10-K/A 1 y49457ae10-ka.txt LUCENT TECHNOLOGIES INC. 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-K/A #1 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000 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. [ ] At November 30, 2000, the aggregate market value of the voting stock held by non-affiliates was approximately $52,500,000,000. At November 30, 2000, 3,388,942,883 common shares were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement to be filed pursuant to Regulation 14A on or before January 28, 2001, 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.................................................. 22 3. Legal Proceedings........................................... 22 4. Submission of Matters to a Vote of Security-Holders......... 23 PART II 5. Market for Registrant's Common Equity and Related 24 Stockholder Matters......................................... 6. Selected Financial Data..................................... 25 7. Management's Discussion and Analysis of Financial Condition 26 and Results of Operations................................... 8. Financial Statements and Supplementary Data................. 45 9. Changes in and Disagreements with Accountants on Accounting 45 and Financial Disclosure.................................... PART III 10. Directors and Executive Officers of the Registrant.......... 46 11. Executive Compensation...................................... 46 12. Security Ownership of Certain Beneficial Owners and 46 Management.................................................. 13. Certain Relationships and Related Transactions.............. 46 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 47 8-K.........................................................
This Report contains trademarks, service marks and registered marks of Lucent and its subsidiaries, and other companies, as indicated. This Form 10-K is filed with respect to Lucent's fiscal year ended September 30, 2000. No attempt has been made in this Form 10-K/A to update our disclosures for events subsequent to the initial filing date of December 27, 2000, except as otherwise explicitly noted. 3 4 This Form 10-K is filed with respect to Lucent's fiscal year ended September 30, 2000. No attempt has been made in this Form 10-K/A to update our disclosures for events subsequent to the initial filing date of December 27, 2000, except as otherwise explicitly noted. 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. ("AT&T"), 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 ("IPO") of its common stock and on September 30, 1996, became independent of AT&T when AT&T distributed to its shareowners all of its Lucent shares. Lucent's fiscal year begins October 1 and ends September 30. On September 30, 2000 Lucent completed its plan to spin off its enterprise networks business, forming a separate and independent company. The spin off of the new company, Avaya Inc., was accomplished through a tax-free distribution of shares to Lucent shareholders. On July 20, 2000, Lucent announced its intention to spin off its microelectronics business, which includes the optoelectronics components and integrated circuits divisions, into a separate, independent company called Agere Systems Inc. ("Agere Systems"). On December 11, 2000 Agere Systems filed a Form S-1 registration statement with the Securities and Exchange Commission (the "SEC") in anticipation of an initial public offering of Agere Systems and intends to distribute the remaining shares in a tax-free distribution. This report does not constitute an offering of any securities, which will be made only by a prospectus filed with the SEC. The initial public offering is expected to be completed in the quarter ending March 31, 2001, and the completion of the spin-off is expected by the end of the 2001 fiscal year. The initial public offering and spin-off are subject to certain conditions, including a favorable tax ruling by the IRS. On November 13, 2000 Lucent entered into an agreement to sell its power systems business to Tyco International Ltd., a diversified manufacturing and service company, for $2.5 billion in cash. The sale, which is subject to regulatory approval and other customary closing conditions, is expected to close by December 31, 2000. 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 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 (which uses electronic circuits to connect calling parties in a telephone network) and data packet transmission (a highly efficient, cost-effective technology that divides a transmission into envelopes of data and sends them to destinations where they are reassembled) are converging on single networks. The convergence of the two technologies enables service providers to economically send information in different formats (phone calls, faxes, emails, video clips) over the same network and to offer advanced services, including applications that include voice and video. 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 end-to-end products and services that work across a customer's complete network, bringing together Lucent's core products with new offerings obtained through 4 5 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 two reportable segments: Service Provider Networks and Microelectronics and Communications Technologies. Service Provider Networks provides public networking systems and software to telecommunications service providers and public network operators around the world. Microelectronics and Communications Technologies 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. These two reportable operating segments are strategic market units based on the customers and the markets served. For further information about Lucent's segments and products, see Note 14 to the accompanying consolidated financial statements. 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 Service Provider Networks segment includes the product groups responsible for Lucent's optical networking, switching equipment, access, wireless networks and software products 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. 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 worldwide by switches manufactured by Lucent) of approximately 150 million lines. According to an industry data report, at the end of calendar year 1999, Lucent ranked number two in the number of ports for lines and trunks installed worldwide with a 16.5 percent share, behind Alcatel Alsthom's 18.5 percent share. The others in the top five were Siemens AG, 15.9 percent, Nortel Networks Corporation, 13.2 percent and Telefonaktiebolaget LM Ericsson, 11.2 percent. 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 and billing for services provided on their networks; intelligent network/application software, which enables service providers to offer a broad array of enhanced and differentiated services; and cable systems, which provide the transport media between points in a network. These systems collectively comprise the infrastructure that enables 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 2000, Lucent acquired several companies related to the Service Provider Networks segment's business, including Chromatis Networks and Spring Tide Networks. B. Switching Products Lucent manufactures, develops, markets and manages switching products and software for the service provider market. Lucent's primary switching products include: - 7R/E(TM) Packet Solutions -- A portfolio of packet data networking products that delivers traditional telephony as well as data features and services within a packet environment. 5 6 - 5ESS(R) Switch -- The most highly-deployed circuit switching solution in today's global network. Its evolution capabilities allow for complete migration to packet-based networks, which can be offered in different sizes and which the service provider can enlarge to handle future growth, for both incumbent and emerging network operators and service providers from 3,000 subscribers and higher. - Lucent SoftSwitch (and Full Circle(SM) Program) -- Robust, programmable call control (the setting up, monitoring and tearing down of telephone calls) and signable product; targeted at the entire range of service providers and network operators regardless of network size or scope; also targeted at a large audience of third party application and service developers. A programmable product can handle different kinds of control signals used in the communications industry to allow different network elements, such as switches to communicate with one another. It can also translate different kinds of signals to ensure that elements in the circuit-switched telephone network can communicate with those in packet-switched data networks. An example is Signaling System 7, which is used by switches in the public switched telephone network for setting up telephone calls and performing other functions. - ExchangePlus EXS(R) and VSE(TM) Switches -- A scalable (can be made greater or smaller without significant cost increase), converged product providing tandem (in connection of the output of one circuit to the input of another circuit), international gateway (the switches in the various domestic long distance networks which interface their networks with international communications networks)and/or Internet protocol application servers, targeted at networks of up to 30,000 ports. - Packet Intelligent Networks -- Products for large service provider customers for wireline and mobile internet applications. - Messaging Products and Services -- Voice mail, unified messaging, agent and portal products and services for service providers. Unified messaging is a function of a product that lets users send, receive and manage all email, voice and fax messages from any telephone, personal computer or information device. 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 standard has been widely adopted in North America. The Synchronized Digital Hierarchy 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 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(TM) Bandwidth Manager and WaveStar(TM) Lambda Router(TM) Switches. - 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 Synchronous Optical Network and Synchronous Digital Hierarchy 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). 6 7 D. Wireless Products Lucent manufactures and markets systems 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 products and services for wireless network operators encompass all of the major wireless mobile network standards, including AMPS (an analog cellular phone service standard), TDMA (Time Division Multiple Access, a cellular technology), CDMA (Code Division Multiple Access, a digital cellular technology) and GSM (Global System for Mobile Communications, a cellular technology used predominantly in Europe), spreading over a broad frequency spectrum including: 800 MHz, 900 MHz, 1800 MHz or 1900 MHz. Lucent offers scalable (i.e., can be made greater or smaller without significant cost increase) products for wireless services that are fully compatible with the larger telecommunications environment of today, yet are able to evolve to next-generation networks including those that will make use of new varying technologies collectively referred to as Third Generation or 3G, including UMTS (Universal Mobile Telecommunications Service), that will provide enhanced capacity and improved Internet access and facilitate the provision of sophisticated, high speed data applications. Lucent's 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. E. Software Products 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 products and services includes software for network and service management, billing and customer care. Lucent's primary software products are Operations Support Software which 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 (i.e., can be made greater or smaller without significant cost increase), 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. F. Data Networking -- Service Providers and Access Lucent develops, markets, sells and services data networking products and services for communications service providers worldwide. These data networking offerings enable communications service providers to: - Give their customers access to wide area networks; - Support different protocols (e.g., Asynchronous Transfer Mode, Frame Relay, Internet protocol) on their core networks; - Transmit voice calls over packet networks that normally carry data traffic; - Operate secure virtual private networks for subscriber voice and data traffic; - Provide Digital Subscriber Line (DSL) services to business and residential customers 7 8 - Provide metropolitan optical network services to their customers; and - Manage their communications networks for optimum performance. The following data networking and access products are Lucent's primary offerings to communications service providers worldwide: - GRF multigigabit routers which deliver high performance in dynamic heavy-traffic Internet protocol 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 MAX TNT(R) multiprotocol wide area network access switch enables carriers, Internet service providers, corporations, and major network providers to offer a variety of access services such as analog, ISDN (Integrated Services Digital Network, which provides simultaneous voice and high-speed data through a single channel to a user's premises), leased T1/E1 (a 1,544 megabits-per-second, point-to-point, dedicated, digital circuit provided by service providers, typically to business customers and E1 is the European counterpart to T1, which transmits information at 2,048 megabits per second), and frame relay (a high-speed packet switching technology used in wide area networks). Because the MAX TNT is the highest-density product in its class, it dramatically reduces rack space requirements while driving down the price per port. - The GX Smart Core asynchronous transfer mode product family which includes the GX 550 Smart Core ATM Switch, a scalable (i.e., can be made greater or smaller without significant cost increase), high-capacity switching system that provides the necessary capacity, performance, and port fanout capabilities for carrier services. Asynchronous transfer mode 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.). Asynchronous transfer mode is a connection-oriented technology, i.e., before data can be transferred, a connection between the sending and receiving nodes must be established. - The 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 asynchronous transfer mode switches and high-capacity routers. A terabit is one trillion bits; a multi-terabit switch/router can handle more than one trillion bits per second. - B-STDX Multiservice wide area network switches (deployed to build core frame relay networks), carrier-class switches which are evolving as an access point to the next-generation wide area networks with the addition of internetworking modules for Internet protocol and asynchronous transfer mode 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 wide area network switch is the CBXTM 500 which is of greater bandwidth than the B-STDX family of products. In addition, Lucent has its MAX family of wide area network access switches. - The 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 asynchronous transfer mode 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. - AnyMedia(R) access server. The AnyMedia(R) Access System is a high-density multiservice access product that supports both narrowband and broadband services. AnyMedia's "plug-and-play" application packs allows a customer to "plug in" the applications needed supporting any combination of 8 9 Digital Subscriber Line, POTS (Plain Old Telephone Service), Integrated Services Digital Network and special services. AnyMedia Access System can also be enhanced to include Internet Protocol interfaces for delivering packet-based services. G. NetworkCare(R) Professional Services -- Service Providers and Engineering Services Lucent's NetworkCare(SM) Professional Services provides a comprehensive suite of value added services in the communications industry. These services includes the full lifecycle of planning, design, implementation and operations support services that allow customers to manage their networks. The NetworkCare Professional Services provides network planning and design, consulting, integration and support services, including remote diagnostics and around-the-clock network monitoring services. In addition, NetworkCare Professional Services offers specialized services focused on clients' network security, performance and service level management, Microsoft Windows 2000, and voice/data convergence requirements. The NetworkCare Network Services unit is focused on network engineering, provisioning, installation, and warranty and post-warranty support. In addition, NetworkCare Network Services offers specialized services for system upgrades and conversions, system health assessments, capacity planning, network optimization, and program/project management services of complex network implementations. H. Markets/Sales/Distribution The principal customers for Lucent's systems in the Service Provider Networks 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." 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 the Service Provider Networks 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 Service Provider Networks systems worldwide, primarily through a direct sales force. Many of Service Provider Network's 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 Service Provider Networks 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 configurations 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 products and services 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 9 10 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 also, "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. I. Competition Lucent believes that its key competitive assets in the Service Provider Networks segment are its broad product line, large installed base, relationships with key customers, technological expertise and new product and software development capabilities. In fiscal year 2000, the Service Provider Networks segment had sales of $26.5 billion. Lucent is among the leaders in the service provider market. 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 S.A., Nortel Networks Corporation, Siemens AG and Telefonaktiebolaget LM Ericsson. Other competitors of Lucent include Fujitsu, Motorola, Cisco Systems Inc. and Nokia. All of the market share data set forth below are estimates. Although Lucent believes that these estimates are reasonable, because the data are generally derived from multiple sources and involve calculations and other estimates, actual market share data may differ. In addition, Lucent may not maintain the same market share in 2001 and future years. The calculations and estimates utilized to compute the market share data set forth below were made subsequent to the initial filing date of this Form 10-K of December 27, 2000 and the sources from which the data are derived were published subsequent to the initial filing date. In addition to overall market competition, in each of Lucent's major product areas in the Service Provider Networks segment, Lucent faces significant competition from companies which do business in one or a number of such product areas. These competitors may be very large with substantial technological and financial resources. For example, in switching, an industry data report ranked Lucent third behind Siemens and Alcatel in shipments of digital local lines in calendar year 1999. In the wireless infrastructure market, an analyst report ranked Lucent fourth in revenues in calendar year 2000, behind Ericsson, Nokia and Motorola, but ahead of Nortel. In optical networking, Lucent believes that Nortel is the clear market leader, followed by companies such as Alcatel, Fujitsu and Lucent. Lucent also faces competition from companies that design and manufacture data networking equipment. Based on Lucent's calculations using data from industry data reports, Lucent estimates that in calendar year 2000 it held the number two position in data networking products, as defined by Lucent, behind Cisco, but ahead of Nortel and Alcatel. It is likely that other competitors will arise in each new technology or market area. J. Customer Dependency A limited number of customers have provided a substantial portion of Service Provider Networks' revenues. These customers include Verizon, AT&T and certain incumbent, wireless and other carriers including Verizon Wireless, AT&T Wireless, SBC, Bell South, Sprint and Qwest. The spending patterns of these customers can vary significantly during the year. An elimination or change in the spending patterns of, or a significant reduction in orders from, any one of these customers could negatively affect SPN's operating results. Service Provider Network's fiscal year 2000 results were negatively affected by a decline in sales to AT&T in the U.S. and the wind-down of a large multi-year contract with Saudi Telecommunications Company (STC) in Saudi Arabia. Recently there has been consolidation among the larger service providers. See also, "Outlook -- Reliance on Major Customers." K. 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. While there are some shortages in electrical components and some other materials, Lucent has generally been able to obtain sufficient materials and components from sources around the world to meet its needs, although there may be temporary delays. 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. 10 11 Lucent does not have a concentration of sources of supply of materials, labor or services that, if suddenly eliminated, could severely impact its operations. L. Seasonality Revenues and earnings from the Service Provider Networks segment do not follow a consistent pattern and are not materially seasonal. M. Intellectual Property -- See "Patents, Trademarks and Other Intellectual Property." N. Industry Practices Impacting Working Capital Existing industry practices that affect working capital and operating cash flow 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. See also, "Outlook -- Future Capital Requirements." III. MICROELECTRONICS AND COMMUNICATIONS TECHNOLOGIES A. General Lucent designs, manufactures and sells integrated circuits, 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, as well as many of our own systems and products. Lucent offers products in several integrated circuits product areas critical to communications applications, including digital signal processors for digital cellular phones and modems, integrated circuits for voice and data communications and standard-cell application specific integrated circuits (chip that is designed for a specific application, such as communications). 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. On November 13, 2000 Lucent entered into an agreement to sell its power systems business, a part of Microelectronics and Communications Technologies, to Tyco International Ltd. The sale is expected to close by December 31, 2000. During fiscal year 2000, Lucent acquired several companies related to the Microelectronics and Communications Technologies segment's business including, Agere, Inc., Ortel Corporation, Herrmann Technology Inc., and substantially all of the assets of VTC Inc. B. Integrated Circuits Lucent's integrated circuits are designed to provide advanced communications and control functions for a wide variety of electronic products and systems. Lucent focuses on integrated circuits 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; digital signal processors 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 (Global System for Mobil Communications, a cellular technology used predominantly in Europe) hardware/software products 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 also sells wireless local area networking equipment for use in business enterprises and homes. Lucent's primary integrated circuits product groups include: - Access Products, products that allow users to gain access to communications networks including integrated circuits for modems, analog line cards data network interface cards, and personal computer and workstation input/output. 11 12 - 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 integrated circuits) 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, and short-range wireless connectivity. 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, modulators, transmitters and receivers that enable high speed fiber optic communications. These products support dense wavelength division multiplexing of up to 160 channels over a single optical fiber at speeds up to 40 Gb/s. - Fiber Amplifier Products, amplifiers that extend the transmission distance capabilities of optical signals beyond 700 kilometers. - Metro and Internetworking Products, highly integrated modules and subsystems that enable dense wavelength division multiplexing 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, local area network and enterprise applications. D. Fiber Optics Lucent designs, develops, and manufactures an extensive line of fiber optic products, including singlemode and multimode fiber and fiber cables. With 12 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 fiber family for submarine and long haul, and AllWave(TM) fiber for metropolitan networks). - AllWave Advantage(TM), a optical end to end fiber cable and connectivity solution for metro AllWave fiber based networks. - Smart fiber monitoring and connectorization systems (Smart LGX). E. 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. 12 13 F. Market/Sales/Distribution Lucent's Microelectronics and Communications Technologies 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 service providers. Lucent's Microelectronics and Communications Technologies 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 Microelectronics and Communications Technologies 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, integrated circuits, power systems, optoelectronic products and fiber optics are also key components of Lucent's systems sold by Microelectronics and Communications Technologies to the Service Provider Networks segment. These Microelectronics and Communications Technologies products compete with products of third party manufacturers for inclusion in Lucent's Service Provider Networks systems and products. Lucent has traditionally sold its power products via direct sales to large service providers and original equipment manufacturers. Lucent has increased market coverage to both Service Provider and original equipment manufacturer customers by building indirect sales channels. G. Competition Lucent considers its product leadership and relationships with key customers to be important competitive assets. The market for Microelectronics and Communications Technologies products is global and generally highly fragmented. Lucent's competitors differ widely among product categories. Lucent's competitors in certain integrated circuits 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, Nortel Networks Corporation and JDS Uniphase Corporation; and in optical fiber, competitors include Corning, Siecor, Alcatel Alsthom S.A., 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. H. Customer Dependency Lucent sells its Microelectronics and Communications Technologies products to external customers outside of Lucent and to Lucent (internal). External customers include a wide variety of global electronic systems manufacturers and service providers. The internal Lucent customer is Service Provider Networks segment. Over the past few years, external revenues have increased. External revenues for the years ended September 30, 2000, 1999 and 1998 were $7.0 billion, $5.0 billion and $4.1 billion, respectively. This represented 82.8%, 79.5% and 79.8%, respectively, of total Microelectronics and Communications Technologies segment revenues for the years ended September 30, 2000, 1999 and 1998. Because of the high fixed-cost nature of many Microelectronics and Communications Technologies manufacturing processes, the loss of any significant customer could have a material adverse effect on Lucent's operating results in the Microelectronics and Communications Technologies segment. See also, "Outlook -- Reliance on Major Customers". I. Sources and Availability of Raw Materials Demand for optoelectronic components is greater than the ability of most manufacturers of optoelectronic components, including us, to supply products. Lucent has supply limitations that we believe most of our competitors also have. Although we have not experienced any significant difficulties in purchasing these 13 14 components, we are currently looking to expand alternative sources of these components. The loss of a significant supplier or the inability of a significant supplier to meet performance and quality specifications or delivery schedules could have a material adverse effect on our business and profitability. J. Seasonality The Microelectronics and Communications Technologies segment may experience variability in revenues due to changes in market conditions, the timing of product development cycles and the life cycle of major programs by customers. However, the Microelectronics and Communications Technologies segment is not materially seasonal. K. Intellectual Property -- See "Patents, Trademarks and Other Intellectual Property". L. Industry Practices Impacting Working Capital -- See "Outlook -- Future Capital Requirements". IV. BELL LABORATORIES Lucent's Service Provider Networks and Microelectronics and Communications Technologies 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 integrated circuits and many types of lasers. Areas of Bell Labs research and development work in recent years include: networking software; data networking; lightwave transmission, especially the wavelength division multiplexing systems which offer greater transmission capacity than other transmission systems; electronic switching technology, which enables rapid call processing, increased reliability and reduced network costs; and microelectronics components, which bring the latest advantages of very large scale integration to the full range of products offered by the Company. Bell Labs' research and development activities continue to focus on the core technologies critical to 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, personal communications services, mobile computing and wireless local access networks. Bell Lab's technology has allowed the recent introduction of data networking products such as the Internet Telephony Server SP, PacketStar(R) IP switch, PacketStar(R) IP Services platform and the WaveStar 400G high capacity wave length division multiplexing 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. 14 15 V. RECENT DEVELOPMENTS Lucent is in the process of reorganizing its business to become more focused and better positioned to capitalize on market opportunities. This reorganization includes the recent spin-off of Avaya, the expected sale of the power systems business, and the announced initial public offering and spin-off of Agere Systems, as well as a comprehensive review and restructuring of Lucent's internal systems and processes. Specific initiatives include performing a comprehensive product and service portfolio review aimed at aligning research and development and effective redeployment of sales and marketing teams and other investments as appropriate, consolidating corporate infrastructure and improving supply chain management. The spin-off of Agere Systems is expected to be completed by September 30, 2001. For a discussion of an anticipated substantial decline in revenues and a substantial loss from continuing operations, along with lowered credit ratings and expected restructuring charges, please see "Key Business Challenges" in Item 7. VI. BACKLOG Lucent's backlog, calculated as the aggregate of the sales price of orders received from customers less revenue recognized, was approximately $8.7 billion and $6.3 billion on September 30, 2000 and 1999, respectively. Of these amounts, approximately $1.9 billion and $600 million at September 30, 2000 and 1999, respectively, was attributable to the microelectronics business which will be spun off as Agere Systems. Approximately $1.2 billion of the orders included in the September 30, 2000 backlog are scheduled for delivery after September 30, 2001. However, all orders are subject to possible rescheduling by customers. Although Lucent believes that the orders included in the backlog are firm, some orders may be canceled by the customer without penalty, and Lucent may elect to permit cancellation of orders without penalty where management believes that it is in Lucent's best interest to do so. About $330 million of the amount at September 30, 2000 is under large, multi-year contracts of which about $110 million is scheduled for delivery after September 30, 2001 and is included in the $1.2 billion referred to above. VII. PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY RIGHTS From October 1, 1997 to September 30, 2000, Lucent was issued 4,000 patents in the United States. Lucent owns approximately 10,000 patents in the United States and 15,000 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 also, "Separation Agreements -- AT&T -- 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. Lucent and Avaya executed and delivered assignments and other agreements related to patents, technology, and trademarks owned by Lucent. Lucent assigned to Avaya or its subsidiaries approximately 800 issued U.S. patents and their corresponding foreign counterparts relating principally to the businesses of Avaya. Lucent assigned to Avaya certain technology, including trade secrets, software, and copyrights, principally relating to the Avaya businesses. Lucent also assigned to Avaya several hundred trademarks principally relating to the Avaya businesses. Lucent and Avaya each granted to the other, under the patents 15 16 that each of us has, a non-exclusive, license to make, have made, use, lease, import, sell, and offer for sale any and all products and services in which the licensed company is now or hereafter engaged. Each company also granted limited licenses to the other under certain specified technology existing as of October 1, 2000. There are no time restrictions applicable to AVAYA's use of patents assigned or licensed to by Lucent. See also, "Separation Agreements -- AVAYA." VIII. OUTLOOK A. Forward-Looking Statements This Form 10-K report contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about the industries in which Lucent operates, management's beliefs and assumptions made by management. In addition, other written or oral statements which constitute forward-looking statements may be made by or on behalf of Lucent. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission, Lucent does not have any intention or obligation to update publicly any forward-looking statements after the distribution of this Form 10-K/A, whether as a result of new information, future events or otherwise. Future Factors include increasing price, products and services competition by U.S. and non-U.S. 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 availability of manufacturing capacity, components and materials; the ability to recruit and retain talent; the achievement of lower costs and expenses; credit concerns in the emerging service provider market; customer demand for Lucent's products and services; the ability to successfully integrate the operations and business of acquired companies; timely completion of the proposed IPO and spin-off of Agere Systems and the sale of the power systems business; the successful implementation of the strategic reorganization; 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 and significant suppliers; the ability to supply customer financing when appropriate; technological, implementation and cost/financial risks in the use of large, multi-year contracts; Lucent's credit ratings; 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 operates in a highly competitive industry 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 expansion by market participants and advancements in technology. These competitors, as well as existing competitors, may include entrants from the telecommunications, software, data networking and semiconductor industries, and may have strong financial capabilities, technological expertise and established name recognition. Such competitors include Alcatel Alsthom S.A., Cisco Systems, Inc., Ericsson, Nortel Networks Corporation, Motorola, Nokia and Siemens AG. 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," and "Microelectronic and Communications Technologies." 16 17 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 other 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 A limited number of large customers provide a substantial portion of Lucent's revenues. These customers include Verizon, AT&T and certain incumbent and competitive local exchange carriers. Revenues from Verizon accounted for approximately 13% of consolidated revenues in fiscal year 2000, principally in the Service Provider Networks segment. Revenues from AT&T accounted for approximately 10%, 14% and 15% of consolidated revenues in fiscal years 2000, 1999 and 1998, respectively. The spending patterns of any of these customers can vary significantly during the year. Elimination or change in the spending patterns of, or a significant reduction in orders from, any one of these customers could negatively affect Lucent's operating results. Lucent's fiscal year 2000 results were negatively affected by the decline in sales to one large U.S. customer (AT&T) and Saudi Telecommunications Company (STC). The communications industry has recently experienced a consolidation of both U.S. and non U.S. companies. As a result, Lucent's operating results could become more dependent on a smaller number of large carriers. In addition, Lucent, is often required to provide or arrange for long-term financing for customers as a condition to obtain or bid on infrastructure contracts. Thus, our ability to develop certain customer relationships may be dependent upon our ability to raise capital and extend credit. E. European Monetary Union -- Euro Several member countries of the European Union have established fixed conversion rates between their existing sovereign currencies and the Euro and have adopted the Euro as their new common legal currency. The legacy currencies will remain legal tender in the participating countries for a transition period until January 1, 2002. During the transition period, cashless payments can be made in the Euro. 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 Lucent. 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, and existing contracts. The Euro conversion may effect 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. F. Future Capital Requirements Lucent's working capital requirements and cash flow from operating activities can vary greatly from quarter to quarter, depending on the volume of production, the timing of deliveries and collection of receivables, 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 17 18 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, 2000, Lucent had made commitments or entered into an agreement to extend credit to customers up to an aggregate of approximately $6.7 billion. As of September 30, 2000, approximately $1.3 billion had been advanced and was outstanding. In addition, as of September 30, 2000, Lucent had made commitments or entered into agreements to guarantee debt of customers up to an aggregate of approximately $1.4 billion of which approximately $770 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, credit rating 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 for the issuance of debt securities of which approximately $1.8 billion remained available at September 30, 2000. 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 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. G. Non-U.S. Growth, 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 exchange forward or option 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. H. Legal Proceedings and Environment -- See "Environmental Matters" and "Item 3. Legal Proceedings." 18 19 I. Seasonality -- See "Seasonality" above under "Service Provider Networks," and "Microelectronic and Communications Technologies." J. Intellectual Property -- See "Patents, Trademarks and Other Intellectual Property Rights" above. IX. EMPLOYEE RELATIONS On September 30, 2000, Lucent employed approximately 126,000 persons, including 73% located in the United States. Of these domestic employees, about 36% are represented by unions, primarily the Communications Workers of America ("CWA") and the International Brotherhood of Electrical Workers ("IBEW"). Lucent's current five-year collective agreements with the CWA and IBEW expire May 31, 2003. X. ENVIRONMENTAL MATTERS Lucent's current and historical operations are subject to a wide range of environmental protection laws. In the United States, these laws often require parties to fund remedial action regardless of fault. Lucent has remedial and investigatory activities underway at numerous current and former facilities. In addition, Lucent was named a successor to AT&T as a potentially responsible party ("PRP") at numerous "Superfund" sites pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or comparable state statutes. Under the Separation and Distribution Agreement, Lucent is responsible for all liabilities primarily resulting from or relating to the operation of Lucent's business as conducted at any time prior to or after the Separation including related businesses discontinued or disposed of prior to the Separation, and Lucent's assets including, without limitation, those associated with these sites. In addition, under such Separation and Distribution Agreement, Lucent is required to pay a portion of contingent liabilities paid out in excess of certain amounts by AT&T and NCR, including environmental liabilities. It is often difficult to estimate the future impact of environmental matters, including potential liabilities. Lucent records an environmental reserve when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable. This practice is followed whether the claims are asserted or unasserted. Management expects that the amounts reserved will be paid out over the periods of remediation for the applicable sites which 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, 2000 cannot be determined. XI. SEPARATION AGREEMENTS A. AT&T 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 a 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. 19 20 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 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 20 21 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 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. B. AVAYA For the purpose of governing certain of the relationships between Lucent and Avaya following the spin off, Lucent and Avaya entered into a Contribution and Distribution Agreement, as well as other ancillary agreements, including the Employee Benefits Agreement; the Patent and Technology License Agreement; the Tax Sharing Agreement; and the Trademark Licensing Agreement. The Contribution and Distribution Agreement provides for indemnification by each company with respect to contingent liabilities primarily relating to their respective businesses or otherwise assigned to each, subject to certain sharing provisions. In the event the aggregate value of all amounts paid by each company, in respect of any single contingent liability or any set or group of related contingent liabilities, is in excess of $50 million, each company will share portions in excess of the threshold amount based on agreed-upon percentages. The Contribution and Distribution Agreement also provides for the sharing of certain contingent liabilities, specifically: (1) any contingent liabilities that are not primarily contingent liabilities of Lucent or contingent liabilities associated with the businesses attributed to Avaya; (2) certain specifically identified liabilities, including liabilities relating to terminated, divested or discontinued businesses or operations; and (3) shared contingent liabilities within the meaning of the Separation and Distribution Agreement with AT&T Corp. Please refer to the 21 22 Registration Statement on Form 10 (No. 001-15951) of Avaya for the full text of the Contribution and Distribution Agreement and other ancillary agreements. ITEM 2. PROPERTIES. At September 30, 2000, Lucent operated 36 manufacturing sites, of which 17 were located in the United States, occupying in excess of 17 million square feet substantially all of which were owned. The remaining 19 sites were located in 11 countries. At September 30, 2000, Lucent operated 118 warehouse sites, of which 86 were located in the United States, occupying in excess of 4 million square feet, substantially all of which were leased. The remaining 32 sites were located in 15 countries. At September 30, 2000, Lucent operated 627 office sites (administration, sales, field service), of which 379 were located in the United States, occupying in excess of 20 million square feet, of which 15 million square feet of which were leased. The remaining 248 sites were located in 56 countries. At September 30, 2000, Lucent operated additional sites in 21 cities, of which 8 were located in the United States, with significant research and development activities, occupying in excess of 10 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 the laws and regulations related to environmental and other matters. (Also see Item 1. "Business -- XI 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, 2000. 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, 2000 would not be material to Lucent's annual consolidated financial statements. In addition, Lucent and certain of its former officers are defendants in several purported shareholder class action lawsuits described in the following three paragraphs for alleged violations of federal securities laws. The purported class action suits described in the following three paragraphs are in the early stages and Lucent is unable to express a view on their outcome. Lucent intends to defend these actions vigorously. Lucent and certain former officers of Lucent are defendants in a purported class action litigation pending in the United States District Court for the District of New Jersey. That action is the result of several complaints that were consolidated on February 25, 2000, and amended several times since. The third Consolidated Amended and Supplemental Class Action Complaint purports to bring claims on behalf of all persons who allegedly purchased Lucent's common stock between October 26, 1999, and November 21, 2000, for alleged violations of the federal securities laws, including Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Specifically, the complaint alleges, among other things, that beginning in late October 1999, Lucent and certain of its officers misrepresented Lucent's financial condition and failed to disclose material facts that would have an adverse impact on Lucent's future earnings and prospects for growth. The action seeks compensatory and other damages, and costs and expenses associated with litigation. Lucent is aware of five other purported class action lawsuits that have been filed in the United States District Court for the District of New Jersey. As with the consolidated action discussed above, those actions purport to bring claims for alleged violations of the federal securities laws, including Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The actions seek 22 23 compensatory and other damages, and costs and expenses associated with litigation. Because the actions assert claims that relate to or are similar to the claims in the consolidated litigation discussed above, it is likely that these actions will be consolidated with that action. In addition, Lucent is aware of purported class action lawsuits that have been filed in Civil District Court in the State of Louisiana and in the United States District Court for the Eastern District of New York. As with the consolidated action discussed above, those actions purport to bring claims for alleged violations of the federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaints allege that Lucent misrepresented its financial condition and failed to disclose material facts about its business, operations and future prospects. The actions seek compensatory and other damages, and costs and expenses associated with litigation. Lucent has filed a petition to remove the Louisiana action from state court to federal court in Louisiana. In addition, because these actions assert claims that relate to or are similar to the claims in the consolidated litigation discussed above, these actions may ultimately be transferred to the United States District Court for the District of New Jersey and consolidated with that action. From time to time we are subject to unfair labor charges filed by the unions with the National Labor Relations Board. For example, Lucent has been advised by Region 6 of the National Labor Relations Board, which is located in Pittsburgh, Pennsylvania, that it is issuing a complaint alleging that Lucent has refused to bargain over the outsourcing of certain of its manufacturing activities. In that proceeding, which will be held before an administrative law judge in Region 6 of the National Labor Relations Board, the General Counsel of the National Labor Relations Board will act as prosecutor and the charging party, IBEW System Council EM-3, which is the union representing the workers at the manufacturing facilities in question, will be an interested party entitled to participate in the proceeding. On December 11, 2000, the former President of Lucent North America filed a lawsuit against Lucent in the Superior Court of New Jersey. The complaint makes a number of allegations, including claims under New Jersey's Conscientious Employee Protection Act and for breach of contract. It seeks unspecified claims, compensatory damages and punitive damages. Lucent intends to defend this action vigorously. See also the discussion of "Environmental Matters" in Item 1 for additional information on 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. 23 24 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS (a) MARKET PRICE AND DIVIDEND INFORMATION Lucent's common stock is traded on the New York Stock Exchange ("NYSE") under the symbol LU. The following table presents the reported high and low sales prices of Lucent's common stock as reported on the NYSE:
DIVIDENDS PER HIGH LOW SHARE ---- --- --------- YEAR ENDED SEPTEMBER 30, 2000 Quarter ended December 31, 1999............................. $84 3/16 $55 1/16 $0.04 Quarter ended March 31, 2000................................ 77 1/2 49 13/16 0.00 Quarter ended June 30, 2000................................. 65 15/16 51 1/16 0.02 Quarter ended September 30, 2000............................ 67 3/16 28 1/16 0.02 YEAR ENDED SEPTEMBER 30, 1999 Quarter ended December 31, 1998............................. $56 15/16 $26 23/32 $0.04 Quarter ended March 31, 1999................................ 60 47 0.00 Quarter ended June 30, 1999................................. 68 11/16 51 7/8 0.02 Quarter ended September 30, 1999............................ 79 3/4 60 0.02
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK As of November 30, 2000, there were approximately 1,602,553 shareholders of record. 24 25 ITEM 6. SELECTED FINANCIAL DATA LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA (UNAUDITED)
YEARS ENDED NINE MONTHS SEPTEMBER 30, ENDED ------------------------------------- SEPTEMBER 30, 2000 1999 1998 1997 1996(1) ------- ------- ------- ------- ------------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) RESULTS OF OPERATIONS(5) Revenues.......................................... $33,813 $30,617 $24,367 $21,483 $12,432 Gross margin...................................... 14,274 15,012 11,429 9,215 4,868 Depreciation and amortization expense............. 2,318 1,580 1,228 1,348 822 Operating income................................ 2,985 4,694 1,953 1,219 256 Income from continuing operations................. 1,681 3,026 769 453 125 Income (loss) from discontinued operations........ (462) 455 296 17 263 Income before cumulative effect of accounting change.......................................... 1,219 3,481 1,065 470 388 Cumulative effect of accounting change............ -- 1,308 -- -- -- Net income........................................ 1,219 4,789 1,065 470 388 Earnings (loss) per common share -- basic(2)(3): Income from continuing operations............... $ 0.52 $ 0.97 $ 0.25 $ 0.15 $ 0.04 Income (loss) from discontinued operations...... (0.14) 0.15 0.10 0.01 0.10 Cumulative effect of accounting change.......... -- 0.42 -- -- -- Net income...................................... $ 0.38 $ 1.54 $ 0.35 $ 0.16 $ 0.14 Earnings (loss) per common share -- diluted (2)(3): Income from continuing operations............... $ 0.51 $ 0.94 $ 0.25 $ 0.15 $ 0.04 Income (loss) from discontinued operations...... (0.14) 0.14 0.09 0.01 0.10 Cumulative effect of accounting change.......... -- 0.41 -- -- -- Net income...................................... $ 0.37 $ 1.49 $ 0.34 $ 0.16 $ 0.14 Earnings per common share -- pro forma(3)(4)...... n/a n/a n/a n/a $ 0.13 Dividends per common share(3)..................... $ 0.08 $ 0.08 $0.0775 $0.0563 $0.0375 FINANCIAL POSITION(5) Total assets...................................... $48,792 $35,372 $25,144 $21,045 $20,242 Working capital................................... 10,613 10,090 5,355 1,494 1,963 Total debt........................................ 6,559 5,867 2,861 4,182 2,795 Shareowners' equity............................... 26,172 13,936 7,960 4,570 3,479 OTHER INFORMATION Gross margin percentage........................... 42.2% 49.0% 46.9% 42.9% 39.2% Selling, general and administrative expenses as a percentage of revenues.......................... 18.5% 19.0% 18.2% 19.5% 22.4% Research and development expenses as a percentage of revenues..................................... 11.9% 13.8% 15.0% 14.1% 14.7% Ratio of total debt to total capital (debt plus equity)......................................... 20.0% 29.6% 26.4% 47.8% 44.5% Capital expenditures.............................. $ 2,701 $ 2,042 $ 1,615 $ 1,569 $ 981
--------------- (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 have 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 2,951,466,467 shares outstanding on April 10, 1996, were outstanding since January 1, 1996, and gives no effect to the use of proceeds from the IPO. (5) Certain prior year amounts have been reclassified to conform to the fiscal year 2000 presentation. n/a Not applicable. 25 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW In fiscal 2000, Lucent Technologies Inc. completed its plan to spin off its Enterprise Networks business to shareowners, forming a separate and independent company. The new company is called Avaya Inc. (See DISCONTINUED OPERATIONS). The separation of Avaya's businesses were intended to allow Avaya to focus greater management attention and resources on opportunities for its businesses in the communication market and to focus on better managing its cost structure. Lucent similarly benefits by being able to focus on its remaining businesses and their growth opportunities. Additionally both companies had different customers, distribution and services requirements and different rates of technology evolution. In addition, on July 20, 2000, Lucent announced its intention to spin off its microelectronics business, which includes the optoelectronics components and integrated circuits divisions, into a separate and independent company. The new company is called Agere Systems Inc. On December 11, 2000, a Form S-1 registration statement was filed with the SEC in anticipation of an initial public offering of Agere Systems. Lucent intends to distribute the remaining shares in a tax-free distribution. This report does not constitute the offering of any securities, which will be made only by a prospectus filed with the SEC. In connection with the spin-off, Lucent may be adjusting its capital structure including a possible reduction in the amount of debt outstanding. The initial public offering is expected to be completed in the quarter ending March 31, 2001, and completion of the spin-off is expected by the end of the 2001 fiscal year. The initial public offering and spin-off are subject to certain conditions, including a favorable tax ruling by the IRS. Lucent believes that the separation of Agere from Lucent will provide Agere with the opportunity to expand its business prospects and improve its operations in a manner not achievable as part of Lucent. Lucent believes that its competitors for its communications equipment businesses may be reluctant to purchase components from Agere, as one of Lucent's divisions. Lucent believes that this conflict, which impedes Agere's ability to sell to many of its largest current and potential customers, would be significantly resolved by separating Agere's businesses from Lucent's other businesses. Lucent similarly benefits by being able to focus on its communications equipment businesses and their growth opportunities. On November 13, 2000, Lucent entered into an agreement to sell its power systems business to Tyco International Ltd., a diversified manufacturing and service company, for $2,500 million in cash. The sale, which is subject to regulatory approval and other customary closing conditions, is expected to close by December 31, 2000 and result in a one-time gain to be recorded as an extraordinary item, net of tax, in the quarter in which the sale closes. The sale of power systems allowed Lucent to sharpen its focus on the broadband and mobile Internet infrastructure market, and now, as part of Tyco, the power systems business is linked to other businesses, which Lucent believes complement power systems products, technology and people. The core technology involved in power systems is fundamentally different from the networking technologies on which Lucent now focuses -- optical, wireless, data and software. By focusing Lucent's resources, management attention, research and development and investments, Lucent hopes to be able to improve its growth by providing Internet networks, based on optical, data, and wireless products with the professional services and software to support them. Lucent is focusing on these areas because of its core technology strengths in optical, data and wireless networking and in providing related services to service provider networks. Lucent believes that there are high-growth opportunities in broadband and mobile Internet products and services. Lucent believes that as a multidivisional company, Lucent was not as well positioned to capitalize on these opportunities. By moving from a multidivisional company to a company focused on the service provider network, Lucent believes it will be able to focus its product development, sales and other efforts more effectively on these opportunities. For example, in fiscal year 2000 we had lower revenues in part because of a misjudgment of demand for OC-192, an optical networking product. Lucent believes that by being a more focused company, it will be more effective at responding to market demand. Lucent expects to take a business restructuring charge associated with the redesign of its business in the quarter ending March 31, 2001. A review of our internal processes will continue throughout 2001 and may result in additional restructuring and associated charges (see KEY BUSINESS CHALLENGES). 26 27 On a total basis, Lucent reported net income of $1,219 million, or $0.37 per share (diluted) for the year ended September 30, 2000, as compared with year-ago net income of $4,789 million, or $1.49 per share (diluted). Fiscal 2000 net income includes a $462 million loss, or $0.14 per share (diluted), from discontinued operations, net of tax, compared with $455 million of income, or $0.14 per share (diluted), net of tax, for fiscal 1999. The fiscal 2000 net income also includes a reduction of costs and operating expenses of $252 million representing the impact of adopting Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). In addition, in fiscal 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 $0.41 per share (diluted), cumulative effect of accounting change. Lucent's income before the cumulative effect of accounting change was $3,481 million for the year ended September 30, 1999. See Note 12 to the accompanying Consolidated Financial Statements for further details of the accounting change. DISCONTINUED OPERATIONS On March 1, 2000, Lucent announced plans to spin off Avaya and, on September 30, 2000, the spin-off was accomplished through a tax-free distribution of shares to Lucent's shareowners. Avaya represented a significant segment of the Company's business. Pursuant to Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB 30"), Lucent has reclassified its Consolidated Financial Statements to reflect the spin-off of Avaya. The revenues, costs and expenses, assets and liabilities, and cash flows of Avaya have been segregated in the Consolidated Statements of Income, Consolidated Balance Sheets and Consolidated Statements of Cash Flows. The net operating results, net assets and net cash flows of this business have been reported as "Discontinued Operations" in the accompanying Consolidated Financial Statements. Lucent recorded a $462 million loss from discontinued operations (net of a tax benefit of $78 million) for the year ended September 30, 2000. The net loss is comprised of $303 million of net income from discontinued operations for the period prior to the measurement date and a $765 million net loss on disposal of Avaya. The loss on disposal of Avaya reflects the costs directly associated with the spin-off and the net loss of Avaya between the measurement date and the spin-off date of September 30, 2000. The costs reflect those components of Avaya reorganization plan, including a business restructuring charge and directly related asset write-downs of $545 million recorded during the year, along with transaction costs of $56 million for the spin-off. Major components of this charge include $365 million for employee separation and $101 million for real estate consolidation. In addition, the loss from discontinued operations includes an allocation of Lucent's interest expense based on the amount of debt assumed by Avaya. Approximately $780 million of commercial paper borrowings were assumed by Avaya as part of the spin-off transaction. Lucent's financial results for discontinued operations are different from the results reported by Avaya due to different assumptions and allocations required to be made by the two companies. The following discussion will focus on Lucent's results from continuing operations. FINANCIAL HIGHLIGHTS Lucent reported income from continuing operations of $1,681 million, or $0.51 per share (diluted), for the year ended September 30, 2000, compared with year-ago income from continuing operations of $3,026 million, or $0.94 per share (diluted). Income from continuing operations for 2000 includes $1,005 million ($1,001 million after-tax) of purchased in-process research and development ("IPRD") expenses related to the acquisitions of Spring Tide Networks, Chromatis Networks, Herrmann Technology, Ortel Corporation, Agere, Inc. and VTC Inc., a pre-tax gain of $189 million ($115 million after-tax) associated with the sale of an equity investment, a reduction to costs and operating expenses of $252 million related to the impact of adopting SOP 98-1 and a pre-tax 27 28 charge of $61 million ($40 million after-tax) primarily associated with the mergers with International Network Services ("INS"), Excel Switching Corporation and Xedia Corporation. Income from continuing operations in 1999 includes a $108 million ($71 million after-tax) reversal of business restructuring charges, a $110 million non-tax deductible charge for merger-related costs and a $236 million charge ($169 million after-tax) primarily associated with asset impairments and integration-related charges related to the Ascend Communications, Inc. and Nexabit Networks, Inc. mergers, a $274 million gain ($167 million after-tax) on the sale of an equity investment, and $292 million ($280 million after-tax) of IPRD expenses related to the acquisitions of Stratus Computer, Inc., XNT Systems, Inc., Quantum Telecom Solutions, Inc., InterCall Communications and Consulting, Inc., Quadritek Systems, Inc., Sybarus Technologies, WaveAccess Ltd. and the Ethernet local area network ("LAN") component business of Enable Semiconductor ("Enable"). ACQUISITIONS As part of Lucent's continuing efforts to provide its customers with end-to-end communications solutions, the Company completed numerous acquisitions and mergers during the three years ended September 30, 2000. For more information, see Note 4 to the accompanying Consolidated Financial Statements. OPERATING SEGMENTS Lucent operates in the global telecommunications networking industry and has two reportable segments: Service Provider Networks and Microelectronics and Communications Technologies. Service Provider Networks provides public networking systems, software and services to telecommunications service providers and public network operators around the world. Microelectronics and Communications Technologies provides high-performance optoelectronic components and integrated circuits, power systems and optical fiber for applications in the communications and computing industries. In addition, Microelectronics and Communications Technologies also includes Lucent's new ventures business. The results of other smaller units and corporate operations are reported in Other and Corporate. The two 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. As a result of reorganization initiatives (see KEY BUSINESS CHALLENGES), the Company is evaluating changes to its management model and organizational structure which will result in changes to the reportable segments in the next fiscal year. SEGMENT REVENUES FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000
1998 1999 2000 ----- ----- ----- (DOLLARS IN BILLIONS) Service Provider Networks................................... $20.1 $24.8 $26.5 Microelectronics and Communications Technologies............ 4.2 5.0 7.0 Other and Corporate......................................... 0.1 0.8 0.3
Lucent's Service Provider Networks segment represents about 78% of the total external sales for 2000. Lucent offers a wide range of products and services representing a full-service package for the next generation of networks. 28 29 PRODUCT AND SERVICE REVENUES FOR THE YEAR ENDED SEPTEMBER 30, 2000 Core Networking Systems..................................... 56% Wireless Products........................................... 18% Microelectronics............................................ 11% NetCare Professional Services............................... 4% Other....................................................... 11%
KEY BUSINESS CHALLENGES The communications industry is changing, driven in part by consolidation among service providers. As a result, Lucent is in the process of reorganizing its business moving from a multidivisional company, which was originally designed to capture the wide-ranging market opportunities presented by the deregulation of the telecommunications industry, to one focused on the service provider market, where we believe there is high-growth potential in broadband and mobile Internet products and services. This reorganization includes the recent spin-off of Avaya, the expected sale of the power systems business and the announced initial public offering and spin-off of Agere Systems, as well as a comprehensive review and restructuring of Lucent's internal systems and processes. Specific initiatives include performing a comprehensive product and service portfolio review aimed at aligning research and development and effective redeployment of sales and marketing teams and other investments with such high growth opportunities in the service provider market, consolidating corporate infrastructure and improving supply chain management. Lucent expects to take a significant business restructuring charge in the quarter ending March 31, 2001. Lucent expects to give details of the charge in late January, 2001. A review of our internal processes will continue throughout 2001 and may result in additional restructuring and associated charges. The reorganization, including the spin-off of Agere Systems, is expected to be completed by September 30, 2001. A limited number of large customers provide a substantial portion of Lucent's revenues. These customers include Verizon, AT&T, Verizon Wireless, AT&T Wireless, SBC, Bell South, Sprint and Qwest. The spending patterns of these customers can vary significantly during the year. An elimination or change in the spending patterns of, or a significant reduction in orders from, any one of these customers could negatively affect Lucent's operating results. Lucent's fiscal year 2000 results were negatively affected by the decline in sales to AT&T in the U.S. and Saudi Telecommunications Company (STC) in Saudi Arabia. The communications industry has recently experienced a consolidation of both U.S. and non-U.S. companies. As a result, Lucent's operating results could become more dependent on a smaller number of large carriers. Lucent continually endeavors to diversify its customer base by adding new and different types of customers. In addition, the company continues to develop new products and services for service providers in the optical, data and wireless product areas to broaden its offering for customers. The company believes that providing a broader offering will enhance its relationships with its customers, and may reduce the chance of contract cancellations. Lucent is often asked, however, to provide or arrange for long-term financing for customers as a condition to obtain or bid on infrastructure contracts. Thus, our ability to develop certain customer relationships and diversify our customer base may be dependent upon our ability to raise capital and extend credit. Our financial results in fiscal 2000 were negatively impacted by our customer financing because deteriorating credit worthiness of some of our customers caused us to record additional reserves of approximately $250 million. Lucent uses a disciplined and comprehensive process in evaluating the creditworthiness of its customers and extends financing only when it believes it is appropriate for its business. During the first fiscal quarter of 2001, Lucent announced that it is implementing a more selective customer financing program, which will result in fewer emerging service provider customers and increased dependence on larger service providers as customers. In addition, the company regularly reviews its financing portfolio and records reserves, as appropriate. Lucent operates in a highly competitive industry and expects the level of competition relating to pricing and product offerings will intensify. Lucent expects that new competitors will enter its markets as a result of 29 30 expansion by market participants and advancements in technology. These competitors may include entrants from the telecommunications, software, data networking, cable television and semiconductor industries, and may have strong financial capabilities, technological expertise and established name recognition. Lucent attempts to direct the Company's resources to meet market needs and competitive challenges based on ongoing assessments of market conditions. Lucent's results for fiscal year 2000 were adversely affected by lower revenues and gross margins for specific optical networking products, including a misjudgment of the market demand for OC-192, an optical networking product, and a larger than expected reduction in revenue and gross margin for its traditional circuit switching products and related software. The lower gross margins from Lucent's traditional circuit switching business and from its optical business contributed significantly to the $1.7 billion decline in the Service Provider Networks segment's operating income in fiscal year 2000. For the first fiscal quarter of 2001, Lucent anticipates a substantial decline in revenues compared to the year-ago quarter, and a substantial loss from continuing operations. This reflects a significant sales decline in North America due to an overall softening in the competitive local exchange carrier market, slowdown in capital spending by established service providers, lower software sales and a more focused use of vendor financing to align this limited resource with the most promising customers in critical, emerging markets like next generation optical and mobile networks. On December 21, 2000, Moody's Investors Service lowered Lucent's credit rating on senior unsecured long-term debt from A2 to A3 and on commercial paper from Prime-1 to Prime-2; the A3 rating remains on review for possible further downgrade, and Moody's concluded the review of the commercial paper rating. Also on December 21, 2000, Standard & Poor's lowered Lucent's credit rating on senior unsecured long-term debt from A to BBB+ and the commercial paper rating from A-1 to A-2, both of which remain on CreditWatch with the possibility of further downgrades. Lucent believes that it will have sufficient capital resources to fulfill its own operational and capital needs, as well as to extend credit to customers when appropriate, although there can be no assurance that this will occur. RESULTS OF OPERATIONS: REVENUES Total revenues for 2000 increased 10.4% to $33,813 million compared with 1999, due to increases in sales from both reportable operating segments, partially offset by a decrease in Other and Corporate, predominantly from the remaining consumer products business, which was sold in the second fiscal quarter of 2000. Revenue growth was driven by sales increases globally. For 2000, sales within the United States grew 10.9% compared with 1999. Non-U.S. revenues increased 9.7% compared with 1999. These non-U.S. sales represented 33.9% of total revenues compared with 34.2% in 1999. REVENUES BY NON-U.S. REGIONS FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000
1998 1999 2000 ----- ----- ----- (DOLLARS IN BILLIONS) Canada...................................................... $0.4 $0.3 $0.4 Caribbean/Latin America..................................... 0.7 1.3 1.7 Asia/Pacific................................................ 2.7 3.2 4.0 Europe/Middle East/Africa................................... 3.2 5.7 5.3
Revenues are attributed to geographic areas based on the location of customers. Total revenues for 1999 increased 25.6% to $30,617 million compared with 1998. Revenue growth was driven by sales increases globally. For 1999, U.S. sales grew 15.6% compared with 1998 and non-U.S. sales increased 50.8% compared with 1998. These non-U.S. sales represented 34.2% of total revenues compared with 28.5% in 1998. 30 31 The following table presents Lucent's revenues by segment and the percentage of total revenues for the years ended September 30, 2000, 1999, and 1998:
2000 1999 1998 ---------------- ---------------- ---------------- % OF % OF % OF TOTAL TOTAL TOTAL (DOLLARS IN MILLIONS) Service Provider Networks................ $26,509 78 $24,833 81 $20,116 83 Microelectronics and Communications Technologies........................... 6,953 21 5,026 16 4,134 17 Other and Corporate...................... 351 1 758 3 117 -- ------- --- ------- --- ------- --- Total Lucent............................. $33,813 100 $30,617 100 $24,367 100 ======= === ======= === ======= ===
Revenues in 2000 from the Service Provider Networks segment increased by 6.8%, or $1,676 million, compared with 1999, and increased 23.4%, or $4,717 million, for 1999 compared with 1998. The 2000 increases were driven by sales of service provider Internet infrastructure, wireless systems and professional services, offset in part by a decline in optical networking products, primarily due to lower revenues in the fiscal fourth quarter and a decline in switching revenues. Lower than expected revenues in optical networking, due primarily to being late to market with the OC-192 product, which affected the entire product cycle, from engineering and manufacturing to deployment and launch, had a negative impact on the fiscal year's revenue growth. In addition, lower revenues from switching products primarily due to the shift in customer spending away from circuit switching, pricing pressures and the impact of a substantial reduction in the major long-term foreign project in Saudi Arabia that declined by approximately 40% to $1,425 million in the current fiscal year negatively impacted growth. The 1999 increases resulted primarily from higher sales of switching and wireless systems products with associated software, optical networking and data networking systems and communications software. U.S. revenues in 2000 from the Service Provider Networks segment increased by 7.1% over 1999, and by 10.9% comparing 1999 with 1998. The 2000 and 1999 U.S. revenue increases included revenue gains from sales to incumbent local exchange carriers, which in certain cases provide wireless service, and competitive local exchange carriers. Revenues in 2000 increased despite a decline in revenues from AT&T, historically a significant customer. In addition, the 1999 U.S. revenue increase included long distance carriers. Non-U.S. revenues for 2000 increased 6.0% compared with 1999, reflecting gains in all regions except the Europe/Middle East/Africa region, which was negatively impacted by the substantial reduction of revenues from Saudi Telecommunications Company (STC), and represented 32.6% of revenues for 2000 compared with 32.8% for 1999. Non-U.S. revenues for 1999 increased 60.7% compared with 1998 due to revenue growth in the Europe/Middle East/Africa region, primarily due to the same major long-term foreign project, Caribbean/Latin America and Asia/Pacific regions and represented 32.8% of revenues for 1999 compared with 25.2% in 1998. Lucent expects that product transition associated with a decline in circuit switching revenue and the substantial reduction of revenues from AT&T and Saudi Telecommunications Company (STC) will not be fully offset immediately by the ramp-up of newer products. In addition, component shortages have led to a longer than expected full-volume ramp-up in optical networking. Lucent expects a decline in total revenues and an accompanying decline in net income and net income per share in fiscal year 2001 compared to fiscal year 2000. Revenues in 2000 from the Microelectronics and Communications Technologies segment increased 38.3%, or $1,927 million, compared with 1999. This increase was driven by sales of optical fiber, optoelectronic components, power systems, wired and wireless local area network systems and customized chips for computing and high-speed communications systems. Revenues in 1999 increased 21.6%, or $892 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. U.S. sales in 2000 increased 51.8% compared with 1999 and 16.2% in 1999 compared with 1998. Non-U.S. revenues increased 22.5% compared with 1999, with revenue growth in all regions. Non-U.S. revenues increased 28.6% in 1999 compared with 1998, driven by sales in the Asia/Pacific and the Europe/Middle 31 32 East/Africa regions. Non-U.S. revenues represented 40.7% of sales in 2000 compared with 46.0% in 1999 and 43.5% in 1998. As previously discussed, in fiscal 2001 Lucent intends to spin off Agere Systems, which is currently part of the Microelectronics and Communications Technologies segment. Revenues in 2000 from sales of OTHER AND CORPORATE decreased $407 million compared with 1999, due to lower revenues from the Company's remaining consumer products business, which was sold in the second fiscal quarter of 2000. Revenues in 1999 increased $641 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. Revenues are included in Other and Corporate. In December 1998, Lucent sold certain assets of the wireless handset business to Motorola, Inc. and completed the sale of its remaining consumer products business in the second fiscal quarter of 2000. COSTS AND GROSS MARGIN
2000 1999 1998 ------- ------- ------- (DOLLARS IN MILLIONS) Costs................................................. $19,539 $15,605 $12,938 Gross margin.......................................... $14,274 $15,012 $11,429 Gross margin percentage............................... 42.2% 49.0% 46.9%
Total costs in 2000 increased $3,934 million, or 25.2%, compared with 1999. As a percentage of revenue, gross margin decreased to 42.2% from 49.0% in 1999. This decrease was primarily due to decreased volumes and margins in the optical networking and switching businesses, including lower software revenues, increased pricing pressures in other product lines and continued expansion into overseas markets, which generally yield lower margins. This decrease in gross margin percentage was partially offset by $400 million resulting from lower personnel costs, including lower incentive compensation awards and a higher net pension credit, and the impact of adopting SOP 98-1. In addition, Lucent anticipates a further shift from higher margin switching products to newer products with initially lower margins. Total costs in 1999 increased $2,667 million, or 20.6%, compared with 1998 due to the increase in sales volume. Gross margin percentage increased 2.1 percentage points from 1998. The increase in gross margin percentage for the year was due to a more favorable mix of products. OPERATING EXPENSES
2000 1999 1998 ------ ------ ------ (DOLLARS IN MILLIONS) Selling, general and administrative ("SG&A")............. $6,266 $5,806 $4,424 As a percentage of revenues.............................. 18.5% 19.0% 18.2% As a percentage of revenues excluding amortization of goodwill and other acquired intangibles................ 16.9% 18.0% 17.7%
SG&A expenses increased $460 million, or 7.9%, and decreased 0.5 percentage points as a percentage of revenues in 2000 as compared with 1999 and increased $1,382 million, or 31.2%, and increased 0.8 percentage points as a percentage of revenues in 1999 as compared with 1998. The dollar increases are attributable to higher sales volume and increased amortization of goodwill and other acquired intangibles. The current year expense was also negatively impacted by increased reserves for bad debt on trade receivables due to specific credit concerns primarily in the emerging service provider market. These increases were partially offset by $500 million resulting from lower personnel costs, including lower incentive compensation awards and a higher net pension credit, and the impact of adopting SOP 98-1. In addition, included in the current year expense is $61 million primarily associated with the mergers with INS, Excel and Xedia. Included in the 1999 expense is $110 million associated with the mergers with Ascend, Nexabit, RAScom and VitalSigns. Amortization expense associated with goodwill and other acquired intangibles was $551 million, $310 million and $105 million for the years ended September 30, 2000, 1999 and 1998, respectively. As a result of 32 33 the 2000 acquisition activity, Lucent expects amortization of goodwill and other acquired intangibles to significantly increase in future periods. On a pro forma basis, assuming the 2000 acquisitions occurred on October 1, 1999, the amortization of goodwill and other acquired intangibles would have increased by approximately $931 million for the year ended September 30, 2000. The 1999 increase largely relates to the $109 million write-off of Livingston goodwill and other acquired intangibles. For further details see IN-PROCESS RESEARCH AND DEVELOPMENT. In addition, 1999 includes an $85 million reversal of 1995 business restructuring charges.
2000 1999 1998 ------ ------ ------ (DOLLARS IN MILLIONS) Research and development ("R&D")......................... $4,018 $4,220 $3,667 As a percentage of revenues.............................. 11.9% 13.8% 15.0% Purchased in-process research and development ("IPRD")... $1,005 $ 292 $1,385
R&D expenses in 2000 decreased $202 million, or 4.8%, and decreased 1.9 percentage points as a percentage of revenues compared with 1999, and increased $553 million, or 15.1%, and decreased 1.2 percentage points in 1999 as a percentage of revenues compared with 1998. The 2000 dollar decrease, as well as the percentage of revenues decrease in 2000, were largely the result of $350 million of lower personnel costs, including lower incentive compensation awards and a higher net pension credit, and the impact of adopting SOP 98-1. The 1999 dollar increase was primarily due to increased expenditures in support of substantially all product lines. The 1999 decrease in R&D as a percentage of revenues reflects more custom contract work that was recorded in costs as opposed to R&D. IPRD expenses for 2000 were $1,005 million, reflecting the charges associated with the acquisitions of Spring Tide, Chromatis, Herrmann, Ortel, Agere and VTC in 2000, as compared with $292 million related primarily to the acquisitions of Stratus, XNT, Quantum, InterCall, Quadritek, Sybarus, WaveAccess and Enable in 1999. See further discussion under IN-PROCESS RESEARCH AND DEVELOPMENT. OTHER INCOME -- NET, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES
2000 1999 1998 ------ ------ ------ (DOLLARS IN MILLIONS) Other income-net......................................... $ 366 $ 402 $ 110 Interest expense......................................... $ 348 $ 318 $ 143 Provision for income taxes............................... $1,322 $1,752 $1,151 Effective income tax rate................................ 44.0% 36.7% 59.9% Adjusted income tax rate*................................ 29.7% 32.6% 34.0%
--------------- * excludes non-tax deductible IPRD expenses, merger-related costs, amortization of goodwill and other acquired intangibles, certain one-time gains on sales of equity investments in 2000 and 1999, and the gain on the sale of the Company's ATS business in 1998. During 2000, other income, net, included interest income of $125 million and net gains on sales and settlements of financial instruments of $361 million, including a $189 million gain from the sale of an equity investment. During 1999, other income, net, included interest income of $133 million and net gains on sales and settlements of financial instruments of $302 million, including a $274 million gain from the sale of an equity investment. During 1998, other income, net, included interest income of $122 million, gains from the sale of businesses of $208 million, including a gain related to the sale of the Advanced Technology Systems unit of $149 million and net equity losses from investments of $207 million primarily related to the investment in PCC. Interest expense increased primarily due to higher debt levels in 2000 and 1999. In addition, interest expense in 2000 increased from higher weighted average interest rates on commercial paper. The effective income tax rates exceed the U.S. federal statutory income tax rates primarily due to the write-offs of IPRD costs and merger-related expenses that are not deductible for tax purposes. The adjusted 33 34 income tax rate decreased 2.9 percentage points in 2000 compared with 1999. This decrease was primarily due to increased research tax credits and the tax impact of non-U.S. activity. The adjusted 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 non-U.S. activity. The 1998 effective income tax rate does not include a federal income tax provision for Kenan since Kenan was an S-Corporation prior to its merger with Lucent. CASH FLOWS
2000 1999 1998 ------- ------- ------- (DOLLARS IN MILLIONS) Net cash provided by (used in): Operating activities................................ $ 304 $ (962) $ 1,452 Investing activities................................ $(2,480) $(1,782) $(2,697) Financing activities................................ $ 2,211 $ 3,345 $ 852
Cash provided by operating activities increased $1,266 million to $304 million in 2000 compared with 1999. This improvement was primarily due to smaller increases in receivables, other operating assets and liabilities and a larger tax benefit from stock options exercised during the current year. The change in receivables resulted from smaller revenue growth in the fiscal fourth quarter of 2000 as compared with the same period in 1999, partially offset by a higher average days outstanding (see FINANCIAL CONDITION). These improvements were partially offset by increased inventories and contracts in process to meet current and anticipated sales commitments to customers and the start-up of several long-term projects, lower accounts payable due to the timing of payments and lower net income as adjusted for non-cash operating items. Cash from operating activities decreased $2,414 million in 1999 compared with 1998. This was primarily due to larger increases in receivables and inventories as well as lower decreases in payroll and benefit-related liabilities. Cash payments of $61 million were charged against the 1995 business restructuring reserves in 1999, compared with $162 million in 1998. All projects associated with the 1995 business restructuring reserve were substantially completed as of September 30, 1999. Cash used in investing activities increased $698 million to $2,480 million in 2000 compared with 1999. The increase was primarily due to increased capital expenditures (see below) and decreased proceeds from the sales of investments, partially offset by decreased purchases of investments and higher proceeds from the dispositions of businesses. Cash used in investing activities decreased $915 million in 1999 compared with 1998, primarily due to increased proceeds from the sales of investments and a reduction in cash used for acquisitions and purchases of investments, partially offset by increased capital expenditures. Capital expenditures were $2,701 million, $2,042 million and $1,615 million for 2000, 1999 and 1998, respectively. The increases in capital expenditures primarily relate to expenditures for equipment and facilities used in manufacturing and research and development, including expansion of manufacturing capacity, and expenditures for efficiency improvements and non-U.S. growth. In addition, in 2000 capital expenditures included capitalized internal use software. Cash provided by financing activities decreased $1,134 million to $2,211 million in 2000 compared with 1999. This decrease was primarily due to lower issuances of long-term debt and increases in repayments of long-term debt, partially offset by an increase in short-term borrowings and an increase in proceeds from the issuances of common stock primarily for stock option exercises. Cash provided by financing activities increased $2,493 million in 1999 compared with 1998. This increase was primarily due to increased issuances of debt. 34 35 FINANCIAL CONDITION
2000 1999 --------- -------- (DOLLARS IN MILLIONS) Total assets................................................ $ 48,792 $35,372 Total liabilities........................................... $ 22,620 $21,436 Working capital............................................. $ 10,613 $10,090 Debt to total capital (debt plus equity).................... 20.0% 29.6% Inventory turnover ratio.................................... 4.1x 4.4x Average days outstanding -- receivables..................... 102 days 89 days
Total assets as of September 30, 2000, increased $13,420 million, or 37.9%, from September 30, 1999. This increase was primarily from increases of $8,985 million in goodwill and other acquired intangibles, as well as from increases in receivables, inventories, contracts in process, prepaid pension costs, and other assets of $759 million, $1,437 million, $779 million, $981 million and $994 million, respectively. These increases were partially offset by a decrease in net assets of discontinued operations of $907 million as a result of completing the Avaya spin-off on September 30, 2000. The increase in goodwill and other acquired intangibles is due to the acquisitions made in fiscal 2000 (see ACQUISITIONS). Receivables increased primarily due to higher sales volume coupled with a higher average days outstanding (see below). During the fourth fiscal quarter of 2000, approximately $550 million of receivables for one large non-U.S. customer were sold. The increase in inventories resulted from the need to meet current and anticipated sales commitments to customers. Contracts in process increased as a result of the start-up of several long-term projects. Prepaid pension costs increased primarily due to higher return on plan assets and an increase in the discount rate in 2000. Other assets increased due largely to the capitalization of internal use software, increased investments and an increase in other intangible assets. 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 and amortization of prior service cost. Total liabilities increased $1,184 million, or 5.5%, from September 30, 1999. This increase was due primarily to higher commercial paper balances. Working capital, defined as current assets less current liabilities, increased $523 million from September 30, 1999, primarily resulting from an increase in receivables, inventories and contracts in process, partially offset by the increase in short-term debt. Debt to total capital decreased 9.6 basis points in 2000 compared with 1999. This decrease was related to the 2000 increase in additional paid-in capital primarily associated with the issuance of common stock for business acquisitions made during the year and, to a lesser extent, the exercise of stock options and sales of stock through the employee stock purchase plan. For the year ended September 30, 2000, Lucent's inventory turnover ratio decreased to 4.1x compared with 4.4x for the year ended September 30, 1999. The decrease is due to higher inventory in fiscal 2000. Inventory turnover ratio is calculated by dividing cost of sales for the three months ended September 30 by the fiscal fourth quarter average ending inventory balance, using a two-point average. Average days outstanding -- receivables were up 13 days to 102 days in 2000 compared with 1999 reflecting the growth in Lucent's sales outside the United States, which typically carry longer payment terms and growth in very competitive emerging markets that currently require longer payment terms. Average days outstanding is calculated by dividing the fiscal fourth quarter average ending receivables balance, using a two-point average, by total revenues for the three months ended September 30. 35 36 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, 2000, 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, 2000, approximately $4.5 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, receivable securitizations, the expected proceeds from the sale of the power systems business and the planned initial public offering of Agere Systems will be adequate to satisfy its future cash requirements, although there can be no assurance that this will be the case. Lucent's customers 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, and continually monitors and reviews the creditworthiness of such arrangements. As market conditions permit, Lucent's intention is to sell or transfer 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, 2000, Lucent had made commitments or entered into agreements to extend credit to certain customers for an aggregate of approximately $6.7 billion. Excluding amounts that are not available because the customer has not yet satisfied the conditions precedent for borrowing, at September 30, 2000, approximately $3.3 billion in loan commitments was undrawn and available for borrowing and approximately $1.3 billion had been advanced and was outstanding. As part of the revenue recognition process, Lucent determines whether the notes receivable under these contracts are reasonably assured of collection based on various factors, among which is the ability of Lucent to sell these notes. In addition, Lucent had made commitments to guarantee customer debt of about $1.4 billion at September 30, 2000. Excluding amounts not available for guarantee because conditions precedent have not been satisfied, approximately $600 million of guarantees was undrawn and available and about $770 million was outstanding on September 30, 2000. Lucent has a credit process that monitors the drawn and un-drawn commitments and guarantees of debt to its customers. Customers are reviewed on a quarterly or annual basis depending upon their risk profile. As part of Lucent's review, it assesses the customer's short-term and long-term liquidity position, current operating performance versus plan, execution challenges facing Lucent, changes in competitive landscape, industry and macro economic conditions, and changes to management and sponsors. Depending upon the extent of any deterioration of a customer's credit profile or non-compliance of our legal documentation, Lucent undertakes actions that could include canceling the commitment, forcing the borrower to take corrective measures, and increasing reserves. These actions are designed to mitigate unexpected events that could have an impact on the company's future results of operations and cash flows, however, there can be no assurance that this will be the case. In the fourth quarter of fiscal 2000, the telecommunications sector, particularly competitive local exchange carriers, began to experience a deterioration in market conditions that resulted in Lucent recording additional provisions of approximately $250 million in the current fiscal year. In addition, beginning in fiscal 2001, Lucent implemented a more selective customer-financing program. The overall vendor financing exposure, coupled with a continued decline in telecommunications market conditions, could cause revenue, results of operations and cash flows in fiscal year 2001 to be lower than fiscal year 2000. 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, credit rating and level of available credit, and its continued ability to sell or transfer commitments and drawn-down borrowings on acceptable terms. Lucent believes that it will be able to access 36 37 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. For a discussion of the Company's sales of receivables and notes, see Note 16 to the accompanying Consolidated Financial Statements. RISK MANAGEMENT Lucent is exposed to market risk from changes in foreign currency exchange rates, interest rates and equity prices 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, hedges these risks through the use of derivative financial instruments. Lucent uses the term hedge to mean a strategy designed to manage risks of volatility in prices or rate movements on certain assets, liabilities or anticipated transactions and it creates a relationship in which gains or losses on derivative instruments are expected to counter-balance the losses or gains on the assets, liabilities or anticipated transactions exposed to such market risks. Lucent uses derivative financial instruments as risk management tools and not for trading or speculative 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's risk management objective is to minimize the effects of volatility on its cash flows by identifying the recognized assets and liabilities or forecasted transactions exposed to these risks and appropriately hedging them with either forward contracts or to a lesser extent, option contracts, swap derivatives or by embedding terms into certain contracts that affect the ultimate amount of cash flows under the contract. Lucent generally does not hedge its credit risk on customer receivables. Foreign Currency Risk Lucent uses foreign exchange forward contracts and to a lesser extent option contracts to minimize 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 exchange forward contracts are designated for recognized receivables and payables, firmly committed or anticipated cash inflows and outflows. 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. Cash inflows and outflows denominated in the same foreign currency are netted on a legal entity basis and the corresponding net cash flows exposure is appropriately hedged. Lucent does not hedge its net investment in non-U.S. entities because Lucent views those investments as long-term in nature. 37 38 As of September 30, 2000, Lucent's primary net foreign currency market exposures were as follows (dollars in millions): ----------------------------------------------------------------------------------------------------------------------- Impact on derivative Notional amounts of Fair value of contracts of a 10% Foreign currency forward and option forward and option depreciation of the transaction exposure contracts on hedged contracts U.S. dollar Currency long (short) positions exposures Asset (Liability) Gain (Loss) ----------------------------------------------------------------------------------------------------------------------- Euro and legacy currencies $538 $443 $6 ($44) ----------------------------------------------------------------------------------------------------------------------- Brazilian real $174 $151 ($4) ($15) ----------------------------------------------------------------------------------------------------------------------- Japanese yen ($85) $51 ($1) $5 ----------------------------------------------------------------------------------------------------------------------- Australian dollar $72 $69 $8 ($7) ----------------------------------------------------------------------------------------------------------------------- Canadian dollar $63 $46 $1 ($5) -----------------------------------------------------------------------------------------------------------------------
The exposure positions above represent a portfolio containing all identified booked and firmly committed exposures and 50% of the first six months of all identified anticipated exposures which is used as a benchmark by Lucent for risk management purposes. The hedged exposures represent the actual external derivative positions executed with financial counterparties to offset Lucent's net exposure. The exposure and hedge positions are not always equal due to the fact that some anticipated exposures included within these portfolios may be hedged as little as 25% or as much as 100%, when deemed appropriate, in accordance with Lucent corporate policy. Management has not changed its foreign exchange risk management strategy from the prior year and does not foresee or expect any significant changes in foreign currency exposure or in how such exposure is managed in the near future. The fair value of foreign exchange forward contracts is subject to changes in foreign currency exchange rates. For the purposes of assessing specific risks, we use a sensitivity analysis to determine the effects that market risk exposures may have on the fair value of our financial instruments and results of operations. The financial instruments included in our sensitivity analysis are foreign currency forward and option contracts. Such contracts generally have durations of three to six months and are primarily used to hedge recognized receivables and payables and anticipated transactions, and to a lesser extent, unrecognized firm commitments. The sensitivity analysis excludes the value of foreign currency denominated receivables and payables (other than loans) because of their short maturities. To perform the sensitivity analysis, we assess the risk of loss in fair values from the effect of a hypothetical 10% change in foreign currency exchange spot rates assuming no change in interest rates. However, these calculated exposures do not generally affect the Company's use of derivative financial instruments as described above. For contracts outstanding as of September 30, 2000 and 1999, a 10% appreciation in the value of foreign currencies against the U.S. dollar from the prevailing market rates would result in an incremental pre-tax net unrealized loss of approximately $59 million and $31 million, respectively. Conversely, a 10% depreciation in these currencies from the prevailing market rates would result in an incremental pre-tax net unrealized gain of approximately $59 million and $31 million, as of September 30, 2000 and 1999, respectively. Consistent with the nature of the economic hedge of such foreign exchange forward and option contracts, such unrealized gains or losses would be offset by corresponding decreases or increases, respectively, of the underlying instrument or transaction being hedged. The model to determine sensitivity assumes a parallel shift in all foreign currency exchange spot rates, however, exchange rates rarely move in the same direction. Additionally, the amounts above do not necessarily represent the actual changes in fair value we would incur under normal market conditions because all variables other than the exchange rates are held constant in the calculations above. 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 38 39 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. Interest Rate Risk Lucent uses a combination of financial instruments, including medium-term and short-term financings, variable-rate debt instruments and to a lesser extent, interest rate swaps to manage its interest rate mix of the total debt portfolio and related overall cost of borrowing. To manage this mix in a cost-effective manner, Lucent, from time to time, may enter into interest rate swap agreements in which it agrees to exchange various combinations of fixed and/or variable interest rates based on agreed-upon notional amounts. Lucent had no material interest rate swap agreements in effect at September 30, 2000 or 1999. The objective of maintaining this mix of fixed and floating rate debt allows Lucent to manage its overall value of cash flows attributable to its debt instruments. Management has not changed its interest rate risk management strategy from the prior year and does not foresee or expect any significant changes in its exposure to interest rate fluctuations or in how such exposure is managed in the near future. Lucent does not enter into derivative transactions on its cash equivalents and short-term investments since their relative short maturities do not create significant risk. 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 the differences between the market interest rates and rates at the inception of the debt obligation. To determine the specific risks of changes in interest rates, Lucent performs a sensitivity analysis on it fixed-rate long-term debt to assess the risk of changes in fair value. These debt instruments have original maturities ranging from 5 years to 30 years. The model to determine sensitivity assumes a hypothetical 150 basis point parallel shift in interest rates. At September 30, 2000 and 1999, a 150 basis point increase in interest rates would reduce the market value of Lucent's fixed-rate long-term debt by approximately $317 million and $360 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, 2000 and 1999 of approximately $397 million and $456 million, respectively. Lucent's sensitivity analysis excludes commercial paper, variable rate debt instruments, secured borrowings and bank loans because the changes in interest rates would not significantly affect the fair value of such instruments. Interest rate swaps have also been excluded from the sensitivity analysis since they are not material. Equity Price Risk Lucent's investment portfolio consists of equity investments accounted for under the cost and equity methods as well as equity investments in publicly held companies that are classified as available-for-sale. These available-for-sale securities are exposed to price fluctuations and are generally concentrated in the high-technology communications and semi-conductor industries, many of which are small capitalization stocks. At September 30, 2000, the fair value of one available-for-sale security totaled $139 million out of a total available-for-sale portfolio value of $212 million. Lucent generally does not hedge its equity price risk; however, on occasion, may use equity derivative financial instruments that are subject to equity price risks to complement its investment strategies. As of September 30, 2000, a 20% adverse change in equity prices would result in an approximate $42 million decrease in the fair value of Lucent's available-for-sale securities. As of September 30, 2000, Lucent had no outstanding hedging instrument for its equity price risk. The model to determine sensitivity assumes a corresponding shift in all equity prices, however, equity prices on individual companies dispersed across many different business industries may not always move in the same direction. This analysis excludes stock purchase warrants as Lucent does not believe that the value of such warrants are significant. IN-PROCESS RESEARCH AND DEVELOPMENT In connection with the acquisitions of Livingston, Yurie, Stratus, Agere, Ortel, Chromatis and Spring Tide, Lucent allocated non-tax impacting charges of $427 million, $620 million, $267 million, $94 million, $307 million, $428 million and $131 million, respectively, of the total purchase price to IPRD. 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 a number of 39 40 factors including 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 IPRD for each of the above acquisitions using an income approach. This involved estimating the fair value of the IPRD using the present value of the estimated after-tax cash flows expected to be generated by the IPRD, 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 IPRD amounts so determined represent fair value and do not exceed the amount a third party would pay for the projects. Where appropriate, Lucent deducted an amount reflecting the contribution of the core technology from the anticipated cash flows from an IPRD project. At the date of acquisition, the IPRD 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 are not completed in a timely manner, management's anticipated 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 significant acquired IPRD projects: Livingston On December 15, 1997, Lucent completed the purchase of Livingston. Livingston was involved in the development of equipment used by Internet service providers to connect subscribers to the Internet. The allocation to IPRD 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 used 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 in June 1999, 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. Yurie was involved in the development of ATM access solutions. The allocation to IPRD 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 40 41 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 used 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. Stratus was a manufacturer of fault-tolerant computer systems. The allocation to IPRD of $267 million represented its estimated fair value using the methodology described above. The primary projects that made up the IPRD 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 used to discount projected cash flows. 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 development relating to the Continuum 1248 would cease by the quarter ended December 31, 1999. Consequently, Lucent did not realize the forecast revenues from these projects. Agere, Inc. On April 20, 2000, Lucent completed the purchase of Agere. Agere was involved in the development of programmable network processors for use in managing traffic on high-speed voice and data networks. The allocation to IPRD of $94 million represented its estimated fair value using the methodology described above. The $94 million was allocated to the development of a fully programmable, multiprotocol network processor for OC-48 (2.5 gigabits per second) wire speeds. Revenues attributable to the OC-48 product were estimated to be $21 million in 2001 and $65 million in 2002. Revenue was expected to peak in 2007 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 205% in 2002 to 5% in 2007 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 product were expected to be $3 million. A risk-adjusted discount rate of 30% was used to discount projected cash flows. Ortel Corporation On April 27, 2000, Lucent completed the purchase of Ortel. Ortel was involved in the development of semiconductor-based optoelectronic components used in fiber-optic systems for telecommunications and cable television networks. The allocation to IPRD of $307 million represented its estimated fair value using the methodology described above. The $307 million was allocated to the following projects: 10G New Products ($61 million), 10G OC-192 Receiver/Daytona ($105 million), 980 ($95 million), 1550 ($27 million) and CATV ($19 million). 41 42 Revenues attributable to the 10G New Products were estimated to be $5 million in 2001 and $30 million in 2002. Revenue was expected to peak in 2009 and decline thereafter through the end of the product's life as new product technologies were expected to be introduced by Lucent. Revenue growth was expected to decrease from 447% in 2002 to 8% in 2009, 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 product were expected to be $3 million. Revenues attributable to the 10G OC-192 Receiver/Daytona were estimated to be $16 million in 2001 and $33 million in 2002. Revenue was expected to peak in 2009 and decline thereafter through the end of the product's life as new product technologies were expected to be introduced by Lucent. Revenue growth was expected to decrease from 166% in 2003 to 8% in 2009 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 product were expected to be $1 million. Revenues attributable to the 980 were estimated to be $44 million in 2001 and $108 million in 2002. Revenue was expected to peak in 2008 and decline thereafter through the end of the product's life as new product technologies were expected to be introduced by Lucent. Revenue growth was expected to decrease from 143% in 2002 to 17% in 2008, 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 product were expected to be $1 million. Revenues attributable to the 1550 were estimated to be $2 million in 2001 and $63 million in 2002. Revenue was expected to peak in 2008 and decline thereafter through the end of the product's life as new product technologies were expected to be introduced by Lucent. Revenue growth was expected to decrease from 33% in 2003 to 17% in 2008, 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 product were expected to be $2 million. Revenues attributable to the CATV product were estimated to be $28 million in 2001 and $58 million in 2002. Revenue was expected to peak in 2004 and decline thereafter through the end of the product's life as new product technologies were expected to be introduced by Lucent. Revenue growth was expected to decrease from 107% in 2002 to 4% 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 product were expected to be $1 million. A risk-adjusted discount rate of 25% was used to discount projected cash flows. Chromatis Networks On June 28, 2000, Lucent completed the purchase of Chromatis. Chromatis was involved in the development of next-generation optical transport solutions that provide telecommunications carriers with improvements in the cost, efficiency, scale and management of multiservice metropolitan networks. The allocation to IPRD of $428 million represented its estimated fair value using the methodology described above. The $428 million was allocated to the first generation of its Metropolis product, which will integrate data, voice and video services on metropolitan networks and combine this traffic onto a wave division multiplexing ("WDM") system. Revenues attributable to the Metropolis product were estimated to be $375 million in 2001 and $1 billion in 2002. Revenue was expected to peak in 2005 and decline thereafter through the end of the product's life as new product technologies were expected to be introduced by Lucent. Revenue growth was expected to decrease from 196% in 2002 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 product were expected to be $7.8 million. A risk-adjusted discount rate of 25% was used to discount projected cash flows. 42 43 Spring Tide Networks On September 19, 2000, Lucent completed the purchase of Spring Tide. Spring Tide was involved in the development of carrier-class network equipment that enables service providers to offer new, value-added Internet protocol ("IP") services and virtual private networks ("VPN") with low cost and complexity. Spring Tide was involved in the development of Versions 2.0 and 2.1 of the IP Service Switch, the next generations of Spring Tide's flagship product. The allocation to IPRD of $131 million represented their estimated fair value using the methodology described above. Approximately $128 million was allocated to the next-generation IP Service Switch products, carrier-class platforms that will combine the connectivity of a remote access server, the network intelligence of a remote access server, and the switching capacity and quality of service ("QoS") capabilities of an ATM switch in one integrated solution. The remaining $3 million was allocated to projects designed to enhance the capabilities and decrease production costs associated with the IP Service Switch. Revenues attributable to the IP Service Switch products were estimated to be $109 million in 2001 and $337 million in 2002. Revenue was expected to peak in 2006 and decline thereafter through the end of the product's life as new product technologies were expected to be introduced by Lucent. Revenue growth was expected to decrease from 209% in 2002 to 4.4% in 2006, 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 product were expected to be $0.5 million and $4.3 million in 2000 and 2001, respectively. A risk-adjusted discount rate of 25% was used to discount projected cash flows. Given the uncertainties of the development process, the aforementioned estimates are subject to change, and no assurance can be given that deviations from these estimates will not occur. Management expects to continue development of these efforts and believes there is a reasonable chance of successfully completing the development efforts. However, there is risk associated with the completion of the projects and there can be no assurance that the projects will realize either technological or commercial success. Failure to successfully develop and commercialize the IPRD would result in the loss of the expected economic return inherent in the fair value allocation. 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 Lucent. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission, Lucent does not have any intention or obligation to update publicly any forward-looking statements after the distribution of this Form 10-K/A whether as a result of new information, future events or otherwise. Future Factors include increasing price, products and services competition by U.S. and non-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 availability of manufacturing capacity, components and materials; the ability to recruit and retain talent; the achievement of lower costs and expenses; credit concerns in the emerging service provider market; customer demand for the Company's products and services; the ability to successfully integrate the operations and business of acquired companies; timely completion of the proposed IPO and spin-off of Agere Systems and the sale of the power systems business; the successful implementation of the strategic reorganization; 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. 43 44 governmental regulations; protection and validity of patent and other intellectual property rights; reliance on large customers and significant suppliers; the ability to supply customer financing; technological, implementation and cost/financial risks in the use of large, multiyear contracts; the Company's credit ratings; 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 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 service providers and other 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 under KEY BUSINESS CHALLENGES. European Monetary Union -- Euro Several member countries of the European Union have established fixed conversion rates between their existing sovereign currencies and the Euro and have adopted the Euro as their new single legal currency. The legacy currencies will remain legal tender in the participating countries for a transition period until January 1, 2002. During the transition period, cashless payments can be made in the Euro. 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 and existing contracts. 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. 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 44 45 significant initial cost overruns and losses. See also discussion under LIQUIDITY AND CAPITAL RESOURCES and KEY BUSINESS CHALLENGES. Future Capital Requirements See discussion above under LIQUIDITY AND CAPITAL RESOURCES. Non-U.S. Growth, Foreign Exchange Rates 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 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 exchange contracts, although there can be no assurances that such attempts will be successful. Legal Proceedings and Environmental Matters See discussion in Note 17 to the accompanying Consolidated Financial Statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Index to Financial Statements and Financial Statement Schedule in Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 45 46 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF DECEMBER 1, 2000)
BECAME LUCENT EXECUTIVE NAME AGE OFFICER ON ---- --- ------------- Henry Schacht....................... 66 Chairman of the Board and Chief 10-00 Executive Officer John T. Dickson..................... 54 Executive Vice President and Chief 10-99 Executive Officer, Agere Systems Robert C. Holder.................... 54 Executive Vice President, Corporate 11-00 Operations Deborah C. Hopkins.................. 45 Executive Vice President and Chief 4-00 Financial Officer Arun N. Netravali................... 54 President Bell Labs 10-99 William T. O'Shea................... 53 Executive Vice President, Corporate 10-99 Strategy Richard J. Rawson................... 48 Senior Vice President, General 2-96 Counsel and Secretary Bernardus J. Verwaayen.............. 48 Vice Chairman 9-97
All of the above executive officers have held high level managerial positions and/or directorships with Lucent and prior thereto with AT&T or its affiliates for more than the past five years, except in the case of Mr. Verwaayen who has held his position since September 1, 1997 and Ms. Hopkins, who has held her position since April 21, 2000. Mr. Verwaayen joined Lucent 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. Ms. Hopkins joined Lucent after serving as Senior Vice President and Chief Financial Officer of the Boeing Company since 1998. She also served as Chairman of Boeing Capital Corporation. Prior to her tenure at Boeing, she served as Chief Financial Officer of General Motors Europe from 1997 to 1998 and as General Auditor from 1995 to 1997. Officers are not elected for a fixed term of office but hold office until their successors have been elected. The other information required by Item 10 is included in the Company's definitive proxy statement to be filed pursuant to Regulation 14A on or before January 28, 2001. 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 which will be filed pursuant to Regulation 14A on or before January 28, 2001. Such information is incorporated herein by reference, pursuant to General Instruction G(3). 46 47 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements
PAGES ----- (1) Index to Financial Statements and Financial Statement Schedule.................................................. 46 (2) Report of Independent Accountants....................... 47 (3) Financial Statements: (i) Consolidated Statements of Income..................... 48 (ii) Consolidated Balance Sheets.......................... 49 (iii) Consolidated Statements of Changes in Shareowners' Equity................................................. 50 (iv) Consolidated Statements of Cash Flows................ 52 (v) Notes to Consolidated Financial Statements............ 53 (4) Financial Statement Schedule: (i) Schedule II--Valuation and Qualifying Accounts........ 82
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. (5) Exhibits: The following documents are filed as Exhibits to this report on Form 10-K/A 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 effective February 16, 2000 (Exhibit 3 to Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). (3)(ii) By-Laws of the registrant (Exhibit 3(ii) to the Annual Report on Form 10-K for the year ended September 30, 2000). (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)(ii) First Supplemental Indenture dated as of April 17, 2000 to Indenture dated April 1, 1996 (Exhibit 4 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). (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).
47 48
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 the Bank of New York (successor to 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 the Bank of New York (successor to 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 year 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)2 to the Annual Report on Form 10-K for the year ended September 30, 2000).* (10)(iii)(A)3 Lucent Technologies Inc. 1996 Long Term Incentive Program (Plan) Restricted Stock Unit Award Agreement. (Exhibit (10)(iii)(A)3 to the Annual Report on Form 10-K for the year ended September 30, 2000).* (10)(iii)(A)4 Lucent Technologies Inc. 1996 Long Term Incentive Program (Plan) Nonstatutory Stock Option Agreement. (Exhibit (10)(iii)(A)4 to the Annual Report on Form 10-K for the year ended September 30, 2000).* (10)(iii)(A)5 Lucent Technologies Inc. Deferred Compensation Plan. (Exhibit (10)(iii)(A)5 to the Annual Report on Form 10-K for the year ended September 30, 2000).* (10)(iii)(A)6 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 year ended September 30, 1998).* (10)(iii)(A)7 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)8 Employment Agreement of Mr. Verwaayen dated June 12, 1997 (Exhibit (10)(iii)(A)(1)) to the Annual Report on Form 10-K for the year ended September 30, 1997).* (10)(iii)(A)9 Employment Agreement of Ms. Hopkins dated April 21, 2000 (Exhibit 10 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). (10)(iii)(A)10 Description of the Lucent Technologies Inc. Supplemental Pension Plan. (Exhibit (10)(iii)(A)13 to the Annual Report on Form 10-K for the year ended September 30, 1998).* (10)(iii)(A)11 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 year ended September 30, 1998).*
48 49
EXHIBIT NUMBER ------- (10)(iii)(A)12 Lucent Technologies Inc. Voluntary Life Insurance Plan (Exhibit 10(iii)(A)15 to the Annual Report on Form 10-K for the year ended September 30, 1998). (12) Computation of Ratio of Earnings to Fixed Charges. (Exhibit (12) to the Annual Report on Form 10-K for the year ended September 30, 2000). (21) List of subsidiaries of Lucent Technologies Inc. (Exhibit (21) to the Annual Report on Form 10-K for the year ended September 30, 2000). (23) Consent of PricewaterhouseCoopers LLP (24) Powers of Attorney executed by officers and directors who signed this report. (27) Financial Data Schedule. (Exhibit (27) to the Annual Report on Form 10-K for the year ended September 30, 2000).
--------------- * Management contract or compensatory plan or arrangement. The Company will furnish, without charge, to a security holder upon request a copy of 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 July 20, 2000 Lucent filed a report on Form 8-K announcing its plan to spin off its microelectronics business which includes the optoelectronics components and integrated circuits (IC) divisions, into a separate new company, later named Agere Systems Inc. On July 28, 2000 Lucent filed a report on Form 8-K which presented the pro forma financial statements reflecting the treatment of the enterprise networks business (Avaya) as discontinued operations pursuant to Accounting Principles Board Opinion No. 30 "Reporting the Results of Operation -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("APB 30")." These statements include Lucent's pro forma Consolidated Statements of Income for the six months ended March 31, 2000 and March 31, 1999 and the three years ended September 30, 1999, 1998 and 1997 and pro forma Consolidated Balance Sheets at March 31, 2000 and September 30, 1999. 49 50 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/ MARK R. WHITE ------------------------------------ Mark R. White Principal Accounting Officer June 13, 2001 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 Henry B. Schacht Chief Executive Officer Principal Financial Officer Frank A. D'Amelio Executive Vice President and Chief Financial Officer Principal Accounting Officer By: /s/ MARK R. WHITE Mark R. White ---------------------------------------- Principal Accounting Officer Mark R. White (attorney-in-fact) June 13, 2001 Directors Paul A. Allaire Betsy S. Atkins Carla A. Hills Henry B. Schacht Franklin A. Thomas John A. Young
50 51 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE ---- Report of Independent Accountants........................... 52 Consolidated Statements of Income for each of the three years in the period ended September 30, 2000.............. 53 Consolidated Balance Sheets as of September 30, 2000 and 1999...................................................... 54 Consolidated Statements of Changes in Shareowners' Equity for each of the three years in the period ended September 30, 2000.................................................. 55 Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 2000.............. 57 Notes to Consolidated Financial Statements.................. 58 Financial Statement Schedule: Schedule II -- Valuation and Qualifying Accounts for each of the three years in the period ended September 30, 2000...................................................... 86
51 52 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareowners of Lucent Technologies Inc.: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Lucent Technologies Inc. and its subsidiaries at September 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 our opinion. As discussed in Note 2 to the consolidated financial statements, in 2000 the Company changed its accounting method for computer software developed or obtained for internal use. Also, as discussed in Note 12, in 1999 the Company changed its method for calculating annual net pension and postretirement benefit costs. PricewaterhouseCoopers LLP New York, New York December 20, 2000 52 53 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, ----------------------------- 2000 1999 1998 ------- ------- ------- (AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Revenues.................................................... $33,813 $30,617 $24,367 Costs....................................................... 19,539 15,605 12,938 ------- ------- ------- Gross margin................................................ 14,274 15,012 11,429 Operating expenses Selling, general and administrative....................... 6,266 5,806 4,424 Research and development.................................. 4,018 4,220 3,667 Purchased in-process research and development............. 1,005 292 1,385 ------- ------- ------- Total operating expenses.................................... 11,289 10,318 9,476 ------- ------- ------- Operating income............................................ 2,985 4,694 1,953 Other income -- net......................................... 366 402 110 Interest expense............................................ 348 318 143 ------- ------- ------- Income from continuing operations before provision for income taxes.............................................. 3,003 4,778 1,920 Provision for income taxes.................................. 1,322 1,752 1,151 ------- ------- ------- Income from continuing operations........................... 1,681 3,026 769 Income (loss) from discontinued operations (net of tax (benefit) provision of ($78), $256 and $347, respectively)............................................. (462) 455 296 ------- ------- ------- Income before cumulative effect of accounting change........ 1,219 3,481 1,065 Cumulative effect of accounting change (net of income taxes of $842).................................................. -- 1,308 -- ------- ------- ------- Net income.................................................. $ 1,219 $ 4,789 $ 1,065 ======= ======= ======= Earnings (loss) per common share -- basic Income from continuing operations......................... $ 0.52 $ 0.97 $ 0.25 Income (loss) from discontinued operations................ (0.14) 0.15 0.10 Cumulative effect of accounting change.................... -- 0.42 -- ------- ------- ------- Net income................................................ $ 0.38 $ 1.54 $ 0.35 ======= ======= ======= Earnings (loss) per common share -- diluted Income from continuing operations......................... $ 0.51 $ 0.94 $ 0.25 Income (loss) from discontinued operations................ (0.14) 0.14 0.09 Cumulative effect of accounting change.................... -- 0.41 -- ------- ------- ------- Net income................................................ $ 0.37 $ 1.49 $ 0.34 ======= ======= ======= Weighted average number of common shares outstanding -- basic...................................... 3,232.3 3,101.8 3,025.3 Weighted average number of common shares outstanding -- diluted.................................... 3,325.9 3,218.5 3,110.6
See Notes to Consolidated Financial Statements. 53 54 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30, 2000 1999 ------------- ------------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) ASSETS Cash and cash equivalents................................... $ 1,467 $ 1,686 Receivables less allowances of $501 in 2000 and $318 in 1999...................................................... 9,558 8,799 Inventories................................................. 5,677 4,240 Contracts in process, net of progress billings of $6,744 in 2000 and $5,565 in 1999................................... 1,881 1,102 Deferred income taxes -- net................................ 1,165 1,472 Other current assets........................................ 1,742 1,941 ------- ------- Total current assets........................................ 21,490 19,240 Property, plant and equipment -- net........................ 7,084 6,219 Prepaid pension costs....................................... 6,440 5,459 Capitalized software development costs...................... 688 436 Goodwill and other acquired intangibles, net of accumulated amortization of $1,072 in 2000 and $502 in 1999........... 9,945 960 Other assets................................................ 3,145 2,151 Net assets of discontinued operations....................... -- 907 ------- ------- Total assets................................................ $48,792 $35,372 ======= ======= LIABILITIES Accounts payable............................................ $ 2,813 $ 2,537 Payroll and benefit-related liabilities..................... 1,210 1,788 Debt maturing within one year............................... 3,483 1,705 Other current liabilities................................... 3,371 3,120 ------- ------- Total current liabilities................................... 10,877 9,150 Postretirement and postemployment benefit liabilities....... 5,548 5,651 Long-term debt.............................................. 3,076 4,162 Deferred income taxes -- net................................ 1,266 870 Other liabilities........................................... 1,853 1,603 ------- ------- Total liabilities........................................... 22,620 21,436 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: 10,000,000,000 Issued and outstanding shares: 3,384,332,104 at September 30, 2000; 3,142,537,636 at September 30, 1999....................... 34 31 Additional paid-in capital.................................. 20,390 7,994 Guaranteed ESOP obligation.................................. (16) (33) Retained earnings........................................... 6,129 6,188 Accumulated other comprehensive income (loss)............... (365) (244) ------- ------- Total shareowners' equity................................... 26,172 13,936 ------- ------- Total liabilities and shareowners' equity................... $48,792 $35,372 ======= =======
See Notes to Consolidated Financial Statements. 54 55 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
ACCUMULATED OTHER ADDITIONAL GUARANTEED COMPREHENSIVE TOTAL PREFERRED COMMON PAID-IN ESOP RETAINED INCOME SHAREOWNERS' STOCK STOCK CAPITAL OBLIGATION EARNINGS (LOSS) EQUITY --------- ------ ---------- ---------- -------- ------------- ------------ (DOLLARS IN MILLIONS) Balance at October 1, 1997.............. $-- $30 $ 4,058 $ (77) $ 708 $ (149) $ 4,570 -- --- ------- ------ ------- ------ -------- Net Income (excluding undistributed S-Corporation earnings)............... 980 Reclassification of undistributed earnings of S-Corporation............. 85 Foreign currency translation adjustment............................ (89) Unrealized holding losses on certain investments........................... (37) Minimum pension liability adjustment.... (8) Dividends declared...................... (201) Amortization of ESOP obligation......... 28 Issuance of common stock................ 1 654 Tax benefit from employee stock options............................... 287 Issuance of common stock and conversion of stock options for acquisitions..... 1,525 Conversion of common stock related to acquisitions.......................... 186 S-Corporation distributions............. (26) Other................................... 5 -- --- ------- ------ ------- ------ -------- Total comprehensive income.............. Balance at September 30, 1998........... -- 31 6,774 (49) 1,487 (283) 7,960 -- --- ------- ------ ------- ------ -------- Net Income (excluding undistributed S-Corporation earnings)............... 4,781 Reclassification of undistributed earnings of S-Corporation............. 8 Foreign currency translation adjustment............................ (33) Unrealized holding gains on certain investments (net of tax of $235)...... 307 Reclassification adjustment for realized holding gains on certain investments (net of tax of $178).................. (246) Minimum pension liability adjustment (net of tax of $6).................... 11 Effect of immaterial poolings........... 106 (26) Dividends declared...................... (222) Amortization of ESOP obligation......... 16 Issuance of common stock................ 745 Tax benefit from employee stock options............................... 394 Adjustment to conform pooled companies' fiscal year........................... 170 S-Corporation distributions............. (40) Other................................... 7 (2) -- --- ------- ------ ------- ------ -------- Total comprehensive income.............. Balance at September 30, 1999........... -- 31 7,994 (33) 6,188 (244) 13,936 -- --- ------- ------ ------- ------ -------- TOTAL COMPREHENSIVE INCOME ------------- Balance at October 1, 1997.............. Net Income (excluding undistributed S-Corporation earnings)............... $ 980 Reclassification of undistributed earnings of S-Corporation............. 85 Foreign currency translation adjustment............................ (89) Unrealized holding losses on certain investments........................... (37) Minimum pension liability adjustment.... (8) Dividends declared...................... Amortization of ESOP obligation......... Issuance of common stock................ Tax benefit from employee stock options............................... Issuance of common stock and conversion of stock options for acquisitions..... Conversion of common stock related to acquisitions.......................... S-Corporation distributions............. Other................................... ------ Total comprehensive income.............. 931 Balance at September 30, 1998........... ------ Net Income (excluding undistributed S-Corporation earnings)............... 4,781 Reclassification of undistributed earnings of S-Corporation............. 8 Foreign currency translation adjustment............................ (33) Unrealized holding gains on certain investments (net of tax of $235)...... 307 Reclassification adjustment for realized holding gains on certain investments (net of tax of $178).................. (246) Minimum pension liability adjustment (net of tax of $6).................... 11 Effect of immaterial 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-Corporation distributions............. Other................................... ------ Total comprehensive income.............. 4,828 Balance at September 30, 1999........... ------
55 56 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY -- (CONTINUED)
ACCUMULATED OTHER ADDITIONAL GUARANTEED COMPREHENSIVE TOTAL PREFERRED COMMON PAID-IN ESOP RETAINED INCOME SHAREOWNERS' STOCK STOCK CAPITAL OBLIGATION EARNINGS (LOSS) EQUITY --------- ------ ---------- ---------- -------- ------------- ------------ (DOLLARS IN MILLIONS) Net Income.............................. 1,219 Foreign currency translation adjustment............................ (185) Reclassification of foreign currency translation losses realized upon spin-off of Avaya..................... 64 Unrealized holding gains on certain investments (net of tax of $124)...... 190 Reclassification adjustments for realized holding gains on certain investments (net of tax of $126)...... (194) Minimum pension liability adjustment (net of tax of $1).................... 2 Effect of immaterial poolings........... 25 (26) Issuance of stock by subsidiaries and investees............................. 7 Dividends declared...................... (254) Amortization of ESOP obligation......... 11 Issuance of common stock................ 1,397 Tax benefit from employee stock options............................... 1,064 Issuance of common stock and conversion of stock options for acquisitions..... 3 9,901 Adjustment to conform pooled company's fiscal year........................... 11 Other................................... 2 Spin-off of Avaya....................... 6 (1,009) 2 -- --- ------- ------ ------- ------ -------- Total comprehensive income.............. Balance at September 30, 2000........... $-- $34 $20,390 $ (16) $ 6,129 $ (365) $ 26,172 == === ======= ====== ======= ====== ======== TOTAL COMPREHENSIVE INCOME ------------- Net Income.............................. 1,219 Foreign currency translation adjustment............................ (185) Reclassification of foreign currency translation losses realized upon spin-off of Avaya..................... 64 Unrealized holding gains on certain investments (net of tax of $124)...... 190 Reclassification adjustments for realized holding gains on certain investments (net of tax of $126)...... (194) Minimum pension liability adjustment (net of tax of $1).................... 2 Effect of immaterial poolings........... Issuance of stock by subsidiaries and investees............................. Dividends declared...................... Amortization of ESOP obligation......... Issuance of common stock................ Tax benefit from employee stock options............................... Issuance of common stock and conversion of stock options for acquisitions..... Adjustment to conform pooled company's fiscal year........................... Other................................... Spin-off of Avaya....................... ------ Total comprehensive income.............. $1,096 Balance at September 30, 2000........... ======
See Notes to Consolidated Financial Statements. 56 57 LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, ----------------------------- 2000 1999 1998 ------- ------- ------- (DOLLARS IN MILLIONS) OPERATING ACTIVITIES Net income.................................................. $ 1,219 $ 4,789 $ 1,065 Less: Income (loss) from discontinued operations, net....... (462) 455 296 Less: Cumulative effect of accounting change................ -- 1,308 -- ------- ------- ------- Income from continuing operations........................... 1,681 3,026 769 Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: Business restructuring reversal........................... (5) (108) (77) Asset impairment and other charges........................ -- 236 -- Depreciation and amortization............................. 2,318 1,580 1,228 Provision for uncollectibles.............................. 252 67 129 Tax benefit from employee stock options................... 1,064 394 287 Deferred income taxes..................................... 466 974 88 Purchased in-process research and development............. 1,005 19 1,385 Adjustment to conform pooled companies' fiscal years...... 11 170 -- Increase in receivables -- net............................ (1,828) (3,250) (1,765) Increase in inventories and contracts in process.......... (2,340) (1,699) (199) Increase in accounts payable.............................. 266 727 88 Changes in other operating assets and liabilities......... (1,192) (2,280) (20) Other adjustments for non-cash items -- net............... (1,394) (818) (461) ------- ------- ------- Net cash provided by (used in) operating activities of continuing operations..................................... 304 (962) 1,452 ------- ------- ------- INVESTING ACTIVITIES Capital expenditures........................................ (2,701) (2,042) (1,615) Proceeds from the sale or disposal of property, plant and equipment................................................. 29 80 44 Purchases of investments.................................... (745) (920) (1,385) Sales or maturity of investments............................ 838 1,394 838 Dispositions of businesses.................................. 250 44 329 Acquisitions of businesses -- net of cash acquired.......... (156) (268) (837) Other investing activities -- net........................... 5 (70) (71) ------- ------- ------- Net cash used in investing activities of continuing operations................................................ (2,480) (1,782) (2,697) ------- ------- ------- FINANCING ACTIVITIES Repayments of long-term debt................................ (405) (16) (98) Issuance of long-term debt.................................. 72 2,193 375 Proceeds from issuance of common stock...................... 1,444 725 659 Dividends paid.............................................. (255) (222) (201) S-Corporation distribution to stockholder................... -- (40) (26) Increase in short-term borrowings -- net.................... 1,355 705 143 ------- ------- ------- Net cash provided by financing activities of continuing operations................................................ 2,211 3,345 852 ------- ------- ------- Effect of exchange rate changes on cash and cash equivalents............................................... 10 41 (67) ------- ------- ------- NET CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS........ 45 642 (460) Net cash (used in) provided by discontinued operations...... (264) (100) 84 ------- ------- ------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (219) 542 (376) Cash and cash equivalents at beginning of year.............. 1,686 1,144 1,520 ------- ------- ------- Cash and cash equivalents at end of year.................... $ 1,467 $ 1,686 $ 1,144 ======= ======= =======
See Notes to Consolidated Financial Statements. 57 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1. BASIS OF PRESENTATION On September 30, 2000, Lucent Technologies Inc. (the "Company") spun off its Enterprise Networks business ("Avaya"). This transaction resulted in a distribution of Avaya common stock to each holder of Lucent common stock of record as of September 20, 2000. As a result of this transaction, the Consolidated Financial Statements and related footnotes have been restated to present the results of this business as discontinued operations (see Note 3). In fiscal year 2000, the Company merged with Excel Switching Corporation and International Network Services ("INS"). In fiscal year 1999, the Company merged with Ascend Communications, Inc. and Kenan Systems Corporation. These mergers have been accounted for under the "pooling-of-interests" method of accounting, therefore, the Consolidated Financial Statements of Lucent were restated for all periods prior to the mergers to include the accounts and operations of Excel, INS, Ascend and Kenan (see Note 4). 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% to 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 revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates are used in accounting for, among other things, 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 Consolidated Financial Statements in the period they are determined to be necessary. FOREIGN CURRENCY TRANSLATION For operations outside the U.S. 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. REVENUE RECOGNITION Revenue is generally recognized when all significant contractual obligations have been satisfied and collection of the resulting receivable, including receivables of customers to which Lucent has provided customer financing, is reasonably assured. The determination of whether the collectibility of receivables is reasonably assured is based upon an assessment of the creditworthiness of the customers and Lucent's ability to sell the receivable. In instances where collection or sale of a receivable is not reasonably assured, revenue and the related costs are deferred. 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 58 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) 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 AND SOFTWARE 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. Effective October 1, 1999, Lucent adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). As a result, certain costs of computer software developed or obtained for internal use have been capitalized as part of other assets and are amortized over a three-year period. The impact of adopting SOP 98-1 was a reduction of costs and operating expenses of $252 for the fiscal year ended September 30, 2000. CASH AND CASH EQUIVALENTS All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. These primarily consist of money market funds and to a lesser extent certificates of deposit and commercial paper. 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 stated 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 over the estimated useful lives of the various asset classes. Useful lives for buildings and building improvements, furniture and fixtures and machinery and equipment principally range from 10 to 40 years, five to 10 years and two to 10 years, respectively. FINANCIAL INSTRUMENTS Lucent uses various financial instruments, including foreign exchange forward contracts and interest rate swap agreements to manage 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. 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. See Note 15 for further discussion on derivative financial instruments and hedging activities. 59 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) Lucent's investment portfolio consists of equity investments accounted for under the cost and equity methods as well as equity investments in publicly held companies that are generally concentrated in the high-technology communications and semi-conductor industries. These investments are included in other assets. Marketable equity securities with readily determinable fair values are classified as available-for-sale securities and reported at fair value. Unrealized gains and losses on the changes in fair value of these securities are reported, net of tax, as a component of accumulated other comprehensive income (loss) until sold (see Note 8). At the time of sale, any such gains or losses are recognized in other income-net. GOODWILL AND OTHER ACQUIRED INTANGIBLES Goodwill and other acquired intangibles are amortized on a straight-line basis over the periods benefited, principally in the range of 5 to 10 years. Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for as purchases. IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED ASSETS Goodwill and other long-lived assets are reviewed for impairment whenever events such as product discontinuance, plant closures, product dispositions or other changes in circumstances indicate that the carrying amount may not be recoverable. When such events occur, Lucent compares the carrying amount of the assets to undiscounted expected future cash flows. If this comparison indicates that there is an impairment, the amount of the impairment is typically calculated using discounted expected future cash flows. The discount rate applied to these cash flows is based on Lucent's weighted average cost of capital, which represents the blended after-tax costs of debt and equity. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the 2000 presentation. 3. DISCONTINUED OPERATIONS On September 30, 2000, Lucent completed the spin-off of Avaya in a tax-free distribution to its shareowners. Each Lucent shareowner received one share of Avaya common stock for every 12 shares of Lucent common stock held on the record date of September 20, 2000. Avaya represented a significant segment of Lucent's business. Pursuant to Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions"("APB 30"), the Consolidated Financial Statements of Lucent have been reclassified to reflect the spin-off of Avaya. Accordingly, the revenues, costs and expenses, assets and liabilities, and cash flows of Avaya spun off have been segregated in the Consolidated Statements of Income, Consolidated Balance Sheets and Consolidated Statements of Cash Flows. The net operating results, net assets and net cash flows of this business have been reported as "Discontinued Operations." The historical carrying amount of the net assets transferred to Avaya on the spin-off date has been recorded as a stock dividend of $1,009. 60 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) Following is summarized financial information for the discontinued operations:
YEARS ENDED SEPTEMBER 30, -------------------------- 2000 1999 1998 ------ ------ ------ Revenues................................................. $7,607 $8,157 $7,741 ====== ====== ====== Income from discontinued operations(1) (after applicable income taxes of $160, $256, and $347, respectively).... 303 455 296 Loss on disposal of business(2) (after applicable income tax benefit of $238)................................... (765) -- -- ------ ------ ------ Income (loss) from discontinued operations............... $ (462) $ 455 $ 296 ====== ====== ======
SEPTEMBER 30, 1999 ------------- Current assets.............................................. $3,043 Total assets................................................ 4,955 Current liabilities......................................... 2,758 Total liabilities........................................... 4,048 Net assets of discontinued operations....................... 907
--------------- (1) Income from discontinued operations includes an allocation of Lucent's interest expense totaling $64, $91 and $112 for the fiscal years ended September 30, 2000, 1999 and 1998, respectively based upon the amount of debt being assumed by Avaya. Approximately $780 of commercial paper borrowings was assumed by Avaya as part of the spin-off transaction. (2) The loss on disposal of Avaya recorded in the Company's results for the year ended September 30, 2000 reflects the costs directly associated with the spin-off and the net loss of Avaya between the measurement date and the spin date of September 30, 2000. The costs reflect those components of the Avaya reorganization plan, including a business restructuring charge and directly-related asset write-downs of $545 recorded during the year, along with transaction costs of $56 for the spin-off. Major components of this charge include $365 for employee separation and $101 for real estate consolidation. Included in the net assets transferred to Avaya at September 30, 2000 were reserves of $499 associated with remaining actions under the reorganization plan, principally for employee separation and real estate consolidation. Avaya is responsible for completing the plan. 4. BUSINESS COMBINATIONS Acquisitions The following table presents information about acquisitions by Lucent in the fiscal years ended September 30, 2000, 1999 and 1998. All of these acquisitions were accounted for under the purchase method of accounting, and the acquired technology valuation included existing technology, purchased in-process research and development ("IPRD") and other intangibles. All IPRD charges were recorded in the quarter in which the transaction was completed. On a pro forma basis, if the following fiscal 2000 acquisitions had 61 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) occurred on October 1, 1999, the amortization of goodwill and other acquired intangibles would have increased by approximately $931 for the fiscal year ended September 30, 2000.
PURCHASED ACQUISITION PURCHASE EXISTING OTHER IPRD DATE PRICE GOODWILL TECHNOLOGY INTANGIBLES (AFTER-TAX) ----------- --------------- -------- ---------- ----------- ----------- 2000 Spring Tide(1)....... 9/00 $1,315 $1,075 $143 $ 14 $131 Stock & options Chromatis(2)......... 6/00 4,756 4,223 n/a 186 428 Stock & options Herrmann(3).......... 6/00 432 384 52 16 34 Stock & options Ortel(4)............. 4/00 2,998 2,554 171 24 307 Stock & options Agere(5)............. 4/00 377 303 n/a n/a 94 Stock & options DeltaKabel(6)........ 4/00 52 56 n/a n/a n/a Cash VTC Inc.(7).......... 3/00 104 46 31 7 7 Cash 1999 Stratus(8)........... 10/98 $917 $ 0 $130 $ 4 $267* Stock & options Other(9)............. various 217 146 22 12 37 Cash & notes 1998 Yurie(10)............ 5/98 $1,056 $ 292 $ 40 n/a $620 Cash & options Livingston(11)....... 12/97 610 114 69 n/a 427 Stock & options Other(12)............ various 131 39 36 7 59 Cash AMORTIZATION PERIOD (IN YEARS) ----------------------------------- EXISTING OTHER GOODWILL TECHNOLOGY INTANGIBLES -------- ---------- ----------- 2000 Spring Tide(1)....... 7 7 7 Chromatis(2)......... 7 n/a 2-7 Herrmann(3).......... 8 7 7 Ortel(4)............. 9 7.5 4-9 Agere(5)............. 7 n/a n/a DeltaKabel(6)........ 6 n/a n/a VTC Inc.(7).......... 7 5 7 1999 Stratus(8)........... n/a 10 3 Other(9)............. 4-10 4-7 4-8 1998 Yurie(10)............ 7 5 n/a Livingston(11)....... 5 8 n/a Other(12)............ 5-10 5-10 10
--------------- (1) Spring Tide Networks was a provider of network switching equipment. (2) Chromatis Networks Inc. was a supplier of metropolitan optical networking systems. (3) Herrmann Technology, Inc. was a supplier of devices for next-generation dense wavelength division multiplexing (DWDM) optical networks. (4) Ortel Corporation was a developer of optoelectronic components for cable TV networks. (5) Agere, Inc. was a developer of programmable network processor technology. (6) DeltaKabel Telecom cv was a developer of cable modem and Internet protocol (IP) telephony products and services for the European market. (7) VTC, Inc. was a supplier of semiconductor components to computer hard disk drive manufacturers. (8) Stratus Computer, Inc. was a manufacturer of fault-tolerant computer systems, acquired by Ascend. (9) Other acquisitions include the Ethernet local area network business of Enable Semiconductor ("Enable Ethernet"); Sybarus Technologies; WaveAccess Ltd.; Quadritek Systems, Inc.; XNT Systems, Inc.; Quantum Telecom Solutions, Inc.; and InterCall Communications and Consulting, Inc. (10) Yurie Systems, Inc. was a provider of ATM access technology and equipment for data, voice and video networking. (11) Livingston Enterprises, Inc. was a global provider of equipment used by Internet service providers to connect their subscribers to the Internet. 62 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) (12) Other acquisitions include JNA Telecommunications Limited, MassMedia Communications,Inc. and Optimay GmbH. n/a Not applicable. * $24 of purchased in-process research and development was subsequently reversed in March 1999. In connection with the acquisitions of Spring Tide and Chromatis, certain key employees are entitled to receive additional Lucent common stock based on the achievement of specified milestones. The value of such stock, if distributed, will be recorded as compensation expense. In connection with the acquisition of Herrmann, certain stockholders are entitled to receive additional Lucent common stock based on the achievement of specified milestones. If distributed, a portion will be recorded as compensation expense and a portion will be recorded as additional goodwill. Included in the purchase price for the acquisitions was IPRD, 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 other acquired intangibles, less liabilities assumed. The value allocated to IPRD was determined using 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 IPRD 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. TeraBeam Corporation On April 9, 2000, Lucent and TeraBeam Corporation entered into an agreement to develop TeraBeam's fiberless optical networking system that provides high-speed data networking between local and wide area networks. Under the agreement, Lucent paid cash and contributed research and development assets, intellectual property, and free-space optical products, valued in the aggregate at $450. Lucent owns 30 percent of the venture that will develop the fiberless optical networking system, which is accounted for under the equity method of accounting. Lucent will also be a preferred supplier of optical components, networking equipment and professional services to TeraBeam. In addition, under certain conditions, Lucent will have the 63 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) right to purchase TeraBeam's equity interest in the venture. A total of $189 was allocated to goodwill and other acquired intangibles to be amortized over five years. Ignitus Communications LLC On April 4, 2000, Lucent acquired the remaining 44 percent of Ignitus Communications LLC, a start-up company that focuses on high-speed optical communications at the network edge, for approximately $33. Lucent previously owned 56 percent of the company. 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 percent interest in SpecTran. The acquisition was accounted for under the purchase method of accounting. On February 4, 2000, Lucent acquired the remaining shares of SpecTran, resulting in a total purchase price of approximately $68. Pooling-of-Interests Mergers The following table presents information about certain mergers by Lucent accounted for under the pooling-of-interests method of accounting in the fiscal years ended September 30, 2000 and 1999. As a result, Lucent's financial statements have been restated for all periods prior to the mergers to include the accounts and operations of those companies.
TOTAL SHARES MERGER OF COMMON STOCK ACQUISITION DATE ISSUED DESCRIPTION OF BUSINESS ----------- ------ --------------- ----------------------- 2000: Excel................................ 11/99 22 million Developer of programmable switches INS(1)............................... 10/99 49 million Provider of network consulting, design and integration services 1999: Ascend(2)............................ 6/99 371 million Developer, manufacturer and seller of wide area networking equipment Kenan................................ 2/99 26 million Developer of third-party billing and customer care software
--------------- (1) INS previously had a June 30 fiscal year-end. In order to conform the fiscal year-ends for INS and Lucent, INS's results of operations and cash flows for the three months ended September 30, 1999, were not reflected in Lucent's financial statements for the first fiscal quarter of 2000. INS's revenue and net income for the three months ended September 30, 1999 were $100 and $11, respectively. The Consolidated Balance Sheet of Lucent at September 30, 2000, includes an adjustment to retained earnings to reflect the income recognized by INS for the three months ended September 30, 1999. (2) Lucent assumed Ascend stock options equivalent to approximately 65 million shares of Lucent common stock. In connection with the merger, Lucent recorded a third fiscal quarter 1999 charge to operating expenses of approximately $79 (non-tax deductible) for merger-related costs, primarily fees for investment bankers, attorneys, accountants and financial printing. Ascend's historical revenue and net loss for the fiscal year ended September 30, 1998 were $1,478 and $20, respectively. For the nine months ended June 30, 1999, Ascend's historical revenue and net income of $1,610 and $66, respectively, are included in Lucent's historical revenues and income from continuing operations, respectively, for the year ended September 30, 1999. Intercompany transactions between Lucent and Ascend for the nine months 64 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) ended June 30, 1999 of $138 and $86 have been eliminated from revenues and income from continuing operations, respectively, for the year ended September 30, 1999. Lucent has also completed other pooling transactions. The historical operations of these entities were not material to Lucent's consolidated results of operations either on an individual or aggregate basis; therefore, prior periods have not been restated for these mergers. 5. RECENT PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides guidance on the recognition, presentation and disclosure of revenues in financial statements and requires adoption no later than the fourth quarter of fiscal 2001. The Company is currently evaluating the impact of SAB 101 and its related interpretations to determine the effect it will have on the Company's consolidated financial position and results of operations. 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 requires the recognition of the fair value of all derivative instruments on the balance sheet. Subsequent to the issuance of SFAS 133, the FASB received many requests to clarify certain issues causing difficulties in implementation. In June 2000, the FASB issued SFAS 138, which responds to those requests by amending certain provisions of SFAS 133. These amendments include allowing foreign-currency denominated assets and liabilities to qualify for hedge accounting, permitting the offsetting of certain interentity foreign currency exposures that reduce the need for third-party derivatives and redefining the nature of interest rate risk to avoid sources of ineffectiveness. Lucent is adopting SFAS 133 and the corresponding amendments under SFAS 138 effective as of October 1, 2000. The impact of adopting SFAS 133, as amended by SFAS 138, is not significant. 6. SUPPLEMENTARY FINANCIAL INFORMATION SUPPLEMENTARY INCOME STATEMENT INFORMATION
YEARS ENDED SEPTEMBER 30, ------------------------- 2000 1999 1998 ------ ------ ----- INCLUDED IN COSTS AND OPERATING EXPENSES Amortization of software development costs.................. $ 396 $ 235 $ 210 ====== ====== ===== Depreciation of property, plant and equipment............... $1,370 $1,169 $ 882 ====== ====== ===== INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Amortization of goodwill and other acquired intangibles..... $ 551 $ 310 $ 105 ====== ====== ===== OTHER INCOME -- NET Interest income............................................. $ 125 $ 133 $ 122 Minority interests in earnings of subsidiaries.............. (50) (27) (24) Net equity losses from investments.......................... (27) (23) (207) (Loss) gains on foreign currency transactions............... (12) 1 (51) Net gain on sales and settlements of financial instruments............................................... 361 302 38 Gain on businesses sold..................................... 54 16 208 Miscellaneous -- net........................................ (85) -- 24 ------ ------ ----- Other income -- net......................................... $ 366 $ 402 $ 110 ====== ====== ===== DEDUCTED FROM INTEREST EXPENSE Capitalized interest........................................ $ 20 $ 20 $ 17 ====== ====== =====
65 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) SUPPLEMENTARY BALANCE SHEET INFORMATION
SEPTEMBER 30, ------------------ 2000 1999 ------- ------- INVENTORIES Completed goods............................................. $ 2,976 $ 2,374 Work in process............................................. 1,083 834 Raw materials............................................... 1,618 1,032 ------- ------- Inventories................................................. $ 5,677 $ 4,240 ======= ======= PROPERTY, PLANT AND EQUIPMENT -- NET Land and improvements....................................... $ 367 $ 328 Buildings and improvements.................................. 3,773 3,601 Machinery, electronic and other equipment................... 10,085 9,060 ------- ------- Total property, plant and equipment......................... 14,225 12,989 Less: Accumulated depreciation.............................. 7,141 6,770 ------- ------- Property, plant and equipment -- net........................ $ 7,084 $ 6,219 ======= ======= INCLUDED IN OTHER CURRENT LIABILITIES Advance billings, progress payments and customer deposits... $ 855 $ 719 ======= =======
SUPPLEMENTARY CASH FLOW INFORMATION
YEARS ENDED SEPTEMBER 30, ------------------------- 2000 1999 1998 ----- ----- ------- Interest payments, net of amounts capitalized............... $364 $316 $ 159 ==== ==== ====== Income tax payments, net.................................... $ 72 $774 $ 406 ==== ==== ====== Acquisitions of businesses: Fair value of assets acquired, net of cash acquired......... $165 $398 $1,748 Less: Fair value of liabilities assumed..................... 9 130 911 ---- ---- ------ Acquisitions of businesses, net of cash acquired............ $156 $268 $ 837 ==== ==== ======
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 percent 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, 1999 and 1998, 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 related to the Ascend and Nexabit mergers. 7. EARNINGS PER COMMON SHARE Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is 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. 66 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) The following table reconciles the number of shares used in the earnings per share calculations:
YEARS ENDED SEPTEMBER 30, -------------------------------- 2000 1999 1998 -------- -------- -------- (NUMBER OF SHARES IN MILLIONS) Common shares -- basic.................................. 3,232.3 3,101.8 3,025.3 Effect of dilutive securities: Stock options......................................... 88.5 109.5 78.4 Other................................................. 5.1 7.2 6.9 ------- ------- ------- Common shares -- diluted................................ 3,325.9 3,218.5 3,110.6 ======= ======= ======= 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................................. 41.0 5.5 14.0 ======= ======= =======
8. COMPREHENSIVE INCOME Comprehensive income, which is displayed in the Consolidated Statements of Changes in Shareowners' Equity, represents net income plus the results of certain shareowners' equity changes not reflected in the Consolidated Statements of Income. The after-tax components of accumulated other comprehensive income (loss) are as follows:
TOTAL FOREIGN UNREALIZED MINIMUM ACCUMULATED CURRENCY HOLDING PENSION OTHER TRANSLATION GAINS/ LIABILITY COMPREHENSIVE ADJUSTMENT (LOSSES) ADJUSTMENT INCOME/(LOSS) ----------- ---------- ---------- ------------- Beginning balance October 1, 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) Current-period change............... (185) (4) 2 (187) Amounts transferred to Avaya........ 64 -- 2 66 ----- ---- ---- ----- Ending balance, September 30, 2000.............................. $(434) $ 75 $ (6) $(365) ===== ==== ==== =====
Foreign currency translation adjustments are not currently adjusted for income taxes since they relate to indefinite investments in non-U.S. subsidiaries. 9. BUSINESS RESTRUCTURING AND OTHER CHARGES In the fourth quarter of calendar year 1995, a pre-tax charge of $2,655 was recorded to cover restructuring costs of $2,467 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 $16 and $184 for the years ended September 30, 2000 and 1999, respectively. Included in these deductions were cash payments of $11 and $61 for the years ended September 30, 2000 and 1999, respectively, and non-cash related charges of $15 for the year ended September 30, 1999. 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 67 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) generate future revenues. The reserves were charged as the product lines and businesses were exited during 1999. In addition, during 1999 Lucent reversed $108 of business restructuring reserves primarily related to favorable experience in employee separations, as well as to other projects being completed at a cost lower than originally estimated for the year ended September 30, 1999. As of September 30, 1999, all restructuring plans were substantially completed. 10. INCOME TAXES The following table presents the principal reasons for the difference between the effective tax rate on continuing operations and the U.S. federal statutory income tax rate:
YEARS ENDED SEPTEMBER 30, ------------------------- 2000 1999 1998 ----- ----- ----- U.S. federal statutory income tax rate...................... 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax effect.................................................... 1.7% 2.3% 3.1% Foreign earnings and dividends taxed at different rates..... (1.1)% (0.1)% 1.0% Research credits............................................ (3.5)% (2.5)% (3.2)% Acquisition-related costs(1)................................ 14.2% 3.9% 25.9% Other differences -- net.................................... (2.3)% (1.9)% (1.9)% ---- ---- ---- Effective income tax rate................................... 44.0% 36.7% 59.9% Effective income tax rate excluding acquisition-related costs(1).................................................. 29.8% 32.8% 34.0%
--------------- (1) Includes non-tax deductible purchased in-process research and development, goodwill amortization and merger-related costs. The following table presents the U.S. and non-U.S. components of income before income taxes and the provision for income taxes:
YEARS ENDED SEPTEMBER 30, -------------------------- 2000 1999 1998 ------ ------ ------ INCOME BEFORE INCOME TAXES U.S. .................................................... $2,349 $4,169 $1,689 Non-U.S. ................................................ 654 609 231 ------ ------ ------ Income before income taxes............................... $3,003 $4,778 $1,920 ====== ====== ====== PROVISION FOR INCOME TAXES CURRENT Federal.................................................. $ 460 $ 476 $ 766 State and local.......................................... 40 8 127 Non-U.S. ................................................ 356 294 170 ------ ------ ------ Sub-total.............................................. 856 778 1,063 ------ ------ ------ DEFERRED Federal.................................................. 399 858 36 State and local.......................................... 78 185 42 Non-U.S. ................................................ (11) (69) 10 ------ ------ ------ Sub-total.............................................. 466 974 88 ------ ------ ------ Provision for income taxes............................... $1,322 $1,752 $1,151 ====== ====== ======
68 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) As of September 30, 2000, Lucent had tax credit carryforwards of $112 and federal, state and local, and non-U.S. net operating loss carryforwards of $138 (tax-effected), all of which expire primarily after the year 2004. As of September 30, 2000, Lucent has recorded valuation allowances totaling $198 against these carryforwards primarily in certain foreign jurisdictions where recovery of these carryforwards is uncertain. The components of deferred tax assets and liabilities are as follows:
SEPTEMBER 30, ---------------- 2000 1999 ------ ------ DEFERRED INCOME TAX ASSETS Employee benefit obligations................................ $2,788 $2,572 Reserves and allowances..................................... 847 855 Net operating loss/credit carryforwards..................... 250 198 Valuation allowance......................................... (198) (148) Other....................................................... 231 348 ------ ------ Total deferred tax assets................................... $3,918 $3,825 ====== ====== DEFERRED INCOME TAX LIABILITIES Employee benefit obligations................................ $2,698 $2,176 Property, plant and equipment............................... 497 408 Other....................................................... 824 639 ------ ------ Total deferred tax liabilities.............................. $4,019 $3,223 ====== ======
Lucent has not provided for U.S. deferred income taxes or foreign withholding taxes on $3,802 of undistributed earnings of its non-U.S. subsidiaries as of September 30, 2000, since these earnings are intended to be reinvested indefinitely. 11. DEBT OBLIGATIONS
SEPTEMBER 30, SEPTEMBER 30, 2000 1999 ------------- ------------- DEBT MATURING WITHIN ONE YEAR Commercial paper.......................................... $2,475 $ 667 Long-term debt............................................ 765 41 Secured borrowings and other.............................. 243 997 ------ ------ Total debt maturing within one year....................... $3,483 $1,705 ====== ====== Weighted Average Interest Rates Commercial paper........................................ 6.3% 5.0% Long-term debt, secured borrowings and other............ 7.4% 9.6%
Lucent had revolving credit facilities at September 30, 2000 aggregating $4,731 (a portion of which is used to support Lucent's commercial paper program), $4,000 with domestic lenders and $731 with foreign lenders. The total credit facilities available at September 30, 2000 with domestic and foreign lenders were $4,000 and $455, respectively. 69 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED)
SEPTEMBER 30, SEPTEMBER 30, 2000 1999 ------------- ------------- 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......................... 500 500 6.50% debentures due January 15, 2028..................... 300 300 6.45% debentures due March 15, 2029....................... 1,360 1,360 7.70% notes due May 19, 2010.............................. 20 -- 8.00% notes due May 18, 2015.............................. 25 -- Long-term lease obligations............................... 62 79 Secured borrowings and other (6.9% and 8.4% weighted average interest rates, respectively)................... 116 509 Less: Unamortized discount................................ 42 45 ------ ------ Total long-term debt...................................... 3,841 4,203 Less: Amounts maturing within one year.................... 765 41 ------ ------ Long-term debt............................................ $3,076 $4,162 ====== ======
Lucent has an effective shelf registration statement for the issuance of debt securities up to $1,800, of which $1,755 remains available at September 30, 2000. The following table shows the aggregate maturities, by year, of the $3,841 in total long-term debt obligations:
SEPTEMBER 30, --------------------------------------------- 2001 2002 2003 2004 2005 LATER YEARS ---- ---- ---- ---- ---- ----------- $765 $22 $38 $28 $21 $2,967
In 1999, Lucent sold trade accounts receivable and notes receivable to unaffiliated financial institutions with and without recourse. Certain sales with recourse were 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 in the year ended September 30, 1999. These arrangements were terminated in the year ended September 30, 2000. In 2000, there were no sales of receivables accounted for as secured borrowings. See Note 16 for further discussion of sales of receivables. 12. 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. The 70 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) following information summarizes activity in the pension and postretirement benefit plans for the entire Company, including discontinued operations:
PENSION BENEFITS POSTRETIREMENT BENEFITS SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------------ 2000 1999 2000 1999 -------- ------- ---------- ---------- Change in benefit obligation Benefit obligation at October 1.................... $ 27,401 $27,846 $ 8,604 $ 9,193 Service cost....................................... 478 509 67 80 Interest cost...................................... 1,915 1,671 601 537 Actuarial losses(gains)............................ 370 (2,182) 33 (240) Amendments......................................... (1) 1,534 -- (359) Benefits paid...................................... (2,294) (1,977) (651) (607) Benefit obligation assumed by Avaya................ (1,756) -- (412) -- -------- ------- ------- ------- Benefit obligation at September 30................. $ 26,113 $27,401 $ 8,242 $ 8,604 -------- ------- ------- ------- Change in plan assets Fair value of plan assets at October 1............. $ 41,067 $36,191 $ 4,467 $ 3,959 Actual return on plan assets....................... 9,791 7,114 654 776 Company contributions.............................. 19 14 8 29 Benefits paid...................................... (2,294) (1,977) (651) (607) Assets transferred to Avaya........................ (2,984) -- (255) -- Other (including transfer of assets from pension to postretirement plans)............................ (337) (275) 334 310 -------- ------- ------- ------- Fair value of plan assets at September 30.......... $ 45,262 $41,067 $ 4,557 $ 4,467 -------- ------- ------- ------- Funded (unfunded) status of the plan............... $ 19,149 $13,666 $(3,685) $(4,137) Unrecognized prior service cost.................... 2,086 2,583 49 121 Unrecognized transition asset...................... (322) (645) -- -- Unrecognized net gain.............................. (14,499) (9,466) (1,208) (1,014) -------- ------- ------- ------- Net amount recognized.............................. $ 6,414 $ 6,138 $(4,844) $(5,030) ======== ======= ======= ======= Amounts recognized in the Consolidated Balance Sheets consist of: Prepaid pension costs............................ $ 6,440 $ 5,459 $ -- $ -- Prepaid pension costs allocated to discontinued operations.................................... -- 716 -- -- Accrued benefit liability........................ (37) (63) (4,844) (4,730) Accrued benefit liability allocated to discontinued operations....................... -- -- -- (300) Intangible asset................................. 5 9 -- -- Accumulated other comprehensive income........... 6 17 -- -- -------- ------- ------- ------- Net amount recognized.............................. $ 6,414 $ 6,138 $(4,844) $(5,030) ======== ======= ======= =======
Pension plan assets include $102 and $287 of Lucent common stock at September 30, 2000 and 1999, respectively. Postretirement plan assets include $3 and $20 of Lucent common stock at September 30, 2000 and 1999, respectively. 71 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) The asset and pension obligation amounts that were transferred to Avaya are subject to final adjustment. The final amounts to be transferred to Avaya are not expected to be materially different from the estimated amounts. COMPONENTS OF NET PERIODIC BENEFIT COST
YEARS ENDED SEPTEMBER 30, ----------------------------- 2000 1999 1998 ------- ------- ------- PENSION COST Service cost................................................ $ 478 $ 509 $ 331 Interest cost on projected benefit obligation............... 1,915 1,671 1,631 Expected return on plan assets.............................. (3,229) (2,957) (2,384) Amortization of unrecognized prior service costs............ 362 461 164 Amortization of transition asset............................ (300) (300) (300) Amortization of net (gain) loss............................. (197) 2 -- ------- ------- ------- Net pension credit.......................................... $ (971) $ (614) $ (558) ======= ======= ======= DISTRIBUTION OF NET PENSION CREDIT Continuing operations....................................... $(1,085) $ (740) $ (647) Discontinued operations..................................... 114 126 89 ------- ------- ------- Net pension credit.......................................... $ (971) $ (614) $ (558) ======= ======= ======= POSTRETIREMENT COST Service cost................................................ $ 67 $ 80 $ 63 Interest cost on accumulated benefit obligation............. 601 537 540 Expected return on plan assets.............................. (338) (308) (263) Amortization of unrecognized prior service costs............ 37 53 53 Amortization of net (gain) loss............................. (12) 6 3 ------- ------- ------- Net postretirement benefit cost............................. $ 355 $ 368 $ 396 ======= ======= ======= DISTRIBUTION OF NET POSTRETIREMENT BENEFIT COST Continuing operations....................................... $ 306 $ 315 $ 351 Discontinued operations..................................... 49 53 45 ------- ------- ------- Net postretirement benefit cost............................. $ 355 $ 368 $ 396 ======= ======= ======= PENSION AND POSTRETIREMENT BENEFITS WEIGHTED-AVERAGE ASSUMPTIONS AS OF SEPTEMBER 30 Discount rate............................................... 7.5% 7.25% 6.0% 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-plan 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 SFAS No. 87, "Employers' Accounting for Pensions," because it 72 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) 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. The cumulative effect of this accounting change related to periods prior to fiscal year 1999 of $2,150 ($1,308 after-tax, or $0.42 and $0.41 earnings 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 $0.08 earnings per basic and diluted share) as compared with the previous accounting method. If the accounting change were applied retroactively for the year ended September 30, 1998, pro forma net income would be $1,306, earnings per share-basic would be $0.43 and earnings per share-diluted would be $0.42. 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 receive a different pension benefit, known as an account balance program, effective January 1, 2000. Expenses related to the account balance program are included in the previous pension cost table. Lucent has several non-pension postretirement benefit plans. For postretirement health care benefit plans, Lucent assumed a 7.6% annual health care cost trend rate for 2001 through 2004, after which the trend rate would decline to 3.9%. 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... $ 26 $ 24 Effect on postretirement benefit obligation............... $353 $329
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 $228, $318 and $317 for the years ended September 30, 2000, 1999 and 1998, respectively. Lucent savings plan expense charged to continuing operations was $185, $250 and $254 for the years ended September 30, 2000, 1999 and 1998, 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 a reduction in shareowners' equity. As of September 30, 2000, the ESOP contained 12.8 million shares of Lucent's common stock. Of the 12.8 million shares, 11.0 million shares have been allocated under the ESOP and 1.8 million shares were unallocated. As of September 30, 2000, the unallocated shares had a fair value of $54. 13. 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. 73 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) 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 two-to-10-year terms and vest within four years from the date of grant. Subject to customary antidilution adjustments and certain exceptions, the total number of shares of common stock authorized for option grants under the plans was 446 million shares at September 30, 2000. 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 generally included as part of the purchase price. As of July 1, 2000, Lucent began recording deferred compensation related to unvested options held by employees of companies acquired in a purchase acquisition, in accordance with FASB Interpretation No. 44. Unamortized deferred compensation expense was $34 at September 30, 2000. The deferred expense calculation and future amortization is based on the graded vesting schedule of the awards. 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 2000, 1999 and 1998, 7.8 million, 7.5 million and 9.4 million shares, respectively, were purchased under the ESPP and the employee stock purchase plans of acquired companies, at a weighted average price of $46.75, $43.60 and $23.23, respectively. Lucent has adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") and, as permitted under SFAS 123, applies Accounting Principles Board Opinion No. 25 ("APB 25") and related interpretations in accounting for its plans. Compensation expense recorded under APB 25 was $49, $50 and $79 for the years ended September 30, 2000, 1999 and 1998, respectively. If Lucent had elected to adopt the optional recognition provisions of SFAS 123 for its stock option plans and ESPP, net income and earnings per share would have been changed to the pro forma amounts indicated below:
YEARS ENDED SEPTEMBER 30, -------------------------- 2000 1999 1998 ------ ------ ------ NET INCOME As reported.............................................. $1,219 $4,789 $1,065 Pro forma................................................ $ 452 $4,239 $ 770 EARNINGS PER SHARE-BASIC As reported.............................................. $ 0.38 $ 1.54 $ 0.35 Pro forma................................................ $ 0.14 $ 1.37 $ 0.25 EARNINGS PER SHARE-DILUTED As reported.............................................. $ 0.37 $ 1.49 $ 0.34 Pro forma................................................ $ 0.13 $ 1.27 $ 0.24
74 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) 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:
2000 1999 1998 ---- ---- ---- WEIGHTED AVERAGE ASSUMPTIONS Dividend yield.............................................. 0.23% 0.10% 0.17% Expected volatility -- Lucent............................... 39.2% 33.8% 28.2% -- Acquisitions(1)...................... 55.3% 58.2% 60.3% Risk-free interest rate..................................... 6.5% 5.2% 5.3% Expected holding period (in years).......................... 2.9 3.7 4.2
--------------- (1) Pre-merger assumptions for companies acquired in a pooling-of-interests. Presented below is a summary of the status of Lucent stock options and the related transactions for the years ended September 30, 2000, 1999 and 1998:
WEIGHTED AVERAGE SHARES EXERCISE PRICE (IN THOUSANDS) PER SHARE -------------- ---------------- Options outstanding at October 1, 1997................. 194,066 $11.85 Granted/assumed(1)(2).................................. 130,730 $27.46 Exercised.............................................. (41,722) $ 9.33 Forfeited/expired...................................... (15,941) $19.85 ------- ------ Options outstanding at September 30, 1998.............. 267,133 $19.40 Granted/assumed(1)..................................... 61,944 $47.68 Exercised.............................................. (30,951) $12.20 Forfeited/expired...................................... (11,834) $23.16 ------- ------ Options outstanding at September 30, 1999.............. 286,292 $26.15 Granted/assumed(1)..................................... 285,798 $47.95 Exercised.............................................. (74,963) $15.38 Forfeited/expired...................................... (38,815) $41.56 ------- ------ Options outstanding at September 30, 2000.............. 458,312 $40.20 ======= ====== Options outstanding reflecting spin-off adjustments(3)....................................... 431,509 $39.34 ======= ======
--------------- (1) Includes options converted in acquisitions. (2) 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. (3) Effective with the spin-off of Avaya on September 30, 2000, unvested Lucent stock options held by Avaya employees were converted into Avaya stock options. For remaining unexercised Lucent stock options, the number of Lucent stock options and the exercise price were adjusted to preserve the intrinsic value of the stock options that existed prior to the spin-off. The weighted average fair value of Lucent stock options, calculated using the Black-Scholes option-pricing model, granted during the years ended September 30, 2000, 1999 and 1998 is $16.15, $16.65 and $11.87 per share, respectively. 75 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) The following table summarizes the status of stock options outstanding and exercisable at September 30, 2000 after considering the spin-off adjustments:
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE ----------------------------------------- -------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE REMAINING EXERCISE EXERCISE RANGE OF EXERCISE SHARES CONTRACTUAL PRICE PER SHARES PRICE PER PRICES PER SHARE (IN THOUSANDS) LIFE (YEARS) SHARE (IN THOUSANDS) SHARE ----------------- -------------- ------------ --------- -------------- --------- $ 0.02 to $ 11.14 65,014 5.8 $ 7.61 49,393 $ 9.16 $11.15 to $ 23.07 47,558 6.6 17.19 39,825 16.68 $23.08 to $ 41.70 61,080 7.9 34.52 11,904 31.00 $41.71 to $ 42.47 101,011 2.2 42.17 60 42.15 $42.48 to $ 58.60 49,474 9.0 52.57 3,513 51.73 $58.61 to $ 59.13 52,202 9.6 58.61 99 58.78 $59.14 to $101.73 55,170 9.2 65.89 2,987 64.59 ------- ------ ------- ------ Total 431,509 $39.34 107,781 $17.34 ======= ====== ======= ======
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, 2000, 1999 and 1998:
YEARS ENDED SEPTEMBER 30, -------------------------- 2000 1999 1998 ------ ------ ------ Other stock unit awards granted (in thousands)........... 858 532 1,730 Weighted average market value of shares granted during the period............................................. $59.23 $31.82 $22.23
14. OPERATING SEGMENTS As described in Note 3, Lucent has reclassified the results of operations of Avaya as discontinued operations. This business was previously disclosed as a separate operating segment. The segment data included below has been restated to exclude amounts related to the spin-off of Avaya. Lucent operates in the global telecommunications networking industry and has two reportable operating segments: Service Provider Networks ("SPN") and Microelectronics and Communications Technologies ("MCT"). SPN provides public networking systems, software and services to telecommunications service providers and public network operators around the world. MCT provides high-performance optoelectronic components and integrated circuits, power systems and optical fiber for applications in the communications and computing industries. MCT also includes Lucent's new ventures business. The two 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 was 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 other acquired intangibles amortization, and IPRD 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 on other factors according to the nature of the activity. The 76 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) accounting policies of the reportable operating segments are the same as those described in the Summary of Significant Accounting Policies (see Note 2).
REPORTABLE SEGMENTS ------------------- OTHER AND CONSOLIDATED SPN MCT CORPORATE(1) TOTALS -------- ------- ------------ ------------ YEAR ENDED SEPTEMBER 30, 2000 External revenues............................... $26,509 $6,953 $ 351 $33,813 Intersegment revenues........................... 328 1,440 (1,768) -- ------- ------ ------- ------- Total revenues........................ 26,837 8,393 (1,417) 33,813 Depreciation and amortization................... 959 553 806 2,318 Operating income (loss)......................... 3,041 1,582 (1,638) 2,985 Assets.......................................... 26,919 8,497 13,376 48,792 Capital expenditures............................ 981 1,003 717 2,701 REPORTABLE SEGMENTS ------------------- OTHER AND CONSOLIDATED SPN MCT CORPORATE(1) TOTALS -------- ------- ------------ ------------ YEAR ENDED SEPTEMBER 30, 1999 External revenues............................... $24,833 $5,026 $ 758 $30,617 Intersegment revenues........................... 230 1,297 (1,527) -- ------- ------ ------- ------- Total revenues........................ 25,063 6,323 (769) 30,617 Depreciation and amortization................... 677 499 404 1,580 Operating income (loss)......................... 4,730 786 (822) 4,694 Assets.......................................... 17,627 4,146 13,599 35,372 Capital expenditures............................ 713 828 501 2,042 REPORTABLE SEGMENTS ------------------- OTHER AND CONSOLIDATED SPN MCT CORPORATE(1) TOTALS -------- ------- ------------ ------------ YEAR ENDED SEPTEMBER 30, 1998 External revenues............................... $20,116 $4,134 $ 117 $24,367 Intersegment revenues........................... 215 1,044 (1,259) -- ------- ------ ------- ------- Total revenues........................ 20,331 5,178 (1,142) 24,367 Depreciation and amortization................... 631 371 226 1,228 Operating income (loss)......................... 3,008 406 (1,461) 1,953 Assets.......................................... 13,154 3,140 8,851 25,145 Capital expenditures............................ 584 712 319 1,615
--------------- (1) 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, prepaid pension costs and other assets. 77 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) RECONCILING ITEMS A reconciliation of the totals reported for the operating segments to income from continuing operations before provision for income taxes in the Consolidated Financial Statements is as follows:
YEARS ENDED SEPTEMBER 30, ---------------------------- 2000 1999 1998 ------- ------ ------- OPERATING INCOME Total reportable segments.............................. $ 4,623 $5,516 $ 3,414 Acquisition/integration-related costs.................. (1,066) (530) (1,385) Goodwill and other acquired intangibles amortization... (551) (310) (105) Other and corporate.................................... (21) 18 29 ------- ------ ------- Operating income....................................... 2,985 4,694 1,953 Other income -- net.................................... 366 402 110 Interest expense....................................... (348) (318) (143) ------- ------ ------- Income from continuing operations before provision for income taxes......................................... $ 3,003 $4,778 $ 1,920 ======= ====== =======
PRODUCTS AND SERVICES REVENUES The table below presents external revenue for groups of similar products and services:
YEARS ENDED SEPTEMBER 30, ----------------------------- 2000 1999 1998 ------- ------- ------- Wireless Products..................................... $ 6,223 $ 5,511 $ 4,456 Core Networking Systems............................... 19,018 18,309 14,962 NetCare Professional Services......................... 1,247 1,107 656 Microelectronics...................................... 3,726 2,805 2,396 Other(1).............................................. 3,599 2,885 1,897 ------- ------- ------- Totals...................................... $33,813 $30,617 $24,367 ======= ======= =======
--------------- (1) "Other" principally includes optical fiber, power systems and consumer products. GEOGRAPHIC INFORMATION
EXTERNAL REVENUES(1) LONG-LIVED ASSETS(2) YEARS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- --------------------------- 2000 1999 1998 2000 1999 1998 ------- ------- ------- ------- ------ ------ United States.................... $22,337 $20,151 $17,428 $15,367 $5,575 $4,719 Non-U.S. countries............... 11,476 10,466 6,939 1,662 1,604 1,317 ------- ------- ------- ------- ------ ------ Totals................. $33,813 $30,617 $24,367 $17,029 $7,179 $6,036 ======= ======= ======= ======= ====== ======
--------------- (1) Revenues are attributed to geographic areas based on the location of customers. (2) Represents property, plant and equipment (net), and goodwill and other acquired intangibles. CONCENTRATIONS Historically, Lucent has relied on a limited number of customers for a substantial portion of its total revenues. Revenues from Verizon accounted for approximately 13% of consolidated revenues in fiscal year 2000, principally in the SPN segment. Revenues from AT&T accounted for approximately 10%, 14% and 15% of consolidated revenues in the years 2000, 1999 and 1998, respectively, principally in the SPN segment. Lucent expects a significant portion of its future revenues to continue to be generated by a limited number of 78 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) 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. 15. FINANCIAL INSTRUMENTS The carrying values and estimated fair values of financial instruments, including derivative financial instruments were as follows:
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 ------------------ ------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------ -------- ------ ASSETS Derivative and off-balance-sheet instruments: Foreign exchange forward contracts/options..... $ 31 $ 32 $ 17 $ 16 Letters of credit.............................. -- 2 -- 2 LIABILITIES Long-term debt(1).............................. $3,029 $2,731 $4,083 $3,956 Derivative and off-balance-sheet instruments: Foreign exchange forward contracts/options..... 13 19 35 26
--------------- (1) Excluding long-term lease obligations of $47 at September 30, 2000 and $79 at September 30, 1999. 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 exchange forward 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 non-performance by the other party to the financial instruments for commitments to extend credit and financial guarantees is limited to the amount drawn and outstanding on those instruments. Lucent seeks to reduce credit risk on financial instruments by dealing only with financially secure counterparties. Exposure to credit risk is controlled through credit approvals, credit limits and continuous monitoring procedures and reserves for losses are established when deemed necessary. 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. 79 80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) 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 the foreign exchange rates. The notional amounts for foreign exchange forward and option contracts represent the U.S. dollar equivalent of amounts exchanged. Generally, foreign exchange forward contracts are designated for firmly committed or forecast 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 other income-net when the transactions occur or are no longer probable and are not material to the Consolidated Financial Statements at September 30, 2000 and 1999. All other gains and losses on foreign exchange forward 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 to, 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 2000, these notional amounts principally represent contracts in Canadian dollars, Brazilian reals, Australian dollars, British pounds, Japanese yen and Euros. 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, ---------------- 2000 1999 ------ ------ Foreign exchange forward contracts.......................... $1,850 $1,778 Foreign exchange option contracts........................... $ 124 $ 251
Lucent may enter into certain interest rate swap agreements to manage its risk between fixed and variable interest rates and long-term and short-term maturity debt instruments. There were no material interest rate swap agreements in effect during 2000 and 1999. 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. 80 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) 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 expire without being drawn upon. Therefore, the amounts committed but not drawn-down do not necessarily represent future cash flows.
AMOUNTS AMOUNTS COMMITTED BUT DRAWN-DOWN AND NOT DRAWN-DOWN OUTSTANDING SEPTEMBER 30, SEPTEMBER 30, ---------------- ---------------- 2000 1999 2000 1999 ------ ------ ------ ------ Commitments to extend credit.................... $5,391 $5,543 $1,263 $1,565 Guarantees of debt.............................. $ 677 $ 108 $ 771 $ 324
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. In certain situations, credit may not be available for draw down until certain conditions precedent are met. 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 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 $917 and $910 as of September 30, 2000 and 1999, respectively. 16. SECURITIZATIONS In September 2000, Lucent and a third-party financial institution arranged for the creation of a non-consolidated Special Purpose Trust (the "Trust") for the purpose of allowing Lucent from time to time to sell on a limited-recourse basis up to a maximum of $970 of customer finance loans and receivables (the "Loans") at any given point in time through a wholly owned bankruptcy-remote subsidiary, which in turn will sell the Loans to the Trust. Lucent has also agreed, in the case of foreign currency denominated Loans and Loans with a fixed interest rate, to indemnify the Trust for foreign exchange losses and losses due to movements in interest rates (if any) if hedging instruments have not been entered into for such Loans. Lucent will receive a fee from the Trust for either arranging hedging instruments or providing the indemnity. Lucent will continue to service, administer and collect the Loans on behalf of the Trust and receive a fee for performance of these services. Lucent will also receive a fee for referring Loans to the Trust that the Trust purchases from Lucent. At September 30, 2000, Lucent had sold $579 of Loans to the Trust. The impact of this transaction increased cash flows from operating activities by $575. In September 1999, a subsidiary of Lucent sold approximately $625 of accounts receivable from one large non-U.S. customer 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 as of September 30, 1999. The impact of the above transaction on the 1999 financial statements reduced receivables and increased cash flows from operating activities in the Consolidated Statements of Cash Flows by $600. During December 1999, Lucent repurchased $408 of the $625 of accounts receivable, and the previously reported arrangement was terminated. In addition, Lucent established a new arrangement whereby its subsidiary sold $750 of accounts receivable (including the repurchased receivables described) to a consortium of banks with limited recourse. As a result 81 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) of these transactions, receivables at September 30, 2000 were reduced by $342 and cash flows from operating activities were increased by $312 during fiscal 2000. During the fourth fiscal quarter of 2000, approximately $550 of additional receivables from this customer were sold. From time to time, Lucent may sell trade and note receivables with or without recourse and/or discounts in the normal course of business. 17. 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, 2000, 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, from matters other than those described in the next paragraph, beyond that provided for at September 30, 2000 would not be material to the annual Consolidated Financial Statements. In addition, Lucent and certain of its former officers are defendants in several purported shareholder class action lawsuits for alleged violations of federal securities laws. Specifically, the complaints allege, among other things, that beginning in late October 1999, Lucent and certain of its officers misrepresented Lucent's financial condition and failed to disclose material facts that would have an adverse impact on Lucent's future earnings and prospects for growth. These actions seek compensatory and other damages, and costs and expenses associated with the litigation. These actions are in the early stages and the Company is unable to determine their potential impact on the Consolidated Financial Statements. Lucent intends to defend these actions vigorously. In connection with the formation of Lucent from certain units of AT&T Corp. and the associated assets and liabilities of those units and AT&T's distribution of its remaining interest in Lucent to its shareowners, Lucent, AT&T and NCR Corporation executed and delivered the Separation and Distribution Agreement, dated as of February 1, 1996, as amended and restated, and certain related agreements. The Separation and Distribution Agreement, among other things, provides that Lucent will indemnify AT&T and NCR for all liabilities relating to Lucent's business and operations and for all contingent liabilities relating to Lucent's business and operations or otherwise assigned to Lucent. In addition to contingent liabilities relating to the present or former business of Lucent, any contingent liabilities relating to AT&T's discontinued computer operations (other than those of NCR) were assigned to Lucent. The Separation and Distribution Agreement provides for the sharing of contingent liabilities not allocated to one of the parties, in the following proportions: AT&T: 75%, Lucent: 22%, and NCR: 3%. The Separation and Distribution Agreement also provides that each party will share specified portions of contingent liabilities related to the business of any of the other parties that exceed specified levels. In connection with the spin-off of Avaya, Lucent and Avaya executed and delivered a Contribution and Distribution Agreement which provides for indemnification by each company with respect to contingent liabilities primarily relating to their respective businesses or otherwise assigned to each, subject to certain sharing provisions. In the event the aggregate value of all amounts paid by each company, in respect of any single contingent liability or any set or group of related contingent liabilities, is in excess of $50 each company will share portions in excess of the threshold amount based on agreed-upon percentages. The Contribution and Distribution Agreement also provides for the sharing of certain contingent liabilities, specifically: (1) any contingent liabilities that are not primarily contingent liabilities of Lucent or contingent liabilities associated with the businesses attributed to Avaya; (2) certain specifically identified liabilities, including liabilities relating to terminated, divested or discontinued businesses or operations; and (3) shared contingent liabilities within the meaning of the Separation and Distribution Agreement with AT&T Corp. 82 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) 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 five 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 amounts 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, 2000 cannot be estimated. LEASE COMMITMENTS Lucent leases land, buildings and equipment under agreements that expire in various years through 2020. Rental expense under operating leases was $522, $406 and $336 for the years ended September 30, 2000, 1999 and 1998, respectively. The table below shows the future minimum lease payments due under non-cancelable leases at September 30, 2000. Such payments total $1,463 for operating leases. The net present value of such payments on capital leases was $62 after deducting imputed interest of $10.
YEARS ENDED SEPTEMBER 30, --------------------------------------------- LATER 2001 2002 2003 2004 2005 YEARS ---- ---- ---- ---- ---- ----- Operating leases.............................. $298 $255 $202 $150 $109 $449 Capital leases................................ 16 21 21 13 1 -- ---- ---- ---- ---- ---- ---- Minimum lease payments........................ $314 $276 $223 $163 $110 $449 ==== ==== ==== ==== ==== ====
18. SUBSEQUENT EVENTS On November 13, 2000, Lucent entered into an agreement to sell its power systems business to Tyco International Ltd., a diversified manufacturing and service company, for $2,500 in cash. The sale, which is subject to regulatory approval and other customary closing conditions, is expected to close by December 31, 2000. 83 84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED) 19. QUARTERLY INFORMATION (UNAUDITED)
FISCAL YEAR QUARTERS ------------------------------------------------------------- FIRST SECOND THIRD FOURTH TOTAL ------ ------ ------ ------ ------- Year Ended September 30, 2000 Revenues....................... $8,065 $8,355 $8,713 $8,680 $33,813 Gross margin................... 3,758 3,482 3,790 3,244 14,274 Income (loss) from continuing operations................... 1,124(1) 622(2) (14)(3) (51)(4) 1,681 Income (loss) from discontinued operations................... 125 133 (287) (433) (462) ------ ------ ------ ------ ------- Net income (loss).............. $1,249 $ 755 $ (301) $ (484) $ 1,219 ====== ====== ====== ====== ======= Earnings (loss) per common share -- basic: Income (loss) from continuing operations................ $ 0.36(1) $ 0.20(2) $(0.00)(3) $(0.01)(4) $ 0.52 Income (loss) from discontinued operations... 0.04 0.04 (0.09) (0.13) (0.14) ------ ------ ------ ------ ------- Net income (loss)............ $ 0.40 $ 0.24 $(0.09) $(0.14) $ 0.38 ====== ====== ====== ====== ======= Earnings (loss) per common share -- diluted: Income (loss) from continuing operations................ $ 0.34(1) $ 0.19(2) $(0.00)(3)(5) $(0.01)(4)(5) $ 0.51 Income (loss) from discontinued operations... 0.04 0.04 (0.09)(5) (0.13)(5) (0.14) ------ ------ ------ ------ ------- Net income (loss)............ $ 0.38 $ 0.23 $(0.09)(5) $(0.14)(5) $ 0.37 ====== ====== ====== ====== ======= Dividends per share............ $ 0.04 $ 0.00 $ 0.02 $ 0.02 $ 0.08 ====== ====== ====== ====== ======= Stock price:(10) High......................... 84 3/16 77 1/2 65 15/16 67 3/16 84 3/16 Low.......................... 55 1/16 49 13/16 51 1/16 28 1/16 28 1/16 Quarter-end close............ 75 62 58 3/4 30 1/2 30 1/2 Year Ended September 30, 1999 Revenues....................... $8,036 $6,831 $7,403 $8,347 $30,617 Gross margin................... 4,378 3,347 3,573 3,714 15,012 Income from continuing operations................... 1,194(6) 511(7) 622(8) 699(9) 3,026 Income from discontinued operations................... 42 24 141 248 455 ------ ------ ------ ------ ------- Income before cumulative effect of accounting change......... 1,236 535 763 947 3,481 Cumulative effect of accounting change....................... 1,308 -- -- -- 1,308 ------ ------ ------ ------ ------- Net income..................... $2,544 $ 535 $ 763 $ 947 $ 4,789 ====== ====== ====== ====== =======
84 85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED)
FISCAL YEAR QUARTERS ------------------------------------------------------------- FIRST SECOND THIRD FOURTH TOTAL ------ ------ ------ ------ ------- Earnings per common share -- basic: Income from continuing operations................ $ 0.39(6) $ 0.16(7) $ 0.20(8) $ 0.22(9) $ 0.97 Income from discontinued operations................ 0.01 0.01 0.05 0.08 0.15 Cumulative effect of accounting change......... 0.43 -- -- -- 0.42 ------ ------ ------ ------ ------- Net income................... $ 0.83 $ 0.17 $ 0.25 $ 0.30 $ 1.54 ====== ====== ====== ====== =======
Earnings per common share -- diluted: Income from continuing operations................ $ 0.38(6) $ 0.16(7) $ 0.19(8) $ 0.21(9) $ 0.94 Income from discontinued operations................ 0.01 0.01 0.05 0.08 0.14 Cumulative effect of accounting change......... 0.41 -- -- -- 0.41 ------ ------ ------ ------ ------- Net income................... $ 0.80 $ 0.17 $ 0.24 $ 0.29 $ 1.49 ====== ====== ====== ====== ======= Dividends per share............ $ 0.04 $ 0.00 $ 0.02 $ 0.02 $ 0.08 ====== ====== ====== ====== ======= Stock price:(10) 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
--------------- (1) Includes an after-tax gain of $115 ($189 pre-tax) associated with the sale of an equity investment and an after-tax charge of $40 ($61 pre-tax) primarily associated with the mergers with INS, Excel and Xedia. (2) Includes an after-tax charge of $7 ($11 pre-tax) of IPRD related to the acquisition of VTC. (3) Includes an after-tax charge of $863 (non-tax impacting) of IPRD related to the acquisitions of Chromatis, Herrmann, Ortel and Agere. (4) Includes an after-tax charge of $131 (non-tax impacting) of IPRD related to the acquisition of Spring Tide. (5) As a result of the loss reported from continuing operations, potentially dilutive securities have been excluded from the calculation of diluted earnings (loss) per share because their effect would be anti-diluted. (6) Includes an after-tax charge of $287 ($295 pre-tax) of IPRD related to the acquisitions of Quadritek, Stratus, XNT and Quantum. (7) Includes an after-tax charge of $15 ($18 pre-tax) of IPRD related to the acquisitions of WaveAccess, Enable Ethernet and Sybarus. In addition, $24 of Stratus IPRD was reversed. As a result of the merger with Vital Signs, Lucent recorded a charge to operating expenses of $7 (non-tax impacting) for direct merger related costs. (8) Includes an after-tax charge of $81 (non-tax impacting) primarily associated with the mergers with Ascend and RASCom. (9) Includes pre-tax costs of $258 ($191 after-tax) primarily associated with asset impairments, integration-related charges and merger expenses related to the mergers with Ascend and Nexabit. These costs principally include the write-off of Livingston goodwill and other acquired intangibles and certain product and system integration and direct merger expenses related to Nexabit. Additionally, as a result of the 1999 acquisition of InterCall, Lucent recorded an after-tax charge of $2 ($3 pre-tax) for IPRD and an after-tax gain of $167 ($274 pre-tax) associated with the sale of an equity investment. (10) 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. 85 86 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 COSTS & OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (NET) DEDUCTIONS OF PERIOD ----------- ------------ ---------- -------------- ---------- ---------- YEAR 2000 Allowance for doubtful accounts......... $318 $252 -- $ 69(a) $501 Reserves related to business restructuring and facility consolidation......................... 18 -- -- 16(b) 2 Deferred tax asset valuation allowance............................. 148 64 $ 6 20(c) 198 Inventory valuation..................... $709 $376 $ 8 $201(d) $892 YEAR 1999 Allowance for doubtful accounts......... $337 $ 67 $ 26 $112(a) $318 Reserves related to business restructuring and facility consolidation......................... 202 -- -- 184(b) 18 Deferred tax asset valuation allowance............................. 245 65 5 167(c) 148 Inventory valuation..................... $697 $165 $ (68) $ 85(d) $709 YEAR 1998 Allowance for doubtful accounts......... $307 $129 $(102) $ (3)(a) $337 Reserves related to business restructuring and facility consolidation......................... 483 -- -- 281(b) 202 Deferred tax asset valuation allowance............................. 206 31 39 31(c) 245 Inventory valuation..................... $688 $162 $ 28 $181(d) $697
--------------- (a) Amounts written off as uncollectible, payments or recoveries. (b) Included in these deductions were cash payments of $11, $61, and $162 for the years ended September 30, 2000, 1999 and 1998, respectively. In addition, Lucent reversed $5, $108, and $77 for the years ended September 30, 2000, 1999 and 1998, respectively. (c) Realization of deferred tax assets which a valuation allowance had previously been provided for. (d) Primarily write-off of obsolete or scrapped inventory. Amounts above reflect continuing operations. All amounts have been reclassified to exclude Avaya. 86 87 EXHIBIT INDEX The following documents are filed as Exhibits to this report on Form 10-K/A 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 effective February 16, 2000 (Exhibit 3 to Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). (3)(ii) By-Laws of the registrant (Exhibit (3)(ii) to the Annual Report on Form 10-K for the year ended September 30, 2000). (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)(ii) First Supplemental Indenture dated as of April 17, 2000 to Indenture dated April 1, 1996 (Exhibit 4 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). (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 the Bank of New York (successor to 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 the Bank of New York (successor to 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 year 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).*
88
EXHIBIT NUMBER ------- (10)(iii)(A)2 Lucent Technologies Inc. 1996 Long Term Incentive Program. (Exhibit (10)(iii)(A)2 to the Annual Report on Form 10-K for the year ended September 30, 2000). (10)(iii)(A)3 Lucent Technologies Inc. 1996 Long Term Incentive Program (Plan) Restricted Stock Unit Award Agreement. (Exhibit (10)(iii)(A)3 to the Annual Report on Form 10-K for the year ended September 30, 2000). (10)(iii)(A)4 Lucent Technologies Inc. 1996 Long Term Incentive Program (Plan) Nonstatutory Stock Option Agreement. (Exhibit (10)(iii)(A)4 to the Annual Report on Form 10-K for the year ended September 30, 2000). (10)(iii)(A)5 Lucent Technologies Inc. Deferred Compensation Plan. (Exhibit (10)(iii)(A)5 to the Annual Report on Form 10-K for the year ended September 30, 2000). (10)(iii)(A)6 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 year ended September 30, 1998).* (10)(iii)(A)7 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)8 Employment Agreement of Mr. Verwaayen dated June 12, 1997 (Exhibit (10)(iii)(A)(1)) to the Annual Report on Form 10-K for the year ended September 30, 1997).* (10)(iii)(A)9 Employment Agreement of Ms. Hopkins dated April 21, 2000 (Exhibit 10 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). (10)(iii)(A)10 Description of the Lucent Technologies Inc. Supplemental Pension Plan. (Exhibit (10)(iii)(A)13 to the Annual Report on Form 10-K for the year ended September 30, 1998).* (10)(iii)(A)11 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 year ended September 30, 1998).* (10)(iii)(A)12 Lucent Technologies Inc. Voluntary Life Insurance Plan (Exhibit 10(iii)(A)15 to the Annual Report on Form 10-K for the year ended September 30, 1998). (12) Computation of Ratio of Earnings to Fixed Charges. (Exhibit (12) to the Annual Report on Form 10-K for the year ended September 30, 2000). (21) List of subsidiaries of Lucent Technologies Inc. (Exhibit (21) to the Annual Report on Form 10-K for the year ended September 30, 2000). (23) Consent of PricewaterhouseCoopers LLP (24) Powers of Attorney executed by officers and directors who signed this report. (27) Financial Data Schedule. (Exhibit (27) to the Annual Report on Form 10-K for the year ended September 30, 2000).
--------------- * Management contract or compensatory plan or arrangement.