and "Microelectronic and Communications Technologies." C. Dependence on New Product Development The markets for Lucent's principal products are characterized by rapidly-changing technology, evolving industry standards, frequent new product introductions and evolving methods of building and operating communications systems for service providers and business customers. Lucent's operating results will depend to a significant extent on its ability to continue to introduce new systems, products, software and services successfully on a timely basis and to reduce costs of existing systems, products, software and services. The success of these and other new offerings is dependent on several factors, including proper identification of customer needs, cost, timely completion and introduction, differentiation from offerings of Lucent's competitors and market acceptance. In addition, new technological innovations generally require a substantial investment before any assurance is available as to their commercial viability, including, in some cases, certification by U.S. and non-U.S. standards-setting bodies. D. Reliance on Major Customers/Multi-Year Contracts The contribution of AT&T to Lucent's total revenues and percentage of total revenues for the three years ended September 30, 1999, 1998 and 1997 were $4,587 million (12%), $3,841 million (12.1%), and 19 20 $3,789 million (13.7%), respectively. In addition, sales to seven service providers including AT&T, some of which may vary from year to year, constituted approximately 29.7% and 34.4% of total revenues in the twelve months ended September 30, 1999 and 1998, respectively. The purchasing behavior of Lucent's largest customers has increasingly been characterized by the use of fewer, larger contracts. Lucent has significant contracts for the sale of infrastructure systems to service providers which extend over a multi-year period, and expects to enter into similar contracts in the future. These contracts typically involve longer negotiating cycles, require the dedication of substantial amounts of working capital and other resources, and in general require costs that may substantially precede recognition of associated revenues. Moreover, in return for larger, longer-term purchase commitments, customers often demand more stringent acceptance criteria, which can also cause revenue recognition delays. Lucent has increasingly provided or arranged long-term financing for customers as a condition to obtain or bid on infrastructure projects. Certain multi-year contracts involve new technologies that may not have been previously deployed on a large-scale commercial basis. On its multi-year contracts, Lucent may incur significant initial cost overruns and losses that are recognized in the quarter in which they become ascertainable. Further, profit estimates on such contracts are revised periodically over the lives of the contracts, and such revisions can have a significant impact on reported earnings in any one quarter. See "Future Capital Requirements," and the Customer Dependency" section above under "Service Provider Networks," "Enterprise Networks" and "Microelectronic and Communications Technologies". E. Readiness for Year 2000 Lucent is in the final phase of a major effort to minimize the impact of the Year 2000 date change on Lucent's products, information technology systems, facilities and production infrastructure. The Year 2000 challenge is a priority within Lucent at every level of the Company. Primary Year 2000 preparedness responsibility rests with program offices which have been established within each of Lucent's product groups and corporate centers. A corporate-wide Lucent Year 2000 Program Office ("LYPO") monitors and reports on the progress of these offices. Each program office has a core of full-time individuals augmented by a much larger group who have been assigned specific Year 2000 responsibilities in addition to their regular assignments. Further, Lucent has engaged third parties to assist in its readiness efforts in certain cases. LYPO has established a methodology to measure, track and report Year 2000 readiness status consisting of five steps: inventory; assessment; remediation; testing; and deployment. In addition, LYPO tracks and reports on the development and deployment of Year 2000 contingency plans. Lucent has completed programs to make its commercially available products Year 2000 ready and has developed evolution strategies for customers who own non-Year 2000 ready Lucent products. All of the upgrades and products needed to support customer migration are generally available. Lucent is completing its extensive efforts to alert customers who have non-Year 2000 ready products, including direct mailings, phone contacts and participation in user and industry groups. Lucent also has a Year 2000 website www.lucent.com/y2k that provides Year 2000 product information. Lucent continues to cooperate in the Year 2000 information sharing efforts of the Federal Communications Commission and other governmental bodies. Lucent believes it has sufficient resources to provide timely support to its customers that require product migrations or upgrades. However, because this effort is heavily dependent on customer cooperation, Lucent monitors customer response and takes steps to encourage customer responsiveness, as necessary. With very few exceptions, Lucent has completed the five steps of its Year 2000 readiness program with respect to its factories, information systems and facilities. LYPO has developed a formal "exceptions" tracking process to approve and track a small number of cases in which factors such as third party dependencies prevented project completion by Lucent's internal target date of June 30, 1999. Virtually all of the exceptions identified have since been closed. In addition, Lucent has implemented various change management mechanisms to allow the Company to maintain Year 2000 readiness even as systems are modified or replaced to address non-Year 2000 business needs. 20 21 To ensure the continued delivery of third party products and services, Lucent's procurement organization has analyzed Lucent's supplier base and has sent surveys to approximately 5,000 suppliers. To supplement this effort, Lucent has conducted more detailed readiness reviews of the Year 2000 status of the suppliers ranked as most critical based on the nature of their relationship with Lucent, the product/service provided and/or the content of their survey responses. Over ninety percent 90% of Lucent's critical suppliers have reported completion of their Year 2000 readiness efforts. However, Lucent continues to monitor the Year 2000 status of all of its critical suppliers to minimize its Year 2000 supply chain risk and is developing appropriate contingency responses as the risks become clearer. Lucent has committed considerable resources to Year 2000 contingency planning throughout the enterprise. These plans focus on risks posed by the Year 2000 date change, as well as other sensitive dates such as February 29, 2000. Lucent's plans are designed both to mitigate the impact of Year 2000 failures, as well as providing emergency response mechanisms and supporting the prompt resumption of regular operations. Lucent is currently in the process of completing the preparations necessary to support the implementation of its contingency plans. In addition, the plans are updated as new information is obtained, the risks posed by external dependencies become clearer and customer support needs become more focused. A network of corporate center and business group communications centers, staffed on a continuous basis during the period before and after the Year 2000 date transition, will support Lucent's contingency planning efforts. These communications centers will facilitate the handling of Year 2000 issues that may arise. An initial test of the Lucent Communications Center network was conducted in connection with the September 9, 1999 date. The September 9, 1999 date passed with no reported impact on Lucent's business. The risk to Lucent resulting from the failure of third parties in the public and private sector to attain Year 2000 readiness is the same as other firms in Lucent's industry and other business enterprises generally. The following are representative of the types of risks that could result in the event of one or more major failures of Lucent's information systems, factories or facilities to be Year 2000 ready, or similar major failures by one or more major third party suppliers to Lucent: (1) information systems -- could include interruptions or disruptions of business and transaction processing such as customer billing, payroll, accounts payable and other operating and information processes, until systems can be remedied or replaced; (2) factories and facilities -- could include interruptions or disruptions of manufacturing processes and facilities with delays in delivery of products, until non-compliant conditions or components can be remedied or replaced; and (3) major suppliers to Lucent -- could include interruptions or disruptions of the supply of raw materials, supplies and Year 2000 ready components which could cause interruptions or disruptions of manufacturing and delays in delivery of products, until the third party supplier remedied the problem or contingency measures were implemented. Risks of major failures of Lucent's principal products could include adverse functional impacts experienced by customers, the costs and resources for Lucent to remedy problems or replace products where Lucent is obligated or undertakes to take such action and delays in delivery of new products. Lucent believes that it is taking the necessary steps to resolve Year 2000 issues; however, given the possible consequences of failure to resolve significant Year 2000 issues, there can be no assurance that any one or more such failures would not have a material adverse effect on Lucent. Lucent estimates that the cost of efforts to prepare for Year 2000 from calendar year 1997 through 2000 is about $560 million, of which an estimated $515 million has been spent as of September 30, 1999. Lucent has been able to reprioritize work projects to largely address Year 2000 readiness needs within its existing organizations. As a result, most of these costs represent costs that would have been incurred in any event. These amounts cover costs of the Year 2000 readiness work for inventory, assessment, remediation, testing, deployment and contingency planning, including fees and charges of contractors for outsourced work and consultant fees. Costs for previously contemplated updates and replacements of Lucent's internal systems and information systems infrastructure have been excluded without attempting to establish whether the timing of non-Year 2000 replacement or upgrading was accelerated. While the Year 2000 cost estimates above include additional costs, Lucent believes, based on available information, that it will be able to manage its total Year 2000 transition without any material adverse effect on its business operations, products or financial prospects. 21 22 The actual outcomes and results could be affected by Future Factors including, but not limited to, the continued availability of skilled personnel, cost control, the ability to locate and remediate software code problems, critical suppliers and subcontractors meeting their commitments to be Year 2000 ready and provide Year 2000 ready products and timely actions by customers. F. European Monetary Union -- Euro On January 1, 1999, eleven member countries of the European Union established fixed conversion rates between their existing sovereign currencies and adopted the Euro as their new common legal currency. The Euro is currently trading on currency exchanges and the legacy currencies will remain legal tender in the participating countries for a transition period between January 1, 1999 and January 1, 2002. During the transition period, cash-less payments can be made in the Euro, and parties can elect to pay for goods and services and transact business using either the Euro or a legacy currency. Between January 1, 2002 and July 1, 2002, the participating countries will introduce Euro notes and coins and withdraw all legacy currencies so that they will no longer be available. Lucent has in place a joint European-United States team representing affected functions within the Company. This team has been evaluating Euro related issues which may affect Lucent as they develop, including its pricing/marketing strategy, conversion of information technology systems, existing contracts and currency risk and risk management in the participating countries. The Euro conversion may affect cross-border competition by creating cross-border price transparency. Lucent will continue to evaluate issues involving the introduction of the Euro as further accounting, tax and governmental legal and regulatory guidance is available. Based on current information and Lucent's current assessment, Lucent does not expect that the Euro conversion will have a material adverse effect on its business or financial condition. G. Future Capital Requirements Lucent's working capital requirements and cash flow provided by (or used in) operating activities can vary greatly from quarter to quarter, depending on the volume of production, the timing of deliveries, the build-up of inventories, the payment terms offered to customers, and the extension of credit to customers. Service providers, inside and outside the United States, increasingly have required their suppliers to arrange or provide long-term financing for them as a condition to obtaining or bidding on infrastructure projects. These projects may require financing in amounts ranging from modest sums to over a billion dollars. Lucent has increasingly provided or arranged long-term financing for customers. As market conditions permit, Lucent's intention is to lay off these long-term financing arrangements, which may include both commitments and drawn down borrowings, to financial institutions and investors. This enables Lucent to reduce the amount of its commitments and free up additional financing capacity. As of September 30, 1999, Lucent had made commitments or entered into an agreement to extend credit to customers up to an aggregate of approximately $7,100 million. As of September 30, 1999, approximately $1,600 million had been advanced and was outstanding. In addition, as of September 30, 1999, Lucent had made commitments or entered into agreements to guarantee debt of customers up to an aggregate of approximately $420 million of which approximately $310 million was outstanding. In addition to the above arrangements, Lucent will continue to provide or commit to financing where appropriate for its business. The ability of Lucent to arrange or provide financing for its customers will depend on a number of factors, including Lucent's capital structure and level of available credit, and its continued ability to lay off commitments and drawn down borrowings on acceptable terms. Lucent believes that its credit facilities, cash flow from operations, long- and short-term debt financings and receivables securitizations, will be sufficient to satisfy its future working capital, capital expenditure, research and development and debt service requirements. Lucent has a shelf registration statement to register the possible offering from time to time of long-term debt of which $1,800 million remained available at September 30, 1999. Lucent believes that it will be able to access the capital markets on terms and in amounts that will be satisfactory to it, and that it will be able to obtain bid and performance bonds, to arrange or provide customer financing as 22 23 necessary, and to engage in hedging transactions on commercially acceptable terms, although there can be no assurance that Lucent will be successful in regard to any of the foregoing. H. Growth Outside the United States, Foreign Exchange and Interest Rates Lucent intends to continue to pursue growth opportunities in markets outside the United States. In many markets outside the United States, long-standing relationships between potential customers of Lucent and their local providers and protective regulations, including local content requirements and type approvals, create barriers to entry. In addition, pursuit of such growth opportunities outside the United States may require significant investments for an extended period before returns on such investments, if any, are realized. Such projects and investments could be adversely affected by reversals or delays in the opening of foreign markets to new competitors, exchange controls, currency fluctuations, investment policies, repatriation of cash, nationalization, social and political risks, taxation and other factors, depending on the country in which such opportunity arises. Difficulties in foreign financial markets and economies, and of foreign financial institutions, could adversely affect demand from customers in the affected countries. Lucent is exposed to market risk from changes in foreign currency exchange rates and interest rates, which could impact its results of operations and financial condition. Lucent manages its exposure to these market risks through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. A significant change in the value of the dollar against the currency of one or more countries where Lucent sells products to local customers or makes purchases from local suppliers may materially adversely affect Lucent's results. Lucent attempts to mitigate any such effects through the use of foreign currency contracts, although there can be no assurances that such attempts will be successful. While Lucent hedges certain foreign currency transactions, the decline in value of non-U.S. dollar currencies, may, if not reversed, adversely affect Lucent's ability to contract for product sales in U.S. dollars because Lucent's products may become more expensive to purchase in U.S. dollars for local customers doing business in the countries of the affected currencies. I. Legal Proceedings and Environment -- See "Environmental Matters" and "Item 3. Legal Proceedings". J. Seasonality -- See "Seasonality" above under "Service Provider Networks," "Enterprise Networks" and "Microelectronic and Communications Technologies." K. Intellectual Property -- See "Patents, Trademarks and Other Intellectual Property Rights" above. XI. OPERATING REVENUE, RESEARCH AND DEVELOPMENT EXPENSE AND FOREIGN AND DOMESTIC OPERATIONS For information about the consolidated operating revenues contributed by Lucent's major classes of products and services, consolidated research and development expenses, and foreign and domestic operations, see revenue tables and discussion on pages 31 through 34, Consolidated Statements of Income on page 44 and Note 12 thereto on pages 58 through 60 of Lucent's annual report to security holders for the fiscal year ended September 30, 1999. Such information is incorporated herein by reference pursuant to General Instruction G(2). XII. EMPLOYEE RELATIONS On September 30, 1999, Lucent employed approximately 153,000 persons, including 76.5% located in the United States. Of these domestic employees, about 40% are represented by unions, primarily the Communications Workers of America ("CWA") and the International Brotherhood of Electrical Workers ("IBEW"). Lucent entered into new five-year agreements with the CWA and IBEW expiring May 31, 2003. XIII. ENVIRONMENTAL MATTERS Lucent's current and historical operations are subject to a wide range of environmental protection laws. In the United States, these laws often require parties to fund remedial action regardless of fault. Lucent has remedial and investigatory activities underway at numerous current and former facilities. In addition, Lucent was named a 23 24 successor to AT&T as a potentially responsible party ("PRP") at numerous "Superfund" sites pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or comparable state statutes. Under the Separation and Distribution Agreement, Lucent is responsible for all liabilities primarily resulting from or relating to the operation of Lucent's business as conducted at any time prior to or after the Separation including related businesses discontinued or disposed of prior to the Separation, and Lucent's assets including, without limitation, those associated with these sites. In addition, under such Separation and Distribution Agreement, Lucent is required to pay a portion of contingent liabilities paid out in excess of certain amounts by AT&T and NCR, including environmental liabilities. It is often difficult to estimate the future impact of environmental matters, including potential liabilities. Lucent records an environmental reserve when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable. This practice is followed whether the claims are asserted or unasserted. Management expects that the amounts reserved will be paid out over the periods of remediation for the applicable sites which typically range from 5 to 30 years. Reserves for estimated losses from environmental remediation are, depending on the site, based primarily upon internal or third-party environmental studies, and estimates as to the number, participation level and financial viability of any other PRPs, the extent of the contamination and the nature of required remedial actions. Accruals are adjusted as further information develops or circumstances change. The amounts provided for in Lucent's consolidated financial statements for environmental reserves are the gross undiscounted amount of such reserves, without deductions for insurance or third-party indemnity claims. In those cases where insurance carriers or third-party indemnitors have agreed to pay any amounts and management believes that collectibility of such amounts is probable, the amounts are reflected as receivables in the financial statements. Although Lucent believes that its reserves are adequate, there can be no assurance that the amount of capital expenditures and other expenses which will be required relating to remedial actions and compliance with applicable environmental laws will not exceed the amounts reflected in Lucent's reserves or will not have a material adverse effect on Lucent's financial condition, results of operations or cash flows. Any amounts of environmental costs that may be incurred in excess of those provided for at September 30, 1999 cannot be determined. On November 16, 1998, Lucent signed a Consent Order with the Pennsylvania Department of Environmental Protection settling alleged violations resulting from etching equipment being installed in 1991 and 1992 without undergoing the proper state air permit with payment of a civil penalty of approximately $294,000, a portion of which will be devoted to the creation of community environmental projects. XIV. SEPARATION AGREEMENTS For the purposes of governing certain of the relationships between Lucent and AT&T (including NCR) following the Separation, the Company, AT&T and NCR entered into the Separation and Distribution Agreement and the Ancillary Agreements to which they are parties (collectively, the "Separation Agreements"). The Ancillary Agreements include the Employee Benefits Agreement; the Brand License Agreement; the Patent License Agreement and other patent-related agreements; the Technology License Agreement and other technology-related agreements; and the Tax Sharing Agreement and other tax-related agreements. Certain of the Separation Agreements, including certain of the Agreements summarized below, are exhibits to this Form 10-K. Reference is made to such exhibits for the full text of the provisions of those Agreements, and the agreement summaries below are qualified in their entirety by reference to the full text of such Agreements. Capitalized terms used in this section and not otherwise defined in this Form 10-K shall have their respective meanings set forth in the Separation and Distribution Agreement (except that the term "Company" is used in lieu of the term "Lucent") or other Separation Agreement. Separation and Distribution Agreement Under the Separation and Distribution Agreement, Lucent assumed or agreed to assume, and agreed to perform and fulfill, all the "Lucent Liabilities" (as defined in such Agreement) in accordance with their respective terms. Without limitation, the Lucent Liabilities generally include all liabilities and contingent liabilities relating to Lucent's present and former business and operations, and contingent liabilities otherwise 24 25 assigned to Lucent; contingent liabilities related to AT&T's discontinued computer operations (other than those of NCR) were assigned to the Company. The Separation and Distribution Agreement provides for the sharing of contingent liabilities not allocated to one of the parties in specified proportions, and also provides that each party will share specified portions of contingent liabilities related to the business of any of the other parties that exceed specified levels. Ability to Terminate Certain Rights. The Separation and Distribution Agreement provides that certain rights granted to Lucent and the members of Lucent Group will be subject to the following provisions. Except as otherwise expressly provided, in the event that, at any time prior to February 1, 2001, Lucent or any member of Lucent Group offers, furnishes or provides any Telecommunications Services of the type offered by the AT&T Services Business as of the Closing Date, then AT&T may, in its sole discretion: (a) terminate all or any portion of the rights granted by AT&T under the Brand License Agreement (b) exercise the right to require Lucent to transfer to AT&T certain personnel, information, technology and software under the Supplemental Agreements; (c) terminate all or any portion of the rights to patents and technology of AT&T or any member of the AT&T Group granted to Lucent and the members of Lucent Group pursuant to the Patent License Agreement and the Technology License Agreement; and (d) direct Lucent and the members of Lucent Group to reconvey to AT&T all interests in any and all patents and technology in which Lucent or any member of Lucent Group was granted an undivided one-half interest pursuant to the Patent Assignments or the Technology Assignment and Joint Ownership Agreements. Lucent and the members of Lucent Group will not be deemed to offer, furnish or provide any Telecommunications Services (and the foregoing provisions will not apply) solely by virtue of certain specified investments in Persons that offer, furnish or provide Telecommunications Services or by virtue of offering, furnishing or providing Telecommunications Services below a specified de minimis amount. Employee Benefits Agreement AT&T and Lucent entered into the Employee Benefits Agreement that governs the employee benefit obligations of the Company, including both compensation and benefits, with respect to active employees and retirees assigned to the Company. Pursuant to the Employee Benefits Agreement, Lucent assumed and agreed to pay, perform, fulfill and discharge, in accordance with their respective terms, all Liabilities (as defined) to, or relating to, former employees of AT&T or its affiliates employed by Lucent and its affiliates and certain former employees of AT&T or its affiliates (including retirees) who either were employed in Lucent Business (as defined) or who otherwise are assigned to Lucent for purposes of allocating employee benefit obligations (including all retirees of Bell Labs). Patent Licenses and Related Matters The Company, AT&T and NCR executed and delivered assignments and other agreements, including a patent license agreement, related to patents then owned or controlled by AT&T and its subsidiaries. The patent assignments divided ownership of patents, patent applications and foreign counterparts among the Company, AT&T and NCR, with the substantial portion of those then owned or controlled by AT&T and its subsidiaries (other than NCR) being assigned to the Company. A small number of the patents assigned to Lucent are jointly owned with either AT&T or NCR. Certain of the patents that Lucent jointly owns with AT&T are subject to a joint ownership agreement under which each of Lucent and AT&T has full ownership rights in the patents. The other patents that Lucent jointly owns with AT&T, and the patents that Lucent jointly owns with NCR, are subject to defensive protection agreements with AT&T and NCR, respectively, under which Lucent holds most ownership rights in the patents exclusively. Under these defensive protection agreements, AT&T or NCR, as the case may be, has the ability, subject to specified restrictions, to assert infringement claims under the patents against companies that assert patent infringement claims against them, and has consent rights in the event Lucent wishes to license the patents to certain third parties or for certain fields of use under specified circumstances. The defensive protection agreements also provide for one-time payments from AT&T and NCR to the Company. The patent license agreement entered into by the Company, AT&T and NCR provides for cross-licenses to each company, under each of the other company's patents that are covered by the licenses, to make, use, lease, sell and import any and all products and services of the businesses in which the licensed company (including specified related companies) is now or hereafter engaged. The cross-licenses also permit each company, subject 25 26 to specified limitations, to have third parties make items under the other companies' patents, as well as to pass through to customers certain rights under the other companies' patents with respect to products and services furnished to customers by the licensed company. In addition, the rights granted to Lucent and AT&T include the right to license third parties under each of the other company's patents to the extent necessary to meet existing patent licensing obligations as of March 29, 1996, and AT&T has the right, subject to specified restrictions and procedures, to ask Lucent to license third parties under a limited number of identified patents that were assigned to the Company. Technology Licenses and Related Matters The Company, AT&T and NCR executed and delivered assignments and other agreements, including the Technology License Agreement, related to technology then owned or controlled by AT&T and its subsidiaries. Technology includes copyrights, mask works and other intellectual property other than trademarks, trade names, trade dress, service marks and patent rights. The technology assignments divide ownership of technology among the Company, AT&T and NCR, with Lucent and AT&T owning technology that was developed by or for, or purchased by, Lucent's business or AT&T's services business, respectively, and NCR owning technology that was developed by or for, or purchased by, NCR. Technology that is not covered by any of these categories is owned jointly by Lucent and AT&T or, in the case of certain specified technology, owned jointly by the Company, AT&T and NCR. The Technology License Agreement entered into by the Company, AT&T and NCR provides for royalty-free cross-licenses to each company to use the other companies' technology existing as of April 10, 1996, except for specified portions of each company's technology as to which use by the other companies is restricted or prohibited. ITEM 2. PROPERTIES. At September 30, 1999, Lucent operated 40 manufacturing sites, of which 19 were located in the United States, occupying in excess of 19 million square feet substantially all of which were owned. The remaining 21 sites were located in 14 countries. At September 30, 1999, Lucent operated 241 warehouse sites, of which 202 were located in the United States, occupying in excess of 4 million square feet, substantially all of which were leased. The remaining 39 sites were located in 24 countries. At September 30, 1999, Lucent operated 973 office sites (administration, sales, field service), of which 662 were located in the United States, occupying in excess of 16 million square feet, of which 10 million square feet of which were leased. The remaining 311 sites were located in 57 countries. At September 30, 1999, Lucent operated additional sites in 17 cities, of which 11 were located in the United States, with significant research and development activities, occupying in excess of 8 million square feet, of which approximately 2 million square feet were leased. Lucent believes its plants and facilities are suitable and adequate to meet its current needs. ITEM 3. LEGAL PROCEEDINGS. In the normal course of business, Lucent is subject to proceedings, lawsuits and other claims, including proceedings under laws and regulations related to environmental and other matters. (Also see Item 1. "Business -- XIV Separation Agreements" regarding the assumption by Lucent of certain liabilities and contingent liabilities.) All such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, Lucent is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at September 30, 1999. While these matters could affect operating results of any one quarter when resolved in future periods and, while there can be no assurance with respect thereto, it is management's opinion that after final disposition, any monetary liability or financial impact to Lucent beyond that provided in the consolidated balance sheet at September 30, 1999 would not be material to Lucent's annual consolidated financial statements. 26 27 See also the discussion in Item 1. "Business -- XIII. Environmental Matters" for additional legal proceedings, and environmental matters and proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. During the fourth quarter of the fiscal year covered by this report on Form 10-K, no matter was submitted to a vote of Security-Holders. PART II ITEMS 5. THROUGH 8. The information required by these items is included in pages 29 through 64 of the Company's annual report to security holders for the fiscal year ended September 30, 1999. The referenced pages of the Company's annual report to security holders have been filed as Exhibit 13 to this document. Such information is incorporated herein by reference, pursuant to General Instruction G(2). The New York Stock Exchange is the principal market for the Company's Common Shares. As of November 30, 1999, there were approximately 1,677,810 shareholders of record. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding executive officers required by Item 401 of Regulation S-K is furnished in this separate disclosure because the Company did not furnish such information in its definitive proxy statement prepared in accordance with Schedule 14A. EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF DECEMBER 1, 1999)
BECAME LUCENT EXECUTIVE NAME AGE OFFICER ON ---- --- ------------- Richard A. McGinn................... 53 Chairman of the Board and Chief 2-96 Executive Officer Bernardus J. Verwaayen.............. 47 Vice Chairman 9-97 John T. Dickson..................... 53 Executive Vice President and Chief 10-99 Executive Officer, Microelectronics and Communications Technologies Arun N. Netravali................... 53 President, Bell Labs 10-99 William T. O'Shea................... 52 Executive Vice President and Chief 10-99 Executive Officer, Enterprise Networks Donald K. Peterson.................. 50 Executive Vice President and Chief 2-96 Financial Officer Richard J. Rawson................... 47 Senior Vice President and General 2-96 Counsel Patricia F. Russo................... 47 Executive Vice President and Chief 2-96 Executive Officer, Service Provider Networks
27 28 All of the above executive officers have held high level managerial positions with the Company and prior thereto with AT&T or its affiliates for more than the past five years, except in the case of Messrs. Peterson and Verwaayen who have held such positions since September 1, 1995 and September 1, 1997, respectively. Prior to joining AT&T, Mr. Peterson held various senior executive positions at Northern Telecom, Inc., a telecommunications equipment company, which included President of Nortel Communications Systems, Inc. (from January 1993 to September 1995). Mr. Verwaayen joined the Company after serving as President of PTT Telecom, the national telecommunications operator of the Netherlands since May 1988. He was a co-founder of Unisource, the pan-European alliance of Telia of Sweden, Swiss Telecom and PTT Telecom. Officers are not elected for a fixed term of office but hold office until their successors have been elected. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Company's Directors and officers to file reports of holdings and transactions in the Company's Common Shares with the Securities and Exchange Commission and the New York Stock Exchange. Based on Company records and other information, the Company believes that all SEC filing requirements applicable to its directors and officers with respect to the Company's fiscal year ending September 30, 1999 were complied with. The other information required by Item 10 is included in the Company's definitive proxy statement dated December 21, 1999, on pages 10 through 12. Such information is incorporated herein by reference, pursuant to General Instruction G(3). ITEMS 11. THROUGH 13. The information required by Items 11 through 13 is included in the Company's definitive proxy statement dated December 21, 1999, on pages 7 through 9, page 13 and pages 23 through page 37. Such information is incorporated herein by reference, pursuant to General Instruction G(3). 28 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed as a part of this Form 10-K:
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..................... 31 (ii) Schedule II -- Valuation and Qualifying Accounts..... 32
Separate financial statements of subsidiaries not consolidated and 50 percent or less owned persons are omitted since no such entity constitutes a "significant subsidiary" pursuant to the provisions of Regulation S-X, Article 3-09. - --------------- * Incorporated herein by reference to the appropriate portions in pages 29 through 64 of the Company's annual report to security holders for the fiscal year ended September 30, 1999. (See Part II and Exhibit 13.) (6) Exhibits: The following documents are filed as Exhibits to this report on Form 10-K or incorporated by reference herein. Any document incorporated by reference is identified by a parenthetical referencing the SEC filing which included such document.
EXHIBIT NUMBER ------- (3)(i) Articles of Incorporation of the registrant, as amended February 17, 1999 (Exhibit 3(i) to Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, File No. 001-11639). (3)(ii) By-Laws of the registrant, as amended, October 24, 1999 (4)(i) Indenture dated as of April 1, 1996 between Lucent Technologies Inc. and the Bank of New York, as Trustee (Exhibit 4A to Registration Statement on Form S-3 No. 333-01223). (4)(iii) Other instruments in addition to Exhibit 4(i) which define the rights of holders of long term debt, of the registrant and all of its consolidated subsidiaries, are not filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. (10)(i)1 Separation and Distribution Agreement by and among Lucent Technologies Inc., AT&T Corp. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit 10.1 to Registration Statement on Form S-1 No. 333-00703). (10)(i)2 Tax Sharing Agreement by and among Lucent Technologies Inc., AT&T Corp. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit 10.6 to Registration Statement on Form S-1 No. 333-00703).
29 30
EXHIBIT NUMBER ------- (10)(i)3 Employee Benefits Agreement by and between AT&T and Lucent Technologies Inc., dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit 10.2 to Registration Statement on Form S-1 No. 333-00703). (10)(i)4 Rights Agreement between Lucent Technologies Inc. and First Chicago Trust Company of New York, as Rights Agent, dated as of April 4, 1996 (Exhibit 4.2 to Registration Statement on Form S-1 No. 333-00703). (10)(i)5 Amendment to Rights Agreement between Lucent Technologies Inc. and First Chicago Trust Company of New York, dated as of February 18, 1998. (10)(ii)(B)1 Brand License Agreement by and between Lucent Technologies Inc. and AT&T, dated as of February 1, 1996 (Exhibit 10.5 to Registration Statement on Form S-1 No. 333-00703). (10)(ii)(B)2 Patent License Agreement among AT&T, NCR and Lucent Technologies Inc., effective as of March 29, 1996 (Exhibit 10.7 to Registration Statement on Form S-1 No. 333-00703). (10)(ii)(B)3 Amended and Restated Technology License Agreement among AT&T, NCR and Lucent Technologies Inc., effective as of March 29, 1996 (Exhibit 10.8 to Registration Statement on Form S-1 No. 333-00703). (10)(iii)(A)(1) Lucent Technologies Inc. Short Term Incentive Program (Exhibit (10)(iii)(A)(2) to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998).* (10)(iii)(A)2 Lucent Technologies Inc. 1996 Long Term Incentive Program (Exhibit(10)(iii)(A)1 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998).* (10)(iii)(A)3 Lucent Technologies Inc. 1996 Long Term Incentive Program (Plan) Restricted Stock Unit Award Agreement. (10)(iii)(A)4 Lucent Technologies Inc. 1996 Long Term Incentive Program (Plan) Nonstatutory Stock Option Agreement. (10)(iii)(A)5 Lucent Technologies Inc. Deferred Compensation Plan (Exhibit (10)(iii)(A)3 to the Annual Report on Form 10-K for the period ended September 30, 1998).* (10)(iii)(A)6 Pension Plan for Lucent Non-Employee Directors (Exhibit 10.11 to Registration Statement on Form S-1 No. 333-00703).* (This plan has been terminated) (10)(iii)(A)7 Lucent Technologies Inc. Stock Retainer Plan for Non-Employee Directors (Exhibit (10)(iii)(A)5 to the Annual Report on Form 10-K for the period ended September 30, 1998).* (10)(iii)(A)8 Lucent Technologies Inc. Excess Benefit and Compensation Plan (Exhibit (10)(iii)(A)5 to Annual Report on Form 10-K for Transition Period ended September 30, 1996).* (10)(iii)(A)9 Lucent Technologies Inc. Mid-Career Pension Plan (Exhibit (10)(iii)(A)6 to Annual Report on Form 10-K for Transition Period ended September 30, 1996).* (10)(iii)(A)10 Lucent Technologies Inc. Non-Qualified Pension Plan (Exhibit (10)(iii)(A)7 to Annual Report on Form 10-K for Transition Period ended September 30, 1996).* (10)(iii)(A)11 Lucent Technologies Inc. Officer Long-Term Disability and Survivor Protection Plan (Exhibit (10)(iii)(A)8 to the Annual Report on Form 10-K for Transition Period ended September 30, 1996).* (10)(iii)(A)12 Employment Agreement of Mr. Verwaayen dated June 12, 1997 (Exhibit (10)(iii)(A)(1)) to the Annual Report on Form 10-K for the period ended September 30, 1997).* (10)(iii)(A)13 Employment Agreement of Mr. Peterson dated August 8, 1995 (Exhibit (10)(iii)(A)(9) to the Annual Report on Form 10-K for the period ended September 30, 1997).* (10)(iii)(A)14 Consulting Agreement of Mr. Schacht, effective March 1, 1998 (Exhibit (10)(iii)(A)5 to the Quarterly Report on Form 10-Q for the period ended March 31, 1998).* (10)(iii)(A)15 Description of the Lucent Technologies Inc. Supplemental Pension Plan. (Exhibit (10)(iii)(A)13 to the Annual Report on Form 10-K for the period ended September 30, 1998).*
30 31
EXHIBIT NUMBER ------- (10)(iii)(A)16 Lucent Technologies Inc. 1999 Stock Compensation Plan for Non-Employee Directors (Exhibit 10(iii)(A)14 to the Annual Report on Form 10-K for the period ended September 30, 1998).* (10)(iii)(A)17 Lucent Technologies Inc. Voluntary Life Insurance Plan (Exhibit 10(iii)(A)15 to the Annual Report on Form 10-K for the period ended September 30, 1998). (12) Computation of Ratio of Earnings to Fixed Charges. (13) Specified portions (pages 29 through 64) of the Company's Annual Report to security holders for the year ended September 30, 1999. (21) List of subsidiaries of Lucent Technologies Inc. (23) Consent of PricewaterhouseCoopers LLP (24) Powers of Attorney executed by officers and directors who signed this report. (27) Financial Data Schedule.
- --------------- * Management contract or compensatory plan or arrangement. The Company will furnish, without charge, to a security holder upon request a copy of the annual report to security holders and the proxy statement, portions of which are incorporated herein by reference thereto. The Company will furnish any other exhibit at cost. (b) Reports on Form 8-K during the last quarter of the fiscal year covered by this Report: On August 2, 1999 Lucent filed a report on Form 8-K which presented the: (1) restated consolidated financial information, including restated consolidated financial statements, at September 30, 1998 and 1997 and for the years ended September 30, 1998 and 1997 and the nine months ended September 30, 1996; and (2) restated financial information, including restated condensed consolidated financial statements, as of March 31, 1999 and for the six months ended March 31, 1999 and 1998, in each case giving retroactive effect to the merger between Lucent and Ascend for all periods presented.. 31 32 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareowners of Lucent Technologies Inc.: Our audits of the consolidated financial statements referred to in our report dated October 25, 1999 appearing in the 1999 Annual Report to the Shareowners of Lucent Technologies Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the consolidated financial statement schedule listed in Item 14(5)(ii) of this Form 10-K. In our opinion, this consolidated financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP New York, New York October 25, 1999 32 33 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 ACCOUNTS AT END OF DESCRIPTION PERIOD EXPENSES (NET) DEDUCTIONS PERIOD ----------- ------------ ---------- -------------- ---------- --------- Year 1999 Allowance for doubtful accounts 416 68 37 159(a) 362 Reserves related to business restructuring and facility consolidation 251 -- -- 233(b) 18 Deferred tax asset valuation allowance 261 66 15 163 179 Inventory valuation (c) 845 279 (68) 234 822 Year 1998 Allowance for doubtful accounts 363 132 (59) 20(a) 416 Reserves related to business restructuring and facility consolidation 569 -- -- 318(b) 251 Deferred tax asset valuation allowance 234 31 45 49 261 Inventory valuation (c) 880 257 30 322 845 Year 1997 Allowance for doubtful accounts 276 120 5 38(a) 363 Reserves related to business restructuring and facility consolidation 1,289 -- -- 720(b) 569 Deferred tax asset valuation allowance 208 86 3 63 234 Inventory valuation (c) 815 382 19 336 880
- --------------- (a) Amounts written off as uncollectible, payments or recoveries. (b) Included in these deductions were cash payments of $77, $176, and $483 for the years ended September 30, 1999, 1998 and 1997, respectively. In addition, Lucent reversed $141, $100, and $201 for the years ended September 30, 1999, 1998 and 1997, respectively. (c) Certain prior year amounts have been reclassified to conform to the 1999 presentation. 33 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LUCENT TECHNOLOGIES INC. By: /s/ JAMES S. LUSK ------------------------------------ James S. Lusk Senior Vice President and Controller December 21, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Principal Executive Officer Richard A. McGinn Chief Executive Officer Principal Financial Officer Donald K. Peterson Executive Vice President and Chief Financial Officer Principal Accounting Officer By: /s/ JAMES S. LUSK James S. Lusk -------------------------------------------- Senior Vice President and James S. Lusk Controller (attorney-in-fact) December 21, 1999 Directors Paul A. Allaire Carla A. Hills Richard A. McGinn Drew Lewis Donald S. Perkins Henry B. Schacht Franklin A. Thomas John A. Young
- --------------- 34 35 EXHIBIT INDEX The following documents are filed as Exhibits to this report on Form 10-K or incorporated by reference herein. Any document incorporated by reference is identified by a parenthetical referencing the SEC filing which included such document.
EXHIBIT NUMBER ------- (3)(i) Articles of Incorporation of the registrant, as amended February 17, 1999 (Exhibit 3(i) to Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, File No. 001-11639). (3)(ii) By-Laws of the registrant, as amended, October 24, 1999 (4)(i) Indenture dated as of April 1, 1996 between Lucent Technologies Inc. and the Bank of New York, as Trustee (Exhibit 4A to Registration Statement on Form S-3 No. 333-01223). (4)(iii) Other instruments in addition to Exhibit 4(i) which define the rights of holders of long term debt, of the registrant and all of its consolidated subsidiaries, are not filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. (10)(i)1 Separation and Distribution Agreement by and among Lucent Technologies Inc., AT&T Corp. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit 10.1 to Registration Statement on Form S-1 No. 333-00703). (10)(i)2 Tax Sharing Agreement by and among Lucent Technologies Inc., AT&T Corp. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit 10.6 to Registration Statement on Form S-1 No. 333-00703). (10)(i)3 Employee Benefits Agreement by and between AT&T and Lucent Technologies Inc., dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit 10.2 to Registration Statement on Form S-1 No. 333-00703). (10)(i)4 Rights Agreement between Lucent Technologies Inc. and First Chicago Trust Company of New York, as Rights Agent, dated as of April 4, 1996 (Exhibit 4.2 to Registration Statement on Form S-1 No. 333-00703). (10)(i)5 Amendment to Rights Agreement between Lucent Technologies Inc. and First Chicago Trust Company of New York, dated as of February 18, 1998 (Exhibit (10)(i)5 to the Annual Report on Form 10-K for the period ended September 30, 1998). (10)(ii)(B)1 Brand License Agreement by and between Lucent Technologies Inc. and AT&T, dated as of February 1, 1996 (Exhibit 10.5 to Registration Statement on Form S-1 No. 333-00703). (10)(ii)(B)2 Patent License Agreement among AT&T, NCR and Lucent Technologies Inc., effective as of March 29, 1996 (Exhibit 10.7 to Registration Statement on Form S-1 No. 333-00703). (10)(ii)(B)3 Amended and Restated Technology License Agreement among AT&T, NCR and Lucent Technologies Inc., effective as of March 29, 1996 (Exhibit 10.8 to Registration Statement on Form S-1 No. 333-00703). (10)(iii)(A)(1) Lucent Technologies Inc. Short Term Incentive Program (Exhibit (10)(iii)(A)(2) to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998).* (10)(iii)(A)2 Lucent Technologies Inc. 1996 Long Term Incentive Program (Exhibit(10)(iii)(A)1 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998).* (10)(iii)(A)3 Lucent Technologies Inc. 1996 Long Term Incentive Program (Plan) Restricted Stock Unit Award Agreement. (10)(iii)(A)4 Lucent Technologies Inc. 1996 Long Term Incentive Program (Plan) Nonstatutory Stock Option Agreement. (10)(iii)(A)5 Lucent Technologies Inc. Deferred Compensation Plan (Exhibit (10)(iii)(A)3 to the Annual Report on Form 10-K for the period ended September 30, 1998).*
35 36
EXHIBIT NUMBER ------- (10)(iii)(A)6 Pension Plan for Lucent Non-Employee Directors (Exhibit 10.11 to Registration Statement on Form S-1 No. 333-00703).* (This plan has been terminated) (10)(iii)(A)7 Lucent Technologies Inc. Stock Retainer Plan for Non-Employee Directors (Exhibit (10)(iii)(A)5 to the Annual Report on Form 10-K for the period ended September 30, 1998).* (10)(iii)(A)8 Lucent Technologies Inc. Excess Benefit and Compensation Plan (Exhibit (10)(iii)(A)5 to Annual Report on Form 10-K for Transition Period ended September 30, 1996).* (10)(iii)(A)9 Lucent Technologies Inc. Mid-Career Pension Plan (Exhibit (10)(iii)(A)6 to Annual Report on Form 10-K for Transition Period ended September 30, 1996).* (10)(iii)(A)10 Lucent Technologies Inc. Non-Qualified Pension Plan (Exhibit (10)(iii)(A)7 to Annual Report on Form 10-K for Transition Period ended September 30, 1996).* (10)(iii)(A)11 Lucent Technologies Inc. Officer Long-Term Disability and Survivor Protection Plan (Exhibit (10)(iii)(A)8 to the Annual Report on Form 10-K for Transition Period ended September 30, 1996).* (10)(iii)(A)12 Employment Agreement of Mr. Verwaayen dated June 12, 1997 (Exhibit (10)(iii)(A)(1)) to the Annual Report on Form 10-K for the period ended September 30, 1997).* (10)(iii)(A)13 Employment Agreement of Mr. Peterson dated August 8, 1995 (Exhibit (10)(iii)(A)(9) to the Annual Report on Form 10-K for the period ended September 30, 1997).* (10)(iii)(A)14 Consulting Agreement of Mr. Schacht, effective March 1, 1998 (Exhibit (10)(iii)(A)5 to the Quarterly Report on Form 10-Q for the period ended March 31, 1998).* (10)(iii)(A)15 Description of the Lucent Technologies Inc. Supplemental Pension Plan. (Exhibit (10)(iii)(A)13 to the Annual Report on Form 10-K for the period ended September 30, 1998).* (10)(iii)(A)16 Lucent Technologies Inc. 1999 Stock Compensation Plan for Non-Employee Directors (Exhibit 10(iii)(A)14 to the Annual Report on Form 10-K for the period ended September 30, 1998).* (10)(iii)(A)17 Lucent Technologies Inc. Voluntary Life Insurance Plan (Exhibit 10(iii)(A)15 to the Annual Report on Form 10-K for the period ended September 30, 1998). (12) Computation of Ratio of Earnings to Fixed Charges. (13) Specified portions (pages 29 through 64) of the Company's Annual Report to security holders for the year ended September 30, 1999. (21) List of subsidiaries of Lucent Technologies Inc. (23) Consent of PricewaterhouseCoopers LLP (24) Powers of Attorney executed by officers and directors who signed this report. (27) Financial Data Schedule.
- --------------- * Management contract or compensatory plan or arrangement. The Company will furnish, without charge, to a security holder upon request a copy of the annual report to security holders and the proxy statement, portions of which are incorporated herein by reference thereto. The Company will furnish any other exhibit at cost. 36 EX-3.II 2 BY-LAWS AS AMENDED 10/24/99 1 EXHIBIT 3(ii) BY-LAWS OF LUCENT TECHNOLOGIES INC. (AMENDED AS OF OCTOBER 24, 1999) INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE ARTICLE I OFFICES AND RECORDS SECTION 1.1. DELAWARE OFFICE. The principal office of the Corporation in the State of Delaware shall be located in the City of Wilmington, County of New Castle, and the name and address of its registered agent is The Prentice Hall Corporation System, Inc. SECTION 1.2. OTHER OFFICES. The Corporation may have such other offices, either within or without the State of Delaware, as the Board of Directors may designate or as the business of the Corporation may from time to time require. SECTION 1.3. BOOKS AND RECORDS. The books and records of the Corporation may be kept outside the State of Delaware at such place or places as may from time to time be designated by the Board of Directors. ARTICLE II STOCKHOLDERS SECTION 2.1. ANNUAL MEETING. The annual meeting of the stockholders of the Corporation shall be held on such date and at such time as may be fixed by resolution of the Board of Directors. SECTION 2.2. SPECIAL MEETING. Except as otherwise required by law and subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, special meetings of stockholders of the Corporation for any purpose or purposes may be called only by (i) the Board of Directors pursuant to a resolution stating the purpose or purposes thereof approved by a majority of the total number of Directors which the Corporation would have if there were no vacancies (the "Whole Board"), or (ii) by the Chairman of the Board of Directors of the Corporation. In addition, prior to the Trigger Date (as defined in the Certificate of Incorporation), the Corporation will call a special meeting of stockholders promptly upon request by AT&T Corp., a New York corporation ("AT&T"), or any of its affiliates, in each case, if such entity is a stockholder of the Corporation. No business other than that stated in the notice shall be transacted at any special meeting. Adopted 4/1/96 Ratified 4/3/96 Amended 7/17/96 Amended as of 2/17/99 Amended as of 10/24/99 2 SECTION 2.3. PLACE OF MEETING. The Board of Directors or the Chairman of the Board, as the case may be, may designate the place of meeting for any annual meeting or for any special meeting of the stockholders. If no designation is so made, the place of meeting shall be the principal office of the Corporation. SECTION 2.4. NOTICE OF MEETING. Written or printed notice, stating the place, day and hour of the meeting and the purpose or purposes for which the meeting is called, shall be delivered by the Corporation not less than 10 calendar days nor more than 60 calendar days before the date of the meeting, either personally or by mail, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid, addressed to the stockholder at such person's address as it appears on the stock transfer books of the Corporation. Such further notice shall be given as may be required by law. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Meetings may be held without notice if all stockholders entitled to vote are present, or if notice is waived by those not present in accordance with Section 6.4 of these By-Laws. Any previously scheduled meeting of the stockholders may be postponed, and any special meeting of the stockholders may be canceled, by resolution of the Board of Directors upon public notice given prior to the date previously scheduled for such meeting of stockholders. SECTION 2.5. QUORUM AND ADJOURNMENT; VOTING. Except as otherwise provided by law or by the Certificate of Incorporation, the holders of a majority of the voting power of all outstanding shares of the Corporation entitled to vote generally in the election of directors (the "Voting Stock"), represented in person or by proxy, shall constitute a quorum at a meeting of stockholders, except that when specified business is to be voted on by a class or series of stock voting as a class, the holders of a majority of the shares of such class or series shall constitute a quorum of such class or series for the transaction of such business. The Chairman of the meeting may adjourn the meeting from time to time, whether or not there is such a quorum. No notice of the time and place of adjourned meetings need be given except as required by law. The stockholders present at a duly called meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. SECTION 2.6. PROXIES. At all meetings of stockholders, a stockholder may vote by proxy executed in writing (or in such manner prescribed by the General Corporation Law of the State of Delaware (the "DGCL")) by the stockholder, or by such person's duly authorized attorney in fact. 2 Adopted 4/1/96 Ratified 4/3/96 Amended 7/17/96 Amended as of 2/17/99 Amended as of 10/24/99 3 SECTION 2.7. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS. (A) Annual Meetings of Stockholders. (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the Corporation's notice of meeting pursuant to Section 2.4 of these By-Laws, (b) by or at the direction of the Board of Directors, or (c) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this By-Law, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this By-Law, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 45th calendar day nor earlier than the 75th calendar day prior to the first anniversary of the record date of stockholders entitled to vote at the preceding year's annual meeting; provided, however, that in the event that the record date is more than 30 calendar days before or more than 60 calendar days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 75th calendar day prior to such record date and not later than the close of business on the later of the 45th calendar day prior to such record date or the 10th calendar day following the calendar day on which public announcement of such record date is first made by the Corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. 3 Adopted 4/1/96 Ratified 4/3/96 Amended 7/17/96 Amended as of 2/17/99 Amended as of 10/24/99 4 (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this By-Law to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 55 calendar days prior to the first anniversary of the record date for the preceding year's annual meeting, a stockholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th calendar day following the day on which such public announcement is first made by the Corporation. (B) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting under Section 2.4 of these By-Laws. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors, or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this By-Law, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting pursuant to such clause (b), if the stockholder shall have delivered written notice thereof containing the information set forth in the notice specified in the last sentence of paragraph (A) (2) of this By-Law to the Secretary at the principal executive offices of the Corporation not earlier than the 120th calendar day prior to such special meeting and not later than the close of business on the later of the 90th calendar day prior to such special meeting or the 10th calendar day following the date on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. (C) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this By-Law shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this By-Law. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the Chairman of the meeting 4 Adopted 4/1/96 Ratified 4/3/96 Amended 7/17/96 Amended as of 2/17/99 Amended as of 10/24/99 5 shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this By-Law and, if any proposed nomination or business is not in compliance with this By-Law, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this By-Law, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of Preferred Stock to elect directors under an applicable Preferred Stock Designation (as defined in the Corporation's Certificate of Incorporation). SECTION 2.8. PROCEDURE FOR ELECTION OF DIRECTORS; REQUIRED VOTE. Election of directors at all meetings of the stockholders at which directors are to be elected shall be by ballot, and, subject to the rights of the holders of any series of Preferred Stock to elect directors under an applicable Preferred Stock Designation, a plurality of the votes cast thereat shall elect directors. Except as otherwise provided by law, the Certificate of Incorporation, Preferred Stock Designation, or these By-Laws, in all matters other than the election of directors, the affirmative vote of a majority of the voting power of the shares present in person or represented by proxy at the meeting and entitled to vote on the matter shall be the act of the stockholders. SECTION 2.9. INSPECTORS OF ELECTIONS; OPENING AND CLOSING THE POLLS. The Board of Directors by resolution shall appoint, or shall authorize an officer of the Corporation to appoint, one or more inspectors, which inspector or inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives, to act at the meetings of stockholders and make a written report thereof. One or more persons may be designated as alternate inspector(s) to replace any inspector who fails to act. If no inspector or alternate has been appointed to act or is able to act at a meeting of stockholders, the Chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging such person's duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such person's ability. The inspector(s) shall have the duties prescribed by law. The Chairman of the meeting shall 5 Adopted 4/1/96 Ratified 4/3/96 Amended 7/17/96 Amended as of 2/17/99 Amended as of 10/24/99 6 fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting. SECTION 2.10. NO STOCKHOLDER ACTION BY WRITTEN CONSENT. Effective as of the Trigger Date, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders. ARTICLE III BOARD OF DIRECTORS SECTION 3.1. GENERAL POWERS. The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. In addition to the powers and authorities by these By-Laws expressly conferred upon them, the Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws required to be exercised or done by the stockholders. SECTION 3.2. NUMBER AND TENURE. Except as otherwise fixed by or pursuant to the provisions of Article IV of the Certificate of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional directors under specified circumstances, the number of the Directors of the Corporation shall be fixed from time to time exclusively pursuant to a resolution adopted by a majority of the Whole Board (but shall not be less than three). The Directors, other than those who may be elected by the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, one class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1997, another class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1998, and another class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1999, with each class to hold office until its successor is duly elected and qualified. At each succeeding annual meeting of stockholders, directors elected to succeed those directors whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until such person's successor shall have been duly elected and qualified. SECTION 3.3. REGULAR MEETINGS. A regular meeting of the Board of Directors shall be held without other notice than this By-Law immediately after, and at the same place as, the annual meeting of stockholders. The Board of Directors may, by resolution, provide 6 Adopted 4/1/96 Ratified 4/3/96 Amended 7/17/96 Amended as of 2/17/99 Amended as of 10/24/99 7 the time and place for the holding of additional regular meetings without other notice than such resolution. SECTION 3.4. SPECIAL MEETINGS. Special meetings of the Board of Directors shall be called at the request of the Chairman of the Board, the President or a majority of the Board of Directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix the place and time of the meetings. SECTION 3.5. NOTICE. Notice of any special meeting of directors shall be given to each director at such person's business or residence in writing by hand delivery, first-class or overnight mail or courier service, telegram or facsimile transmission, or orally by telephone. If mailed by first-class mail, such notice shall be deemed adequately delivered when deposited in the United States mails so addressed, with postage thereon prepaid, at least 5 calendar days before such meeting. If by telegram, overnight mail or courier service, such notice shall be deemed adequately delivered when the telegram is delivered to the telegraph company or the notice is delivered to the overnight mail or courier service company at least 24 hours before such meeting. If by facsimile transmission, such notice shall be deemed adequately delivered when the notice is transmitted at least 12 hours before such meeting. If by telephone or by hand delivery, the notice shall be given at least 12 hours prior to the time set for the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice of such meeting, except for amendments to these By-Laws, as provided under Section 8.1. A meeting may be held at any time without notice if all the directors are present or if those not present waive notice of the meeting either before or after such meeting. SECTION 3.6. ACTION BY CONSENT OF BOARD OF DIRECTORS. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. SECTION 3.7. CONFERENCE TELEPHONE MEETINGS. Members of the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. SECTION 3.8. QUORUM. Subject to Section 3.9, a whole number of directors equal to at least a majority of the Whole Board shall constitute a quorum for the transaction of business, but if at any meeting of the Board of Directors there shall be less than a quorum 7 Adopted 4/1/96 Ratified 4/3/96 Amended 7/17/96 Amended as of 2/17/99 Amended as of 10/24/99 8 present, a majority of the directors present may adjourn the meeting from time to time without further notice. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. The directors present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum. SECTION 3.9. VACANCIES. Except as otherwise provided for or fixed by or pursuant to the provisions of Article IV of the Certificate of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, newly created directorships resulting from any increase in the number of Directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board of Directors. A Director elected in accordance with the preceding sentence shall hold office until the next succeeding annual meeting of stockholders following his election by the Directors, and if elected by the stockholders at such meeting, shall serve for the remainder of the full term of the class of Directors in which the new directorship was created or the vacancy occurred and until such Director's successor shall have been duly elected and qualified. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director. SECTION 3.10. EXECUTIVE AND OTHER COMMITTEES. (a) The Board of Directors may, by resolution adopted by a majority of the Whole Board, designate an Executive Committee to exercise, subject to applicable provisions of law, all the powers of the Board in the management of the business and affairs of the Corporation when the Board is not in session, including without limitation the power to declare dividends, to authorize the issuance of the Corporation's capital stock and to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of the State of Delaware, and may, by resolution similarly adopted, designate one or more other committees. The Executive Committee and each such other committee shall consist of one or more directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, other than the Executive Committee (the powers of which are expressly provided for herein), may to the extent permitted by law exercise such powers and shall have such responsibilities as shall be specified in the designating resolution. In the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or 8 Adopted 4/1/96 Ratified 4/3/96 Amended 7/17/96 Amended as of 2/17/99 Amended as of 10/24/99 9 disqualified member. Each committee shall keep written minutes of its proceedings and shall report such proceedings to the Board when required. (b) A majority of any committee may determine its action and fix the time and place of its meetings, unless the Board shall otherwise provide. Notice of such meetings shall be given to each member of the committee in the manner provided for in Section 3.5 of these By-Laws. The Board shall have power at any time to fill vacancies in, to change the membership of, or to dissolve any such committee. Nothing herein shall be deemed to prevent the Board from appointing one or more committees consisting in whole or in part of persons who are not directors of the Corporation; provided, however, that no such committee shall have or may exercise any authority of the Board. SECTION 3.11. REMOVAL. Subject to the rights of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect Directors under specified circumstances, any Director may be removed from office only for cause by the affirmative vote of the holders of at least a majority of the voting power of all Voting Stock then outstanding, voting together as a single class. SECTION 3.12. RECORDS. The Board of Directors shall cause to be kept a record containing the minutes of the proceedings of the meetings of the Board and of the stockholders, appropriate stock books and registers and such books of records and accounts as may be necessary for the proper conduct of the business of the Corporation. ARTICLE IV OFFICERS SECTION 4.1. ELECTED OFFICERS. The elected officers of the Corporation shall be a Chairman of the Board of Directors, a President, a Secretary, a Treasurer, and such other officers (including, without limitation, Senior Vice Presidents and Executive Vice Presidents and Vice Presidents) as the Board of Directors from time to time may deem proper. The Chairman of the Board shall be chosen from among the directors. All officers elected by the Board of Directors shall each have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this Article IV. Such officers shall also have such powers and duties as from time to time may be conferred by the Board of Directors or by any committee thereof. The Board or any committee thereof may from time to time elect, or the Chairman of the Board or President may appoint, such other officers (including one or more Vice Presidents, Controllers, Assistant Secretaries and Assistant Treasurers), as may be necessary or desirable for the conduct of the business of the Corporation. Such other officers and agents shall have such duties and shall hold their offices for such terms as shall be 9 Adopted 4/1/96 Ratified 4/3/96 Amended 7/17/96 Amended as of 2/17/99 Amended as of 10/24/99 10 provided in these By-Laws or as may be prescribed by the Board or such committee or by the Chairman of the Board or President, as the case may be. SECTION 4.2. ELECTION AND TERM OF OFFICE. The elected officers of the Corporation shall be elected annually by the Board of Directors at the regular meeting of the Board of Directors held after the annual meeting of the stockholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as convenient. Each officer shall hold office until such person's successor shall have been duly elected and shall have qualified or until such person's death or until he shall resign or be removed pursuant to Section 4.8. SECTION 4.3. CHAIRMAN OF THE BOARD; CHIEF EXECUTIVE OFFICER. The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors and shall be the Chief Executive Officer of the Corporation. The Chairman of the Board shall be responsible for the general management of the affairs of the Corporation and shall perform all duties incidental to such person's office which may be required by law and all such other duties as are properly required of him by the Board of Directors. He shall make reports to the Board of Directors and the stockholders, and shall see that all orders and resolutions of the Board of Directors and of any committee thereof are carried into effect. The Chairman of the Board may also serve as President, if so elected by the Board. The Directors also may elect a Vice-Chairman to act in the place of the Chairman upon his or her absence or inability to act. SECTION 4.4. PRESIDENT. The President shall act in a general executive capacity and shall assist the Chairman of the Board in the administration and operation of the Corporation's business and general supervision of its policies and affairs. The President, if he or she is also a Director, shall, in the absence of or because of the inability to act of the Chairman of the Board, perform all duties of the Chairman of the Board and preside at all meetings of stockholders and of the Board of Directors. SECTION 4.5. VICE PRESIDENTS. Each Senior Vice President and Executive Vice President and any Vice President shall have such powers and shall perform such duties as shall be assigned to him by the Board of Directors. SECTION 4.6. TREASURER. The Treasurer shall exercise general supervision over the receipt, custody and disbursement of corporate funds. The Treasurer shall cause the funds of the Corporation to be deposited in such banks as may be authorized by the Board of Directors, or in such banks as may be designated as depositories in the manner provided by resolution of the Board of Directors. The Treasurer shall have such further powers and duties and shall be subject to such directions as may be granted or imposed from time to time by the Board of Directors, the Chairman of the Board or the President. 10 Adopted 4/1/96 Ratified 4/3/96 Amended 7/17/96 Amended as of 2/17/99 Amended as of 10/24/99 11 SECTION 4.7. SECRETARY. (a) The Secretary shall keep or cause to be kept in one or more books provided for that purpose, the minutes of all meetings of the Board, the committees of the Board and the stockholders; the Secretary shall see that all notices are duly given in accordance with the provisions of these By-Laws and as required by law; shall be custodian of the records and the seal of the Corporation and affix and attest the seal to all stock certificates of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as hereinafter provided) and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal; and shall see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and in general, shall perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to the Secretary by the Board, the Chairman of the Board or the President. (b) Assistant Secretaries shall have such of the authority and perform such of the duties of the Secretary as may be provided in these By-Laws or assigned to them by the Board of Directors or the Chairman of the Board or by the Secretary. During the Secretary's absence or inability, the Secretary's authority and duties shall be possessed by such Assistant Secretary or Assistant Secretaries as the Board of Directors, the Chairman of the Board, the President or a Vice Chairman of the Board may designate. SECTION 4.8. REMOVAL. Any officer elected, or agent appointed, by the Board of Directors may be removed by the affirmative vote of a majority of the Whole Board whenever, in their judgment, the best interests of the Corporation would be served thereby. Any officer or agent appointed by the Chairman of the Board or the President may be removed by him whenever, in such person's judgment, the best interests of the Corporation would be served thereby. No elected officer shall have any contractual rights against the Corporation for compensation by virtue of such election beyond the date of the election of such person's successor, such person's death, such person's resignation or such person's removal, whichever event shall first occur, except as otherwise provided in an employment contract or under an employee deferred compensation plan. SECTION 4.9. VACANCIES. A newly created elected office and a vacancy in any elected office because of death, resignation, or removal may be filled by the Board of Directors for the unexpired portion of the term at any meeting of the Board of Directors. Any vacancy in an office appointed by the Chairman of the Board or the President because of death, resignation, or removal may be filled by the Chairman of the Board or the President. ARTICLE V 11 Adopted 4/1/96 Ratified 4/3/96 Amended 7/17/96 Amended as of 2/17/99 Amended as of 10/24/99 12 STOCK CERTIFICATES AND TRANSFERS SECTION 5.1. STOCK CERTIFICATES AND TRANSFERS. The interest of each stockholder of the Corporation shall be evidenced by certificates for shares of stock in such form as the appropriate officers of the Corporation may from time to time prescribe. The shares of the stock of the Corporation shall be transferred on the books of the Corporation by the holder thereof in person or by such person's attorney, upon surrender for cancellation of certificates for at least the same number of shares, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require. The certificates of stock shall be signed, countersigned and registered in such manner as the Board of Directors may by resolution prescribe, which resolution may permit all or any of the signatures on such certificates to be in facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Notwithstanding the foregoing provisions regarding share certificates, the proper officers of the Corporation may provide that some or all of any or all classes or series of the Corporation's common or any preferred shares may be uncertificated shares. SECTION 5.2. LOST, STOLEN OR DESTROYED CERTIFICATES. No certificate for shares of stock in the Corporation shall be issued in place of any certificate alleged to have been lost, destroyed or stolen, except on production of such evidence of such loss, destruction or theft and on delivery to the Corporation of a bond of indemnity in such amount, upon such terms and secured by such surety, as the Board of Directors or any financial officer may in its or such person's discretion require. ARTICLE VI MISCELLANEOUS PROVISIONS SECTION 6.1. FISCAL YEAR. The fiscal year of the Corporation shall begin on the first day of October and end on the last day of September of each year. SECTION 6.2. DIVIDENDS. The Board of Directors may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and the Certificate of Incorporation. SECTION 6.3. SEAL. The corporate seal shall have inscribed thereon the words "Corporate Seal," the year of incorporation and the word "Delaware." 12 Adopted 4/1/96 Ratified 4/3/96 Amended 7/17/96 Amended as of 2/17/99 Amended as of 10/24/99 13 SECTION 6.4. WAIVER OF NOTICE. Whenever any notice is required to be given to any stockholder or director of the Corporation under the provisions of the DGCL or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at, nor the purpose of, any annual or special meeting of the stockholders or the Board of Directors or committee thereof need be specified in any waiver of notice of such meeting. SECTION 6.5. AUDITS. The accounts, books and records of the Corporation shall be audited upon the conclusion of each fiscal year by an independent certified public accountant selected by the Board of Directors, and it shall be the duty of the Board of Directors to cause such audit to be done annually. SECTION 6.6. RESIGNATIONS. Any director or any officer, whether elected or appointed, may resign at any time by giving written notice of such resignation to the Chairman of the Board, the President, or the Secretary, and such resignation shall be deemed to be effective as of the close of business on the date said notice is received by the Chairman of the Board, the President, or the Secretary, or at such later time as is specified therein. No formal action shall be required of the Board of Directors or the stockholders to make any such resignation effective. ARTICLE VII CONTRACTS, PROXIES, ETC. SECTION 7.1. CONTRACTS. Except as otherwise required by law, the Certificate of Incorporation, a Preferred Stock Designation, or these By-Laws, any contracts or other instruments may be executed and delivered in the name and on the behalf of the Corporation by such officer or officers of the Corporation as the Board of Directors may from time to time direct. Such authority may be general or confined to specific instances as the Board may determine. The Chairman of the Board, the President or any Senior Vice President, Executive Vice President or Vice President may execute bonds, contracts, deeds, leases and other instruments to be made or executed for or on behalf of the Corporation. Subject to any restrictions imposed by the Board of Directors or the Chairman of the Board, the President or any Senior Vice President, Executive Vice President or Vice President of the Corporation may delegate contractual powers to others under such person's jurisdiction, it being understood, however, that any such delegation of power shall not relieve such officer of responsibility with respect to the exercise of such delegated power. 13 Adopted 4/1/96 Ratified 4/3/96 Amended 7/17/96 Amended as of 2/17/99 Amended as of 10/24/99 14 SECTION 7.2. PROXIES. Unless otherwise provided by resolution adopted by the Board of Directors, the Chairman of the Board, the President or any Senior Vice President, Executive Vice President or Vice President may from time to time appoint an attorney or attorneys or agent or agents of the Corporation, in the name and on behalf of the Corporation, to cast the votes which the Corporation may be entitled to cast as the holder of stock or other securities in any other corporation, any of whose stock or other securities may be held by the Corporation, at meetings of the holders of the stock or other securities of such other corporation, or to consent in writing, in the name of the Corporation as such holder, to any action by such other corporation, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal or otherwise, all such written proxies or other instruments as he may deem necessary or proper in the premises. ARTICLE VIII AMENDMENTS SECTION 8.1. AMENDMENTS. The By-Laws may be altered or repealed and new By-Laws may be adopted (1) at any annual or special meeting of stockholders by the affirmative vote of the holders of a majority of the voting power of the stock issued and outstanding and entitled to vote thereat, provided, however, that any proposed alteration or repeal of, or the adoption of any By-Law inconsistent with, Section 2.2, 2.7 or 2.10 of Article II or Section 3.2, 3.9 or 3.11 of Article III of the By-Laws by the stockholders shall require the affirmative vote of the holders of at least 80% of the voting power of all Voting Stock then outstanding, voting together as a single class, and provided, further, however, that, in the case of any such stockholder action at a special meeting of stockholders, notice of the proposed alteration, repeal or adoption of the new By-Law or By-Laws must be contained in the notice of such special meeting, or (2) by the affirmative vote of a majority of the Whole Board. I HEREBY CERTIFY that the foregoing is a full, true, and correct copy of the By-Laws of Lucent Technologies Inc., a Delaware corporation, as in effect on the date hereof. Effective as of October 24, 1999 --------------------------------------- Pamela F. Craven Secretary of Lucent Technologies Inc. 14 Adopted 4/1/96 Ratified 4/3/96 Amended 7/17/96 Amended as of 2/17/99 Amended as of 10/24/99 15 [Seal] 15 Adopted 4/1/96 Ratified 4/3/96 Amended 7/17/96 Amended as of 2/17/99 Amended as of 10/24/99 EX-10.III.A.3 3 1996 RESTRICTED STOCK UNIT AWARD AGREEMENT 1 10(iii)(A)(3) FORM OF LUCENT TECHNOLOGIES INC. 1996 LONG TERM INCENTIVE PROGRAM ("PLAN") RESTRICTED STOCK UNIT AWARD AGREEMENT - -------------------------------------------------------------------------------- NAME SOCIAL SECURITY NO. GRANT DATE - -------------------------------------------------------------------------------- Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan. - -------------------------------------------------------------------------------- You have been granted as of the Grant Date set forth above, ________ restricted stock units ("Restricted Stock Units"). Upon termination of the restrictions related thereto each Restricted Stock Unit will be converted into one common share par value $.01 of Lucent ("Shares"). 1. VESTING OF AWARD. The Restricted Stock Units shall vest and become nonforfeitable on the following schedule; [insert vesting schedule], (the date on which any Restricted Stock Unit vests being the "Vesting Date" for such Restricted Stock Unit). The period beginning on the Grant Date hereof and ending on the day prior to the Vesting Date for a Restricted Stock Unit is herein referred to as the "Restriction Period" with respect to such Restricted Stock Unit. 2. TERMINATION OF EMPLOYMENT. Upon termination of your employment for any reason other than death or disability as described below, including without limitation, retirement and termination as a result of your employer ceasing to be either an Affiliate or Lucent, any Restricted Stock Units that are not vested shall be forfeited. Transfer to or from Lucent and any Affiliate shall not be considered a termination of employment for purposes of this Agreement. Nor shall it be considered a termination of employment for purposes of this Agreement if you are placed on a military leave or other approved leave of absence, unless the Committee shall otherwise determine. (a) DEATH - If you die during the Restriction Period, the Restricted Stock Units will become nonforfeitable, the Restriction Period will end and the award will be paid at time of termination as specified in Section 4. (b) DISABILITY - Upon termination of your employment prior to the Vesting Date as a result of your Disability (as defined below) this award will become nonforfeitable, the Restriction Period will end and the award will be paid at time of termination as specified in Section 4. "Disability" means termination of employment under circumstances entitling you to one of the follow: (i) Disability Pension under Lucent's Management Pension Plan; (ii) Disability Benefit under the Long Term Disability Plan for Management Employees of Lucent; (iii)Similar disability benefits under any plan of Lucent that is a successor to or offered in substitution for one or more of the foregoing plans; or (iv) Disability benefits of a type similar to those described in (i) through (iii) under any plan of an Affiliate that adopts reasonable standards and criteria for benefit entitlement. 3. DIVIDEND EQUIVALENT. On each dividend payment date the Company will pay you a cash payment in an amount equal to the dividend payable on one Share for each Restricted Stock Unit you hold on the record date for such dividend, which has not been forfeited, canceled or converted to a Share and distributed. You have no rights as a shareholder of Lucent with respect to any Restricted Stock Unit that has not vested and been converted to a Share. 4. PAYMENT OF SHARES. As soon as practicable after termination of the Restriction Period, the Company will deliver a certificate representing the Shares being distributed to you or to your legal representative. [Insert the following where receipt of stock at the end of the Restriction Period may be deferred: 5. DEFERRAL. You may irrevocably elect, in accordance with the Lucent Technologies Inc. Deferred Compensation Plan (or any successor to such Plan) to defer the distribution of all or any portion of this Award, that you otherwise would have become entitled to receive pursuant to the terms of this Agreement.] 6. TRANSFERABILITY. You may not transfer, pledge, assign, sell or otherwise alienate your Restricted Stock Units. 7. NO RIGHT OF EMPLOYMENT. Neither the Plan nor this Restricted Stock Unit Award shall be construed as giving you the right to be retained in the employ of Lucent or any Affiliate. 8. TAXES. Lucent shall deduct or cause to be deducted from, or collect or cause to be collected with respect to, any distribution hereunder any federal, state, or local taxes required by law to be withheld or paid with respect to such 2 distribution, and you or your legal representative or beneficiaries shall be required to pay any such amounts. Lucent shall have the right to take such action as may be necessary, in Lucent's opinion, to satisfy such obligations. 9. BENEFICIARY. You may, in accordance with procedures established by the Committee, designate one or more beneficiaries to receive all or part of this award in case of your death, and you may change or revoke such designation at any time. Such designation shall not be effective unless and until the Senior Vice President-Human Resources shall determine, on advice of counsel, that resale of Shares by your beneficiary(ies) does not require any registration, qualification, consent or approval of any securities exchange or governmental or regulatory agency or authority. In the event of your death, any portion of this Award that is subject to such a designation (to the extent such designation is valid, effective and enforceable under this Agreement and applicable law) shall be distributed to such beneficiary or beneficiaries in accordance with this Agreement. Any other portion of this Award shall be distributed to your estate. If there shall be any question as to the legal right of any beneficiary to receive a distribution hereunder, or to the extent your designation is not effective, such portion will be delivered to your estate, in which event neither Lucent nor any Affiliate shall have any further liability to anyone with respect to such award. 10. NONCOMPETITION. (a) In addition to your separately enforceable obligations under existing Lucent intellectual property and non-disclosure agreements, and at common law, you will not without the prior written consent of Lucent entity that employs you (the "Employer"), both during and for a period of nine (9) months after termination for any reason of your employment with Lucent, on behalf of any competitor of Lucent (A) render any services relating to: (1) strategic planning, research and development, manufacturing, marketing, or selling with respect to any product, process, material or service which resembles, competes with, or is the same as a product, process, material or service of Lucent about which you gained any proprietary or confidential information or on which you worked during the three (3) years prior to your termination of employment, or (2) any actual or potential customer of Lucent about whom you gained any proprietary or confidential knowledge or with whom you worked during the three (3) years prior to your termination of employment, or (B) solicit or offer, or induce or encourage others to solicit or offer, employment to any employee of Lucent. You recognize and agree that such restrictions are necessary and reasonable to protect Lucent's highly confidential and proprietary information, valuable goodwill, customer relationships and competitive position. (b) You agree that upon termination of employment with Lucent, you will immediately inform Lucent of the identity of your new employer (or the nature of self-employment) and of your new title and job description, and hereby authorize Lucent to provide a copy of this Agreement to your new employer. Further you will provide such information as Lucent may from time to time request to determine your compliance with the terms of this Agreement. (c) You agree that the damages which Lucent would sustain upon any violation of this Agreement are difficult or impossible to ascertain in advance and that immediate and irreparable harm would be caused to Lucent. In the event of any breach of this Agreement, Lucent shall be entitled to obtain injunctive relief; and, in addition, to cancel this award; recoup any profits with respect to the payout of this award realized within nine (9) months prior to termination for any reason of your employment at Lucent through nine (9) months after termination, to be repaid within ten (10) days of Lucent's written request (or, at Lucent's option, to be set off against any amounts Lucent owes you); and obtain reimbursement for all costs and expenses, including attorneys' fees, it may incur in connection with enforcement of rights hereunder. Lucent shall be entitled to any or all of such remedies, the use of one not precluding others or constituting a binding election. (d) The restrictions set forth in Section 10 are the essence of this Agreement. They shall be construed as independent of any other provision of this Agreement, and the existence of any claim or cause of action by you against Lucent, whether or not predicated on this Agreement, shall not constitute a defense to the enforcement by Lucent of these restrictions. (e) The terms and provisions of this Section 10 shall be administered in accordance with such policies and procedures as Lucent, in its sole discretion, may from time to time adopt. 11. GOVERNING LAW. The validity, construction and effect of this Agreement shall be determined in accordance with the laws of the State of Delaware without giving effect to principles of conflicts of law. [The following may be inserted in awards to individuals that may be covered employees for purposes of Section 162(m) of the Internal Revenue Code: 12. SECTION 162(m). (a) Notwithstanding any contrary provision in this Agreement, Section 12 of the Plan and this Section shall apply to your award if you are, or are expected to be as of the end of the tax year in which the Company intends to claim a tax deduction related to this award, a "covered employee" of Lucent within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (i.e., the Chief Executive Officer and the four most highly compensated officers of Lucent, other than the Chief Executive Officer). 3 (b) Vesting of your award shall be subject (i) to Lucent having Net Income (as defined in the Plan) in the fiscal year preceding each applicable Vesting Date at least equal to an amount determined by the Committee and (ii) to the Committee certifying in writing that such level of Net Income was achieved.] - -------------------------------------------------------------------------------- Please indicate your acceptance of terms 1-12, AND IN PARTICULAR THE PROVISIONS OF SECTION 10, HEREOF, and acknowledge that you have received a copy of the Plan, as currently in effect, by signing at the place provided and returning the original of this Agreement. ACCEPTED AND AGREED: LUCENT TECHNOLOGIES INC. - -------------------------------------------------------------------------------- SIGNATURE BY - -------------------------------------------------------------------------------- EX-10.III.A.4 4 1996 NONSTATUTORY STOCK OPTION AGREEMENT 1 EXHIBIT 10(iii)(A)(4) FORM OF LUCENT TECHNOLOGIES INC. 1996 LONG TERM INCENTIVE PROGRAM ("PLAN") NONSTATUTORY STOCK OPTION AGREEMENT - -------------------------------------------------------------------------------- NAME SOCIAL SECURITY NO. GRANT DATE EXPIRATION DATE - -------------------------------------------------------------------------------- Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan. - -------------------------------------------------------------------------------- You have been granted as of the Grant Date set forth above, an option (the "Option") under the Plan to purchase from Lucent Technologies Inc. ("Lucent") ________ common shares, par value $.01, of Lucent ("Shares") at the price of ________ per Share, subject to the terms and conditions of the Plan and this agreement. 1. EXERCISABILITY OF OPTION. Except as provided in Sections 2 and 3 below, [insert vesting provisions and definition of "Vesting Date"] and ending on the Expiration Date set forth above. 2. TERMINATION OF EMPLOYMENT. [Appropriate changes are made to this section in options providing for graded vesting] (a)Upon your termination of employment for any reason prior to the Vesting Date, this Option will be immediately forfeited and canceled in its entirety, except as provided in this Section 2. If you terminate employment on or after the Vesting Date, this Option will remain exercisable until the earlier of the ninetieth day after termination of employment or the original Expiration Date, except as provided in Sections 2, 3 and 4. It will not be considered a termination of your employment if you (i) transfer to or from Lucent and any Affiliate or (ii) are placed on an approved leave of absence. Unless otherwise determined by the Committee, it will be considered a termination of employment if your employer ceases to be Lucent or an Affiliate. (b) RETIREMENT - [For regular grants, such as grants made under the annual grant program, include the following: Upon your Retirement prior to the six month anniversary of the Grant Date, this Option will be immediately forfeited and canceled in its entirety. Upon your Retirement (as defined below) on or after the six month anniversary of the Grant Date, this Option shall become immediately exercisable in full and shall remain exercisable until the original Expiration Date, except as provided in Section 3.] [For special grants, such as retention grants, include the following: Upon your Retirement (as defined below) prior to the Vesting Date this Option will be forfeited and canceled. Upon your Retirement on or after the Vesting Date this Option will remain exercisable until the original Expiration Date, except as provided in Section 3.] "Retirement" means termination of employment with Lucent or any of its Affiliates under any of the following circumstances or entitlements: (i) Service Pension under Lucent's Management Pension Plan; (ii) Minimum Retirement Benefit under Lucent's Supplemental Pension Plan; (iii) Similar pension under any plan of Lucent that is a successor to or offered in substitution for one or more of the foregoing plans; (iv) Pension of a type similar to those described in (i) through (iii) under any plan of an Affiliate that adopts reasonable standards and criteria for benefit entitlement; or (v) You are at least age 50 with a minimum of 15 years service or your age and years of service at the time of termination add up to at least 75. (c) DEATH AND DISABILITY - Upon your termination of employment as a result of your Death or Disability (as defined below), any portion of this Option which is not then exercisable shall become immediately exercisable in full and the outstanding portion of this Option shall remain exercisable until the original Expiration Date, except as provided in Section 3. "Disability" means termination of employment under circumstances entitling you to any of the following benefits: (i) Disability Pension under Lucent's Management Pension Plan; (ii) Disability Benefit under the Long Term Disability Plan for Management Employees of Lucent; (iii) Similar disability benefits under any plan of Lucent that is a successor to or offered in substitution for 2 one or more of the foregoing plans; or (iv) Disability benefits of a type similar to those described in (i) through (iii) under any plan of an Affiliate that adopts reasonable standards and criteria for benefit entitlement. 3. NONCOMPETITION. (a) In addition to your separately enforceable obligations under existing Lucent intellectual property and non-disclosure agreements, and at common law, you will not without the prior written consent of Lucent, both during and for a period of nine (9) months after termination for any reason of your employment with the Lucent entity that employs you (the "Employer"), on behalf of any competitor of Lucent (A) render any services relating to: (1) strategic planning, research and development, manufacturing, marketing, or selling with respect to any product, process, material or service which resembles, competes with, or is the same as a product, process, material or service of Lucent about which you gained any proprietary or confidential information or on which you worked during the three (3) years prior to your termination of employment, or (2) any actual or potential customer of Lucent about whom you gained any proprietary or confidential knowledge or with whom you worked during the three (3) years prior to your termination of employment, or (B) solicit or offer, or induce or encourage others to solicit or offer, employment to any employee of Lucent or any Affiliate. You recognize and agree that such restrictions are necessary and reasonable to protect Lucent's and any Employer's highly confidential and proprietary information, valuable goodwill, customer relationships and competitive position. (b) You agree that upon termination of employment with Lucent, you will immediately inform Lucent of the identity of your new employer (or the nature of self-employment) and of your new title and job description, and hereby authorize Lucent to provide a copy of this Agreement to your new employer. Further you will provide such information as Lucent may from time to time request to determine your compliance with the terms of this Agreement. (c) You agree that the damages which Lucent would sustain upon any violation of this Agreement are difficult or impossible to ascertain in advance and that immediate and irreparable harm would be caused to Lucent. In the event of any breach of this Agreement, Lucent shall be entitled to obtain injunctive relief; and, in addition, to cancel any unexercised portion of this Option; recoup any profits with respect to the exercise of this Option realized within nine (9) months prior to termination for any reason of your employment at Lucent through nine (9) months after termination, to be repaid within ten (10) days of Lucent's written request (or, at Lucent's option, to be set off against any amounts Lucent owes you); and obtain reimbursement for all costs and expenses, including attorneys' fees, it may incur in connection with enforcement of rights hereunder. Lucent shall be entitled to any or all of such remedies, the use of one not precluding others or constituting a binding election. (d) The restrictions set forth in Section 3 are the essence of this Agreement. They shall be construed as independent of any other provision of this Agreement; and the existence of any claim or cause of action by you against Lucent, whether or not predicated on this Agreement, shall not constitute a defense to the enforcement by Lucent of these restrictions. (e) The terms and provisions of this Section 3 shall be administered in accordance with such policies and procedures as Lucent, in its sole discretion, may from time to time adopt. 4. TERMINATION FOR CAUSE. Upon the termination of your employment for "Cause", Lucent will immediately cancel any unexercised portion of this Option. For purposes of this agreement, "Cause" shall be defined as follows: (a) violation of the Lucent Business Guideposts, its code of conduct; (b) conviction of (including a plea of guilty or nolo contendere) of a felony or any crime of theft, dishonesty or moral turpitude, or (c) gross omission or gross dereliction of any statutory or common law duty of loyalty to Lucent. 5. EXERCISE PROCEDURE. This Option shall be exercised by delivering to Lucent a notice in the form prescribed for this purpose. The notice shall specify the number of Shares as to which the Option is being exercised. The Option or any portion thereof may be exercised only upon payment of the exercise price thereof in full, and in accordance with procedures established by the Committee. Payment shall be made in cash or in Shares or a combination of cash and Shares such that the total of the cash plus the Fair Market Value, as determined in accordance with procedures established by the Committee, of the Shares on the date of exercise at least equals the aggregate exercise price of the Shares as to which the Option is being exercised; provided, however, that any Shares surrendered as payment must have been owned by you at least six months prior to the date of exercise. Exercise of the Option shall take effect on the date the notice of exercise, properly completed, is actually received at the address specified in the form. 3 6. ISSUANCE OF LUCENT SHARES. Following exercise of this Option, Lucent will issue the number of Shares purchased under this Option. Neither you nor anyone else shall be, or have any of the rights and privileges of, a shareholder of Lucent in respect of any Shares purchasable upon the exercise of this Option, in whole or in part, unless and until such Shares shall have been issued. 7. TRANSFERABILITY. (a) [Insert in options that are transferable: Except as provided in Section (b),] This Option is not transferable by you otherwise than by will or the laws of descent and distribution, and during your lifetime the Option may be exercised only by you or your guardian or legal representative. [Insert in transferable options: (b) This Option may be transferred by you, in accordance with rules established by the Company, to one or more members of your immediate family, to a partnership of which the only partners are members of your immediate family or to a trust established by you for the benefit of one or more members of your immediate family (each such transferee a "Permitted Transferee"). For purposes of this Section (b), your immediate family means your spouse, parents, children, grandchildren and the spouses of children and grandchildren. Adopted children will be considered to be your children or grandchildren, as the case may be, for this purpose. A Permitted Transferee may not further transfer the Option. An Option transferred pursuant to this Section shall remain subject to all of the provisions of the Plan and this Agreement, including, but not limited to, the provisions of Section 2 relating to the exercise of the Option upon termination of your employment, Section 3 relating to the forfeiture of the Option (or any benefits from its exercise) in the event of certain activities by you in competition with Lucent, and Section 4 relating to the cancelation of the Option in the event of termination for Cause . (c) No Option may be exercised by a Permitted Transferee unless and until the Shares to be purchased upon exercise of such Option shall have been listed, registered or otherwise qualified as provided in Section 9 of this Agreement.] [Insert in non-transferable options: (b)] [Insert in transferable options: (d)] You may, in accordance with procedures established by the Committee, designate one or more beneficiaries to receive all or part of the Option in case of your death, and you may change or revoke such designation at any time. Such designation shall not be effective unless and until the Senior Vice President-Human Resources or the Vice President Compensation and Benefits shall determine, on advice of counsel, that exercise of the Option by your beneficiary(ies) does not require any registration, qualification, consent or approval of any securities exchange or governmental or regulatory agency or authority. In the event of your death, any portion of this Option that is subject to such a designation (to the extent such designation is valid, effective and enforceable under this Agreement and applicable law) shall be distributed to such beneficiary or beneficiaries in accordance with this Agreement. Any other portion of this Option shall be distributable to your estate. If there shall be any question as to the legal right of any beneficiary to receive a distribution hereunder, or to the extent your designation is not effective, such portion may be exercised by your estate, in which event neither Lucent nor any Affiliate shall have any further liability to anyone with respect to such Option. 8. NO RIGHT OF EMPLOYMENT. Neither the Plan nor this Agreement shall be construed as giving you the right to be retained in the employ of Lucent or any Affiliate. 9. REGULATORY APPROVALS. If the Senior Vice President-Human Resources or the Vice President Compensation and Benefits of the Company shall determine, on advice of counsel, that the listing, registration or qualification of Shares upon any securities exchange or under any law, or the consent or approval of any governmental or regulatory agency or authority, is necessary or desirable as a condition of, or in connection with, the exercise of the Option, no portion of the Option may be exercised until or unless such listing, registration, qualification, consent or approval shall have been effected or obtained. The foregoing shall not be construed as requiring any such listing, registration, qualification, consent or approval. 10. DETERMINATIONS OF THE COMMITTEE. Any determinations or decisions made or actions taken arising out of or in connection with the interpretation and administration of this Agreement and the Plan by the Committee shall be final and conclusive. 11. AMENDMENTS. This Agreement may be amended by the Committee provided that no such amendment shall impair your rights hereunder without your consent. 4 12. TAXES. Lucent may withhold or require payment of taxes or social insurance payments due upon the exercise of this Option. Payments may be paid in cash or a combination of cash and shares if permitted by the Administrator. 13. GOVERNING LAW. The validity, construction and effect of this Agreement shall be determined in accordance with the laws of the State of Delaware without giving effect to principles of conflicts of laws. - -------------------------------------------------------------------------------- Please indicate your acceptance of terms 1-13, and in particular the provisions contained in Section 3 hereof, and acknowledge that you have received a copy of the Plan as currently in effect, by signing at the place provided and returning the original of this Agreement. ACCEPTED AND AGREED: LUCENT TECHNOLOGIES INC. - -------------------------------------------------------------------------------- SIGNATURE BY - -------------------------------------------------------------------------------- VICE PRESIDENT EX-12 5 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 TWELVE FOR THE NINE FOR THE MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, 1999 1998 1997 1996 1995 -------------- -------------- -------------- -------------- ------------ Earnings Before Income Taxes ............ $ 5,443 $ 2,512 $ 1,458 $ 627 $(1,050) Less Interest Capitalized During the Period ............. 20 17 14 14 14 Less Undistributed Earnings of Less than 50% Owned Affiliates ....... 2 11 3 1 2 Add Fixed Charges ........ 635 503 460 313 327 ------- ------- ------- ------- ------- Total Earnings .......... $ 6,056 $ 2,987 $ 1,901 $ 925 $ (739) Fixed Charges Total Interest Expense Including Capitalized Interest .... $ 453 $ 297 $ 281 $ 209 $ 257 Interest Portion of Rental Expenses ........ 182 142 112 63 70 ------- ------- ------- ------- ------- Total Fixed Charges ..... $ 635 $ 439 $ 393 $ 272 $ 327 Ratio of Earnings to Fixed Charges .......... 9.5 6.8 4.8 3.4 (A)
(A) For purposes of determining the ratio of earnings to fixed charges, earnings are defined as income(loss) before income taxes, less interest capitalized, less undistributed earnings of less than 50% owned affiliates and plus fixed charges. Fixed charges consist of interest expense on all indebtedness and that portion of operating lease rental expense that is representative of the interest factor. Earnings were inadequate to cover fixed charges for the year ended December 31, 1995 by $1,066. EX-13 6 PORTIONS OF 1999 ANNUAL REPORT TO SECURITY HOLDERS 1 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION HIGHLIGHTS Lucent Technologies Inc. (the "Company") reported net income of $4,766 million, or $1.52 per share (diluted), for the year ended September 30, 1999, compared with year-ago net income of $1,035 million, or $0.34 per share (diluted). In 1999, Lucent changed its method for determining annual net pension and postretirement benefit costs. As a result, included in 1999 net income is a $1,308 million, or $0.42 per share (diluted), cumulative effect of accounting change. See Note 10 to the Consolidated Financial Statements for further detail of the accounting change. Lucent's income before the cumulative effect of the accounting change was $3,458 million for the year ended September 30, 1999. In 1999, Lucent recorded a $141 million ($93 million after-tax) reversal of business restructuring charges, a $101 million non-tax deductible charge to operating expenses for merger-related costs and a $236 million charge ($169 million after-tax) primarily associated with asset impairments and integration-related charges associated with the Ascend Communications, Inc. and Nexabit Networks, Inc. mergers, a $274 million gain ($167 million after-tax) on the sale of an equity investment in Juniper Networks, and $282 million ($272 million after-tax) purchased in-process research and development expenses related to the acquisitions of Stratus Computer, Inc., Quadritek Systems, Inc., Sybarus Technologies, WaveAccess Ltd. and the Ethernet local area network ("LAN") component business of Enable Semiconductor ("Enable"). In 1998, Lucent recorded a $118 million ($76 million after-tax) reversal of business restructuring charges (including an $18 million pre-tax reversal of merger-related costs by Ascend), a $149 million ($95 million after-tax) gain on the sale of Lucent's Advanced Technology Systems ("ATS") business, and $1,683 million ($1,679 million after-tax) purchased in-process research and development expenses related to the acquisitions of Stratus, JNA Telecommunications Limited, LANNET, MassMedia Communications Inc., SDX Business Systems plc, Yurie Systems, Inc., Optimay GmBH, Prominet Corporation and Livingston Enterprises, Inc. All per share amounts have been adjusted to reflect the two-for-one stock splits of Lucent common stock that became effective April 1, 1999 and April 1, 1998. All financial information has been restated to reflect the Ascend and Kenan Systems Corporation mergers. CONVERGENCE The communications industry is experiencing rapid changes in the technologies used to service customers' needs. Traditional circuit-based switching and data packet transmission are converging. This convergence of technologies is driven by the growing demands for the transmission of information using data, voice, video and fax, or any combination of these. The demand is driven by the expansion of Internet traffic over existing networks - both wireline and wireless - as well as the buildout of new and improved networks. Lucent's strategy is to meet its customers' needs by offering an end-to-end solutions platform. This strategy brings together the core products of switching, transmission, software, messaging and optoelectronics (including microelectronic componentry) with the new portfolio offerings obtained through strategic acquisitions as well as the research and development of Bell Laboratories. These new offerings are in the areas of data packet switching, access products, software and services. With these new offerings, Lucent will enhance its spectrum of communications products and services - data, voice, optical, wireless, software, services and support - and is able to offer a full-service package for the next generation of networks. In June 1999, Lucent merged with Ascend. The Ascend merger enhances Lucent's data switching and remote access products. The February 1999 merger with Kenan refines Lucent's expertise in the field of billing software and customer care. Subsequent to the close of fiscal 1999, Lucent continued to broaden its portfolio by merging with International Network Services ("INS"), a global provider of network consulting and software solutions, and Excel Switching Corporation, a provider of open switching solutions for telecom carriers. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Lucent will continue to review its portfolio of offerings and may use acquisitions to enhance those offerings where it makes good business sense. These acquisitions may occur through the use of cash, the issuance of debt or common stock, or any combination of the three. ACQUISITIONS AND DISPOSITIONS As part of Lucent's continued efforts to provide its customers with end-to-end communications solutions, the Company completed the following acquisitions and dispositions during the three years ended September 30, 1999: August 1999 Acquisition of 61% interest in SpecTran Corporation, a designer and manufacturer of specialty optical fiber and fiber-optic products. Lucent expects to acquire the remaining shares of SpecTran by the end of the first quarter of fiscal year 2000 July 1999 Merger with Nexabit, a developer of high-speed switching equipment and software that directs traffic along telecommunications networks Merger with Mosaix Inc., a provider of software that links companies' front and back offices and helps them deliver more responsive and efficient customer service June 1999 Merger with Ascend, a developer, manufacturer and seller of wide area networking solutions March 1999 Acquisition of the Ethernet LAN component business of Enable Semiconductor February 1999 Merger with Kenan, a developer of third-party billing and customer care software Acquisition of Sybarus, a semiconductor design company January 1999 Acquisition of the remaining 80% interest in WaveAccess, a developer of high-speed systems for wireless data communications October 1998 Acquisition of Quadritek, a start-up developer of next-generation Internet protocol ("IP") network administration software solutions Ascend acquisition of Stratus, a manufacturer of fault-tolerant computer systems September 1998 Acquisition of JNA, an Australian telecom equipment manufacturer, reseller and system integrator August 1998 Acquisition of LANNET, an Israeli-based supplier of Ethernet and asynchronous transfer mode ("ATM") switching solutions July 1998 Acquisition of SDX, a United Kingdom-based provider of business communications systems Acquisition of MassMedia, a developer of next-generation network interoperability software May 1998 Acquisition of Yurie, a provider of ATM access technology and equipment for data, voice and video networking April 1998 Acquisition of Optimay, a Germany-based developer of software products and services for chip sets to be used for Global System for Mobile Communications cellular phones January 1998 Acquisition of Prominet, a participant in the emerging Gigabit Ethernet networking industry December 1997 Acquisition of Livingston, a global provider of equipment used by Internet service providers to connect their subscribers to the Internet September 1997 Acquisition of Octel Communications Corporation, a provider of voice, fax and electronic messaging technologies 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION June 1997 Ascend merger with Cascade Communications Corp., a developer and manufacturer of wide area network switches April 1997 Ascend merger with Whitetree, Inc., a developer and manufacturer of high-speed ATM switching products February 1997 Ascend acquisition of InterCon Systems Corporation, a developer of remote access client software products January 1997 Ascend acquisition of Sahara Networks, Inc., a developer of scalable high-speed broadband access products Lucent has also sought to divest itself of non-core businesses: October 1, 1997 Lucent contributed its Consumer Products business to a new venture formed by Lucent and Philips Electronics N.V. ("Philips") in exchange for 40% ownership of the venture. The venture, Philips Consumer Communications ("PCC"), was formed to create a worldwide provider of personal communications products. On October 22, 1998, Lucent and Philips announced their intention to end the venture in PCC. The venture was terminated in late 1998. In December 1998, Lucent sold certain assets of its wireless handset business to Motorola. Lucent is continuing to look for opportunities to sell the remaining consumer products business. October 1997 Sale of ATS unit December 1996 Sale of interconnect products and Custom Manufacturing Services ("CMS") businesses In addition, subsequent to the 1999 fiscal year-end, Lucent merged with the following: On October 15, 1999, Lucent merged with INS, a global provider of network consulting and software solutions On November 3, 1999, Lucent merged with Excel, a provider of open switching solutions for telecom carriers On November 12, 1999, Lucent merged with Xedia Corporation, a developer of high-performance Internet access routers for wide area networks LUCENT'S FORMATION Lucent was formed from the systems and technology units that were formerly part of AT&T Corp., including the research and development capabilities of Bell Laboratories. Prior to February 1, 1996, AT&T conducted Lucent's original business through various divisions and subsidiaries. On February 1, 1996, AT&T began executing its decision to separate Lucent into a stand-alone company by transferring to Lucent the assets and liabilities related to its business. In April 1996, Lucent completed the initial public offering of its common stock ("IPO") and on September 30, 1996, became independent of AT&T when AT&T distributed to its shareowners all of its Lucent shares. OPERATING SEGMENTS Lucent operates in the global telecommunications networking industry and has three reportable segments: Service Provider Networks ("SPN"), Enterprise Networks ("Enterprise"), and Microelectronics and Communications Technologies ("MCT"). SPN provides public networking systems and software to telecommunications service providers and public network operators around the world. Enterprise develops, manufactures, markets and services advanced communications products and data networking systems for business customers. MCT designs and manufactures high-performance integrated circuits, power systems and optoelectronic components for applications in the communications and computing industries. In addition, MCT includes network products, new ventures and intellectual property. The results of other smaller units and corporate operations are reported in Other and Corporate. The three reportable operating segments are strategic market units that offer distinct products and services. These segments were determined based on the customers and the markets that Lucent serves. Each market unit is managed separately as each operation requires different technologies and marketing strategies. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SEGMENT REVENUES-for the year ended September 30, 1997, 1998 and 1999 (Dollars in Billions)
1997 1998 1999 Other $ 1.4 $ 0.1 $ 0.7 Microelectronics and Communications Technologies 4.2 4.6 5.4 Enterprise Networks 6.3 8.0 8.6 Service Provider Networks 15.7 19.1 23.6
Lucent's Service Provider Networks segment represents about 62% of the total external sales for 1999. Lucent offers a wide range of products and services that represent a full-service package for the next generation of networks. PRODUCT AND SERVICE REVENUES-for the year ended September 30, 1999 Core Networking Systems 46% Business Communications Systems 18% Wireless Products 15% Microelectronics 7% NetCare Professional Services 2% Other 12% Lucent's segments include products and services businesses focused on developing and delivering systems and technologies to our customers. KEY BUSINESS CHALLENGES Lucent continues to face significant competition and expects that the level of competition on pricing and product offerings will intensify. Lucent expects that new competitors will enter its markets as a result of the trend toward global expansion by U.S. and non-U.S. competitors as well as continued changes in technology and public policy. These competitors may include entrants from the telecommunications, software, data networking, cable television and semiconductor industries. Existing competitors have, and new competitors may have, strong financial capabilities, technological expertise, well-recognized brand names and a global presence. Such competitors may include Alcatel Alsthom, Cisco Systems, Inc., Ericsson, Nortel Networks, and Siemens AG. Lucent's management periodically assesses market conditions and redirects the Company's resources to meet new challenges. Steps Lucent may take include acquiring or investing in new businesses and ventures, partnering with other companies, delivering new technologies, closing and consolidating facilities, disposing of assets, reducing work force levels and withdrawing from markets. Historically, revenues and earnings were higher in the first fiscal quarter primarily because many of Lucent's large customers delay a disproportionate percentage of their capital expenditures until the fourth quarter of the calendar year (Lucent's first fiscal quarter). Lucent has taken measures to manage the seasonality of its business by changing the date on which its fiscal year ends to September 30 and its compensation programs for employees, resulting in a more uniform distribution of revenues and earnings throughout the year. The purchasing behavior of Lucent's largest customers has increasingly been characterized by the use of fewer, larger contracts. These contracts typically involve longer negotiating cycles, require the dedication of substantial amounts of working capital and other resources, and in general require costs that may substantially precede the recognition of associated revenues. Moreover, in return for larger, longer-term purchase commitments, customers often demand more stringent acceptance criteria, which can also cause revenue recognition delays. Lucent has increasingly provided or arranged long-term financing for customers as a condition to obtain or bid on infrastructure projects. Certain multiyear contracts involve new technologies that may not have been previously deployed on a large-scale commercial basis. On its multiyear contracts, Lucent may incur significant initial cost overruns and losses that are recognized in the quarter in which they become ascertainable. Further, profit estimates on such contracts are revised periodically over the lives of the contracts, and such revisions can have a significant impact on reported earnings in any one quarter. Historically, a limited number of customers have provided a substantial portion of Lucent's total revenues. These customers include AT&T, which continues to be a significant customer, and the Regional Bell Operating Companies ("RBOCs"). The communications industry is experiencing a consolidation of both U.S. and non-U.S. companies. The loss of any of these customers, or any 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION substantial reduction in orders by any of these customers, could materially adversely affect the Company's operating results. Lucent is diversifying its customer base and seeking out new types of customers globally. These new types of customers include competitive access providers and local exchange carriers, wireless service providers, cable television network operators and computer manufacturers. RESULTS OF OPERATIONS REVENUES Total revenues for 1999 increased 20.4% to $38,303 million compared with 1998, due to increases in sales from all reportable operating segments, as well as Other and Corporate. Revenue growth was driven by sales increases globally. For 1999, sales within the United States grew 11.1% compared with 1998. Non-U.S. revenues increased 47.0% compared with 1998. These non-U.S. sales represented 31.8% of total revenues compared with 26.1% in 1998. REVENUES BY NON-U.S. REGIONS-for the year ended September 30, 1997, 1998 and 1999 (Dollars in Billions)
1997 1998 1999 Canada $0.1 $0.5 $0.4 Caribbean/Latin America 0.7 0.9 1.5 Asia/Pacific 2.8 3.0 3.5 Europe/Middle East/Africa 3.0 3.9 6.8
Lucent continues to expand its business outside of the United States, with growth led by the Europe/Middle East/ Africa region for the past three years. Total revenues for 1998 increased 15.2% to $31,806 million compared with 1997, due to increases in sales from all reportable operating segments. Revenue growth was driven by sales increases globally. For 1998, U.S. sales grew 12.7% compared with 1997 and non-U.S. sales increased 22.8% compared with 1997. These sales represented 26.1% of total revenues compared with 24.5% in 1997. The following table presents Lucent's revenues by segment and the approximate percentage of total revenues for the years ended September 30, 1999, 1998, and 1997:
1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- % of % of % of - --------------------------------------------------------------------------------------------------------------------------- Total Total Total - --------------------------------------------------------------------------------------------------------------------------- Service Provider Networks $23,562 62 $19,108 60 $15,675 57 - --------------------------------------------------------------------------------------------------------------------------- Enterprise Networks 8,559 22 7,954 25 6,257 23 - --------------------------------------------------------------------------------------------------------------------------- Microelectronics and Communications Technologies 5,424 14 4,628 15 4,238 15 - --------------------------------------------------------------------------------------------------------------------------- Other and Corporate 758 2 116 - 1,441 5 - --------------------------------------------------------------------------------------------------------------------------- Total Lucent $38,303 100 $31,806 100 $27,611 100 - ---------------------------------------------------------------------------------------------------------------------------
Revenues in 1999 from the SERVICE PROVIDER NETWORKS segment increased by 23.3%, or $4,454 million compared with 1998, and increased 21.9%, or $3,433 million for 1998 compared with 1997. These increases resulted primarily from higher sales of switching and wireless systems products with associated software, optical networking and data networking systems and communications software. Continued demand for voice, data and wireless services, as well as the need for increased network capacity contributed to the group's revenues. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION U.S. revenues in 1999 from the Service Provider Networks segment increased by 9.0% over 1998, and by 22.3% comparing 1998 with 1997. The 1999 U.S. revenue increase was led by sales to local exchange carriers, wireless service providers and long distance carriers. The 1998 U.S. revenue increase was led by sales to RBOCs, local exchange carriers, wireless service providers and long distance carriers. Non-U.S. revenues for 1999 increased 64.8% compared with 1998 due to revenue growth in the Europe/Middle East/Africa, Caribbean/Latin America and Asia/Pacific regions and represented 34.2% of revenues for 1999 compared with 25.6% in 1998. Non-U.S. revenues for 1998 increased 20.8% compared with 1997 due to growth in all non-U.S. regions, led by the Europe/Middle East/Africa region. Non-U.S. revenues represented 25.8% of revenues in 1997. Revenues in 1999 from the ENTERPRISE NETWORKS segment increased by 7.6%, or $605 million compared with 1998. This increase was led by sales of DEFINITY enterprise communication servers, including those with call center applications and messaging systems. Revenue gains were partially offset by decreased sales of SYSTIMAX(R) structured cabling systems. Revenues in 1998 increased 27.1%, or $1,697 million compared with 1997. This increase was led by sales of messaging systems, including systems provided by Octel, SYSTIMAX structured cabling and services. Non-U.S. revenues increased by 16.3% in 1999 compared with 1998 and 52.0% in 1998 compared with 1997 due to growth in all non-U.S. regions, led by the Europe/Middle East/Africa region. Non-U.S. revenues represented 20.6% of the revenues for 1999 compared with 19.0% for 1998 and 15.9% for 1997. For 1999, U.S. sales increased 5.6% compared with 1998 and 22.4% for 1998 compared with 1997. Revenues in 1999 from the MICROELECTRONICS AND COMMUNICATIONS TECHNOLOGIES segment increased 17.2%, or $796 million compared with 1998, due to higher sales of optoelectronic components and integrated circuits for high-speed communications, data networking, wireless, and computing systems. Increased sales of power systems also contributed to the increase. Revenues increased 9.2%, or $390 million for 1998 compared with 1997, due to higher sales of chips for computing and communications, including semiconductor components for broadband and narrowband networks, data networking, wireless telephones and infrastructure, high-end workstations, optoelectronic transmission systems, power systems and the licensing of intellectual property. U.S. sales in 1999 increased 11.8% compared with 1998 and 8.2% in 1998 compared with 1997. Non-U.S. revenues increased 25.0% compared with 1998 driven by sales in the Asia/Pacific and the Europe/Middle East/Africa regions. Non-U.S. revenues increased 10.7% in 1998 compared with 1997 due to growth in all non-U.S. regions, led by the Europe/Middle East/Africa region. Non-U.S. revenues represented 43.6% of sales compared with 40.8% in 1998 and 40.3% in 1997. Revenues in 1999 from sales of OTHER AND CORPORATE increased $642 million compared with 1998, primarily due to the consolidation of the businesses regained from the PCC venture. On October 22, 1998, Lucent and Philips announced they would end their PCC venture. The venture was terminated in late 1998. The results of operations and net assets of the remaining businesses Lucent previously contributed to PCC had been consolidated as of October 1, 1998. The revenues are included in Other and Corporate. In December 1998, Lucent sold certain assets of the wireless handset portion of the remaining businesses to Motorola, Inc. Lucent is continuing to look for opportunities to sell the remaining consumer products businesses. Revenues for 1998 decreased 92.0%, or $1,325 million, compared with 1997. The reduction in revenues was primarily due to Lucent's contribution of its Consumer Products business in exchange for 40% ownership of PCC in October 1997. In addition, the sale of Lucent's ATS and CMS businesses contributed to the decrease in Other and Corporate. (R) Registered trademark of Lucent 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION COSTS AND GROSS MARGIN
1999 1998 1997 ------- ------- ------- (Dollars in Millions) Costs $19,688 $16,715 $15,318 Gross margin $18,615 $15,091 $12,293 Gross margin % 48.6% 47.4% 44.5%
Total costs in 1999 increased $2,973 million, or 17.8%, compared with 1998, and $1,397 million, or 9.1%, in 1998 compared with 1997 due to the increase in sales volume. Gross margin percentage increased 1.2 percentage points from 1998. The increase in gross margin percentage for the year was due to a more favorable mix of products. Gross margin percentage increased 2.9 percentage points in 1998 from 1997 due to an overall favorable mix of higher margin products and services sales. OPERATING EXPENSES - SG&A
1999 1998 1997 -------- -------- -------- (Dollars in Millions) Selling, general and administrative ("SG&A") $ 8,417 $ 6,867 $ 6,254 As a percentage of revenues 22.0% 21.6% 22.7% As a percentage of revenues excluding amortization of goodwill and existing technology 20.9% 21.1% 22.5%
SG&A expenses increased $1,550 million, or 22.6%, and increased 0.4 percentage points as a percentage of revenues comparing 1999 with 1998 and increased $613 million, or 9.8%, and decreased 1.1 percentage points as a percentage of revenues comparing 1998 with 1997. The dollar increases are attributable to higher sales volume, investment in growth initiatives, and increased amortization of goodwill and existing technology. In addition, the 1998 increase reflects the implementation of SAP, an integrated software platform. Amortization expense associated with goodwill and existing technology was $394 million, $149 million and $32 million for the years ended September 30, 1999, 1998, and 1997, respectively. The 1999 increase largely relates to the write-off of Livingston goodwill and existing technology. For further detail see IN-PROCESS RESEARCH AND DEVELOPMENT below. The 1998 increase relates to increased business acquisition activity in 1998. In addition, 1999 includes a $118 million reversal of 1995 business restructuring charges compared with $66 million in 1998 and $174 million in 1997. The 1998 period also includes an $18 million reversal of merger-related costs associated with the acquisition of Cascade. OPERATING EXPENSES - R&D
1999 1998 1997 ------ ------ ------ (Dollars in Millions) Research and development ("R&D") $4,510 $3,903 $3,185 As a percentage of revenues 11.8% 12.3% 11.5% Purchased in-process research and development $ 282 $1,683 $1,255
R&D expenses in 1999 increased $607 million, or 15.6%, and decreased 0.5 percentage points as a percentage of revenues compared with 1998, and increased $718 million, or 22.5%, and increased 0.8 percentage points in 1998 as a percentage of revenues compared with 1997. The dollar increases were primarily due to increased expenditures in support of wireless, data networking, optical networking, switching and microelectronic products. The 1998 increase also reflected increased expenditures in support of software development and sales. The 1999 decrease in R&D as a percentage of revenues includes more custom contract work that is recorded in Costs as opposed to R&D. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Purchased in-process research and development expenses for 1999 reflect charges associated with the acquisitions of Stratus, Quadritek, Sybarus, WaveAccess and Enable, compared with 1998 expenses associated with the acquisitions of Stratus, JNA, LANNET, MassMedia, SDX, Optimay, Yurie, Prominet and Livingston and with 1997 expenses associated with the acquisitions of Octel, InterCon, Sahara and Agile Networks, Inc. In 1999, $24 million of in-process research and development charges related to the acquisition of Stratus by Ascend were reversed. Since the proceeds received by Ascend in the divestiture of the non-telecommunications business units of Stratus exceeded the carrying value of the assets held for sale, a portion of the original charge for purchased in-process research and development was reversed, reducing the amount of the purchase price allocated to non-current assets on a pro-rata basis. The Stratus acquisition is reported in the 1999 and 1998 fiscal years as a result of the merger with Ascend, which had a different year-end than Lucent. OTHER INCOME-NET, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES
1999 1998 1997 ------ ------ ------ (Dollars in Millions) Other income-net $ 443 $ 128 $ 97 Interest expense $ 406 $ 254 $ 238 Provision for income taxes $1,985 $1,477 $1,009 Effective income tax rate 36.5% 58.8% 69.2% Adjusted income tax rate * 33.9% 35.3% 36.8%
* excludes non-tax deductible purchased in-process research and development expenses and merger-related costs Other income - net in 1999 increased $315 million compared with 1998. This increase was primarily due to the $274 million gain on the sale of an equity investment in Juniper Networks and lower net equity losses in 1999, partially offset by the $149 million gain on the sale of the Company's ATS business in 1998. For 1998, the increase was $31 million compared with 1997. This increase was primarily due to gains recorded on the sale of certain business operations, including the gain on ATS. The 1998 gain was partially offset by higher net losses associated with Lucent's equity investments, primarily from the PCC investment. Also included in Other income - net for 1998 is a charge of $110 million related to a write-down associated with Lucent's investment in the PCC venture. This charge was offset by one-time gains of $103 million primarily related to the sale of an investment and the sale of certain business operations including Bell Labs Design Automation Group. Interest expense for 1999 increased $152 million compared with 1998 and $16 million for 1998 compared with 1997. The increases in interest expense are due to higher debt levels in each comparable period. The effective income tax rates for 1998 and 1997 exceed the U.S. federal statutory income tax rates primarily due to the write-offs of purchased in-process research and development costs and merger-related expenses that are not deductible for tax purposes. Excluding the impact of non-tax deductible purchased in-process research and development expenses and certain merger-related costs, the effective income tax rate decreased 1.4 percentage points in 1999 compared with 1998. This decrease was primarily due to a reduced state effective tax rate and the tax impact of foreign activity. Excluding the impact of the purchased in-process research and development expenses associated with acquisitions, the effective income tax rate decreased 1.5 percentage points in 1998 compared with 1997. This decrease was primarily due to a reduced state effective tax rate and increased research tax credits. The 1998 and 1997 effective income tax rates do not include a federal income tax provision for Kenan since Kenan was an S-Corporation during those years. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CASH FLOWS
1999 1998 1997 ------- ------- ------- (Dollars in Millions) Net cash (used in) provided by: Operating activities $ ( 276) $ 1,860 $ 2,129 Investing activities $(1,787) $(3,100) $(3,371) Financing activities $ 2,685 $ 849 $ 297
Cash from operating activities decreased $2,136 million in 1999 compared with 1998. This decrease was primarily due to increases in receivables and inventories as well as a decrease in payroll and benefit-related liabilities. Cash payments of $77 million were charged against the 1995 business restructuring reserves in 1999, compared with $176 million in 1998. As of September 30, 1999, $18 million of reserves remained, and substantially all of the 23,000 positions that Lucent announced it would eliminate in connection with the 1995 restructuring charges have been eliminated. Cash provided by operating activities decreased $269 million in 1998 compared with 1997. This decrease in cash was largely due to the increase in receivables, partially offset by the increase in payroll and benefit-related liabilities. Cash payments of $176 million were charged against the December 1995 business restructuring reserves in 1998 compared with $483 million in 1997. The restructuring reserves were established in December 1995 after AT&T decided to spinoff Lucent, but before the formal transfer of assets and personnel. The restructuring plans included the exit of certain businesses as well as consolidating and re-engineering numerous corporate and business unit operations. The reserves were in support of Lucent's intention to focus on the technologies and markets it viewed as critical to its long-term success as a stand-alone entity. Many of the 1995 restructuring projects were significant and complex initiatives, some of which could not be completed until new enterprisewide information technology systems, centralized back office support hubs and provisioning centers were in place. At the time the restructuring plans were adopted, the estimated time lines and project plans indicated that substantially all projects would be complete within two years. Some of the restructuring projects have taken longer than anticipated to complete due to their complicated nature and size, and the complicated nature and size of other projects that needed to be completed first. All projects have been substantially completed as of September 30, 1999. Cash used in investing activities decreased $1,313 million in 1999 compared with 1998, primarily due to increased sales of investment securities and a reduction in cash used for acquisitions, partially offset by increased capital expenditures. Cash used in investing activities decreased $271 million in 1998 compared with 1997, primarily due to a decrease in cash used for acquisitions as well as an increase in proceeds from sales of investment securities, partially offset by an increase in cash used to purchase investment securities. In 1998, cash was used in the acquisitions of Yurie, Optimay, SDX, LANNET and JNA. The acquisitions of Livingston, Stratus and Prominet in 1998 were completed through the issuance of stock and options and did not require the use of cash. The use of cash in 1998 was partially offset by proceeds from the sale of ATS and $269 million of cash acquired as part of the acquisition of Stratus. In 1997, Lucent acquired Octel, InterCon, Sahara and Agile and disposed of its interconnect products and CMS businesses. The 1997 acquisition of Sahara was completed through the issuance of stock and options and did not require the use of cash. Capital expenditures were $2,215 million, $1,791 million and $1,744 million for 1999, 1998, and 1997, respectively. Capital expenditures relate to expenditures for equipment and facilities used in manufacturing and research and development, including expansion of manufacturing capacity, and expenditures for cost reduction efforts and non-U.S. growth. Cash provided by financing activities increased $1,836 million in 1999 compared with 1998. This increase was primarily due to increased issuances of long-term debt. Cash provided by financing activities increased $552 million in 1998 compared with 1997. The increase was due to increased issuances of long-term debt and common stock when compared with the prior year. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FINANCIAL CONDITION
1999 1998 ------- ------- (Dollars in Millions) Total assets $38,775 $29,363 Total liabilities $25,191 $21,654 Working capital $10,153 $ 4,899 Debt to total capital (debt plus equity) 34.1% 37.6% Inventory turnover ratio 4.5x 5.6x Average days outstanding - receivables 85 days 71 days
Total assets as of September 30, 1999, increased $9,412 million, or 32.1%, from September 30, 1998. This increase was largely due to increases in cash and cash equivalents, receivables, prepaid pension costs, inventories and other current assets of $662 million, $3,033 million, $2,421 million, $1,769 million and $1,031 respectively. Cash increased primarily due to the securitization of certain customer receivables. The increase in receivables reflects higher sales volume and a higher percentage of sales from outside the United States. Prepaid pension costs increased due to the change in accounting for pensions. The increase in inventories resulted from the need to meet current and anticipated sales commitments to customers. The increase in other current assets is largely due to increases in notes receivable and prepaid expenses. Total liabilities increased $3,537 million, or 16.3%, from September 30, 1998. This increase was due primarily to higher short- and long-term debt levels, including debt recorded in connection with the sale of certain customer receivables with recourse. Working capital, defined as current assets less current liabilities, increased $5,254 million from September 30, 1998, primarily resulting from the increase in receivables and inventories, partially offset by higher short-term debt and accounts payable. Debt to total capital decreased 350 basis points due to the increase in shareowners' equity, partially offset by the increase in total debt. For the year ended September 30, 1999, Lucent's inventory turnover ratio decreased 1.1 times compared with the year ended September 30, 1998. The decrease includes the build-up of inventory to meet current and anticipated sales to customers. Inventory turnover ratio is calculated by dividing cost of sales for the three months ended September 30 by the fourth quarter average ending inventory balance, using a two-point average. Average days outstanding - receivables were up 14 days in 1999 compared with 1998 reflecting the growth in Lucent's sales outside the United States, which typically carry longer payment terms. Average days outstanding is calculated by dividing the fourth quarter average ending receivables balance, using a two-point average, by total revenues for the three months ended September 30. The fair value of Lucent's pension plan assets is greater than the projected pension obligations. Lucent records pension income when the expected return on plan assets plus amortization of the transition asset is greater than the interest cost on the projected benefit obligation plus service cost for the year. Consequently, Lucent continued to have a net pension credit that added to prepaid pension costs in 1999 and which is expected to continue in the near term. LIQUIDITY AND CAPITAL RESOURCES Lucent expects that, from time to time, outstanding commercial paper balances may be replaced with short- or long-term borrowings as market conditions permit. At September 30, 1999, Lucent maintained approximately $4.7 billion in credit facilities, of which a portion is used to support Lucent's commercial paper program. At September 30, 1999, approximately $4.4 billion was unused. Future financings will be arranged to meet Lucent's requirements with the timing, amount and form of issue depending on the prevailing market and general economic conditions. Lucent anticipates that borrowings under its bank credit facilities, the issuance of additional commercial paper, cash generated from operations, short- and long-term debt financings and receivable securitizations will be adequate to satisfy its future cash requirements, although there can be no assurance that this will be the case. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Network operators worldwide are requiring their suppliers to arrange or provide long-term financing for them as a condition of obtaining or bidding on infrastructure projects. These projects may require financing in amounts ranging from modest sums to more than a billion dollars. Lucent has increasingly provided or arranged long-term financing for customers. As market conditions permit, Lucent's intention is to lay off these long-term financing arrangements, which may include both commitments and drawn-down borrowings, to financial institutions and other investors. This enables Lucent to reduce the amount of its commitments and free up additional financing capacity. As of September 30, 1999, Lucent had made commitments or entered into agreements to extend credit to certain network operators, including personal communications service and wireless operators, for an aggregate of approximately $7.1 billion. As of September 30, 1999, approximately $1.6 billion had been advanced and was outstanding under these agreements. In September 1999, a subsidiary of Lucent sold approximately $625 million of accounts receivable to a non-consolidated qualified special purpose entity ("QSPE") which, in turn, sold an undivided ownership interest in these receivables to entities managed by an unaffiliated financial institution. Additionally, Lucent transferred a designated pool of qualified accounts receivable of approximately $700 million to the QSPE as collateral for the initial sale. Lucent's retained interest in the QSPE's designated pool of qualified accounts receivable has been included in Receivables. Lucent will continue to service, administer and collect the receivables on behalf of the purchaser. The impact of the above transaction reduced Receivables and increased cash flows from operating activities in the Consolidated Statements of Cash Flows by $600 million. As part of the revenue recognition process, Lucent assesses the collectibility of its receivables relating to contracts with customers for which Lucent provides financing. In addition to the above arrangements, Lucent will continue to provide or commit to financing where appropriate for its business. The ability of Lucent to arrange or provide financing for its customers will depend on a number of factors, including Lucent's capital structure and level of available credit, and its continued ability to lay off commitments and drawn-down borrowings on acceptable terms. Lucent believes that it will be able to access the capital markets on terms and in amounts that will be satisfactory to Lucent and that it will be able to obtain bid and performance bonds, to arrange or provide customer financing as necessary, and to engage in hedging transactions on commercially acceptable terms, although there can be no assurance that this will be the case. IN-PROCESS RESEARCH AND DEVELOPMENT In connection with the acquisitions of Octel, Livingston and Yurie, Lucent allocated a significant portion of the purchase price to purchased in-process research and development. In addition, in connection with the purchase of Stratus, Lucent allocated $267 million to purchased in-process research and development. As part of the process of analyzing each of these acquisitions, Lucent made a decision to buy technology that had not yet been commercialized rather than develop the technology internally. Lucent based this decision on factors such as the amount of time it would take to bring the technology to market. Lucent also considered Bell Labs' resource allocation and its progress on comparable technology, if any. Lucent management expects to use the same decision process in the future. Lucent estimated the fair value of in-process research and development for each of the above acquisitions using an income approach. This involved estimating the fair value of the in-process research and development using the present value of the estimated after-tax cash flows expected to be generated by the purchased in-process research and development, using risk-adjusted discount rates and revenue forecasts as appropriate. The selection of the discount rate was based on consideration of Lucent's weighted average cost of capital, as well as other factors, including the useful life of each technology, profitability levels of each technology, the uncertainty of technology advances that were known at the time, and the stage of completion of each technology. Lucent believes that the estimated in-process research and development amounts so determined represent fair value and do not exceed the amount a third party would pay for the projects. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Where appropriate, Lucent deducted an amount reflecting the contribution of the core technology from the anticipated cash flows from an in-process research and development project. At the date of acquisition, the in-process research and development projects had not yet reached technological feasibility and had no alternative future uses. Accordingly, the value allocated to these projects was capitalized and immediately expensed at acquisition. If the projects are not successful or completed in a timely manner, management's product pricing and growth rates may not be achieved and Lucent may not realize the financial benefits expected from the projects. Set forth below are descriptions of certain acquired in-process research and development projects, including their status at the end of fiscal 1999. Octel On September 29, 1997, Lucent completed the purchase of Octel for $1,819 million. Octel was a public company involved in the development of voice, fax and electronic messaging technologies. The allocation of $945 million to in-process research and development represented its estimated fair value using the methodology described above. The $945 million was allocated to the following projects: Unified Messenger ($245 million), Phoenix/Intelligent Messaging Architecture ("IMA") ($540 million), Octel Network Services ("ONS") Projects ($111 million) and three other projects ($49 million in total). Unified Messenger - Revenues attributable to Unified Messenger were estimated to be $5 million in 1998 and $46 million in 1999. Revenue was expected to peak in 2004 and decline thereafter through the end of the product's life (2008) as new product technologies were expected to be introduced by Lucent. Revenue growth was expected to decrease from 179% in 2000 to 20% in 2004, and be negative for the remainder of the projection period. At the acquisition date, costs to complete the research and development efforts related to the initial release of the project were expected to be $3 million. Phoenix/IMA - Revenues attributable to Phoenix/IMA were estimated to be $94 million in 1998 and $508 million in 1999. Revenue was expected to peak in 2004 and decline thereafter through the end of the product's life (2010) as new product technologies were expected to be introduced by Lucent. Revenue growth was expected to decrease from 59% in 2000 to 10% in 2004, and be negative for the remainder of the projection period. At the acquisition date, costs to complete the research and development efforts related to the Phoenix/IMA project were expected to be $49 million. ONS Projects - Revenues attributable to the ONS Projects were estimated to be $18 million in 1998 and $93 million in 1999. Revenue was expected to peak in 2003 and decline thereafter through the end of the product's life (2006) as new product technologies were expected to be introduced by Lucent. Revenue growth was expected to decrease from 52% in 2000 to 10% in 2003, and be negative for the remainder of the projection period. At the acquisition date, costs to complete the research and development efforts related to the ONS projects were expected to be less than $1 million. An average risk-adjusted discount rate of 20% was utilized to discount projected cash flows. There have not been any significant departures from the planned efforts for Unified Messenger. The Phoenix and ONS efforts have been completed. The IMA research and development effort has been delayed twice as a result of the inclusion of new capability specifications, first, in January 1998 to include unified messaging capabilities and, second, in September 1998 to include significant new hardware platform capabilities and incorporate Internet software capabilities. This enhanced version reached technological feasibility, a beta stage, in August 1999, and is scheduled for shipment in December 1999. Since intermediate milestones for IMA have been met on schedule and Phoenix will continue to earn revenues through completion of IMA development, the completion and exploitation of this project and current market conditions make it reasonable that estimated revenue and cash flow levels will be achieved, although on a delayed basis. The IMA version enhancements and the rescheduled market introduction are not expected to impact the originally forecasted market penetration rates. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Livingston On December 15, 1997, Lucent completed the purchase of Livingston for $610 million. Livingston was involved in the development of equipment used by Internet service providers to connect subscribers to the Internet. The allocation to in-process research and development of $427 million represented its estimated fair value using the methodology described above. Approximately $421 million was allocated to the PortMaster4, a remote access concentrator targeted at large independent telecommunication companies, cable television companies, and Internet service providers, and the remaining $6 million was allocated to another project. Revenues attributable to the PortMaster4 were estimated to be $48 million in 1998 and $261 million in 1999. Revenue was expected to peak in 2002 and decline thereafter through the end of the product's life (2007) as new product technologies were expected to be introduced by Lucent. Revenue growth was expected to decrease from 69% in 2000 to 11% in 2002, and be negative for the remainder of the projection period. At the acquisition date, costs to complete the research and development efforts related to the PortMaster4 were expected to be $5 million. A risk adjusted discount rate of 20% was utilized to discount projected cash flows. Livingston's Portmaster4 was commercially released in July 1998 and started generating revenues immediately after commercial launch. As a result of the merger between Lucent and Ascend, the decision was made to discontinue future development and sales of the PortMaster4 platform in order to maximize research and development efficiency by concentrating on the MAX TNT platform. Instead of having two platforms to address the full spectrum of access switching products, Lucent will be able to have one platform that can address a broad spectrum of applications while minimizing duplicative research and development. Yurie On May 29, 1998, Lucent completed the purchase of Yurie for $1,056 million. Yurie was involved in the development of ATM access solutions. The allocation to in-process research and development of $620 million represented its estimated fair value using the methodology described above. The $620 million was allocated to the following projects: (i) LDR 50/200/250 ($609 million) and (ii) LDR 4 ($11 million). Revenues attributable to the LDR 50/200/250 were estimated to be $132 million in 1999. Revenue was expected to peak in 2000 and decline thereafter through the end of the product's life (2009) as new product technologies were expected to be introduced by Lucent. Revenue growth was expected to decrease from 84% in 2000 to 9% in 2007, and be negative for the remainder of the projection period. Costs to complete the research and development efforts related to the LDR 50/200/250 were expected to be $29 million at the acquisition date. A risk-adjusted discount rate of 20% was utilized to discount projected cash flows. The LDR 50, LDR 200 and LDR 250 were all completed on time or have met all of their scheduled milestones. Some of the product releases have been renamed. Stratus On October 20, 1998, Ascend completed the purchase of Stratus for $917 million. Stratus was a manufacturer of fault-tolerant computer systems. The allocation to in-process research and development of $267 million represented its estimated fair value using the methodology described above. The primary projects that made up the in-process research and development were as follows: HP-UX, Continuum 1248, Continuum 448, M708, SPHINX, HARMONY, LNP, CORE IN, Personal Number Portability (PN), Signaling System 7 (SS7) Gateway and Internet Gateway. Revenues attributable to the projects were estimated to be $84 million in 1999 and $345 million in 2000. Revenue was expected to peak in 2002 and decline thereafter through the end of the product's life (2009) as new product technologies were expected to be introduced by Lucent. Revenue growth was expected to decrease from 310% in 2000 to 6% in 2002, and be negative for the remainder of the projection period. At the acquisition date, costs to complete the research and development efforts related to the projects were expected to be $48 million. A risk-adjusted discount rate of 35% was utilized to discount projected cash flows. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The actual results to date have been consistent, in all material respects, with our assumptions at the time of the acquisition, except as noted below. During fiscal 1999 the product development relating to the HARMONY, SPHINX, and Continuum 448 projects were discontinued due to management's reprioritization of product direction. In addition, it was decided that the development relating to the Continuum 1248 will cease by the quarter ending December 31, 1999. Consequently, Lucent will not realize the forecasted revenues from these projects. RISK MANAGEMENT Lucent is exposed to market risk from changes in foreign currency exchange rates and interest rates that could impact its results of operations and financial condition. Lucent manages its exposure to these market risks through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Lucent uses derivative financial instruments as risk management tools and not for speculative or trading purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions in order to manage Lucent's exposure to nonperformance on such instruments. Lucent uses foreign currency exchange contracts, and to a lesser extent foreign currency options, to reduce significant exposure to the risk that the eventual net cash inflows and outflows resulting from the sale of products to non-U.S. customers and purchases from non-U.S. suppliers will be adversely affected by changes in exchange rates. Foreign currency exchange contracts are designated for recorded, firmly committed or anticipated purchases and sales. The use of these derivative financial instruments allows Lucent to reduce its overall exposure to exchange rate movements, since the gains and losses on these contracts substantially offset losses and gains on the assets, liabilities and transactions being hedged. As of September 30, 1999, Lucent's primary net foreign currency market exposures included Canadian dollars and Brazilian reals. As of September 30, 1998, Lucent's primary net foreign currency market exposures included German marks and British pounds. In 1999, Lucent revised its hedging policy regarding anticipated purchase and sales transaction exposures. Prior to the revision, the Company hedged 100% of all recorded, firmly committed and anticipated transactions with amounts over $1 million. Beginning on August 31, 1999, Lucent's policy is to hedge 50% of the first six months of a 12-month anticipated exposure forecast, with the hedging of the remainder of the forecast to be evaluated on an ongoing basis. This applies to all transactions with value equal to the lesser of $5 million or 10% of the relevant subsidiary's 12-month trailing net revenues. These revisions provide greater risk management flexibility in cases where hedging costs may be excessive relative to the actual risk and when there is greater cash flow uncertainty. Management does not expect that this revised policy will have any material impact on the results of operations or financial condition of the Company. In addition, management does not foresee or expect any significant changes in foreign currency exposure in the near future. The fair value of foreign currency exchange contracts is sensitive to changes in foreign currency exchange rates. As of September 30, 1999 and 1998, a 10% appreciation in foreign currency exchange rates from the prevailing market rates would increase the related net unrealized gain by approximately $41 million and $11 million, respectively. Conversely, a 10% depreciation in these currencies from the prevailing market rates would decrease the related net unrealized gain by approximately $55 million and $18 million, as of September 30, 1999 and 1998, respectively. Consistent with the nature of the economic hedge of such foreign currency exchange contracts, such unrealized gains or losses would be offset by corresponding decreases or increases, respectively, of the underlying instrument or transaction being hedged. While Lucent hedges certain foreign currency transactions, the decline in value of non-U.S. dollar currencies, may, if not reversed, adversely affect Lucent's ability to contract for product sales in U.S. dollars because Lucent's products may become more expensive to purchase in U.S. dollars for local customers doing business in the countries of the affected currencies. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The fair value of Lucent's fixed rate long-term debt is sensitive to changes in interest rates. Interest rate changes would result in gains/losses in the market value of this debt due to differences between the market interest rates and rates at the inception of the debt obligation. Based on a hypothetical immediate 150 basis point increase in interest rates at September 30, 1999 and 1998, the market value of Lucent's fixed rate long-term debt would be impacted by a net decrease of approximately $360 million and $209 million, respectively. Conversely, a 150 basis point decrease in interest rates would result in a net increase in the market value of Lucent's fixed rate long-term debt outstanding at September 30, 1999 and 1998 of approximately $456 million and $247 million, respectively. FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of Results of Operations and Financial Condition and other sections of this report contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about the industries in which Lucent operates, management's beliefs and assumptions made by management. In addition, other written or oral statements that constitute forward-looking statements may be made by or on behalf of the Company. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Future Factors include increasing price and products and services competition by non-U.S. and U.S. competitors, including new entrants; rapid technological developments and changes and the Company's ability to continue to introduce competitive new products and services on a timely, cost-effective basis; the mix of products and services; the achievement of lower costs and expenses; customer demand for the Company's products and services; the ability to successfully integrate the operations and business of acquired companies; readiness for Year 2000; the impact of Year 2000 on customer spending habits; U.S. and non-U.S. governmental and public policy changes that may affect the level of new investments and purchases made by customers; changes in environmental and other U.S. and non-U.S. governmental regulations; protection and validity of patent and other intellectual property rights; reliance on large customers; technological, implementation and cost/financial risks in the increasing use of large, multiyear contracts; the cyclical nature of the Company's business; the outcome of pending and future litigation and governmental proceedings and continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support the Company's future business. These are representative of the Future Factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general U.S. and non-U.S. economic conditions, including interest rate and currency exchange rate fluctuations and other Future Factors. Competition See discussion above under KEY BUSINESS CHALLENGES. Dependence on New Product Development The markets for the Company's principal products are characterized by rapidly changing technology, evolving industry standards, frequent new product introductions and evolving methods of building and operating communications systems for network operators and business customers. The Company's operating results will depend to a significant extent on its ability to continue to introduce new systems, products, software and services successfully on a timely basis and to reduce costs of existing systems, products, software and services. The success of these and other new offerings is dependent on several factors, including proper identification of customer needs, cost, timely completion and introduction, differentiation from offerings of the Company's competitors and market acceptance. In addition, new technological innovations generally require a substantial investment before any assurance is available as to their commercial viability, including, in some cases, certification by non-U.S. and U.S. standard-setting bodies. Reliance on Major Customers See discussion above under KEY BUSINESS CHALLENGES. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Readiness for Year 2000 Lucent is in the final phase of a major effort to minimize the impact of the Year 2000 date change on Lucent's products, information technology systems, facilities and production infrastructure. The Year 2000 challenge is a priority within Lucent at every level of the Company. Primary Year 2000 preparedness responsibility rests with program offices which have been established within each of Lucent's product groups and corporate centers. A corporatewide Lucent Year 2000 Program Office ("LYPO") monitors and reports on the progress of these offices. Each program office has a core of full-time individuals augmented by a much larger group who have been assigned specific Year 2000 responsibilities in addition to their regular assignments. Further, Lucent has engaged third parties to assist in its readiness efforts in certain cases. LYPO has established a methodology to measure, track and report Year 2000 readiness status consisting of five steps: inventory; assessment; remediation; testing; and deployment. In addition, LYPO tracks and reports on the development and deployment of Year 2000 contingency plans. Lucent has completed programs to make its commercially available products Year 2000 ready and has developed evolution strategies for customers who own non-Year 2000 ready Lucent products. All of the upgrades and products needed to support customer migration are generally available. Lucent is completing its extensive efforts to alert customers who have non-Year 2000 ready products, including direct mailings, phone contacts and participation in user and industry groups. Lucent also has a Year 2000 Web site www.lucent.com/y2k, which provides Year 2000 product information. Lucent continues to cooperate in the Year 2000 information sharing efforts of the Federal Communications Commission and other governmental bodies. Lucent believes it has sufficient resources to provide timely support to its customers who require product migrations or upgrades. However, because this effort is heavily dependent on customer cooperation, Lucent monitors customer response and takes steps to encourage customer responsiveness, as necessary. With very few exceptions, Lucent has completed the five steps of its Year 2000 readiness program with respect to its factories, information systems and facilities. LYPO has developed a formal "exceptions" tracking process to approve and track a small number of cases in which factors such as third-party dependencies prevented project completion by Lucent's internal readiness target date of June 30, 1999. Virtually all of the exceptions identified have since been closed. In addition, Lucent has implemented various change management mechanisms to allow the Company to maintain Year 2000 readiness even as systems are modified or replaced to address non-Year 2000 business needs. To ensure the continued delivery of third-party products and services, Lucent's procurement organization has analyzed Lucent's supplier base and has sent surveys to approximately 5,000 suppliers. To supplement this effort, Lucent has conducted more detailed readiness reviews of the Year 2000 status of the suppliers ranked as most critical based on the nature of their relationship with Lucent, the product/service provided and/or the content of their survey responses. Over 90% of Lucent's critical suppliers have reported completion of their Year 2000 readiness efforts. However, Lucent continues to monitor the Year 2000 status of all of its critical suppliers to minimize its Year 2000 supply chain risk and is developing appropriate contingency responses as the risks become clearer. Lucent has committed considerable resources to Year 2000 contingency planning throughout the enterprise. These plans focus on risks posed by the Year 2000 date change, as well as other sensitive dates such as February 29, 2000. Lucent's plans are designed to mitigate the impact of Year 2000 failures, as well as providing emergency response mechanisms and supporting the prompt resumption of regular operations. Lucent is currently in the process of completing the preparations necessary to support the implementation of its contingency plans. In addition, the plans are updated as new information is obtained, the risks posed by external dependencies become clearer and customer support needs become more focused. A network of corporate center and business group communications centers, staffed on a continuous basis during the period before and after the Year 2000 date transition, will support Lucent's contingency planning efforts. These communications centers will facilitate the handling of Year 2000 issues that may arise. An initial test of the Lucent communications center network was conducted in connection with the September 9, 1999, date change. The September 9, 1999, date change passed with no reported impacts on Lucent's business. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The risk to Lucent resulting from the failure of third parties in the public and private sectors to attain Year 2000 readiness is the same as other firms in Lucent's industry and other business enterprises generally. The following are representative of the types of risks that could result in the event of one or more major failures of Lucent's information systems, factories or facilities to be Year 2000 ready, or similar major failures by one or more major third-party suppliers to Lucent: (1) information systems--could include interruptions or disruptions of business and transaction processing such as customer billing, payroll, accounts payable and other operating and information processes, until systems can be remedied or replaced; (2) factories and facilities--could include interruptions or disruptions of manufacturing processes and facilities with delays in delivery of products, until non-compliant conditions or components can be remedied or replaced; and (3) major suppliers to Lucent--could include interruptions or disruptions of the supply of raw materials, supplies and Year 2000 ready components, that could cause interruptions or disruptions of manufacturing and delays in delivery of products, until the third-party supplier remedied the problem or contingency measures were implemented. Risks of major failures of Lucent's principal products could include adverse functional impacts experienced by customers, the costs and resources for Lucent to remedy problems or replace products where Lucent is obligated or undertakes to take such action, and delays in delivery of new products. Lucent believes it is taking the necessary steps to resolve Year 2000 issues; however, given the possible consequences of failure to resolve significant Year 2000 issues, there can be no assurance that any one or more such failures would not have a material adverse effect on Lucent. Lucent estimates that the costs of efforts to prepare for Year 2000 from calendar year 1997 through 2000 is about $560 million, of which an estimated $515 million has been spent as of September 30, 1999. Lucent has been able to reprioritize work projects to largely address Year 2000 readiness needs within its existing organizations. As a result, most of these costs represent costs that would have been incurred in any event. These amounts cover costs of the Year 2000 readiness work for inventory, assessment, remediation, testing, deployment and contingency planning, including fees and charges of contractors for outsourced work and consultant fees. Costs for previously contemplated updates and replacements of Lucent's internal systems and information systems infrastructure have been excluded without attempting to establish whether the timing of non-Year 2000 replacement or upgrading was accelerated. While the Year 2000 cost estimates above include additional costs, Lucent believes, based on available information, that it will be able to manage its total Year 2000 transition without any material adverse effect on its business operations, products or financial prospects. The actual outcomes and results could be affected by Future Factors including, but not limited to, the continued availability of skilled personnel, cost control, the ability to locate and remediate software code problems, critical suppliers and subcontractors meeting their commitments to be Year 2000 ready and provide Year 2000 ready products, and timely actions by customers. European Monetary Union - Euro On January 1, 1999, 11 member countries of the European Union established fixed conversion rates between their existing sovereign currencies, and adopted the Euro as their new common legal currency. The Euro is currently trading on currency exchanges and the legacy currencies will remain legal tender in the participating countries for a transition period between January 1, 1999, and January 1, 2002. During the transition period, cash-less payments can be made in the Euro, and parties can elect to pay for goods and services and transact business using either the Euro or a legacy currency. Between January 1, 2002, and July 1, 2002, the participating countries will introduce Euro notes and coins and withdraw all legacy currencies so that they will no longer be available. Lucent has in place a joint European-United States team representing affected functions within the Company. This team is evaluating Euro related issues affecting the Company that include its pricing/marketing strategy, conversion of information technology systems, existing contracts and currency risk and risk management in the participating countries. The Euro conversion may affect cross-border competition by creating cross-border price transparency. Lucent will continue to evaluate issues involving introduction of the Euro as further accounting, tax and governmental legal and regulatory guidance is available. Based on current information and Lucent's current assessment, Lucent does not expect that the Euro conversion will have a material adverse effect on its business or financial condition. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Employee Relations On September 30, 1999, Lucent employed approximately 153,000 persons, including 76.5% located in the United States. Of these domestic employees, approximately 40% are represented by unions, primarily the Communications Workers of America ("CWA") and the International Brotherhood of Electrical Workers ("IBEW"). Lucent entered into new five-year agreements with the CWA and IBEW expiring May 31, 2003. Multiyear Contracts Lucent has significant contracts for the sale of infrastructure systems to network operators that extend over multiyear periods, and expects to enter into similar contracts in the future, with uncertainties affecting recognition of revenues, stringent acceptance criteria, implementation of new technologies and possible significant initial cost overruns and losses. See also discussion above under LIQUIDITY AND CAPITAL RESOURCES and KEY BUSINESS CHALLENGES. Seasonality See discussion above under KEY BUSINESS CHALLENGES. Future Capital Requirements See discussion above under LIQUIDITY AND CAPITAL RESOURCES. Non-U.S. Growth, Foreign Exchange and Interest Rates Lucent intends to continue to pursue growth opportunities in non-U.S. markets. In many non-U.S. markets, long-standing relationships between potential customers of Lucent and their local providers, and protective regulations, including local content requirements and type approvals, create barriers to entry. In addition, pursuit of such non-U.S. growth opportunities may require significant investments for an extended period before returns on such investments, if any, are realized. Such projects and investments could be adversely affected by reversals or delays in the opening of non-U.S. markets to new competitors, exchange controls, currency fluctuations, investment policies, repatriation of cash, nationalization, social and political risks, taxation, and other factors, depending on the country in which such opportunity arises. Difficulties in non-U.S. financial markets and economies, and of non-U.S. financial institutions, could adversely affect demand from customers in the affected countries. See discussion above under RISK MANAGEMENT with respect to foreign exchange and interest rates. A significant change in the value of the U.S. dollar against the currency of one or more countries where Lucent sells products to local customers or makes purchases from local suppliers may materially adversely affect Lucent's results. Lucent attempts to mitigate any such effects through the use of foreign currency contracts, although there can be no assurances that such attempts will be successful. Legal Proceedings and Environmental Matters See discussion in Note 14 to the Consolidated Financial Statements. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Five-Year Summary of Selected Financial Data (Unaudited) Lucent Technologies Inc. and Subsidiaries (Dollars in millions, except per share amounts)
Year Ended Year Ended Nine Months December September 30, Ended 31, (Twelve Months) September 30, (Twelve Months) ---------------------------------------------- --------------------- --------- 1999 1998 1997 1996 1996 1995 1995 RESULTS OF OPERATIONS (1) Revenues $ 38,303 $ 31,806 $ 27,611 $ 24,215 $ 16,639 $ 14,247 $ 21,718 Gross margin 18,615 15,091 12,293 9,506 7,085 6,315 8,669 Depreciation and amortization expense 1,806 1,411 1,499 1,350 957 1,112 1,504 Operating income(loss) 5,406 2,638 1,599 (656) 734 503 (921) Income(loss) before cumulative effect of accounting change 3,458 1,035 449 (604) 382 197 (813) Cumulative effect of accounting change 1,308 - - - - - - Net income(loss) 4,766 1,035 449 (604) 382 197 (813) Earnings(loss) per common share - basic (2)(3): Income(loss) before cumulative effect of accounting change 1.14 0.35 0.16 (0.23) 0.14 0.08 (0.34) Cumulative effect of accounting change 0.43 - - - - - - Net income(loss) 1.57 0.35 0.16 (0.23) 0.14 0.08 (0.34) Earnings(loss) per common share - diluted (2)(3): Income(loss) before cumulative effect of accounting change 1.10 0.34 0.15 (0.23) 0.14 0.08 (0.34) Cumulative effect of accounting change 0.42 - - - - - - Net income(loss) 1.52 0.34 0.15 (0.23) 0.14 0.08 (0.34) Earnings(loss) per common share - pro forma(3)(4) n/a n/a n/a (0.21) 0.13 0.07 (0.28) Dividends per common share(3) 0.08 0.0775 0.0563 0.0375 0.0375 - - FINANCIAL POSITION Total assets $ 38,775 $ 29,363 $ 25,006 $ 23,572 $ 23,572 $ 18,714 20,217 Working capital 10,153 4,899(5) 2,529 2,728 2,728 523 (50) Total debt 7,026 4,640 4,203 3,997 3,997 4,196 4,018 Shareowners' equity 13,584 7,709 4,379 3,462 3,462 3,198 1,917 OTHER INFORMATION Selling, general and administrative expenses as a percentage of revenues 22.0% 21.6% 22.7% 31.0% 26.6% 28.8% 33.0% Research and development expenses as a percentage of revenues 11.8 12.3 11.5 10.9 11.5 12.0 11.2 Gross margin percentage 48.6 47.4 44.5 39.3 42.6 44.3 39.9 Ratio of total debt to total capital (debt plus equity) 34.1 37.6 49.0 53.6 53.6 56.7 67.7 Capital expenditures $ 2,215 $ 1,791 $ 1,744 $ 1,507 $ 1,002 $ 803 $ 1,302
20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (1) Beginning September 30, 1996, Lucent changed its fiscal year-end from December 31 to September 30 and reported results for the nine-month transition period ended September 30, 1996. (2) The calculation of earnings per share on a historical basis includes the retroactive recognition to January 1, 1995, of the 2,098,499,576 shares (524,624,894 shares on a pre-split basis) owned by AT&T on April 10, 1996. (3) All per share data has been restated to reflect the two-for-one splits of Lucent's common stock that became effective on April 1, 1998, and April 1, 1999. (4) The calculation of earnings (loss) per share on a pro forma basis assumes that all 2,896,214,012 shares outstanding on April 10, 1996, were outstanding since January 1, 1995, and gives no effect to the use of proceeds from the IPO. (5) Reflects the reclassification from debt maturing within one year to long-term debt as a result of the November 19, 1998, sale of $500 ($495 net of unamortized costs) of 10-year notes. N/a Not applicable. Pro Forma Segment Reporting Information (Unaudited) (Dollars in millions) The following table presents Lucent's revenues and operating income by reportable operating segment for the years ended September 30, 1999, 1998, and 1997, and has been prepared giving effect to the mergers of Lucent with Excel and INS under the pooling-of-interests method of accounting, on a pro forma basis as if the mergers had occurred before Lucent's fiscal year-end.
1999 1998 1997 -------- -------- -------- External Revenues - ----------------- Service Provider Networks $ 23,815 $ 19,274 $ 15,795 Enterprise Networks 8,777 8,090 6,329 Microelectronics and Communications Technologies 5,424 4,628 4,238 Total reportable segments 38,016 31,992 26,362 Other and corporate 758 116 1,441 Total revenues $ 38,774 $ 32,108 $ 27,803 Operating Income - ---------------- Service Provider Networks $ 4,587 $ 3,139 $ 1,543 Enterprise Networks 651 650 675 Microelectronics and Communications Technologies 944 608 549 Total reportable segments (a) 6,182 4,397 2,767 Acquisition/integration-related costs (530) (1,690) (1,439) Goodwill and existing technology amortization (396) (149) (32) Other and corporate 187 122 336 Operating income 5,443 2,680 1,632 Other income-- net 452 137 100 Interest expense (407) (254) (239) Income before income taxes $ 5,488 $ 2,563 $ 1,493
(a) Segment operating income excludes goodwill and existing technology amortization, acquisition/integration-related costs, and one-time gains and charges. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following table provides external revenue for groups of similar products and services, on a pro forma basis as if the Excel and INS mergers had occurred before Lucent's fiscal year-end for the years ended September 30, 1999, 1998, and 1997:
1999 1998 1997 ------- ------- ------- Products and Services Revenues Core Networking Systems (a) $17,906 $14,541 $12,621 Wireless Products 5,516 4,456 2,984 Business Communications Systems (b) 6,977 6,399 5,077 Microelectronics 2,827 2,405 2,214 NetCare Professional Services 1,083 656 374 Other (c) 4,465 3,651 4,533 Totals $38,774 $32,108 $27,803
a) Core Networking Systems includes switching and access products, data networking systems for service providers, optical networking products, communications software and engineering services. b) Business Communications Systems includes advanced communications products and messaging services. c) "Other" principally includes network products. 22 REPORT OF MANAGEMENT Management is responsible for the preparation of Lucent Technologies Inc.'s consolidated financial statements and all related information appearing in this Annual Report. The consolidated financial statements and notes have been prepared in conformity with generally accepted accounting principles and include certain amounts that are estimates based upon currently available information and management's judgment of current conditions and circumstances. To provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition and that accounting records are reliable for preparing financial statements, management maintains a system of accounting and other controls, including an internal audit function. Even an effective internal control system, no matter how well designed, has inherent limitations - including the possibility of circumvention or overriding of controls - and therefore can provide only reasonable assurance with respect to financial statement presentation. The system of accounting and other controls is improved and modified in response to changes in business conditions and operations and recommendations made by the independent accountants and the internal auditors. The Audit and Finance Committee of the Board of Directors, which is composed of directors who are not employees, meets periodically with management, the internal auditors and the independent accountants to review the manner in which these groups of individuals are performing their responsibilities and to carry out the Audit and Finance Committee's oversight role with respect to auditing, internal controls and financial reporting matters. Periodically, both the internal auditors and the independent accountants meet privately with the Audit and Finance Committee and have access to its individual members. Lucent engaged PricewaterhouseCoopers LLP, independent accountants, to audit the consolidated financial statements in accordance with generally accepted auditing standards, which include consideration of the internal control structure. Their report appears on the following page. Richard A. McGinn Donald K. Peterson Chairman and Executive Vice President and Chief Executive Officer Chief Financial Officer 23 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareowners of Lucent Technologies Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and changes in shareowners' equity and of cash flows present fairly, in all material respects, the financial position of Lucent Technologies Inc. and its subsidiaries at September 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP New York, New York October 25, 1999 24 Lucent Technologies Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (Dollars in Millions, Except Per Share Amounts)
Year Ended September 30, --------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Revenues $38,303 $31,806 $27,611 Costs 19,688 16,715 15,318 Gross margin 18,615 15,091 12,293 Operating expenses Selling, general and administrative 8,417 6,867 6,254 Research and development 4,510 3,903 3,185 Purchased in-process research and development 282 1,683 1,255 Total operating expenses 13,209 12,453 10,694 Operating income 5,406 2,638 1,599 Other income - net 443 128 97 Interest expense 406 254 238 Income before income taxes 5,443 2,512 1,458 Provision for income taxes 1,985 1,477 1,009 Income before cumulative effect of accounting change 3,458 1,035 449 Cumulative effect of accounting change (net of income taxes of $842) 1,308 - - Net income $ 4,766 $ 1,035 $ 449 Earnings per common share - basic: Income before cumulative effect of accounting change $ 1.14 $ 0.35 $ 0.16 Cumulative effect of accounting change 0.43 - - Net income $ 1.57 $ 0.35 $ 0.16 Earnings per common share - diluted Income before cumulative effect of accounting change $ 1.10 $ 0.34 $ 0.15 Cumulative effect of accounting change 0.42 - - Net income $ 1.52 $ 0.34 $ 0.15 Dividends per common share $ 0.08 $0.0775 $0.0563
See Notes to Consolidated Financial Statements. 25 Lucent Technologies Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (Dollars in Millions, Except Per Share Amounts)
September 30, September 30, 1999 1998 ------------- ------------- ASSETS Cash and cash equivalents $ 1,816 $ 1,154 Receivables less allowances of $362 in 1999 and $416 in 1998 10,438 7,405 Inventories 5,048 3,279 Contracts in process (net of progress billings of $5,565 in 1999 and $3,036 in 1998) 1,103 1,259 Deferred income taxes - net 1,583 1,775 Other current assets 1,943 912 Total current assets 21,931 15,784 Property, plant and equipment - net 6,847 5,693 Prepaid pension costs 6,175 3,754 Deferred income taxes - net - 761 Capitalized software development costs 470 298 Other assets 3,352 3,073 Total assets $ 38,775 $ 29,363 LIABILITIES Accounts payable $ 2,878 $ 2,157 Payroll and benefit-related liabilities 2,300 2,592 Postretirement and postemployment benefit liabilities 137 187 Debt maturing within one year 2,864 2,231 Other current liabilities 3,599 3,718 Total current liabilities 11,778 10,885 Postretirement and postemployment benefit liabilities 6,305 6,380 Long-term debt 4,162 2,409 Other liabilities 2,946 1,980 Total liabilities $ 25,191 $ 21,654 Commitments and contingencies SHAREOWNERS' EQUITY Preferred stock - par value $1 per share Authorized shares: 250,000,000 $ - $ - Issued and outstanding shares: none Common stock - par value $.01 per share Authorized shares: 6,000,000,000 Issued and outstanding shares: 3,071,750,726 at September 30, 1999; 3,022,369,264 at September 30, 1998 31 30 Additional paid-in capital 7,731 6,589 Guaranteed ESOP obligation (33) (49) Retained earnings 6,099 1,422 Accumulated other comprehensive income(loss) (244) (283) Total shareowners' equity $ 13,584 $ 7,709 Total liabilities and shareowners' equity $ 38,775 $ 29,363
See Notes to Consolidated Financial Statements. 26 Lucent Technologies Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (Dollars in Millions)
Additional Guaranteed Preferred Common Paid-in ESOP Retained Stock Stock Capital Obligation Earnings - ------------------------------------------------------------------------------------------------------------------------------ Balance at October 1, 1996 - 29 3,141 (106) 421 - ------------------------------------------------------------------------------------------------------------------------------ Net Income (excluding undistributed S-Corp earnings) 416 Reclass of undistributed earnings of S-Corp 33 Foreign currency translation adjustment Unrealized holding gains on certain investments Minimum pension liability adjustment Total comprehensive income Effect of poolings 23 (18) Dividends declared (146) Amortization of ESOP obligation 29 Issuance of common stock 281 Tax benefit from employee stock options 88 Issuance of common stock for acquisitions 213 Conversion of common stock related to acquisitions 116 S-Corp distributions (19) Other 27 - ------------------------------------------------------------------------------------------------------------------------------ Balance at September 30, 1997 - 29 3,903 (77) 673 - ------------------------------------------------------------------------------------------------------------------------------ Net Income (excluding undistributed S-Corp earnings) 950 Reclass of undistributed earnings of S-Corp 85 Foreign currency translation adjustment Unrealized holding losses on certain investments Minimum pension liability adjustment Total comprehensive income Effect of poolings Dividends declared (201) Amortization of ESOP obligation 28 Issuance of common stock 1 645 Tax benefit from employee stock options 271 Issuance of common stock for acquisitions 1,525 Conversion of common stock related to acquisitions 186 S-Corp distributions (26) - ------------------------------------------------------------------------------------------------------------------------------ Balance at September 30, 1998 - 30 6,589 (49) 1,422 - ------------------------------------------------------------------------------------------------------------------------------ Net Income (excluding undistributed S-Corp earnings) 4,758 Reclass of undistributed earnings of S-Corp 8 Foreign currency translation adjustment Unrealized holding gains on certain investments (net of tax of $235) Reclassification adjustment (net of tax of $178) Minimum pension liability adjustment (net of tax of $6) Total comprehensive income Effect of poolings 106 (26) Dividends declared (222) Amortization of ESOP obligation 16 Issuance of common stock 1 695 Tax benefit from employee stock options 367 Adjustment to conform pooled companies fiscal year 169 S-Corp distributions (40) Other 6 (2) - ------------------------------------------------------------------------------------------------------------------------------ Balance at September 30, 1999 - 31 7,731 (33) 6,099 - ------------------------------------------------------------------------------------------------------------------------------ Accumulated Other Total Total Comprehensive Shareowners' Comprehensive Income (Loss) Equity Income - --------------------------------------------------------------------------------------------------------------- Balance at October 1, 1996 (23) 3,462 - --------------------------------------------------------------------------------------------------------------- Net Income (excluding undistributed S-Corp earnings) 416 Reclass of undistributed earnings of S-Corp 33 Foreign currency translation adjustment (175) (175) Unrealized holding gains on certain investments 40 40 Minimum pension liability adjustment 9 9 ----- Total comprehensive income 323 Effect of poolings Dividends declared Amortization of ESOP obligation Issuance of common stock Tax benefit from employee stock options Issuance of common stock for acquisitions Conversion of common stock related to acquisitions S-Corp distributions Other - --------------------------------------------------------------------------------------------------------------- Balance at September 30, 1997 (149) 4,379 - --------------------------------------------------------------------------------------------------------------- Net Income (excluding undistributed S-Corp earnings) 950 Reclass of undistributed earnings of S-Corp 85 Foreign currency translation adjustment (89) (89) Unrealized holding losses on certain investments (37) (37) Minimum pension liability adjustment (8) (8) ----- Total comprehensive income 901 Effect of poolings Dividends declared Amortization of ESOP obligation Issuance of common stock Tax benefit from employee stock options Issuance of common stock for acquisitions Conversion of common stock related to acquisitions S-Corp distributions - --------------------------------------------------------------------------------------------------------------- Balance at September 30, 1998 (283) 7,709 - --------------------------------------------------------------------------------------------------------------- Net Income (excluding undistributed S-Corp earnings) 4,758 Reclass of undistributed earnings of S-Corp 8 Foreign currency translation adjustment (33) (33) Unrealized holding gains on certain investments (net of tax of $235 307 307 Reclassification adjustment (net of tax of $178) (246) (246) Minimum pension liability adjustment (net of tax of $6) 11 11 ----- Total comprehensive income 4,805 Effect of poolings Dividends declared Amortization of ESOP obligation Issuance of common stock Tax benefit from employee stock options Adjustment to conform pooled companies fiscal year S-Corp distributions Other - --------------------------------------------------------------------------------------------------------------- Balance at September 30, 1999 (244) 13,584 - ---------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 27 Lucent Technologies Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Millions)
Year Ended September 30, -------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Operating Activities: Net income $ 4,766 $ 1,035 $ 449 Adjustments to reconcile net income to net cash (used in) provided by operating activities, net of effects from acquisitions of businesses: Cumulative effect of accounting change (1,308) - - Business restructuring reversal (141) (100) (201) Asset impairment and other charges 236 - 81 Depreciation and amortization 1,806 1,411 1,499 Provision for uncollectibles 75 149 136 Tax benefit from stock options 367 271 88 Deferred income taxes 1,026 56 (21) Purchased in-process research and development 15 1,683 1,255 Adjustment to conform Ascend and Kenan's fiscal years 169 - - Increase in receivables - net (3,183) (2,161) (484) Increase in inventories and contracts in process (1,612) (403) (316) Increase(decrease) in accounts payable 668 231 (18) Changes in other operating assets and liabilities (2,320) 155 (397) Other adjustments for non-cash items - net (840) (467) 58 Net cash (used in)provided by operating activities (276) 1,860 2,129 Investing Activities: Capital expenditures (2,215) (1,791) (1,744) Proceeds from the sale or disposal of property, plant and equipment 97 57 108 Purchases of equity investments (307) (212) (149) Sales of equity investments 156 71 12 Purchases of investment securities (450) (1,082) (483) Sales or maturity of investment securities 1,132 686 356 Dispositions of businesses 72 329 181 Acquisitions of businesses - net of cash acquired (264) (1,078) (1,584) Cash from mergers 61 - - Other investing activities - net (69) (80) (68) Net cash used in investing activities (1,787) (3,100) (3,371)
See Notes to Consolidated Financial Statements. (CONT'D) 28 Lucent Technologies Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONT'D) (Dollars in Millions)
Year Ended September 30, -------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Financing Activities: Repayments of long-term debt (13) (93) (16) Issuance of long-term debt 2,175 375 52 Proceeds from issuance of common stock 696 645 281 Dividends paid (222) (201) (192) S-Corp distribution to stockholder (40) (26) (19) Increase in short-term borrowings - net 89 149 191 Net cash provided by financing activities 2,685 849 297 Effect of exchange rate changes on cash and cash equivalents 40 (61) (11) Net increase(decrease)in cash and cash equivalents 662 (452) (956) Cash and cash equivalents at beginning of period 1,154 1,606 2,562 Cash and cash equivalents at end of period $ 1,816 $ 1,154 $ 1,606
See Notes to Consolidated Financial Statements. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) 1. BASIS OF PRESENTATION On June 24, 1999, Lucent Technologies Inc. (the "Company") merged with Ascend Communications, Inc. Each share of Ascend common stock was converted into 1.65 shares of Lucent common stock. Lucent issued approximately 371 million shares in exchange for all of the outstanding shares of Ascend. On February 26, 1999, under the terms of the Kenan Systems Corporation merger agreement, Lucent issued approximately 26 million shares (post April 1, 1999 stock split) of Lucent common stock in exchange for all the outstanding shares of Kenan. These transactions were accounted for as pooling-of-interests and, accordingly, the consolidated financial statements of Lucent were restated for all periods prior to the mergers to include the accounts and operations of Ascend and Kenan. Before merging with Lucent, both Ascend and Kenan had December 31 fiscal year ends. Lucent financial information for fiscal 1998 and earlier years was computed by adding financial information for corresponding quarters of Ascend's and Kenan's fiscal year. Thus, the consolidated statements of income for the years ended September 30, 1998, and 1997 were derived by combining the results of operations of Lucent for the years ended September 30, 1998, and 1997, respectively, with the results of operations of Ascend and Kenan for the years ended December 31, 1998, and 1997, respectively. The consolidated balance sheet at September 30, 1998, was derived by combining the financial position of Lucent at September 30, 1998, with the financial position of Ascend and Kenan at December 31, 1998. The consolidated statements of cash flows for the years ended September 30, 1998, and 1997 were derived by combining the cash flows of Lucent for the years ended September 30, 1998, and 1997 with the cash flows of Ascend and Kenan for the years ended December 31, 1998, and 1997. The results of operations, financial position and cash flows as of and for the three months ended December 31, 1998, for Ascend and Kenan were included in Lucent's financial statements as of and for the year ended September 30, 1998. The results of operations for the three months ended December 31, 1998, also were included in Lucent's financial statements for the year ended September 30, 1999. As a result, the consolidated balance sheet of Lucent at September 30, 1999, includes an adjustment to retained earnings to eliminate the income recognized from both Ascend and Kenan for the three months ended December 31, 1998. In addition, information from the statements of cash flows for Ascend and Kenan for the three months ended December 31, 1998, has been eliminated from the consolidated statements of cash flows for the year ended September 30, 1999, since Ascend's and Kenan's activity for this period has been included in the consolidated statements of cash flows for the year ended September 30, 1998. On April 1, 1998, and April 1, 1999, two-for-one splits of Lucent's common stock became effective. Shareowners' equity has been restated to give retroactive recognition to the stock splits for all periods presented by reclassifying from retained earnings to common stock the par value of the additional shares issued as a result of the stock splits. In addition, all references in the financial statements and notes to number of shares, per share amounts, stock option data and market prices have been restated to reflect these stock splits. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) ACQUISITIONS Purchase Method The following table presents information about certain acquisitions by Lucent in the fiscal years ended September 30, 1999, 1998, and 1997. All the acquisitions were accounted for under the purchase method of accounting, and the acquired technology valuation included both existing technology and purchased in-process research and development. All charges were recorded in the quarter in which the transaction was completed.
Amortization Amortization Purchased Period Period Acquisition Purchase Existing IPRD Goodwill Existing Tech. Date Price Goodwill Technology (after-tax) (in years) (in years) 1999 STRATUS(1) 10/98 $ 917 $ 0 $130 $267* n/a 10 OTHER (2) various 187 133 17 29 4-8 6-7 1998 YURIE(3) 5/98 $1,056 $292 $ 40 $620 7 5 PROMINET(4) 1/98 199 35 23 157 5 6 LIVINGSTON(5) 12/97 610 114 69 427 5 8 OTHER (6) various 453 137 67 208 5-10 5-10 1997 OCTEL(7) 9/97 $1,819 $181 $186 $945 7 5 INTERCON(8) 2/97 22 0 3 18 n/a 3 SAHARA(9) 1/97 219 0 0 213 n/a n/a
(1) Stratus Computer, Inc. was a manufacturer of fault-tolerant computer systems, acquired by Ascend. (2) Other acquisitions include the Ethernet LAN business of Enable Semiconductor ("Enable Ethernet"), Sybarus Technologies, WaveAccess Ltd., and Quadritek Systems, Inc. (3) Yurie Systems, Inc. was a provider of ATM access technology and equipment for data, voice and video networking. (4) Prominet Corporation was a participant in the emerging Gigabit Ethernet networking industry. The merger involved $164 of Lucent stock and options. In addition, under the terms of the agreement, Lucent had contingent obligations to pay former Prominet shareowners $35 in stock. The $35 of stock was paid by Lucent in July 1998 and recorded primarily as goodwill. (5) Livingston Enterprises, Inc. was a global provider of equipment used by Internet service providers to connect their subscribers to the Internet. (6) Other acquisitions include JNA Telecommunications Limited, LANNET, MassMedia Communications, Inc., SDX Business Systems plc, and Optimay GmbH. The purchase price for MassMedia has been deemed immaterial. (7) Octel Communications Corporation was a provider of voice, fax and electronic messaging technologies. (8) InterCon Systems Corporation was a developer of remote access client software products, acquired by Ascend. (9) Sahara Networks, Inc. was a developer of scalable high-speed broadband access products, acquired by Ascend. n/a Not applicable. * $24 of purchased in-process research and development was subsequently reversed in March 1999. Included in the purchase price for the above acquisitions was purchased in-process research and development, which was a non-cash charge to earnings as this technology had not reached technological feasibility and had no future alternative use. The remaining purchase price was allocated to tangible assets and intangible assets, including goodwill and existing technology, less liabilities assumed. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) The value allocated to purchased in-process research and development was determined utilizing an income approach that included an excess earnings analysis reflecting the appropriate cost of capital for the investment. Estimates of future cash flows related to the in-process research and development were made for each project based on Lucent's estimates of revenue, operating expenses and income taxes from the project. These estimates were consistent with historical pricing, margins and expense levels for similar products. Revenues were estimated based on relevant market size and growth factors, expected industry trends, individual product sales cycles and the estimated life of each product's underlying technology. Estimated operating expenses, income taxes, and charges for the use of contributory assets were deducted from estimated revenues to determine estimated after-tax cash flows for each project. Estimated operating expenses include cost of goods sold; selling, general and administrative expenses; and research and development expenses. The research and development expenses include estimated costs to maintain the products once they have been introduced into the market and generate revenues and costs to complete the in-process research and development. The discount rates utilized to discount the projected cash flows were based on consideration of Lucent's weighted average cost of capital, as well as other factors including the useful life of each project, the anticipated profitability of each project, the uncertainty of technology advances that were known at the time and the stage of completion of each project. Management is primarily responsible for estimating the fair value of the assets and liabilities acquired, and has conducted due diligence in determining the fair value. Management has made estimates and assumptions that affect the reported amounts of assets, liabilities and expenses resulting from such acquisitions. Actual results could differ from those amounts. SpecTran Corporation On July 21, 1999, Lucent began its cash tender offer for the outstanding shares of SpecTran Corporation, a designer and manufacturer of specialty optical fiber and fiber-optic products. The tender offer expired on August 31, 1999, and Lucent thereafter accepted and paid for shares giving it a 61% interest in SpecTran. The acquisition was accounted for under the purchase method of accounting. Lucent expects to acquire the remaining shares of SpecTran by the end of the first quarter of fiscal year 2000, resulting in a total purchase price of approximately $68. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) Pooling-of-Interests Mergers Ascend Communications On June 24, 1999, Lucent merged with Ascend, a developer, manufacturer and seller of wide area networking solutions. As a result, the outstanding Ascend common stock was converted into approximately 371 million shares of Lucent common stock, based on an exchange ratio of 1.65 shares of Lucent common stock for each share of Ascend common stock. In addition, Lucent assumed Ascend stock options equivalent to approximately 65 million shares of Lucent common stock. The merger was accounted for as a pooling-of-interests under Accounting Principles Board Opinion No. 16, and accordingly, Lucent's consolidated financial statements have been restated for all periods prior to the merger to include the results of operations, financial position and cash flows of Ascend as though it had always been a part of Lucent. Intercompany transactions for fiscal 1999 have been eliminated. Intercompany transactions prior to 1999 were immaterial. In connection with the merger, Lucent recorded a third fiscal quarter charge to operating expenses of approximately $79 (non-tax deductible) for merger-related costs. The merger-related costs consisted primarily of fees for investment bankers, attorneys, accountants and financial printing. Certain reclassifications were made to Ascend's accounts to conform to Lucent's presentation. The results of operations for the separate companies and the combined amounts presented in the consolidated financial statements are as follows:
Nine Months Ended Twelve Months Ended June 30, September 30, ----------------- --------------------------- 1999 1998 1997 REVENUES Lucent $ 26,256 $ 30,328 $ 26,444 Ascend 1,610 1,478 1,167 Eliminations (138) - - Combined $ 27,728 $ 31,806 $ 27,611 NET INCOME(LOSS) Lucent $ 3,838(a) $ 1,055 (c) $ 573 (e) Ascend 66(b) (20)(d) (124)(f) Eliminations (86) - - Combined $ 3,818 $ 1,035 $ 449
(a) Includes $108 of one-time after-tax charges related to Lucent's acquisitions of Quadritek, WaveAccess, Sybarus and Enable Ethernet and the merger-related costs for Ascend as well as $1,308 after-tax gain from the cumulative effect of the accounting change (see Note 10 - EMPLOYEE BENEFIT PLANS). (b) Includes $243 of one-time after-tax charges related to Ascend's acquisition of Stratus. The original charge of $267 was reduced by $24 in the second fiscal quarter of 1999. (c) Includes $1,412 of one-time after-tax charges related to Lucent's acquisitions of Livingston, Prominet, Optimay, Yurie, SDX, LANNET, MassMedia and JNA as well as the $95 after-tax gain on the sale of Advanced Technology Systems ("ATS") business. (d) Includes $267 of one-time after-tax charges related to Ascend's acquisition of Stratus. (e) Includes $966 of one-time after-tax charges related to Lucent's acquisition of Octel. (f) Includes $335 one-time after-tax charges related to Ascend's acquisitions of Sahara and InterCon and Ascend's mergers with Whitetree, Inc. and Cascade Communications Corp. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) Kenan Systems On February 26, 1999, Lucent merged with Kenan Systems Corporation, a developer of third-party billing and customer software. Under the terms of the Kenan merger agreement, Lucent issued approximately 26 million shares (post April 1, 1999 stock split) of Lucent common stock in exchange for all the outstanding shares of Kenan. Mosaix On July 15, 1999, Lucent completed its merger with Mosaix, a provider of software that links companies' front and back offices and helps them deliver more responsive and efficient customer service. Under the terms of the agreement, the outstanding common stock of Mosaix was converted into the right to receive approximately 2.6 million shares of Lucent common stock. Lucent has not restated its historical financial statements to reflect its pooling-of-interests with Mosaix. Nexabit Networks On July 19, 1999, Lucent completed its merger with Nexabit, a developer of high-speed switching equipment and software that directs traffic along telecommunications networks. Under the terms of the agreement, the outstanding stock of Nexabit was converted into the right to receive approximately 13.7 million shares of Lucent common stock. Lucent has not restated its historical financial statements to reflect its pooling-of-interests with Nexabit. Cascade Communications On June 30, 1997, Ascend completed its merger with Cascade, a developer and manufacturer of wide area network switches. Whitetree On April 1, 1997, Ascend completed its merger with Whitetree, a developer and manufacturer of high-speed ATM switching products. Ascend did not restate its historical financial statements to reflect its pooling-of-interests with Whitetree. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION The consolidated financial statements include all majority-owned subsidiaries in which Lucent exercises control. Investments in which Lucent exercises significant influence, but which it does not control (generally a 20% - 50% ownership interest), are accounted for under the equity method of accounting. All material intercompany transactions and balances have been eliminated. USE OF ESTIMATES The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the period reported. Actual results could differ from those estimates. Estimates are used in accounting for long-term contracts, allowances for uncollectible receivables, inventory obsolescence, product warranty, depreciation, employee benefits, taxes, restructuring reserves and contingencies. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the financial statements in the period they are determined to be necessary. FOREIGN CURRENCY TRANSLATION For operations outside the United States that prepare financial statements in currencies other than the U.S. dollar, results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at end-of-period exchange rates. Translation adjustments are included as a separate component of accumulated other comprehensive income (loss) in shareowners' equity. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) REVENUE RECOGNITION Revenue is generally recognized when all significant contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. Revenue from product sales of hardware and software is recognized at time of delivery and acceptance, and after consideration of all the terms and conditions of the customer contract. Sales of services are recognized at time of performance, and rental revenue is recognized proportionately over the contract term. Revenues and estimated profits on long-term contracts are generally recognized under the percentage-of-completion method of accounting using either a units-of-delivery or a cost-to-cost methodology. Profit estimates are revised periodically based on changes in facts. Any losses on contracts are recognized immediately. RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged to expense as incurred. However, the costs incurred for the development of computer software that will be sold, leased or otherwise marketed are capitalized when technological feasibility has been established. These capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in hardware and software technologies. Costs that are capitalized include direct labor and related overhead. Amortization of capitalized software development costs begins when the product is available for general release. Amortization is provided on a product-by-product basis on either the straight-line method over periods not exceeding two years or the sales ratio method. Unamortized capitalized software development costs determined to be in excess of net realizable value of the product are expensed immediately. CASH AND CASH EQUIVALENTS All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost (determined principally on a first-in, first-out basis) or market. CONTRACTS IN PROCESS Contracts in process are valued at cost plus accrued profits less progress billings. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is determined using a combination of accelerated and straight-line methods on either the unit or group methods over the estimated useful lives of the various asset classes. The unit method is used for manufacturing and laboratory equipment and large computer systems. The group method is used for other depreciable assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference. FINANCIAL INSTRUMENTS Lucent uses various financial instruments, including foreign currency exchange contracts and interest rate swap agreements to manage and reduce risk to Lucent by generating cash flows, which offset the cash flows of certain transactions in foreign currencies or underlying financial instruments in relation to their amount and timing. Lucent's derivative financial instruments are for purposes other than trading and are not entered into for speculative purposes. Lucent's non-derivative financial instruments include letters of credit, commitments to extend credit and guarantees of debt. Lucent generally does not require collateral to support its financial instruments. GOODWILL Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for as purchases. Goodwill is amortized on a straight-line basis over the periods benefited, principally in the range of 5 to 15 years. Goodwill is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the 1999 presentation. 3. RECENT PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS 133 requires Lucent to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on Lucent's rights or obligations under the applicable derivative contract. In June 1999, the FASB issued SFAS No. 137 which deferred the effective date of adoption of SFAS 133 for one year. Lucent will adopt SFAS 133 no later than the first quarter of fiscal year 2001. SFAS 133 is not expected to have a material impact on Lucent's consolidated results of operations, financial position or cash flows. In March 1998, the American Institute of Certified Public Accountants (the "AICPA") issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use. This pronouncement identifies the characteristics of internal use software and provides guidance on new cost recognition principles. Certain costs that were previously expensed as incurred will be capitalized and amortized on a straight-line basis over three years. Lucent will adopt SOP 98-1 on October 1, 1999. The implementation of SOP 98-1 will decrease costs and expenses in fiscal year 2000, the initial year of adoption, and thereafter is expected to increase year-over-year costs and expenses as the capitalized amounts are amortized. Costs for general and administrative, overhead, maintenance and training, as well as the cost of software that does not add functionality to the existing system, will be expensed as incurred. 4. SUPPLEMENTARY FINANCIAL INFORMATION SUPPLEMENTARY INCOME STATEMENT INFORMATION
Year Ended September 30, 1999 1998 1997 INCLUDED IN COSTS Amortization of software development costs ......... $ 249 $ 234 $ 380 INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Amortization of goodwill and existing technology ....................................... $ 394 $ 149 $ 32 INCLUDED IN COSTS AND OPERATING EXPENSES Depreciation and amortization of property, plant and equipment .............................. $ 1,296 $ 996 $ 1,057 OTHER INCOME -- NET Interest income .................................... $ 124 $ 112 $ 155 Minority interests in earnings of subsidiaries ..... (27) (24) (35) Net equity losses from investments ................. (25) (209) (64) Gain (loss)on foreign currency transactions ........ 1 (44) (12) Gain on sale of equity investments ................. 359 38 - Gain on businesses sold ............................ 40 208 - Miscellaneous -- net ............................... (29) 47 53 ------- ------- ------- Total other income -- net .......................... $ 443 $ 128 $ 97 DEDUCTED FROM INTEREST EXPENSE Capitalized interest ............................... $ 20 $ 17 $ 14
36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) SUPPLEMENTARY BALANCE SHEET INFORMATION
September 30, 1999 1998 -------- -------- INVENTORIES Completed goods .................................. $ 2,946 $ 1,644 Work in process and raw materials ................ 2,102 1,635 -------- -------- Inventories ...................................... $ 5,048 $ 3,279 PROPERTY, PLANT AND EQUIPMENT -- NET Land and improvements ............................ $ 360 $ 306 Buildings and improvements ....................... 3,951 3,187 Machinery, electronic and other equipment ........ 9,981 8,838 -------- -------- Total property, plant and equipment .............. 14,292 12,331 Less: Accumulated depreciation and amortization .. (7,445) (6,638) -------- -------- Property, plant and equipment -- net ............. $ 6,847 $ 5,693 OTHER CURRENT LIABILITIES Advance billings and customer deposits ........... $ 488 $ 548
SUPPLEMENTARY CASH FLOW INFORMATION
Year Ended September 30, 1999 1998 1997 ------ ------ ------ Interest payments, net of amounts capitalized $ 409 $ 255 $ 240 Income tax payments ............................... $1,025 $ 776 $ 826 Acquisitions of businesses: Fair value of assets acquired, net of cash acquired ............................. $ 394 $2,092 $1,838 Less: Fair value of liabilities assumed ........... $ 130 $1,014 $ 254 ------ ------ ------ Acquisitions of businesses, net of cash acquired ............................. $ 264 $1,078 $1,584
For the year ended September 30, 1999, the Consolidated Statements of Cash Flows excludes the issuance of common stock related to the mergers with Nexabit and Mosaix. On October 1, 1997, Lucent contributed its Consumer Products business to a new venture formed by Lucent and Philips Electronics N.V. in exchange for 40% ownership of Philips Consumer Communications ("PCC"). On October 22, 1998, Lucent and Philips announced their intention to end the PCC venture and agreed to regain control of their original businesses. The results of operations and net assets of the remaining businesses Lucent previously contributed to PCC have been consolidated as of October 1, 1998. However, for the years ended September 30, 1998, and 1999, the Consolidated Statements of Cash Flows exclude both the contribution and the regaining of Lucent's Consumer Products business. For the year ended September 30, 1999, costs and operating expenses include a $236 charge primarily associated with asset impairments and integration-related charges associated with the Ascend and Nexabit mergers. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) For the year ended September 30, 1998, Other income -- net includes a charge of $110 related to a write-down associated with Lucent's investment in the PCC venture. This charge was offset by gains of $103, primarily related to the sale of an investment and the sale of certain business operations, including Bell Laboratories Design Automation Group. For the year ended September 30, 1998, the Consolidated Statements of Cash Flows excludes the issuance of common stock related to the acquisitions of Livingston, Prominet, and Stratus and the conversion of stock options related to the acquisitions of Livingston, Prominet, Yurie, Optimay, and Stratus. For the year ended September 30, 1997, the Consolidated Statements of Cash Flows excludes the conversion of stock options related to the acquisition of Octel and the issuance of common stock and the conversion of stock options related to the acquisition of Sahara. For information on the 1999, 1998 and 1997 acquisitions, see Note 1. For the year ended September 30, 1997, research and development expenses include a $127 write-down of special purpose Bell Laboratories assets no longer being used. 5. EARNINGS PER COMMON SHARE Basic earnings per common share was calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share was calculated by dividing net income by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive securities or common stock equivalents had been issued. The following table reconciles the number of shares utilized in the earnings per share calculations:
Year Ended September 30, 1999 1998 1997 - ------------------------------------------------------------------------------------------------ Net income ............................... $ 4,766 $ 1,035 $ 449 Earnings per common share - basic: Income before cumulative effect of accounting change ................... $ 1.14 $ 0.35 $ 0.16 Cumulative effect of accounting change ................................. 0.43 - - Net income .............................. $ 1.57 $ 0.35 $ 0.16 Earnings per common share - diluted: Income before cumulative effect of accounting change ................... $ 1.10 $ 0.34 $ 0.15 Cumulative effect of accounting change ................................. 0.42 - - Net income .............................. $ 1.52 $ 0.34 $ 0.15 Number of shares (in millions) - ------------------------------ Common shares - basic 3,035.8 2,963.8 2,894.6 Effect of dilutive securities: Stock options 101.0 71.9 37.5 Other 5.9 4.0 0.2 Common shares - diluted 3,142.7 3,039.7 2,932.3 Options excluded from the computation of earnings per share - diluted since option exercise price was greater than the average market price of the common shares for the period 5.5 13.4 15.9
38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) 6. COMPREHENSIVE INCOME Lucent has adopted SFAS No. 130, "Reporting Comprehensive Income" as of October 1, 1998, that requires new standards for reporting and display of comprehensive income and its components that Lucent has displayed in its Consolidated Statements of Changes in Shareowners' Equity. However, it does not affect net income or total shareowners' equity. The after-tax components of accumulated other comprehensive income (loss) are as follows:
Total Accumulated Foreign Unrealized Minimum Other Currency Holding Pension Comprehensive Translation Gains/ Liability Income/ Adjustment (Losses) Adjustment (Loss) Beginning balance October 1, 1996......... $ (16) $ 15 $ (22) $ ( 23) Current-period change..................... (175) 40 9 (126) Ending balance, September 30, 1997........ $ (191) $ 55 $ (13) $ (149) Current-period change..................... (89) (37) ( 8) (134) Ending balance, September 30, 1998........ $ (280) $ 18 $ (21) $ (283) Current-period change..................... (33) 61 11 39 Ending balance, September 30, 1999........ $ (313) $ 79 $ (10) $ (244)
The foreign currency translation adjustments are not currently adjusted for income taxes since they relate to indefinite investments in non-United States subsidiaries. 7. BUSINESS RESTRUCTURING AND OTHER CHARGES In the fourth quarter of calendar year 1995, a pre-tax charge of $2,801 was recorded to cover restructuring costs of $2,613 and asset impairment and other charges of $188. The restructuring plans included the exit of certain businesses as well as consolidating and re-engineering numerous corporate and business unit operations. Total deductions to Lucent's business restructuring reserves were $233 and $318 for the years ended September 30, 1999, and 1998, respectively. Included in these deductions were cash payments of $77 and $176 and non-cash related charges of $15 and $42 for the years ended September 30, 1999, and 1998, respectively. The non-cash related charges were primarily related to assets for product lines and businesses that Lucent exited as part of its restructuring activities. The related costs were included in the 1995 restructuring plan. The assets did not benefit activities that were to continue, nor were they used to generate future revenues. The reserves were charged as the product lines and businesses were exited during 1999 and 1998. In addition, Lucent reversed $141 and $100 of business restructuring reserves primarily related to favorable experience in employee separations as well as, other projects being completed at a cost lower than originally estimated for the years ended September 30, 1999, and 1998, respectively. As of September 30, 1999, all restructuring plans were substantially completed and the remaining reserves of $18 are related to outstanding litigation for certain product lines that were exited. The following table displays a rollforward of the liabilities for business restructuring from September 30, 1997, to September 30, 1999:
September 30, 1998 September 30, 1999 September 30, Type of Cost 1997 Balance Deductions 1998 Balance Deductions 1999 Balance - ----------------------------------------------------------------------------------------- Employee separation $ 348 $(235) $ 113 $ (113) $ - Facility closing 66 ( 23) 43 ( 43) - Other 155 ( 60) 95 ( 77) 18 Total $ 569 $(318) $ 251 $ (233) $ 18
39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) In 1997, Lucent recorded a pre-tax charge of approximately $150 in connection with the acquisition of Cascade Communications Corp. and Whitetree, Inc. The total charge included $54 of merger-related costs and $96 of integration expenses. Included in the integration expenses were $7 for severance and outplacement costs for approximately 275 employees involved in duplicate functions; $67 for redundant assets and assets related to duplicate product lines; and $22 for the cancellation of redundant facility leases and other contracts and obligations. In 1998, Lucent reversed $18 of these costs. There were no reserves remaining as of September 30, 1998. 8. INCOME TAXES The following table presents the principal reasons for the difference between the effective tax rate and the United States federal statutory income tax rate:
Year Ended September 30, 1999 1998 1997 U.S. federal statutory income tax rate 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax effect 2.5% 3.3% 5.4% Foreign earnings and dividends taxed at different rates 0.3% 1.0% 0.8% Research credits (2.6)% (2.6)% (2.4)% Acquisition-related costs (a) 2.6% 23.5% 32.4% Other differences - net (1.3)% (1.4)% (2.0)% Effective income tax rate 36.5% 58.8% 69.2% Effective income tax rate excluding acquisition-related costs (a) 33.9% 35.3% 36.8%
(a) Includes non-tax deductible purchased in-process research and development and merger-related expenses. The following table presents the United States and foreign components of income before income taxes and the provision for income taxes:
Year Ended September 30, 1999 1998 1997 INCOME BEFORE INCOME TAXES United States $4,702 $2,144 $ 861 Foreign 741 368 597 Income before income taxes $5,443 $2,512 $1,458
40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) PROVISION FOR INCOME TAXES CURRENT Federal $ 505 $ 987 $ 554 State and local 38 168 148 Foreign 336 213 228 Sub-total 879 1,368 930 DEFERRED Federal 992 63 11 State and local 183 36 72 Foreign (69) 10 (4) Sub-total 1,106 109 79 Provision for income taxes $ 1,985 $ 1,477 $ 1,009
As of September 30, 1999, Lucent had tax credit carryforwards of $80 and federal, state and local, and foreign net operating loss carryforwards (tax effected) of $146, all of which expire primarily after the year 2000. The components of deferred tax assets and liabilities at September 30, 1999, and 1998 are as follows:
September 30, 1999 1998 Deferred Income Tax Assets Employee pensions and other benefits - net $ 442 $ 1,520 Business restructuring 6 165 Reserves and allowances 1,009 1,137 Net operating loss/credit carryforwards 226 239 Valuation allowance (179) (261) Other 344 526 Total deferred tax assets $ 1,848 $ 3,326 Deferred Income Tax Liabilities Property, plant and equipment $ 628 $ 399 Other 511 391 Total deferred tax liabilities $ 1,139 $ 790
Lucent has not provided for United States deferred income taxes or foreign withholding taxes on $3,211 of undistributed earnings of its non-United States subsidiaries as of September 30, 1999, since these earnings are intended to be reinvested indefinitely. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) 9. DEBT OBLIGATIONS
September 30, September 30, 1999 1998 ------------- ------------- DEBT MATURING WITHIN ONE YEAR Commercial paper ...................... $1,828 $2,106* Long-term debt ........................ 34 39 Secured borrowings and other .......... 1,002 86 ------ ------ Total debt maturing within one year ... $2,864 $2,231 WEIGHTED AVERAGE INTEREST RATES Commercial paper .................... 5.0% 5.6% Long-term debt, secured borrowings and other ........................ 9.7% 7.9%
Lucent had revolving credit facilities at September 30, 1999, aggregating $4,711 (a portion of which is used to support Lucent's commercial paper program), $4,000 with domestic lenders and $711 with foreign lenders. The total credit facilities available at September 30, 1999, with domestic and foreign lenders were $4,000 and $351, respectively.
September 30, September 30, 1999 1998 ------------- ------------- LONG-TERM DEBT 6.90% notes due July 15, 2001 $ 750 $ 750 7.25% notes due July 15, 2006 750 750 5.50% notes due November 15, 2008 500 - 6.50% debentures due January 15, 2028 300 300 6.45% debentures due March 15, 2029 1,360 - Commercial paper refinanced after September 30, 1998 - 495* Long-term lease obligations 79 1 Secured borrowings and other (8.40% weighted average interest rate for both years) 502 164 Less: Unamortized discount 45 12 ------ ------ Total long-term debt 4,196 2,448 Less: Amounts maturing within one year 34 39 ------ ------ Net long-term debt $4,162 $2,409 ====== ======
* On November 19, 1998, Lucent sold $500 ($495 net of unamortized costs) of 10-year 5.5% notes due November 15, 2008, and reclassified the amount from debt maturing within one year to long-term debt. The proceeds were used to pay down a portion of Lucent's commercial paper during the first quarter of fiscal 1999. Lucent has an effective shelf registration statement for the issuance of debt securities up to $1,800, all of which remains available at September 30, 1999. This table shows the maturities, by year, of the $4,196 in total long-term debt obligations:
September 30, ---------------------------------------------- 2000 2001 2002 2003 2004 Later Years $34 $850 $26 $128 $107 $3,051
In the normal course of business, Lucent sells trade accounts receivable and notes receivable to unaffiliated financial institutions with and without recourse. Certain sales with recourse are accounted for as secured borrowings and amounted to $1,037 at September 30, 1999. As a result of these recourse transactions, these receivables remained in the Consolidated Balance Sheets and increased cash flows from financing activities in the Consolidated Statements of Cash Flows by $1,037. See Note 13 for further discussion of sales of receivables without recourse. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) 10. EMPLOYEE BENEFIT PLANS PENSION AND POSTRETIREMENT BENEFITS Lucent maintains defined benefit pension plans covering the majority of its employees and retirees, and postretirement benefit plans for retirees that include health care benefits and life insurance coverage.
Pension Postretirement Benefits Benefits September 30, September 30, 1999 1998 1999 1998 Change in benefit obligation Benefit obligation at October 1 $27,846 $23,187 $9,193 $7,939 Service cost 509 331 80 63 Interest cost 1,671 1,631 537 540 Actuarial (losses)gains (2,182) 3,811 (240) 919 Amendments 1,534 626 (359) 324 Benefits paid (1,977) (1,740) (607) (592) - ---------------------------------------------------------------------------------------------------- Benefit obligation at September 30 $27,401 $27,846 $8,604 $9,193 - ---------------------------------------------------------------------------------------------------- Change in plan assets Fair value of plan assets at October 1 $36,191 $36,204 $3,959 $4,152 Actual return on plan assets 7,114 1,914 776 349 Company contributions 14 12 29 53 Benefits paid (1,977) (1,740) (607) (592) Other (including transfer of assets from pension to postretirement plans) (275) (199) 310 (3) - ---------------------------------------------------------------------------------------------------- Fair value of plan assets at September 30 $41,067 $36,191 $4,467 $3,959 - ---------------------------------------------------------------------------------------------------- Funded (unfunded) status of the plan $13,666 $ 8,345 $(4,137) $(5,234) Unrecognized prior service cost 2,583 1,509 121 533 Unrecognized transition asset (645) (944) - - Unrecognized net gain (9,466) (5,175) (1,014) (408) - ---------------------------------------------------------------------------------------------------- Net amount recognized $ 6,138 $ 3,735 $(5,030) $(5,109) ==================================================================================================== Amounts recognized in the Consolidated Balance Sheets consist of: Prepaid pension costs $ 6,175 $ 3,754 $ - $ - Accrued benefit liability (63) (44) (5,030) (5,109) Intangible asset 9 4 - - Accumulated other comprehensive income 17 21 - - - ---------------------------------------------------------------------------------------------------- Net amount recognized $ 6,138 $ 3,735 $(5,030) $(5,109) ====================================================================================================
Pension plan assets include $256 and $159 of Lucent common stock at September 30, 1999, and 1998, respectively. Postretirement plan assets include $20 and $11 of Lucent common stock at September 30, 1999, and 1998, respectively. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) Components of Net Periodic Benefit Cost
Year Ended September 30, Pension Cost 1999 1998 1997 - ------------ Service cost $ 509 $ 331 $ 312 Interest cost on projected benefit obligation 1,671 1,631 1,604 Expected return on plan assets (2,957) (2,384) (2,150) Amortization of unrecognized prior service costs 461 164 149 Amortization of transition asset (300) (300) (300) Amortization of net loss 2 - - Charges for plan curtailments - - 56 - ----------------------------------------------------------------------------------------------- Net pension credit $ (614) $ (558) $ (329) =============================================================================================== Postretirement Cost - ------------------- Service cost $ 80 $ 63 $ 57 Interest cost on accumulated benefit obligation 537 540 554 Expected return on plan assets (308) (263) (264) Amortization of unrecognized prior service costs 53 53 35 Amortization of net loss (gain) 6 3 (15) Charges for plan curtailments - - 26 - ----------------------------------------------------------------------------------------------- Net postretirement benefit cost $ 368 $ 396 $ 393 =============================================================================================== Pension and Postretirement Benefits Weighted-average assumptions as of September 30 - ----------------------------------- Discount rate 7.25% 6.0% 7.25% Expected return on plan assets 9.0% 9.0% 9.0% Rate of compensation increase 4.5% 4.5% 4.5%
Effective October 1, 1998, Lucent changed its method for calculating the market-related value of plan assets used in determining the expected return-on-asset component of annual net pension and postretirement benefit costs. Under the previous accounting method, the calculation of the market-related value of plan assets included only interest and dividends immediately, while all other realized and unrealized gains and losses were amortized on a straight-line basis over a five-year period. The new method used to calculate market-related value includes immediately an amount based on Lucent's historical asset returns and amortizes the difference between that amount and the actual return on a straight-line basis over a five-year period. The new method is preferable under Statement of Financial Accounting Standards No. 87 because it results in calculated plan asset values that are closer to current fair value, thereby lessening the accumulation of unrecognized gains and losses while still mitigating the effects of annual market value fluctuations. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) The cumulative effect of this accounting change related to periods prior to fiscal year 1999 of $2,150 ($1,308 after-tax, or $0.43 and $0.42 per basic and diluted share, respectively) is a one-time, non-cash credit to fiscal 1999 earnings. This accounting change also resulted in a reduction in benefit costs in the year ended September 30, 1999 that increased income by $427 ($260 after-tax, or $0.09 and $0.08 per basic and diluted share, respectively) as compared with the previous accounting method. A comparison of pro forma amounts below shows the effects if the accounting change were applied retroactively:
Year Ended September 30, 1998 1997 Pro forma net income $ 1,276 $ 657 Earnings per share-basic $ 0.43 $ 0.23 Earnings per share-diluted $ 0.42 $ 0.22
In 1999, Lucent changed its pension plan benefit for management, technical pay plan, and non-represented occupational employees hired on or after January 1, 1999, and certain U.S. employees of companies acquired since October 1, 1996, who are not participating currently in a defined benefit pension plan. These employees will receive a different pension benefit known as an account balance program, effective January 1, 2000. All other employees will retain their current pension benefits and are not affected by the new account balance program. Lucent has several non-pension postretirement benefit plans. For postretirement health care benefit plans, Lucent assumed a 9.2% annual health care cost trend rate for 2000, gradually declining to 3.9% by the year 2005, after which the trend rate would remain at that level. The assumed health care cost trend rate has a significant effect on the amounts reported. A one-percentage-point change in the assumed health care cost trend rate would have the following effects:
1 Percentage Point Increase Decrease Effect on total of service and interest cost components $ 23 $ 20 Effect on postretirement benefit obligation $371 $344
SAVINGS PLANS Lucent's savings plans allow employees to contribute a portion of their compensation on a pre-tax and/or after-tax basis in accordance with specified guidelines. Lucent matches a percentage of the employee contributions up to certain limits. Savings plan expense amounted to $314, $316 and $183 for the years ended September 30, 1999, 1998, and 1997, respectively. EMPLOYEE STOCK OWNERSHIP PLAN Lucent's leveraged Employee Stock Ownership Plan ("ESOP") funds the employer contributions to the Long-Term Savings and Security Plan ("LTSSP") for non-management employees. The ESOP obligation is reported as debt and as a reduction in shareowners' equity. Cash contributions to the ESOP are determined based on the ESOP's total debt service less dividends paid on ESOP shares. As of September 30, 1999, the ESOP contained 18.8 million shares of Lucent's common stock. Of the 18.8 million shares, 16.2 million have been allocated under the ESOP and 2.6 million were unallocated. As of September 30, 1999, the unallocated shares had a fair value of $169. 11. STOCK COMPENSATION PLANS Lucent has stock-based compensation plans under which outside directors and certain employees receive stock options and other equity-based awards. The plans provide for the grant of stock options, stock appreciation rights, performance awards, restricted stock awards and other stock unit awards. Stock options generally are granted with an exercise price equal to 100% of the market value of a share of common stock on the date of grant, have a 10-year term and vest within four years from the date of grant. Subject to customary anti-dilution adjustments and certain exceptions, the total number of shares of common stock authorized for option grants under the plans was 264 million shares at September 30, 1999. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) In connection with certain of Lucent's acquisitions, outstanding stock options held by employees of acquired companies became exercisable, according to their terms, for Lucent common stock effective at the acquisition date. These options did not reduce the shares available for grant under any of Lucent's other option plans. For acquisitions accounted for as purchases, the fair value of these options was included as part of the purchase price. Lucent established an Employee Stock Purchase Plan (the "ESPP") effective October 1, 1996. Under the terms of the ESPP, eligible employees may have up to 10% of eligible compensation deducted from their pay to purchase common stock through June 30, 2001. The per share purchase price is 85% of the average high and low per share trading price of common stock on the New York Stock Exchange on the last trading day of each month. The amount that may be offered pursuant to this plan is 200 million shares. In 1999, 1998 and 1997, 6.8 million, 8.9 million and 12.5 million shares, respectively, were purchased under the ESPP and the employee stock purchase plan of an acquired company, at a weighted average price of $46.04, $23.93 and $12.77, respectively. Lucent has adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," and as permitted under SFAS No. 123, applies Accounting Principles Board Opinion ("APB") No. 25 and related interpretations in accounting for its plans. Compensation expense recorded under APB No. 25 was $48, $77 and $37 for the years ended September 30, 1999, 1998, and 1997, respectively. If Lucent had elected to adopt the optional recognition provisions of SFAS No. 123 for its stock option plans and employee stock purchase plans, net income and earnings per share would have been changed to the pro forma amounts indicated below:
Year Ended September 30, 1999 1998 1997 NET INCOME As reported $ 4,766 $ 1,035 $ 449 Pro forma $ 4,263 $ 756 $ 201 EARNINGS PER SHARE-BASIC As reported $ 1.57 $ 0.35 $ 0.16 Pro forma $ 1.40 $ 0.26 $ 0.07 EARNINGS PER SHARE-DILUTED As reported $ 1.52 $ 0.34 $ 0.15 Pro forma $ 1.31 $ 0.24 $ 0.07
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:
WEIGHTED AVERAGE ASSUMPTIONS 1999 1998 1997 Dividend yield 0.12% 0.18% 0.38% Expected volatility: Lucent 33.8% 28.2% 22.4% Acquisitions (1) 57.5% 61.0% 66.0% Risk-free interest rate 5.2% 5.3% 6.3% Expected holding period(in years) 3.6 4.1 4.4
(1) Pre-merger assumptions for companies acquired in a pooling-of-interests. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) Presented below is a summary of the status of Lucent stock options and the related transactions for the years ended September 30, 1999, 1998, and 1997.
Shares Weighted Average (000s) Exercise Price - ------------------------------------------------------------------------------ Options outstanding at October 1, 1996 86,266 $14.55 - ------------------------------------------------------------------------------ Granted/assumed* (1)(2) 176,170 $15.19 Exercised (15,967) $ 6.88 Forfeited/expired (2) (63,310) $24.92 - ------------------------------------------------------------------------------ Options outstanding at September 30, 1997 183,159 $12.26 - ------------------------------------------------------------------------------ Granted/assumed* (3) 123,075 $27.95 Exercised (39,404) $ 9.78 Forfeited/expired (15,014) $20.25 - ------------------------------------------------------------------------------ Options outstanding at September 30, 1998 251,816 $19.84 - ------------------------------------------------------------------------------ Granted/assumed* 52,576 $48.77 Exercised (27,067) $13.54 Forfeited/expired (10,870) $23.00 - ------------------------------------------------------------------------------ Options outstanding at September 30, 1999 266,455 $26.06 ==============================================================================
* Includes options converted in acquisitions. (1) Includes options covering 51,013 shares of common stock granted under a broad-based employee plan at a weighted average exercise price of $11.15. (2) Grants and forfeitures include options covering 23,039 and 25,598 shares of common stock exchanged or amended under pre-merger stock option repricing programs of a company acquired in a pooling-of-interests, at new exercise prices of $21.18 and $14.81, respectively. (3) Includes options covering 32,355 shares of common stock granted under a broad-based employee plan at a weighted average exercise price of $37.34. The weighted average fair value of Lucent stock options, calculated using the Black-Scholes option-pricing model, granted during the years ended September 30, 1999, 1998, and 1997 is $15.92, $12.26 and $3.65 per share, respectively. The following table summarizes the status of stock options outstanding and exercisable at September 30, 1999:
-------------------------------- -------------------- Stock Options Stock Options Outstanding Exercisable -------------------------------- -------------------- Weighted Average Weighted Weighted Range of Remaining Average Average exercise Shares Contractual Exercise Shares Exercise prices (000s) Life(Years) Price (000s) Price - ------------------------------------------------------------------------------ $ 0.01 to $ 11.14 72,396(1) 6.7 $10.29 12,792 $ 7.42 $11.15 to $ 23.07 70,150(1) 7.5 16.59 31,110 15.52 $23.08 to $ 29.09 21,947 8.8 27.42 20,715 27.48 $29.10 to $ 40.87 60,567 8.9 35.15 9,005 34.78 $40.88 to $ 61.78 25,587 9.2 49.86 5,964 52.44 $61.79 to $102.48 15,808 9.9 65.08 72 67.37 - ------------------------------------------------------------------------------ Total 266,455 $26.06 79,658 $22.32 ==============================================================================
(1) Approximately 43,869 options granted under a broad-based employee plan became exercisable on October 1, 1999. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) Other stock unit awards are granted under certain award plans. The following table presents the total number of shares of common stock represented by awards granted to employees for the years ended September 30, 1999, 1998, and 1997:
Year Ended September 30, 1999 1998 1997 Other stock unit awards granted (000s) 532 1,730 8,756 Weighted average market value of shares granted during the period $31.82 $22.23 $12.00
12. OPERATING SEGMENTS Lucent adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," beginning with this Annual Report. This standard requires disclosure of segment information on the same basis used internally for evaluating segment performance and for deciding how to allocate resources to segments. Lucent operates in the global telecommunications networking industry and has three reportable operating segments: Service Provider Networks ("SPN"), Enterprise Networks ("Enterprise"), and Microelectronics and Communications Technologies ("MCT"). SPN provides public networking systems and software to telecommunications service providers and public network operators around the world. Enterprise develops, manufactures, markets and services advanced communications products and data networking systems for business customers. MCT designs and manufactures high-performance integrated circuits, power systems and optoelectronic components for applications in the communications and computing industries. MCT also includes network products, new ventures and intellectual property. The three reportable operating segments are strategic market units that offer distinct products and services. These segments were determined based on the customers and the markets that Lucent serves. Each market unit is managed separately as each operation requires different technologies and marketing strategies. Intersegment transactions that occur are based on current market prices and all intersegment profit is eliminated in consolidation. Performance measurement and resource allocation for the reportable operating segments are based on many factors. The primary financial measure used is Operating income, exclusive of goodwill and existing technology amortization, and of purchased in-process R&D and other costs from business acquisitions (acquisition/integration-related costs). Lucent employs shared service concepts to realize economies of scale and efficient use of resources. The costs of shared services, and other corporate center operations managed on a common basis, are allocated to the segments based on usage, where possible, or other factors based on the nature of the activity. The accounting policies of the reportable operating segments are the same as those described in the Summary of Significant Accounting Policies (see Note 2). 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts)
REPORTABLE SEGMENTS -------------------------------------- Other* & Consolidated YEAR ENDED 9/30/99 SPN ENTERPRISE MCT CORPORATE TOTALS - ----------------------- -------- ---------- -------- --------- ------------ External revenues $ 23,562 $ 8,559 $ 5,424 $ 758 $ 38,303 Intersegment revenues 183 195 1,318 (1,696) - Total revenues 23,745 8,754 6,742 (938) 38,303 Depreciation & amortization 690 134 489 493 1,806 Operating income/(loss) 4,563 616 944 (717) 5,406 Assets 16,939 3,884 4,095 13,857 38,775 Capital expenditures 675 266 707 567 2,215 - ----------------------------------------------------------------------------------------------------------
Other* & Consolidated YEAR ENDED 9/30/98 SPN ENTERPRISE MCT CORPORATE TOTALS - ----------------------- -------- ---------- ------- --------- ------------ External revenues $19,108 $ 7,954 $ 4,628 $ 116 $31,806 Intersegment revenues 128 148 1,074 (1,350) - Total revenues 19,236 8,102 5,702 (1,234) 31,806 Depreciation & amortization 638 128 366 279 1,411 Operating income/(loss) 3,107 633 608 (1,710) 2,638 Assets 12,978 3,421 3,298 9,666 29,363 Capital expenditures 525 281 646 339 1,791 - -----------------------------------------------------------------------------------------------------
Other* & Consolidated YEAR ENDED 9/30/97 SPN ENTERPRISE MCT CORPORATE TOTALS - ----------------------- -------- ---------- -------- --------- ------------ External revenues $ 15,675 $ 6,257 $ 4,238 $ 1,441 $ 27,611 Intersegment revenues 136 130 905 (1,171) - Total revenues 15,811 6,387 5,143 270 27,611 Depreciation & amortization 730 218 332 219 1,499 Operating income/(loss) 1,517 668 549 (1,135) 1,599 Assets 9,057 2,486 2,928 10,535 25,006 Capital expenditures 447 202 686 409 1,744 - --------------------------------------------------------------------------------------------------------
* The results of other smaller units and corporate operations are reported in Other and Corporate, including eliminations of internal business. Assets included in Other and Corporate consist principally of cash and cash equivalents, deferred income taxes, and prepaid pension costs. 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) RECONCILING ITEMS A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements is as follows:
Year ended September 30, 1999 1998 1997 -------- -------- -------- External Revenues - ----------------- Total reportable segments $ 37,545 $ 31,690 $ 26,170 Other operations 745 70 1,362 Corporate miscellaneous 13 46 79 Total revenues $ 38,303 $ 31,806 $ 27,611 Operating Income: - ----------------- Total reportable segments $ 6,123 $ 4,348 $ 2,734 Acquisition/integration-related costs (510) (1,683) (1,439) Goodwill and existing technology amortization (394) (149) (32) Other and corporate 187 122 336 Operating income 5,406 2,638 1,599 Other income-net 443 128 97 Interest expense (406) (254) (238) Income before income taxes $ 5,443 $ 2,512 $ 1,458
PRODUCTS AND SERVICES REVENUES The table below presents external revenue for groups of similar products and services:
Year Ended 9/30 1999 1998 1997 ------- ------- ------- Core Networking Systems (a) $17,750 $14,412 $12,529 Wireless Products 5,516 4,456 2,984 Business Communications Systems (b) 6,977 6,399 5,077 Microelectronics 2,827 2,405 2,214 NetCare Professional Services 768 483 274 Other (c) 4,465 3,651 4,533 Totals $38,303 $31,806 $27,611
(a) Core Networking Systems includes switching and access products, data networking systems for service providers, optical networking products, communications software and engineering services. (b) Business Communications Systems includes advanced communications products and messaging services. (c) "Other" principally includes network products. GEOGRAPHIC INFORMATION
EXTERNAL REVENUES (a) LONG-LIVED ASSETS (b) ----------------- ----------------- Year Ended ------------------------- September 30, 1999 1998 1997 1999 1998 1997 - ----------------- ------- ------- ------- ------- ------- ------- United States $26,116 $23,513 $20,858 $ 6,244 $ 5,422 $ 4,696 Foreign countries 12,187 8,293 6,753 1,812 1,531 1,188 Totals $38,303 $31,806 $27,611 $ 8,056 $ 6,953 $ 5,884
(a) Revenues are attributed to geographic areas based on the location of customers. (b) Represents property, plant and equipment (net), and goodwill and existing technology. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) CONCENTRATIONS Historically, Lucent has relied on a limited number of customers for a substantial portion of its total revenues. Revenues from AT&T Corp. accounted for approximately, 12%, 12% and 14% of consolidated revenues in the years 1999, 1998 and 1997, respectively, principally in the SPN segment. Lucent expects that a significant portion of its future revenues will continue to be generated by a limited number of customers. The loss of any of these customers or any substantial reduction in orders by any of these customers could materially and adversely affect Lucent's operating results. Lucent does not have a concentration of available sources of supply materials, labor, services or other rights that, if eliminated suddenly, could impact its operations severely. 13. FINANCIAL INSTRUMENTS The carrying values and estimated fair values of financial instruments, including derivative financial instruments were as follows:
September 30, 1999 September 30, 1998 Carrying Fair Carrying Fair Amount Value Amount Value ------- ------- -------- ------- ASSETS Derivative and off-balance-sheet instruments: Foreign currency forward exchange contracts/options $ 18 $ 17 $ 26 $ 4 Letters of credit - 2 - 2 LIABILITIES Long-term debt(1)(2) $ 4,083 $ 3,956 $ 2,408 $ 2,559 Derivative and off-balance-sheet instruments: Foreign currency forward exchange contracts/options 36 27 25 (4)
(1) Excluding long-term lease obligations of $79 at September 30, 1999 and $1 at September 30, 1998. (2) For September 30, 1998 reflects the reclassification of debt maturing within one year to long-term debt as a result of the November 19, 1998 sale of $500 ($495 net of unamortized costs) of 10-year notes. The following methods were used to estimate the fair value of each class of financial instruments:
Financial Instrument Valuation Method - --------------------------------------------------------------------------------------- Long-term debt Market quotes for instruments with similar terms and maturities Foreign currency forward exchange contracts/options Market quotes Letters of credit Fees paid to obtain the obligations
The carrying amounts of cash and cash equivalents, investments, receivables and debt maturing within one year contained in the Consolidated Balance Sheets approximate fair value. CREDIT RISK AND MARKET RISK By their nature, all financial instruments involve risk, including credit risk for non-performance by counterparties. The contract or notional amounts of these instruments reflect the extent of involvement Lucent has in particular classes of financial instruments. The maximum potential loss may exceed any amounts recognized in the Consolidated Balance Sheets. However, Lucent's maximum exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and financial guarantees is limited to the amount drawn and outstanding on those instruments. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) Lucent seeks to reduce credit risk on financial instruments by dealing only with financially secure counterparties. Exposure to credit risk is controlled through credit approvals, credit limits and monitoring procedures. Lucent seeks to limit its exposure to credit risks in any single country or region. All financial instruments inherently expose the holders to market risk, including changes in currency and interest rates. Lucent manages its exposure to these market risks through its regular operating and financing activities and when appropriate, through the use of derivative financial instruments. DERIVATIVE FINANCIAL INSTRUMENTS Lucent conducts its business on a multinational basis in a wide variety of foreign currencies. Consequently, Lucent enters into various foreign exchange forward and option contracts to manage its exposure against adverse changes in those foreign exchange rates. The notional amounts for foreign exchange forward and option contracts represent the U.S. dollar equivalent of an amount exchanged. Generally, foreign currency exchange contracts are designated for firmly committed or forecasted sales and purchases that are expected to occur in less than one year. Gains and losses on all hedged contracts for firmly committed transactions and option contracts for anticipated transactions are deferred in Other current assets and liabilities, are recognized in income when the transactions occur, and are not material to the consolidated financial statements at September 30, 1999, and 1998. All other gains and losses on foreign currency exchange contracts are recognized in Other income-net as the exchange rates change. Lucent engages in foreign currency hedging activities to reduce the risk that changes in exchange rates will adversely affect the eventual net cash flows resulting from the sale of products to foreign customers and purchases from foreign suppliers. Hedge accounting treatment is appropriate for a derivative instrument when changes in the value of the derivative instrument are substantially equal, but opposite, to changes in the value of the exposure being hedged. Lucent believes that it has achieved risk reduction and hedge effectiveness, because the gains and losses on its derivative instruments substantially offset the gains on the assets, liabilities and transactions being hedged. Hedge effectiveness is periodically measured by comparing the change in fair value of each hedged foreign currency exposure at the applicable market rate with the change in market value of the corresponding derivative instrument. The following table summarizes the notional amounts of these derivative financial instruments in U.S. dollars. In 1999, these notional amounts principally represent contracts in Canadian dollars, Brazilian reals, Singapore dollars, British pounds and Euro currencies (primarily Dutch guilders and German marks). Notional amounts represent the face amount of the contractual arrangements and the basis on which U.S. dollars are to be exchanged and are not a measure of market or credit exposure.
Notional Amounts September 30, 1999 1998 Foreign exchange forward contracts $1,871 $1,518 Foreign exchange option contracts $ 303 $ 130
Lucent may enter into certain interest rate swap agreements to manage its risk between fixed, floating and variable interest rates and long-term and short-term maturity debt instruments. There were no material interest rate swap agreements in effect during 1999 and 1998. NON-DERIVATIVE AND OFF-BALANCE-SHEET INSTRUMENTS Requests for providing commitments to extend credit and financial guarantees are reviewed and approved by senior management. Management regularly reviews all outstanding commitments, letters of credit and financial guarantees, and the results of these reviews are considered in assessing the adequacy of Lucent's reserve for possible credit and guarantee losses. At September 30, 1999, and 1998, in management's opinion, there was no significant risk of loss in the event of non-performance of the counterparties to these financial instruments. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) The following table presents Lucent's non-derivative and off-balance-sheet instruments for amounts committed but not drawn-down and the amounts drawn-down on such instruments. These instruments may exist or expire without being drawn upon. Therefore, the amounts committed but not drawn-down do not necessarily represent future cash flows.
Amounts Committed Amounts Drawn- But Not down and Drawn-down Outstanding September 30, September 30, 1999 1998 1999 1998 ------- ------- ------- ------- Commitments to extend credit... $5,544 $2,086 $1,574 $ 536 Guarantees of debt............. $ 108 $ 87 $ 312 $ 205
COMMITMENTS TO EXTEND CREDIT Commitments to extend credit to third parties are conditional agreements generally having fixed expiration or termination dates and specific interest rates and purposes. GUARANTEES OF DEBT From time to time, Lucent guarantees the financing for product purchases by customers and the debt of certain unconsolidated joint ventures. Requests for providing such guarantees are reviewed and approved by senior management. Certain financial guarantees are backed by amounts held in trust for Lucent or assigned to a third-party reinsurer. LETTERS OF CREDIT Letters of credit are purchased guarantees that ensure Lucent's performance or payment to third parties in accordance with specified terms and conditions which amounted to $931 and $805 as of September 30, 1999 and 1998, respectively. SECURITIZATION In September 1999, a subsidiary of Lucent sold approximately $625 of accounts receivable to a non-consolidated qualified special purpose entity ("QSPE") which, in turn, sold an undivided ownership interest in these receivables to entities managed by an unaffiliated financial institution. Additionally, Lucent transferred a designated pool of qualified accounts receivable of approximately $700 to the QSPE as collateral for the initial sale. Lucent's retained interest in the QSPE's designated pool of qualified accounts receivable has been included in Receivables. Lucent will continue to service, administer and collect the receivables on behalf of the purchaser. The impact of the above transaction reduced Receivables and increased cash flows from operating activities in the Consolidated Statements of Cash Flows by $600. 14. COMMITMENTS AND CONTINGENCIES In the normal course of business, Lucent is subject to proceedings, lawsuits and other claims, including proceedings under laws and government regulations related to environmental and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at September 30, 1999, cannot be ascertained. While these matters could affect the operating results of any one quarter when resolved in future periods and while there can be no assurance with respect thereto, management believes that after final disposition, any monetary liability or financial impact to Lucent beyond that provided for at September 30, 1999, would not be material to the annual consolidated financial statements. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) In connection with the formation of Lucent from certain units of AT&T Corp. and the associated assets and liabilities of those units (the "Separation") and AT&T's distribution of its remaining interest in Lucent to its shareowners (the "Distribution"), Lucent, AT&T and NCR Corporation executed and delivered the Separation and Distribution Agreement, dated as of February 1, 1996, as amended and restated (the "Separation and Distribution Agreement"), and certain related agreements. The Separation and Distribution Agreement, among other things, provides that Lucent will indemnify AT&T and NCR for all liabilities relating to Lucent's business and operations and for all contingent liabilities relating to Lucent's business and operations or otherwise assigned to Lucent. In addition to contingent liabilities relating to the present or former business of Lucent, any contingent liabilities relating to AT&T's discontinued computer operations (other than those of NCR) were assigned to Lucent. The Separation and Distribution Agreement provides for the sharing of contingent liabilities not allocated to one of the parties, in the following proportions: AT&T: 75%, Lucent: 22%, and NCR: 3%. The Separation and Distribution Agreement also provides that each party will share specified portions of contingent liabilities related to the business of any of the other parties that exceed specified levels. ENVIRONMENTAL MATTERS Lucent's current and historical operations are subject to a wide range of environmental protection laws. In the United States, these laws often require parties to fund remedial action regardless of fault. Lucent has remedial and investigatory activities under way at numerous current and former facilities. In addition, Lucent was named a successor to AT&T as a potentially responsible party ("PRP") at numerous "Superfund" sites pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or comparable state statutes. Under the Separation and Distribution Agreement, Lucent is responsible for all liabilities primarily resulting from or relating to the operation of Lucent's business as conducted at any time prior to or after the Separation including related businesses discontinued or disposed of prior to the Separation, and Lucent's assets including, without limitation, those associated with these sites. In addition, under such Separation and Distribution Agreement, Lucent is required to pay a portion of contingent liabilities paid out in excess of certain amounts by AT&T and NCR, including environmental liabilities. It is often difficult to estimate the future impact of environmental matters, including potential liabilities. Lucent records an environmental reserve when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable. This practice is followed whether the claims are asserted or unasserted. Management expects that the amounts reserved will be paid out over the periods of remediation for the applicable sites, which typically range from 5 to 30 years. Reserves for estimated losses from environmental remediation are, depending on the site, based primarily on internal or third-party environmental studies, and estimates as to the number, participation level and financial viability of any other PRPs, the extent of the contamination and the nature of required remedial actions. Accruals are adjusted as further information develops or circumstances change. The amounts provided for in Lucent's consolidated financial statements for environmental reserves are the gross undiscounted amount of such reserves, without deductions for insurance or third-party indemnity claims. In those cases where insurance carriers or third-party indemnitors have agreed to pay any amounts and management believes that collectibility of such amounts is probable, the amounts are reflected as receivables in the financial statements. Although Lucent believes that its reserves are adequate, there can be no assurance that the amount of capital expenditures and other expenses which will be required relating to remedial actions and compliance with applicable environmental laws will not exceed the amounts reflected in Lucent's reserves or will not have a material adverse effect on Lucent's financial condition, results of operations or cash flows. Any possible loss or range of possible loss that may be incurred in excess of that provided for at September 30, 1999, cannot be estimated. 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) LEASE COMMITMENTS Lucent leases land, buildings and equipment under agreements that expire in various years through 2020. Rental expense under operating leases was $545, $425 and $335 for the years ended September 30, 1999, 1998 and 1997, respectively. The table below shows the future minimum lease payments due under non-cancelable leases at September 30, 1999. Such payments total $1,509 for operating leases. The net present value of such payments on capital leases was $81 after deducting imputed interest of $15.
Year Ended September 30, Later 2000 2001 2002 2003 2004 Years ---- ---- ---- ---- ---- ----- Operating leases ........... $321 $265 $200 $163 $114 $446 Capital leases ............. 2 41 20 20 13 - Minimum lease payments...... $323 $306 $220 $183 $127 $446
15. SUBSEQUENT EVENTS International Network Services On October 15, 1999, Lucent merged with International Network Services "INS", a global provider of network consulting, design and integration. Pursuant to the merger agreement, the outstanding INS stock was converted into the right to receive approximately 49 million shares of Lucent common stock. In addition, Lucent assumed outstanding employee stock options covering approximately 16 million shares of Lucent common stock. The transaction will be accounted for as a pooling-of-interests. Excel Switching Corporation On November 3, 1999, Lucent merged with Excel Switching Corporation, a Hyannis, Massachusetts-based developer of programmable switches. Under the terms of the agreement, the outstanding Excel stock was converted into the right to receive approximately 22.3 million shares of Lucent common stock. The transaction will be accounted for as a pooling-of-interests. Xedia Corporation On November 12, 1999, Lucent merged with Xedia Corporation, a privately held Acton, Massachusetts-based maker of routers for corporate networks. Under the terms of the agreement, the outstanding Xedia capital stock and warrants were converted into the right to receive approximately 3.86 million shares of Lucent common stock. The transaction will be accounted for as a pooling-of-interests. 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) 16. QUARTERLY INFORMATION (UNAUDITED)
FISCAL YEAR QUARTERS FIRST SECOND THIRD FOURTH TOTAL ------- -------- ------ --------- ---------- Year Ended September 30, 1999 Revenues......................... $ 9,741 $8,672 $9,315 $10,575 $ 38,303 Gross margin..................... 5,159 4,178 4,481 4,797 18,615 Net income before cumulative 1,231(a) 529(b) 750(c) 948(d) 3,458(a,b,c,d) effect of accounting change... Cumulative effect of accounting change........................ 1,308 - - - 1,308 Net income....................... $ 2,539(a) $ 529(b) $ 750(c) $ 948(d) $ 4,766(a,b,c,d) Earnings per common share - basic: Income before cumulative effect of accounting change... $ 0.41(a) $ 0.17(b) $ 0.25(c) $ 0.31(d) $ 1.14(a,b,c,d) Cumulative effect of accounting change........................ 0.43 - - - 0.43 Net income .................... $ 0.84(a) $ 0.17(b) $ 0.25(c) $ 0.31(d) $ 1.57(a,b,c,d) Earnings per common share - diluted: Income before cumulative effect of accounting change... $ 0.40(a) $ 0.17(b) $ 0.24(c) $ 0.30(d) $ 1.10(a,b,c,d) Cumulative effect of accounting change........................ 0.42 - - - 0.42 Net income..................... $ 0.82(a) $ 0.17(b) $ 0.24(c) $ 0.30(d) $ 1.52(a,b,c,d) Dividends per share............. $ 0.04 $ 0.00 $ 0.02 $ 0.02 $ 0.08 Stock price:(i) High......................... 56 15/16 60 68 11/16 79 3/4 79 3/4 Low.......................... 26 23/32 47 51 7/8 60 26 23/32 Quarter-end close............ 54 31/32 54 67 7/16 64 7/8 64 7/8 Year Ended September 30, 1998 Revenues........................ $ 9,079 $6,511 $7,642 $8,574 $31,806 Gross margin.................... 4,447 2,958 3,555 4,131 15,091 Net income(loss)................ 877(e) 88(f) (150)(g) 220(h) 1,035(e,f,g,h) Earnings(loss) per common share - basic........... $ 0.30(e) $ 0.03(f) $(0.05)(g) $ 0.07(h) $ 0.35(e,f,g,h) Earnings(loss) per common share - diluted......... $ 0.29(e) $ 0.03(f) $(0.05)(g) $ 0.07(h) $ 0.34(e,f,g,h) Dividends per share............. $ 0.0375 $ 0.00 $ 0.02 $ 0.02 $ 0.0775 Stock price:(i) High......................... 22 35/64 32 1/16 41 27/32 54 1/4 54 1/4 Low.......................... 18 3/32 18 23/64 32 34 3/16 18 3/32 Quarter-end close............ 19 31/32 31 31/32 41 19/32 34 5/8 34 5/8
(a) As a result of the 1999 acquisitions of Quadritek and Stratus, Lucent recorded an after-tax charge of $281 in the first quarter for purchased in-process research and development. (b) As a result of the 1999 acquisitions of WaveAccess, Enable Ethernet, and Sybarus, Lucent recorded an after-tax charge of $15 in the second quarter for purchased in-process research and development. In addition, $24 of Stratus purchased in-process research and development was reversed. (c) As a result of the merger with Ascend, Lucent recorded a charge to operating expenses of approximately $79 million (non-tax impacting)in the third quarter for direct merger-related costs. 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Per Share Amounts) (d) As a result of the mergers with Ascend and Nexabit, Lucent recorded pretax costs of $258 million ($191 million after-tax) in the fourth quarter primarily associated with assets impairments, integration-related charges and merger expenses. These costs principally include the write-off of Livingston goodwill and existing technology, certain product and system integration and direct merger expenses related to Nexabit. (e) As a result of the 1998 acquisition of Livingston, Lucent recorded a non-tax charge of $427 in the first quarter for purchased in-process research and development. (f) As a result of the 1998 acquisition of Prominet, Lucent recorded a non-tax charge of $157 in the second quarter for purchased in-process research and development. (g) As a result of the 1998 acquisitions of Yurie and Optimay, Lucent recorded a non-tax charge of $668 in the third quarter for purchased in-process research and development. (h) As a result of the 1998 acquisitions of SDX, MassMedia, LANNET, JNA and Stratus, Lucent recorded a charge of $431 ($427 after-tax) in the fourth quarter for purchased in-process research and development. (i) Obtained from the Composite Tape. Stock prices have been restated to reflect the two-for-one splits of the Company's common stock effective April 1, 1998, and April 1, 1999. EX-21 7 LIST OF SUBSIDIARIES OF LUCENT TECHNOLOGIES INC. 1 EXHIBIT 21 LUCENT TECHNOLOGIES SUBSIDIARIES AS OF 9/30/99
NAME OF LUCENT TECHNOLOGIES ENTITY LOCATION Lucent Technologies Argentina S.A. Argentina (Lucent Technologies Sociedad Anonima Argentina) Ascend Australia Pty. Ltd. Australia Lucent Technologies Australia Pty. Ltd. Australia Lucent Technologies Austria Ges.m.b.H. Austria Lucent Technologies Middle East W.L.L. Bahrain Lucent Technologies Foreign Sales Corporation Barbados Ascend Communications Benelux Belgium Lucent Technologies Belgium S.A./N.V. Belgium Lucent Technologies Network Systems Belgium S.A./N.V. Belgium Lucent Technologies (Bermuda) Ltd. Bermuda Lucent Technologies Network Systems do Brasil Ltda. Brazil Lucent Technologies Brasil Ltda. Brazil SID Telecomunicacoes E Controles, S.A. Brazil Lucent Technologies World Services, Inc. (Brunei branch) Brunei Lucent Technologies Microelectronics Canada ULC Canada Ascend Communications Canada Ltd. Canada Lucent Technologies Canada Corp. Canada Octel Communications Canada, Inc. Canada Lucent Technologies (Chile) Limitada Chile Lucent Technologies Colombia S.A. Colombia Lucent Technologies de Costa Rica S.A. Costa Rica Lucent Technologies s.r.o. Czech Republic Lucent Technologies EMEA B.V. (Czech branch)) Czech. Republic
2 Lucent Technologies Denmark A/S Denmark Lucent Technologies Dominicana C. por A. Dominican Republic EcuaLucent Technologies S.A. Ecuador Lucent Technologies International Inc. (Egypt Branch) Egypt Lucent Technologies El Salvador S.A. de C.V. El Salvador Ascend Communications France S.A.R.L. France Ascend Communications Premea France Lucent Technologies BCS S.A. France TRT Lucent Technologies S.A. France Triple C Call Center Communications GmbH Germany Ascend Communications GmbH Germany Lucent Technologies Business Communications Systems and Germany Microelectronics GmbH Lucent Technologies Network Systems GmbH Germany Lucent Technologies EMEA B.V. (Greece) Greece Lucent Technologies de Guatemala S.A. Guatemala Lucent Technologies World Services, Inc. (Honduras Honduras Branch) Lucent Technologies de Honduras S.A. Honduras Lucent Technologies Asia/Pacific Inc. (Hong Kong branch) Hong Kong Lucent Technologies Korea Ltd. (Hong Kong branch) Hong Kong Ascend Communications (HK) Limited Hong Kong Lucent Technologies Asia/Pacific (H.K) Ltd. Hong Kong Lucent Technologies Hungary Ltd. Lucent Technologies Hungary Magyarorszag Kft. Lucent Technologies India Pvt. Ltd. India Lucent Technologies Network Systems Nederland B.V. Indonesia (Indonesia) Lucent Technologies World Services Inc. (Indonesia Project Indonesia Office) Lucent Technologies Asia/Pacific Inc. (Indonesia Rep. Indonesia Office)
3 Lucent Technologies GCM Sales Limited Ireland Lucent Technologies Ireland Ltd. Ireland Ascend Communications Europe Limited Ireland Lucent Technologies Networks Ltd. Israel WaveAccess, Ltd. Israel Ascend Communications Srl Italy Lucent Technologies Italia S.p.A. Italy Ascend Communications Japan K.K. Japan Lucent Technologies Japan Ltd. Japan Lucent Technologies EMEA B.V. (Kazakhstan Kazakhstan Representative Office) Lucent Technologies Nederland B.V. (Kazakhstan Kazakhstan Representative Office) Lucent Technologies World Services Inc. (Kenya Branch) Kenya Lucent Technologies Korea Ltd. Korea Lucent Technologies World Services Inc. (Kuwait branch office) Kuwait Lucent Technologies Eurasia Ltd. (Lithuania Rep. Office) Lithuania Lucent Technologies (Malaysia) Sdn. Bhd. Malaysia Lucent Technologies BCS de Mexico, S.A. de C.V. Mexico Lucent Technologies de Mexico S.A. de C.V. Mexico Lucent Technologies Holdings de Mexico S.A. de C.V. Mexico Lucent Technologies Microelectronica de Mexico S. A. de C. V. Mexico Lucent Technologies Microelectronica de Monterrey, S.A. de C.V. Mexico LTCP Holdings de Mexico, S.A. de C.V. Mexico LTCP de Mexico, S.A. e C.V. Mexico LTCP Reynosa, S.A. de C.V. Mexico Lucent Technologies EMEA Services B.V. Netherlands Lucent Technologies Nederland B.V. Netherlands Lucent Technologies BCS Nederland B.V. Netherlands
4 Lucent Technologies EMEA B.V. Netherlands Lucent Technologies (NZ) Limited New Zealand Lucent Technologies Nicaragua S.A. Nicaragua Lucent Technologies Qingdao Power Systems Company, Peoples Republic of China Ltd. Lucent Technologies Qingdao Telecommunications Systems Peoples Republic of China Ltd. Lucent Technologies (China) Co., Ltd. Peoples Republic of China Lucent Technologies (Shanghai) International Enterprises, Peoples Republic of China Ltd. Lucent Technologies World Services Inc. (Panama branch) Panama Lucent Technologies del Peru S.A. Peru Lucent Technologies Philippines Inc. Philippines Lucent Technologies Poland S.A. Poland Lucent Technologies Polska Spolka z o.o. Poland Lucent Technologies International Inc. - Secursal en Portugal Portugal Lucent Technologies World Services Inc. (Puerto Rico Puerto Rico branch) Lucent Technologies Puerto Rico Inc. Puerto Rico Lucent Technologies Eurasia Ltd. (Romania branch) Romania Lucent Technologies EMEA B.V. (Moscow Rep. Office) Russian Federation Lucent Technologies Eurasia Ltd. (Russia Moscow Rep. Russian Federation Office) ZAO Lucent Technologies Russian Federation Lucent Technologies International Inc. (Saudi Arabia Saudi Arabia branch) Ascend Communications Pte. Ltd. Singapore Lucent Technologies Consumer Products Pte. Ltd. Singapore Lucent Technologies Investments Asia Pte. Ltd. Singapore Lucent Technologies Microelectronics Pte. Ltd. Singapore
5 Lucent Technologies Singapore Pte. Ltd. Singapore Lucent Technologies Slovensko s.r.o. Slovak Republic Lucent Technologies South Africa (Proprietary) Ltd. South Africa Lucent Technologies Microelectronica S.A. Spain Lucent Technologies Network Systems Espana S.A. Spain Lucent Technologies Asia/Pacific Inc. (Sri Lanka branch) Sri Lanka Ascend Communications Nordic AB Sweden Lucent Technologies Sweden AB. Sweden Lucent Technologies A.G. Switzerland Lucent Technologies Taiwan Inc. (Taiwan branch) Taiwan Lucent Technologies Thailand Inc. (Thailand branch) Thailand Lucent Technologies Microelectronics Thailand Ltd. Thailand Lucent Technologies International Inc. (U.A.E. branch) United Arab Emirates Ascend Communications M.E., Inc. Dubai United Arab Emirates Lucent Technologies Network Systems UK Ltd. United Kingdom Lucent Technologies Holdings UK Limited United Kingdom Telectron Systems Ltd. United Kingdom Lucent Technologies plc. United Kingdom Lucent Technologies ECS plc. United Kingdom Lucent CheZaRa Ukraine Lucent Technologies EMEA B.V. (Kiev - Ukraine) Ukraine L.T. Funding, LLC United States Ascend Communications, Inc. United States Ascend Credit Corporation United States Ascend Communications, M.E., Inc. United States ATOR Corporation United States Cascade Communications Securities Corporation United States Cascade Communications Asia Corporation United States Cascade Communications HC Corporation United States Bell Laboratories, Inc. United States Kenan Systems Corporation United States Litespec, Inc. United States
6 Loose Tube Inc. United States LTI Corporation United States Lucent Asset Management Corporation United States Lucent Technologies Americas Inc. United States Lucent Technologies Asia/Pacific Inc. United States Lucent Technologies Construction Services, Inc. United States Lucent Technologies Eastern Ventures Inc. United States Lucent Technologies Engineering Inc. United States Lucent Technologies Eurasia Ltd. United States Lucent Technologies Guardian Corporation United States Lucent Technologies GRL Corporation United States Lucent Technologies Holdings Inc. United States Lucent Technologies International Inc. United States Lucent Technologies Kazakhstan Ltd United States Lucent Technologies Management Services Inc. United States Lucent Technologies Maquiladoras Inc. United States Lucent Technologies Opto Inc. United States Lucent Technologies Realty Inc. United States Lucent Technologies Sentinel, Inc. United States Lucent Technologies Services Company Inc. United States Lucent Technologies Taiwan Inc. United States Lucent Technologies Technical Services Company, Inc. United States Lucent Technologies Thailand Inc. United States Lucent Technologies Ventures Inc. United States Lucent Technologies Western Investments Inc. United States Lucent Technologies World Services Inc. United States Lucent Venture Partners Inc. United States Mosaix, Inc. United States Nassau Metals Corporation United States NCS OSP Development Corp. United States NCS Ventures, Inc. United States
7 Nexabit Networks, Inc. United States Octel Communications Corporation United States Optimay Corporation United States Prominet Corporation United States Telecommunications Technology Middle East Inc. United States Western Electric Company, Incorporated United States Western Electric International Incorporated United States Xedia Corporation United States Lucent Cable Communications Inc. United States Lucent Consumer Communications, LLC United States Lucent Technologies Consumer Products LP United States Lucent Technologies Venezuela S.A. Venezuela Lucent Technologies Asia/Pacific Inc. Vietnam (Vietnam Rep. Office)
Certain subsidiaries, which considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of September 30, 1999, have been omitted in accordance with Item 601(b)(21)(ii) of Regulation S-K. EX-23 8 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the registration statements on Form S-3 (File No. 333-89347, 333-85219 and 333-85061), and Forms S-8 (File No.'s 333-45253, 333-64525, 333-46589, 333-52799, 333-72425, 333-79007, 333-52805, 333-56133, 333-08775, 333-37041, 333-33943, 333-18975, 333-18977, 333-08783, 333-81751, 333-87685, 333-88201, 333-87151, 333-84981, 333-80267 333-08789, 333-08793, 333-08801, 333-23043 and 333-42475), of Lucent Technologies Inc. of our reports dated October 25, 1999, relating to the consolidated financial statements and financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP New York, New York December 21, 1999 EX-24 9 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, an Annual Report on Form 10-K for the fiscal year ended September 30, 1999; and WHEREAS, the undersigned is a Director (and/or Officer) of the Company, as indicated below his or her signature: NOW, THEREFORE, the undersigned hereby constitutes and appoints Donald K. Peterson and James S. Lusk and each of them, as attorneys for and in the name, place and stead of the undersigned, and in the capacity of the undersigned as a Director and Officer of the Company, to execute and file such Form 10-K and any amendments or supplements thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 15th day of December, 1999. By /s/ Richard A. McGinn By /s/ Donald S. Perkins ---------------------------- ------------------------ Name: Richard A. McGinn Name: Donald S. Perkins Title: Chairman of the Board and Title: Director Chief Executive Officer By /s/ Paul A. Allaire By /s/ Henry B. Schacht ---------------------------- ------------------------ Name: Paul A. Allaire Name: Henry B. Schacht Title: Director Title: Director By /s/ Carla A. Hills By /s/ Franklin A. Thomas ---------------------------- ------------------------ Name: Carla A. Hills Name: Franklin A. Thomas Title: Director Title: Director By /s/ Drew Lewis By /s/ John A. Young ---------------------------- ------------------------ Name: Drew Lewis Name: John A. Young Title: Director Title: Director By ---------------------------- Name: Paul H. O'Neill Title: Director 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, Lucent Technologies Inc., a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended September 30, 1999; and WHEREAS, the undersigned is an Officer of the Company, as indicated below his signature: NOW, THEREFORE, the undersigned hereby constitutes and appoints Donald K. Peterson as attorney for and in the name, place and stead of the undersigned, and in the capacity of the undersigned as an Officer of the Company, to execute and file such Form 10-K and any amendments or supplements thereto, hereby giving and granting to said attorney, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorney may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 15 day of December, 1999. By /s/ James S. Lusk -------------------------------- Name: James S. Lusk Title: Senior Vice President and Controller 3 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, Lucent Technologies Inc., a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the fiscal year ended September 30, 1999; and WHEREAS, the undersigned is an Officer of the Company, as indicated below his signature: NOW, THEREFORE, the undersigned hereby constitutes and appoints James S. Lusk as attorney for and in the name, place and stead of the undersigned, and in the capacity of the undersigned as an Officer of the Company, to execute and file such Form 10-K and any amendments or supplements thereto, hereby giving and granting to said attorney, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorney may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 15 day of December, 1999. By /s/ Donald K. Peterson ----------------------------------- Name: Donald K. Peterson Title: Executive Vice President and Chief Financial Officer EX-27 10 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the audited balance sheet of Lucent at September 30, 1999 and the audited consolidated statement of income for the year ended September 30, 1999 and is qualified in its entirety by reference to such financial statements. 12-MOS SEP-30-1999 OCT-1-1998 SEP-30-1999 1,816 0 10,800 362 5,048 21,931 14,292 7,445 38,775 11,778 4,162 0 0 31 13,553 38,775 38,303 38,303 19,688 19,688 4,792 75 406 5,443 1,985 3,458 0 0 1,308 4,766 1.57 1.52
-----END PRIVACY-ENHANCED MESSAGE-----