AS FILED WITH THE SEC ON MAY 14, 2002
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to _____________
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
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_____
At April 30, 2002, 3,426,555,583 common shares were outstanding.
2 Form 10-Q - Part I
PART 1 - Financial Information
Item 1. Financial Statements
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Three months ended Six months ended
March 31, March 31,
2002 2001 2002 2001
-------------- --------------- --------------- --------------
Revenues $3,516 $5,907 $7,095 $ 10,253
Costs 2,714 5,422 5,858 9,087
-------------- --------------- --------------- --------------
Gross margin 802 485 1,237 1,166
Operating expenses:
Selling, general and administrative 876 2,148 2,121 4,003
Research and development 524 970 1,145 1,982
Business restructuring charges, reversals and asset
impairments, net (59) 2,174 (138) 2,174
-------------- --------------- --------------- --------------
Total operating expenses 1,341 5,292 3,128 8,159
Operating loss (539) (4,807) (1,891) (6,993)
Other income (expense), net (37) (77) 503 (117)
Interest expense 80 153 177 280
-------------- --------------- --------------- --------------
Loss from continuing operations before benefit from
income taxes (656) (5,037) (1,565) (7,390)
Benefit from income taxes (61) (1,649) (547) (2,427)
-------------- --------------- --------------- --------------
Loss from continuing operations (595) (3,388) (1,018) (4,963)
Income (loss) from discontinued operations, net 100 (308) 100 (313)
-------------- --------------- --------------- --------------
Loss before extraordinary item and cumulative effect
of accounting changes (495) (3,696) (918) (5,276)
Extraordinary gain, net - - - 1,154
Cumulative effect of accounting changes, net - - - (38)
-------------- --------------- --------------- --------------
Net loss (495) (3,696) (918) (4,160)
Preferred stock dividends and accretion (40) - (82) -
-------------- --------------- --------------- --------------
Loss applicable to common shareowners $ (535) $ (3,696) $ (1,000) $ (4,160)
============== =============== =============== ==============
Loss per common share - basic and diluted
Loss from continuing operations $(0.19) $ (1.00) $(0.32) $ (1.46)
Net loss applicable to common shareowners $(0.16) $ (1.09) $(0.29) $ (1.23)
Weighted average number of common shares
outstanding - basic and diluted 3,422.6 3,400.8 3,419.4 3,394.0
See Notes to Consolidated Financial Statements.
3 Form 10-Q - Part I
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
March 31, September 30,
2002 2001
-------------- ------------
ASSETS
Cash and cash equivalents $4,824 $2,390
Receivables, less allowance of $419 at March 31, 2002 and $634 at September
30, 2001 2,837 4,594
Inventories 2,413 3,646
Contracts in process, net of progress billings of $9,144 at March 31, 2002
and $7,841 at September 30, 2001 435 1,027
Deferred income taxes, net 2,361 2,658
Other current assets 1,839 1,788
-------------- ------------
Total current assets 14,709 16,103
Property, plant and equipment, net 2,821 4,416
Prepaid pension costs 5,022 4,958
Deferred income taxes, net 2,865 2,695
Goodwill and other acquired intangibles, net of accumulated amortization of
$913 at March 31, 2002 and $832 at September 30, 2001 1,283 1,466
Other assets 2,564 2,724
Net long-term assets of discontinued operations 1,082 1,302
-------------- ------------
Total assets $ 30,346 $ 33,664
============== ============
LIABILITIES
Accounts payable $1,483 $1,844
Payroll and benefit-related liabilities 1,033 1,500
Debt maturing within one year 82 1,135
Other current liabilities 4,216 5,285
Net current liabilities of discontinued operations 68 405
-------------- ------------
Total current liabilities 6,882 10,169
Postretirement and postemployment benefit liabilities 5,053 5,481
Long-term debt 3,238 3,274
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust 1,750 -
Deferred income taxes, net - 152
Other liabilities 1,517 1,731
-------------- ------------
Total liabilities 18,440 20,807
Commitments and contingencies
8.00% redeemable convertible preferred stock 1,842 1,834
SHAREOWNERS' EQUITY
Preferred stock - par value $1.00 per share;
Authorized shares: 250,000,000;
issued and outstanding shares: none - -
Common stock - par value $.01 per share;
Authorized shares: 10,000,000,000; 3,426,881,404 issued and 3,426,230,197
outstanding shares at March 31, 2002 and 3,414,815,908 issued and
3,414,167,155 outstanding shares at September 30, 2001 34 34
Additional paid-in capital 21,669 21,702
Accumulated deficit (11,190) (10,272)
Accumulated other comprehensive income (loss) (449) (441)
-------------- ------------
Total shareowners' equity 10,064 11,023
-------------- ------------
Total liabilities, redeemable convertible preferred stock and
shareowners' equity $ 30,346 $33,664
============== ============
See Notes to Consolidated Financial Statements.
4 Form 10-Q - Part I
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Six months ended
March 31,
2002 2001
------------ ------------
Operating Activities
Net loss $ (918) $(4,160)
Less: Income (loss) from discontinued operations 100 (313)
Extraordinary gain - 1,154
Cumulative effect of accounting changes - (38)
---------- ----------
Loss from continuing operations (1,018) (4,963)
Adjustments to reconcile loss from continuing operations to net cash used in
operating activities, net of effects of dispositions of businesses
Non-cash portion of business restructuring charges, reversals and
asset impairments (39) 1,984
Depreciation and amortization 807 1,301
Provision for bad debts and customer financings 643 1,073
Deferred income taxes (44) (2,194)
Net pension and postretirement benefit credit (476) (529)
Gains on sales of businesses (583) (39)
Other adjustments for non-cash items 153 273
Changes in operating assets and liabilities:
Decrease in receivables 1,398 2,373
Decrease (increase) in inventories and contracts in process 1,289 (1,380)
Decrease in accounts payable (332) (500)
Changes in other operating assets and liabilities (2,270) (224)
---------- ----------
Net cash used in operating activities from continuing operations (472) (2,825)
---------- ----------
Investing Activities
Capital expenditures (199) (752)
Dispositions of businesses 2,445 2,494
Other investing activities 80 (23)
---------- ----------
Net cash provided by investing activities from continuing operations 2,326 1,719
---------- ----------
Financing Activities
Issuance of company-obligated mandatorily redeemable preferred
securities of subsidiary trust 1,750 -
Fees paid on company-obligated mandatorily redeemable preferred
securities of subsidiary trust (46) -
(Repayments of) proceeds from credit facilities (1,000) 3,000
Payment of credit facility fees - (100)
Net (repayments of) proceeds from other short-term borrowings (69) (1,621)
Payment of preferred dividends (73) -
Other financing activities 27 17
---------- ----------
Net cash provided by financing activities from continuing operations 589 1,296
Effect of exchange rate changes on cash and cash equivalents 5 (25)
---------- ----------
Net cash provided by continuing operations 2,448 165
Net cash used in discontinued operations (14) (230)
---------- ----------
Net increase (decrease) in cash and cash equivalents 2,434 (65)
Cash and cash equivalents at beginning of year 2,390 1,467
---------- ----------
Cash and cash equivalents at end of period $ 4,824 $ 1,402
========== ==========
See Notes to Consolidated Financial Statements.
5 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
1. BASIS OF PRESENTATION
Lucent Technologies Inc.'s ("Lucent" or the "Company") unaudited consolidated
financial statements reflect all adjustments (consisting of normal recurring
accruals) that the Company considered necessary for a fair presentation of
results of operations, financial position and cash flows as of and for the
periods presented.
The consolidated financial statements are prepared in conformity with generally
accepted accounting principles. Management is required 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 periods reported. Actual results
could differ from those estimates. Among other things, estimates are used in
accounting for long-term contracts, allowances for bad debts and customer
financings, inventory obsolescence, restructuring reserves, product warranty,
depreciation, employee benefits, income taxes, contingencies and loss reserves
for discontinued operations. Estimates and assumptions are periodically reviewed
and the effects of any material revisions are reflected in the consolidated
financial statements in the period that they are determined to be necessary.
The Company believes that adequate disclosures are made to keep the information
presented from being misleading. The results for the periods presented are not
necessarily indicative of the results for the full year and should be read in
conjunction with the audited consolidated financial statements included in
Lucent's latest Annual Report on Form 10-K for the year ended September 30,
2001.
Certain reclassifications were made to conform to the current period
presentation.
2. BUSINESS RESTRUCTURING CHARGES, REVERSALS AND ASSET IMPAIRMENTS
For the six months ended March 31, 2002, Lucent recorded a net reversal of
business restructuring charges and asset impairments of $128, including net
charges for inventory of $10 reflected in costs. Since Lucent's restructuring
program is an aggregation of many individual plans that are currently being
executed, actual costs have differed from estimated amounts and may be different
in the future. The net reversal included:
o a $110 gain was realized from the sale of the billing and customer care
business (see Note 4). The gain was included in business restructuring
as this business disposition was contemplated as part of Lucent's
overall restructuring program;
o a net reversal of previously recorded restructuring reserves of $304,
which consisted of $82 of additional charges primarily related to
changes in estimated inventory provisions for certain existing
restructuring plans and reversals of reserves for existing plans of
$386. The reversal resulted from revised estimates of $119, primarily
for settling certain purchase commitments for amounts lower than
originally planned, $126 for employee separation costs, $77 for excess
inventory reserves and other reserve reductions of $64. The reversal of
employee separation reserves was due to higher than expected attrition
rates, which reduced the number of employees to be terminated by 1,700.
In addition, although reasonable cost estimates were used upon the
initial recording of the charge, the actual severance cost per person
was lower than the original estimates upon the execution of many plans,
which occurred on a global basis. In establishing the initial charge
for inventory, Lucent included an estimate of amounts relating to
products rationalized or discontinued that were not required to fulfill
existing customer obligations. To the extent the fulfillment of those
customer obligations differed from amounts estimated, additional
inventory charges or reserve reductions were required; and
o charges for new plans of $286, which included employee separation
charges for approximately 1,600 employees of $62, net of a
postemployment benefit curtailment credit of $21, lease termination
fees and other contractual obligations under operating leases
associated with additional facility consolidations of $82, contract
settlements of $8, other liabilities of $23 and asset write-downs of
$111. Asset write-downs are primarily for property, plant and equipment
associated with an expected disposition of a manufacturing facility.
During the three months ended March 31, 2002, the net reversal of business
restructuring charges and asset impairments was $60, of which $59 was included
in operating expenses and $1 relating to inventory was included in costs.
Lucent expects to substantially complete the current restructuring program by
the end of fiscal year 2002. However, if the markets for its products do not
improve, Lucent will take additional restructuring actions to address these
market conditions. Any such additional actions could result in additional
restructuring charges.
6 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
This table displays the activity of the restructuring reserve for the six months
ended March 31, 2002, the balance at March 31, 2002 and the components of the
net reversal for the six months ended March 31, 2002:
September 30, Net charges/ March 31, 2002
2001 reserve (reversals) Deductions reserve
Restructuring costs
Employee separations $ 588 $ (64)(a) $ (314) $210
Contract settlements 610 (84) (220) 306
Facility closings 296 58 (60) 294
Other 125 8 (48) 85
---------- -------- ------- ------
Total restructuring costs $1,619 $ (82) $ (642)(b) $895
---------- -------- ------- ------
Asset write-downs
Property, plant and equipment 52
Other 12 (c)
-------
Total asset write-downs 64
Gain on sale (110)
-------
Total net charges/(reversals) $(128)
=======
---------
(a) Includes $13 of pension termination benefits to certain U.S. employees
expected to be funded through Lucent's pension assets, $5 pension
curtailment cost and $21 postemployment benefit curtailment credit.
(b) Includes cash payments of $593 for the six months ended March 31, 2002,
and other non-cash settlements.
(c) Other includes net charges for inventory of $10. At March 31, 2002, the
reserves for inventory related restructuring were $275.
Total voluntary and involuntary employee separations associated with the
employee separation charge, net recorded in fiscal year 2001 and through the six
months ended March 31, 2002 were 39,100. As of March 31, 2002, approximately
36,000 were completed, with approximately 3,900 completed in the three months
ended March 31, 2002. The separations impacted all business groups and
geographic regions. Approximately two-thirds related to management employees and
were involuntary. In addition, 14,000 of employee separations since December 31,
2000 were achieved through attrition and divestitures of businesses.
3. DISCONTINUED OPERATIONS
The income (loss) from discontinued operations includes the results of
operations for Lucent's former power systems business through the date of sale
of December 29, 2000 and Agere Systems, Inc. ("Agere") through the initial
measurement date of March 31, 2001. The income (loss) on disposal of Agere
includes Lucent's share of Agere's estimated losses from the initial measurement
date through the planned spin-off date. Subsequent adjustments to the related
loss reserve were also included in income (loss) on disposal of Agere. On April
21, 2002, Lucent's board of directors approved the distribution of Lucent's
remaining shares of Agere to Lucent's shareowners of record on May 3, 2002 with
a planned distribution date of June 1, 2002.
Three months ended Six months ended
March 31, March 31,
2002 2001 2002 2001
----------- ---------- ----------- -----------
Agere and power systems revenues $ 481 $ 1,002 $ 940 $ 2,489
=========== =========== =========== ===========
Loss from discontinued operations (net of taxes) $ - $ (146) $ - $ (151)
Income (loss) on disposal of Agere 100 (162) 100 (162)
----------- ----------- ----------- -----------
Total income (loss) from discontinued operations (a) $ 100 $ (308) $ 100 $ (313)
=========== =========== =========== ===========
-------
(a) Net of tax provision (benefit) of $33 and ($86) for the three months ended
March 31, 2002 and 2001, respectively, and tax provision of $33 and $13 for
the six months ended March 31, 2002 and 2001, respectively.
7 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
March 31, September 30,
Net assets of Agere 2002 2001
----------- -------------
Current assets $ 2,245 $4,022
Current liabilities 2,313 (a) 4,427 (a)
----------- ---------
Net current liabilities of discontinued operations $ 68 $ 405
=========== =========
Long-term assets $ 2,123 $2,625
Long-term liabilities 1,041 (b) 1,323 (b)
----------- ---------
Net long-term assets of discontinued operations $ 1,082 $1,302
=========== =========
-------
(a) Includes $960 and $2,500 of short-term debt assumed by Agere on April 2,
2001, and $119 and $565 as of March 31, 2002 and September 30, 2001 of
reserves associated with Lucent's share of Agere's estimated future losses
through the planned spin-off date.
(b) Amounts are shown net of the minority interest in the net assets of Agere
of $758 and $1,026 at March 31, 2002 and September 30, 2001.
4. BUSINESS DISPOSITIONS
On February 28, 2002, Lucent completed the sale of its billing and customer care
business to CSG Systems International, Inc. for approximately $260 in cash,
subject to certain post closing purchase price adjustments. The transaction
resulted in a gain of $110 and was included in business restructuring charges,
reversals and asset impairments, net for the three and six months ended March
31, 2002.
On November 16, 2001, Lucent completed the sale of its optical fiber business to
The Furukawa Electric Co., Ltd. for approximately $2,300, of which $173 was in
CommScope, Inc. common stock. The transaction resulted in a gain of $523, which
was included in other income (expense) in the six months ended March 31, 2002.
In addition, Lucent entered into an agreement on July 24, 2001 to sell two
China-based joint ventures -- Lucent Technologies Shanghai Fiber Optic Co., Ltd.
and Lucent Technologies Beijing Fiber Optic Cable Co., Ltd. -- to Corning
Incorporated for $225 in cash. This transaction, which is subject to U.S. and
foreign governmental approvals and other customary closing conditions, is
expected to close by the end of the third quarter of fiscal year 2002.
5. INVENTORIES
March 31, September 30,
2002 2001
---------- ------------
Completed goods $ 1,462 $ 2,023
Work in process 275 432
Raw materials 676 1,191
---------- ---------
Inventories $ 2,413 $ 3,646
========== =========
6. DEBT
March 31, September 30,
2002 2001
--------- ----------------
Revolving credit facilities $ - $1,000
Other 82 135
--------- ---------
Debt maturing within one year 82 1,135
Long-term debt 3,238 3,274
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust 1,750 -
--------- ---------
Total debt $5,070 $4,409
========= =========
On March 19, 2002, Lucent Technologies Capital Trust I ("the trust") completed
the sale of 1,750,000 7.75% cumulative convertible trust preferred securities
for an initial price of $1,000 per share for an aggregate amount of $1,750.
Lucent owns all of the common securities of the trust. The trust used the
proceeds to purchase 7.75% convertible subordinated debentures issued by Lucent
due March 15, 2017 which represent all of the trust's assets. Since the trust
preferred securities are being treated as debt, the dividends on the securities
are included in interest
8 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
expense. The terms of the trust preferred securities are substantially the same
as the terms of the debentures. Lucent may redeem the debentures, in whole or in
part, for cash at premiums ranging from 103.88% beginning March 20, 2007 to
100.00% on March 20, 2012 and thereafter. To the extent Lucent redeems
debentures, the trust is required to redeem a corresponding amount of trust
preferred securities. Lucent has irrevocably and unconditionally guaranteed, on
a subordinated basis, the payments due on the trust preferred securities. In
connection with this transaction, Lucent incurred approximately $46 of expenses
that are deferred and are being amortized over the life of the debentures.
Holders of trust preferred securities are entitled to receive quarterly cash
distributions commencing June 15, 2002. The ability of the trust to pay
dividends depends on the receipt of interest payments on the debentures. Lucent
has the right to defer payments of interest on the debentures for up to 20
consecutive quarters. If Lucent defers the payment of interest on the
debentures, the trust will defer the quarterly distributions on the trust
preferred securities for a corresponding period. Deferred interest accrues at an
annual rate of 9.25%. Beginning the earlier of March 19, 2003 and the day
immediately following the date of the share distribution related to the spin-off
of Agere, each convertible trust preferred security may convert at the option of
the holder into 163.9344 shares of Lucent common stock, subject to adjustment
under certain circumstances, including the Agere spin-off.
7. COMPREHENSIVE LOSS
The components of comprehensive loss are reflected net of tax, except for
foreign currency translation adjustments, which are generally not adjusted for
income taxes as they relate to indefinite investments in non-U.S. subsidiaries,
are as follows:
Three months ended Six months ended
March 31, March 31,
2002 2001 2002 2001
---- ---- ---- ----
Net loss $ (495) $ (3,696) $ (918) $(4,160)
Other comprehensive loss:
Foreign currency translation adjustments (34) (63) 20 (48)
Reclassification adjustments to foreign currency
translation for sale of foreign entities - - 20 (3)
Unrealized holding losses on investments (26) (26) (19) (121)
Reclassification adjustments for realized gains and
impairment losses on investments 7 40 (19) 43
Cumulative effect of accounting change - - - 11
Unrealized gains (losses) and reclassification
adjustments on derivative instruments (1) 2 (10) 1
--------- -------------- ------------ ------------
Comprehensive loss $ (549) $ (3,743) $ (926) $(4,277)
========= ============== ============ ============
8. LOSS PER COMMON SHARE
Basic and diluted loss per common share is calculated by dividing net loss
applicable to common shareowners by the weighted average number of common shares
outstanding during the period. Amounts applicable to common shareowners reflect
the dividends and accretion on the redeemable convertible preferred stock.
Three months ended Six months ended
March 31, March 31,
2002 2001 2002 2001
---- ---- ---- ----
Loss per common share basic and diluted:
Loss from continuing operations $ (0.19) $ (1.00) $ (0.32) $ (1.46)
Income (loss) from discontinued operations 0.03 (0.09) 0.03 (0.10)
Extraordinary gain - - - 0.34
Cumulative effect of accounting changes - - - (0.01)
------------ -------------- ------------- -------------
Net loss applicable to common shareowners $ (0.16) $ (1.09) $ (0.29) $ (1.23)
============ ============== ============= =============
Dividends declared per common share $ - $0.02 $ - $ 0.04
============ ============== ============= =============
Weighted average number of common shares - basic and
diluted (in millions) 3,422.6 3,400.8 3,419.4 3,394.0
9 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
The potential common shares excluded from the calculation of diluted loss per
share because their effect would reduce the loss per share from continuing
operations, and the amount of stock options that were excluded from the
calculation of diluted loss per share because their exercise price was greater
than the average market price of the common shares of the periods presented were
as follows (in millions):
Three months ended Six months ended
March 31, March 31,
2002 2001 2002 2001
---- ---- ---- ----
Potential common shares excluded from the calculation of diluted loss per
share:
Redeemable convertible preferred stock 334.8 - 334.8 -
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust (a) 38.3 - 18.9 -
Stock options 8.4 34.8 10.4 45.1
--------- ---------- -------- --------
Total 381.5 34.8 364.1 45.1
========= ========== ======== ========
Stock options excluded from the calculation of diluted loss per share
because the exercise price was greater than the average market
price of the common shares 601.1 423.6 613.2 376.8
========= ========== ======== ========
-------
(a) Had these securities been outstanding for the entire three and six months
ended March 31, 2002, the amount of shares excluded from the calculation
for each period would have been 286.9 shares.
9. OPERATING SEGMENTS
Lucent designs and delivers networks for the world's largest communications
service providers. Lucent changed its reporting segments beginning in fiscal
year 2002 to two customer-focused operating segments, Integrated Network
Solutions ("INS") and Mobility Solutions ("Mobility"), from Products and
Services. These reportable segments are managed separately. The INS segment
focuses on global, wireline service providers, including long distance carriers,
traditional local telephone companies and Internet service providers, and
provides offerings comprised of a broad range of core switching and access and
optical networking products. The Mobility segment focuses on global wireless
service providers and offers products to support the needs of its customers for
radio access and core networks. Both segments offer network management and
application and service delivery products. In addition, Lucent supports its
segments through its global services organization.
Performance measurement and resource allocation for the reportable segments are
based on many factors. The primary financial measure is operating income (loss),
which includes the revenues, costs and expenses directly controlled by each
reportable segment, as well as an allocation of costs and operating expenses,
which are not managed at a segment level, but are indirectly related to the
products or services sold to its customers. Operating income (loss) for
reportable segments excludes the following:
o goodwill and other acquired intangibles amortization;
o business restructuring and asset impairments;
o the results of the optical fiber business through the date of its
sale;
o the results from billing and customer care software products through
the date of its sale, messaging products and other smaller units;
o certain personnel costs and benefits, including a portion of those
related to pension and postretirement benefits and differences between
the actual and standard allocated benefit rates;
o certain other costs related to shared services such as general
corporate functions, which are managed on a common basis in order to
realize economies of scale and efficient use of resources; and
o certain other general and miscellaneous costs and expenses not
directly used in assessing the performance of the operating segments.
The accounting policies of the reportable segments are the same as those applied
in the consolidated financial statements to the extent that the related items
are included within segment operating income (loss).
The following tables present revenues and operating income (loss) by reportable
segment and a reconciliation of the segment's operating income (loss) to
consolidated operating loss. Amounts for the three and six months ended March
31, 2001 were restated to reflect the Company's new segment structure.
10 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Three months Six months
ended March 31, ended March 31,
2002 2001 2002 2001
---- ---- ---- ----
External Revenues
INS $ 1,792 $ 3,540 $ 3,675 $5,990
Mobility 1,579 1,520 3,047 2,709
--------- ---------- ----------- ---------
Total reportable segments 3,371 5,060 6,722 8,699
Optical fiber business - 581 114 1,099
Other 145 266 259 455
--------- ---------- ----------- ---------
Total external revenues $ 3,516 $ 5,907 $ 7,095 $ 10,253
========= ========== =========== ==========
Operating income (loss)
INS $ (442) $(1,501) $ (1,351) $(2,954)
Mobility 190 (145) 31 (481)
--------- ---------- ----------- ---------
Total reportable segments (252) (1,646) (1,320) (3,435)
Goodwill and other acquired intangibles amortization (69) (249) (143) (510)
Business restructuring and asset impairments, net 60 (2,710) 128 (2,710)
Optical fiber business - 191 (68) 334
Other (278) (393) (488) (672)
--------- ---------- ----------- ---------
Total operating loss $ (539) $ (4,807) $ (1,891) $ (6,993)
========= ========== =========== ==========
Results by reportable segments include services revenues of $1,358 and $2,585
for the three and six months ended March 31, 2002 and $1,405 and $2,489 for the
three and six months ended March 31, 2001, respectively. Services costs were
$563 and $1,203 for the three and six months ended March 31, 2002 and $1,094 and
$1,891 for the three and six months ended March 31, 2001, respectively.
10. 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, labor, product 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 March 31, 2002, 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 four paragraphs, beyond that provided for at March 31, 2002, would
not be material to the consolidated financial statements.
Lucent and certain of its former officers are defendants in several purported
shareowner class action lawsuits for alleged violations of federal securities
laws, which have been consolidated in a single action. 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. This action seeks
compensatory and other damages, and costs and expenses associated with the
litigation. Lucent is unable to determine its potential impact on the
consolidated financial statements. Lucent is defending this action vigorously.
In July 2001, a purported class action complaint was filed under ERISA alleging,
among other things, that Lucent and certain unnamed officers breached their
fiduciary duties with respect to Lucent's employee savings plans claiming that
the defendants were aware that Lucent stock was inappropriate for retirement
investment and continued to offer such stock as a plan investment option. The
complaint seeks damages, injunctive and equitable relief, interest and fees and
expenses associated with the litigation. In August 2001, a separate purported
class action complaint was filed under ERISA alleging, among other things, that
Lucent breached its fiduciary duties with respect to its employee benefit and
compensation plans by offering Lucent stock as an investment to employees
participating in the plans despite the fact that Lucent allegedly knew it was
experiencing significant business problems. The August complaint seeks a
declaration that Lucent breached its fiduciary duties to plan participants, an
order compelling Lucent to return all losses to the plans, injunctive relief to
prevent future breaches of fiduciary duties, as well as costs and expenses
associated with litigation. Both actions are in the discovery stage and the
Company is unable to determine the potential impact of either case on the
consolidated financial statements. Lucent is defending these actions vigorously.
Sparks, et al. v. Lucent Technologies, Inc. et al. is a state court, class
action lawsuit filed in 1996 in Illinois under the name, Crain v. Lucent
Technologies. It seeks unspecified damages for a nationwide class of customers
based on a claim that the former AT&T Consumer Products business (which became
part of Lucent) had defrauded and misled customers who leased telephones from
Consumer Products so as to believe their lease payments would lead to ownership
of the
11 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
telephones. The lawsuit seeks damages based on the difference between the
aggregate lease payments made and the fair market value of telephones. The
Sparks action is one of a number of consumer class actions which, after removal
to a federal court, were remanded to various state courts in July 2001. These
other actions are stayed pending the outcome of the Sparks case, which presently
has an August 5, 2002 trial date. A trial date was set for August 2002, but this
date has been delayed until the fall of 2002. Lucent is unable to determine
their potential impact on our consolidated financial statements. Lucent is
defending these actions vigorously.
In January 2002, the court in Vicor Corp. et al. v. Lucent Technologies Inc.
granted plaintiffs' June 30, 2001 motion for a writ of attachment in the amount
of $20 million. The Court had held a hearing on Vicor's motion on November 19
and 20, 2001. This is an action in which Vicor Corporation and VLT Corporation
("Vicor") sued Lucent in Federal District Court in Boston, MA for an unspecified
amount of damages purportedly stemming from an alleged infringement of a power
supply patent. Discovery was stayed pending the resolution of certain summary
judgment motions in the same court in a related case against Unitrode, a
supplier of controller chips to the Company and other power supply
manufacturers. In January 2001, the Court, in the Unitrode action, to which
Lucent was not a party, held that certain power supplies manufactured by the
Company and others, using the Unitrode controller, infringed Vicor's patent.
This case is in discovery and we are unable to determine its potential impact on
our consolidated financial statements. Lucent is defending this action
vigorously.
In April 2002, a case captioned Preferred Life Insurance Co. of New York, et al
v. Lucent Technologies was filed in New Jersey state court against the Company.
This case involves a group of institutional investors, many of which are
affiliated, that purchased securities issued by Winstar Communications. In March
2002, Lucent was added as a defendant in the Winstar Federal securities
litigation pending in the Southern District of New York, captioned In re Winstar
Communications Litigation. In both of the actions, the plaintiffs allege that
Lucent caused or contributed to the damages the plaintiffs incurred from their
losses in Winstar stock. Both of these actions are in the very early stages, and
Lucent intends to defend these cases vigorously.
Other Commitments
In connection with the planned spin-off of Agere, Lucent entered into a purchase
agreement that governs the purchase of goods and services by Lucent from Agere.
Under the agreement, Lucent committed to purchase at least $2,800 of products
from Agere over a three-year period beginning February 1, 2001. In limited
circumstances, Lucent's purchase commitment may be reduced or the term may be
extended. For the initial 12-month period ending January 31, 2002, Lucent's
purchases under this agreement were $411. Agere and Lucent are currently
discussing ways to restructure Lucent's obligations under the agreement.
Lucent has exited certain of its manufacturing operations and has increased its
use of contract manufacturers. Except for systems integration and final assembly
of its wireless products, it is currently using a sole-source supplier for a
majority of the North American switching and wireless product lines and expects
to do the same with its optical product line later this year. In addition,
several other contract manufacturers produce the majority of other products.
Lucent is generally not committed to unconditional purchase obligations, except
for a commitment which requires annual purchases of certain wireless components
ranging from $275 to $425 over the next three years. However, Lucent is exposed
to short-term purchase commitment levels. These short-term commitment levels are
evaluated and established on a quarterly basis. As a result, any sudden and
significant changes in forecasted demand requirements could adversely affect its
results of operations and cash flows.
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 with
AT&T, Lucent is responsible for all liabilities primarily resulting from or
relating to the operation of Lucent's business as conducted at any time prior to
or after the Separation from AT&T 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
12 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
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 reasonably assured, the amounts are
reflected as receivables in the consolidated 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 March 31, 2002 cannot be estimated.
11. RECENT PRONOUNCEMENTS
Lucent is currently evaluating the impacts of Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"),
SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144") and SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145") to
determine the effect, if any, they may have on the consolidated financial
position and results of operations. Lucent is required to adopt each of these
standards in the first quarter of fiscal year 2003.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 142
under which pre-existing goodwill will no longer be amortized. Intangible assets
will continue to be amortized over their useful lives. The criteria for
recognizing an intangible asset have also been revised. As a result, the Company
is in the process of reassessing the classification and useful lives of its
previously acquired goodwill and other intangible assets. SFAS 142 also requires
that goodwill be tested for impairment initially within one year of adoption and
at least annually thereafter. If an impairment loss exists as a result of the
transitional goodwill impairment test, the implementation of SFAS 142 could
result in a one-time charge to earnings as a cumulative effect of accounting
change. The goodwill impairment test is a two-step process that requires
goodwill to be allocated to reporting units that are reviewed by its segment
managers. In the first step, the fair value of the reporting unit is compared to
the carrying value of the reporting unit. If the fair value of the reporting
unit is less than the carrying value of the reporting unit, goodwill impairment
may exist, and the second step of the test is performed. In the second step, the
implied fair value of the goodwill is compared to the carrying value of the
goodwill and an impairment loss will be recognized to the extent that the
carrying value of the goodwill exceeds the implied fair value of the goodwill.
There was approximately $1,100 of goodwill, with an annual amortization of
approximately $240, that will be subject to this new pronouncement, primarily
within the INS segment.
In June 2001, the FASB issued SFAS 143, which establishes accounting standards
for recognition and measurement of a liability for the costs of asset retirement
obligations. Under SFAS 143, the future costs of retiring a tangible long-lived
asset will be recorded as a liability at their present value when the retirement
obligation arises, and will be amortized to expense over the life of the asset.
Lucent is in the process of identifying assets with retirement obligations,
including leased properties that contractually obligate the Company to remove
their leasehold improvements and restore the properties to their original
condition.
In August 2001, the FASB issued SFAS 144, which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and
discontinued operations. SFAS No. 144 supersedes SFAS No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of"
("SFAS 121") and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30 ("APB 30") for the disposal of a segment of a
business. SFAS No. 144 retains the basic principles of SFAS No. 121 for
long-lived assets to be disposed of by sale or held and used and modifies the
accounting and disclosure rules for discontinued operations.
13 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
In April 2002, the FASB issued SFAS 145, which rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" ("SFAS 4"), SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers" ("SFAS 44") and SFAS No.
64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements" ("SFAS
64") and amends SFAS No. 13, "Accounting for Leases" ("SFAS 13") This statement
updates, clarifies and simplifies existing accounting pronouncements. As a
result of rescinding SFAS 4 and SFAS 64, the criteria in APB 30 will be used to
classify gains and losses from extinguishment of debt. SFAS 44 was no longer
necessary because the transitions under the Motor Carrier Act of 1980 were
completed. SFAS 13 was amended to require that certain lease modifications that
have economic effects similar to sale-leaseback transactions be accounted for in
the same manner as sale-leaseback transactions and makes technical corrections
to existing pronouncements.
12. SUBSEQUENT EVENT
On April 22, 2002, Lucent commenced a voluntary offer to eligible employees to
exchange certain outstanding stock options, including all stock options issued
during the six-month period ended April 22, 2002, to purchase shares of Lucent
common stock for Lucent's promise to grant a new common stock option at a future
date. Terms of the offer require that the new stock option grant will be on a
date that is at least six months and one day after the cancellation date, which
will occur on or about May 23, 2002. Lucent currently expects that the new stock
option under the exchange program will be granted on November 25, 2002 and will
have an exercise price equal to the fair market value of Lucent common stock on
that date. The new stock option grant will be for a smaller number of shares
determined in accordance with prescribed exchange ratios.
14 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
We design and deliver networks for the world's largest communications service
providers. Backed by Bell Labs research and development, we rely on our
strengths in mobility, optical, data and voice networking technologies, as well
as software and services, to develop next-generation networks. Our systems,
services and software are designed to help customers quickly deploy and better
manage their networks and create new, revenue-generating services that help
businesses and consumers.
OUR RESTRUCTURING PROGRAM
Since beginning our restructuring program during the quarter ended March 31,
2001, we eliminated many duplications in marketing functions and programs and
centralized our sales support functions to utilize our resources for the
opportunities that we currently believe to be the most profitable for us -- the
large service provider market. We evaluated our manufacturing operations and
assessed our use of contract manufacturers and decided to eliminate certain of
our manufacturing facilities and make greater use of contract manufacturers. We
assessed virtually every aspect of our product portfolio and associated research
and development ("R&D"), made decisions based on the needs of our largest
service provider customers, deployed our resources to meet those needs and then
streamlined the rest of our operations to support those reassessments. We
eliminated some marginally profitable or non-strategic product lines; merged
certain technology platforms; consolidated development activities; and
eliminated management positions, which resulted in reduced associated product
development costs. We sold the assets relating to a number of product lines
whose products did not support our large service provider customers or our
strategy. We initiated actions to close facilities and reduce the work forces in
approximately 40 of the approximately 60 countries in which we operated at the
end of fiscal year 2000. We expect to complete our restructuring program by the
end of fiscal year 2002. However, if the markets for our products do not
improve, we will take additional restructuring actions to realize these benefits
or address these market conditions. Any such additional actions could result in
additional restructuring charges.
MARKET ENVIRONMENT AND STRATEGIC DIRECTION
During fiscal year 2001, the global telecommunications market deteriorated,
reflecting a significant decrease in the competitive local exchange carrier
market and a significant reduction in capital spending by established service
providers. This trend has continued during the first and second fiscal quarters
of 2002 and is expected to continue at least throughout calendar year 2002. We
estimate that large service providers are reducing their calendar year-over-year
capital spending budgets by at least 20% primarily in the wireline market.
Reasons for this reduction include the economic slowdown, network over-capacity,
customer bankruptcies, network build-out delays and limited capital
availability. As a result, our sales and results of operations have been
adversely affected.
If capital investment levels continue to decline, or if the telecommunications
market does not improve or improves at a slower pace than we anticipate, our
revenues and profitability will continue to be adversely affected. In addition,
if the volume of our sales and product mix does not improve, or we do not
continue to realize cost reductions or reduce inventory related charges, our
gross margin percentage may not improve as much as we have targeted, resulting
in lower than expected results of operations.
The significant slowdown in capital spending in our target markets has created
uncertainty as to the level of demand in those markets. In addition, the level
of demand can change quickly and can vary over short periods of time, including
from month to month. As a result of the uncertainty and variations in our
markets, accurately forecasting future results, earnings and cash flow is
increasingly difficult.
We restructured our operations into distinct wireline and wireless units, and
began to target the large service providers in each segment, which we believe
offers us the best opportunity for future growth and stable revenue. We believe
structuring our business along customer lines - wireline and wireless - enables
us to better serve and anticipate the needs of our large service provider
customers.
Our wireline segment, Integrated Network Solutions ("INS"), focuses on global,
wireline service providers, including long distance carriers and both
traditional local telephone companies and Internet service providers. INS
primarily sells and services core switching and access and optical networking
products. Our wireless segment, Mobility Solutions, offers products to support
the needs of its customers for radio access and core networks and primarily
sells and services wireless products to wireless service providers. Both
segments offer network management and application and service delivery products.
15 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
We support these two new segments through a number of central organizations,
including our services organization and our corporate headquarters.
Manufacturing and supply chain functions have been consolidated into a single
global supply chain networks organization that manages the materials and
activities necessary to produce and deliver products and services to our
customers.
Application of critical accounting policies
Our consolidated financial statements are based on the selection and application
of significant accounting policies, which require management to make significant
estimates and assumptions. We believe that the following are some of the more
critical judgment areas in the application of our accounting policies that
affect our financial condition and results of operations.
Most of our sales are generated from complex contractual arrangements, which
require significant revenue recognition judgments particularly in the areas of
multiple element arrangements and collectibility. Revenue from contracts with
multiple element arrangements, such as those including installation and
integration services, are recognized as each element is earned based on
objective evidence of the relative fair values of each element and when there
are no undelivered elements that are essential to the functionality of the
delivered elements. The assessment of collectibility is particularly critical in
determining whether or not revenue should be recognized in the current market
environment. As part of the revenue recognition process, we determine whether
trade and notes receivable are reasonably assured of collection based on various
factors, including our ability to sell these receivables and whether there has
been deterioration in the credit quality of our customers, which could result in
us being unable to collect or sell the receivables. In situations where we have
the ability to sell the receivable, revenue is recognized to the extent of what
is expected to be realized. In situations where it is unclear as to whether we
will be able to sell or collect the receivable, revenue and related costs are
deferred. Revenue is deferred and costs are recognized when it has been
determined that the collection or sale of the receivable is unlikely. For sales
generated from long-term contracts we make important revenue and cost judgments
that underlie our determinations regarding overall contract value, contract
profitability and timing of revenue recognition. Revenue and profit estimates
are revised periodically based on changes in circumstances; any losses on
contracts are recognized immediately. We also sell products through multiple
distribution channels including resellers and distributors. For products sold
through these channels, revenue is generally recognized when the reseller or
distributor sells the product to the end user. The total amount of deferred
income, including deferrals relating to collectibility concerns, at March 31,
2002 was $681 million.
We are required to estimate the collectibility of our trade receivables and
notes receivable. A considerable amount of judgment is required in assessing the
realization of these receivables including the current credit-worthiness of each
customer and related aging of the past due balances. Our provisions for bad debt
and customer financing during fiscal year 2001 and for the six months ended
March 31, 2002 amounted to $2.2 billion and $643 million, respectively. Our
March 31, 2002 reserves included in the $2.8 billion of trade receivables was
$419 million and there were approximately $700 million of reserves on the $1.2
billion of drawn commitments under our customer financing program. We evaluate
specific accounts when we become aware of a situation where a customer may not
be able to meet its financial obligations due to a deterioration of its
financial viability, credit ratings or bankruptcy. The reserve requirements are
based on the best facts available to us and reevaluated and adjusted as
additional information is received. Our reserves are also based on amounts
determined by using percentages applied to certain aged receivable categories.
(Refer to "Customer finance commitments" in our Liquidity and Capital Resources
section for a further discussion on procedures performed related to customer
financing.) Significant increases in reserves have been recorded in recent
periods and may occur in the future due to the current market environment. In
addition, we currently have approximately $1 billion of assets included in
receivables, contracts in process and other assets from long-term projects that
have been winding down in Saudi Arabia. We have concluded that these assets are
realizable based on our contractual rights and past collection history.
We are required to state our inventories at the lower of cost or market. In
assessing the ultimate realization of inventories, we are required to make
judgments as to future demand requirements and compare that with the current or
committed inventory levels. Our reserve requirements generally increase as our
projected demand requirements decrease due to market conditions, technological
and product life cycle changes as well as longer than previously expected usage
periods. We have experienced significant changes in required reserves in recent
periods due to changes in strategic direction, such as discontinuances of
product lines as well as declining market conditions. As a result, we incurred
inventory charges of $2.4 billion and approximately $250 million during fiscal
year 2001 and the six months ended March 31, 2002, respectively. Inventories of
$2.4 billion at March 31, 2002 are net of reserves of approximately $1.5
billion. It is possible that significant changes in required inventory reserves
may continue to occur in the future if there is a further decline in market
conditions.
At March 31, 2002, we had net deferred tax assets of $5.2 billion, reflecting
tax credit carryforwards, anticipated net operating losses and other deductible
temporary differences which will reduce taxable income in future years. We are
required to assess the realization of our deferred tax assets. Significant
changes in circumstances may require adjustments during interim periods. Our
future tax benefits related to foreign tax credits, most state and foreign net
16 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
operating losses and capital losses are fully reserved as it is more likely
than not that they will not be realized due to their relatively short
carryforward periods. Although realization is not assured, we have
concluded that it is more likely than not that the remaining net deferred tax
assets will be realized principally based upon forecasted taxable income
generally within the twenty-year R&D credit and net operating loss carryforward
periods, giving consideration to the substantial benefits realized to date
through our restructuring program. The amount of the net deferred tax assets
actually realized could vary if there are differences in the timing or amount of
future reversals of existing deferred tax liabilities or changes in the actual
amounts of future taxable income. We have incurred significant losses from
operations over several quarters. If our forecast is determined to no longer be
reliable due to uncertain market conditions or improvement in our results of
operations does not continue, our long-term forecast will require reassessment.
As a result, we may need to establish additional valuation allowances for all or
a portion of the net deferred tax assets.
We currently have intangible assets including goodwill and other acquired
intangibles of $1.3 billion, primarily within the INS segment, and capitalized
software development costs of $824 million. The determination of related
estimated useful lives and whether or not these assets are impaired involves
significant judgments based upon short and long-term projections of future
performance. Certain of these forecasts reflect assumptions regarding our
ability to successfully develop and ultimately commercialize acquired
technology. Changes in strategy and/or market conditions may result in
adjustments to recorded asset balances. For example, we have taken significant
impairment charges, including $4.1 billion related to goodwill and other
acquired intangibles and $362 million related to capitalized software under our
restructuring program during fiscal year 2001. There is $968 million of
remaining goodwill and other acquired intangibles related to our September 2000
acquisition of Spring Tide, which contains a certain switching technology. We
have concluded that this amount is realizable based on forecasted undiscounted
cash flows through 2009. The forecasts include cumulative positive cash flow
beginning in 2007 and a minimum terminal value of approximately $700 million.
There is also $140 million of goodwill and other acquired intangibles related
to the 1998 acquisition of Yurie, which provides Asynchronous Transfer Mode
access equipment. We have also concluded that this amount is realizable based
upon projected undiscounted cash flows through 2006. Due to uncertain market
conditions and potential changes in our strategy and product portfolio, it is
possible that forecasts used to support our intangible assets may change in
the future which could result in significant non-cash charges that would
adversely affect our results of operations and financial condition.
We have significant pension and postretirement benefit costs and credits, which
are developed from actuarial valuations. Inherent in these valuations are key
assumptions including discount rates and expected return on plan assets. We are
required to consider current market conditions, including changes in interest
rates, in selecting these assumptions. Changes in the related pension and
postretirement benefit costs or credits may occur in the future in addition to
changes resulting from fluctuations in our related headcount due to changes in
the assumptions. Our current assumptions include a 7% discount rate, a 9%
expected return on plan assets and a 4.5% rate of compensation increase. These
are consistent with the prior year assumptions except that the discount rate was
reduced by one-half of a percent due to current market conditions. Compared to
the prior year interim period, our net pension and postretirement benefit credit
has been reduced by $53 million to $476 million in the six months ended March
31, 2002.
During fiscal year 2001, we recorded significant charges in connection with our
restructuring program. The related reserves reflect many estimates including
those pertaining to separation costs, inventory, settlements of contractual
obligations and proceeds from asset sales. We reassess the reserve requirements
to complete each individual plan under our restructuring program at the end of
each reporting period. Actual experience has and may continue to be different
from these estimates. For example, we reflected a net reversal of $304 million
for plans existing as of September 30, 2001 and have reflected charges of $286
million for new plans. As of March 31, 2002 and September 30, 2001, liabilities
associated with our restructuring program were $895 million and $1.6 billion.
For more information, see Note 2 to the unaudited consolidated financial
statements.
We are subject to proceedings, lawsuits and other claims related to
environmental, labor, product and other matters. We are required to assess the
likelihood of any adverse judgments or outcomes to these matters as well as
potential ranges of probable losses. A determination of the amount of reserves
required, if any, for these contingencies are made after careful analysis of
each individual issue by us with the assistance of outside legal counsel. The
required reserves may change in the future due to new developments in each
matter or changes in approach such as a change in settlement strategy in dealing
with these matters. For more information, see Note 10 to the unaudited
consolidated financial statements.
The impact of changes in the estimates and judgments pertaining to revenue
recognition, receivables and inventories are directly reflected in our segments'
operating income (loss). Although any charges related to our net deferred tax
assets and goodwill and other acquired intangibles are not reflected in the
segment results, the long-term forecasts supporting the realization of those
assets and changes in them are significantly impacted by the actual and expected
results of each segment. Generally, the changes in estimates related to pension
and
17 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
postretirement benefits, our restructuring program and litigation will not
impact our segment results, although execution of the restructuring plans by
each segment may cause related changes in the estimates. We have discussed the
application of these critical accounting policies with our board of directors
and Audit and Finance Committee. There was no initial adoption of any accounting
policies during the six-month period ended March 31, 2002.
CONSOLIDATED RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED MARCH 31, 2002
VERSUS THREE AND SIX MONTHS ENDED MARCH 31, 2001
Revenues
The following table presents our U.S. and non-U.S. revenues and the approximate
percentage of total revenues (dollars in millions):
Three months ended March 31, Six months ended March 31,
---------------------------------------------------- -------------------------------------------------
% %
2002 2001 change 2002 2001 change
---------------- --------------- ------------ --------------- --------------- ----------
U.S. $ 2,427 $ 4,126 (41.2%) $ 4,659 $ 6,821 (31.7%)
Non-U.S. 1,089 1,781 (38.9%) 2,436 3,432 (29.0%)
---------------- --------------- --------------- ---------------
Total revenues $ 3,516 $ 5,907 (40.5%) $ 7,095 $ 10,253 (30.8%)
================ =============== =============== ===============
Percentage of total Percentage of total
revenues revenues
------------------------------------ -----------------------------------
U.S. 69.0% 69.8% 65.7% 66.5%
Non-U.S. 31.0% 30.2% 34.3% 33.5%
Continued reductions in capital spending by large service providers, primarily
affecting our INS segment, and business dispositions were the primary reasons
why the interim fiscal 2002 revenues were lower than the similar periods of the
prior year. The revenue decline resulting from business dispositions was $664
million for the three months ended March 31, 2002 and $1.1 billion for the six
months ended March 31, 2002. The optical fiber business ("OFS"), which was sold
during the first fiscal quarter of 2002, accounted for approximately 88% and 89%
of the revenue decline associated with business dispositions for the three and
six months ended March 31, 2002, respectively. The impact of product
rationalizations and discontinuances under our restructuring program has not had
a significant impact on our overall trend of revenues.
Gross Margin
The following table presents our gross margin and the percentage to total
revenues (dollars in millions):
Three months ended Six months ended
March 31, March 31,
------------------------------- ------------------------------
2002 2001 2002 2001
--------------- ----------- ------------ -------------
Gross margin $802 $485 $ 1,237 $ 1,166
Percentage to total revenues 22.8% 8.2% 17.4% 11.4%
Changes in gross margin as a percentage of revenues in the current interim
fiscal periods as compared with the prior interim periods primarily resulted
from:
o Gross margin was lower in the prior interim fiscal year periods due to
significant inventory related charges that primarily resulted from weak
market conditions that caused a sudden and significant decrease in demand
for our products and deterioration in the financial condition of certain
customers. As a result of lower inventory levels from our strategy of
focusing on large service providers and improved inventory management, we
reduced the amount of these charges in the current interim fiscal year
periods. In addition, the prior interim fiscal year periods were adversely
affected by higher warranty costs due to certain product performance issues
not occurring in the current interim periods. These two factors improved
gross margins as a percentage of revenues by 12 points for the three months
ended March 31, 2002 and seven points for the six months ended March 31,
2002;
o In addition, gross margin includes $10 million for the six months ended
March 31, 2002 and $536 million for the three and six months ended March
31, 2001, of inventory charges associated with product line
rationalizations and product line discontinuance under our restructuring
program. The decrease in these charges in the current interim fiscal
periods resulted in a nine point improvement in gross margins as a
percentage of revenues for the three months ended March 31, 2002 and a five
point improvement for the six months ended March 31, 2002;
o We reduced our fixed costs in response to the deterioration of global
telecommunications market conditions, however, when combined with
significantly lower revenue volumes, it resulted in a three point decline
in gross margin as a percentage of revenues for both the three- and
six-month periods ended March 31, 2002; and
18 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
o The sale of OFS negatively affected gross margin as a percentage of
revenues by three points for both the three- and six-month periods ended
March 31, 2002.
To maintain or improve our current gross margin level depends upon market
pricing as well as our ability to improve or stabilize sales volume and product
mix, limit inventory related charges, continue cost reductions and market and
product rationalization work and introduce new products.
Operating Expenses
The following table presents our operating expenses (dollars in millions):
Three months ended March 31, Six months ended March 31,
--------------------------------------- ----------------------------------------
2002 2001 % change 2002 2001 % change
---------- --------- ------------ ---------- --------- -------------
Selling, general and
administrative ("SG&A")
expenses, excluding the
following two items: $615 $1,194 (48.5%) $1,335 $2,420 (44.8%)
Provision for bad debts and
customer financings 192 705 (72.8%) 643 1,073 (40.1%)
Amortization of goodwill and
other acquired intangibles 69 249 (72.3%) 143 510 (72.0%)
---------- --------- ------------ ---------- --------- -------------
Total SG&A 876 2,148 (59.2%) 2,121 4,003 (47.0%)
R&D 524 970 (46.0%) 1,145 1,982 (42.2%)
Business restructuring charges,
reversals and asset
impairments, net (59) 2,174 (102.7%) (138) 2,174 (106.3%)
---------- --------- ------------ ---------- --------- -------------
Operating expenses $1,341 $5,292 (74.7%) $3,128 $8,159 (61.7%)
========== ========= ============ ========== ========= =============
SG&A expenses
Excluding provisions for bad debts and customer financings and amortization of
goodwill and other acquired intangibles, SG&A expenses decreased primarily from
headcount reductions under our restructuring program and other cost savings
initiatives that limited discretionary spending.
Provision for bad debts and customer financings
Many of our customers have been negatively affected by the continued decline in
telecommunications market conditions. This has resulted in a decline in the
credit-worthiness of certain customers resulting in some having to file for
bankruptcy or having been declared insolvent. As a result, we have provided
reserves for certain trade and notes receivable and sold others at significant
discounts in the interim periods presented and may have to record additional
reserves or write-offs in the future.
During the three and six months ended March 31, 2002, the provisions included
approximately $123 million and $311 million, respectively, related to customer
financing with the balance for trade receivables. In addition, during the three
and six month periods ended March 31, 2002, approximately 51% and 79% of the
total provisions were related to our INS customers and 42% and 22% were related
to our Mobility customers. The remaining balances were not related to our
reportable segments.
Winstar Communications, Inc., which filed for Chapter 11 protection on April 18,
2001, accounted for nearly all of the provision for the three months ended March
31, 2001 and represented a significant portion of the provision for the six
months ended March 31, 2001.
Amortization of goodwill and other acquired intangibles
Amortization of goodwill and other acquired intangibles for the current interim
periods was significantly lower than the prior year interim periods due to the
write-down of goodwill and other acquired intangibles, in particular, the
discontinuance of the Chromatis product portfolio in connection with our
restructuring program.
R&D
The decrease in R&D expenses for the three and six months ended March 31, 2002
as compared with the 2001 interim periods was primarily due to headcount
reductions and product rationalizations under our restructuring program.
During the six months ended March 31, 2002, slightly more than 50% of our R&D
was attributable to our INS segment and most of the remaining amounts were
attributable to our Mobility segment. The INS spending primarily related to
next-generation products, including optical products for both long-haul and
metro networks, multi-service switches that can handle both internet protocol
services and multiple network traffic protocols, network operations software
solutions, and
19 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
digital subscriber line products. The Mobility spending was primarily related to
next-generation Code Division Multiple Access ("CDMA") and Universal Mobile
Telecommunications System technology.
Business restructuring charges, reversals and asset impairments, net
During the three months ended March 31, 2002, we recorded a net reversal of
business restructuring charges and asset impairments to operating expenses of
$59 million. For the six months ended March 31, 2002, we recorded a net reversal
of business restructuring charges and asset impairments of $138 million to
operating expenses. For additional information on the current year
charges/reversals see Note 2 to the unaudited consolidated financial statements
and for our progress to date see LIQUIDITY AND CAPITAL RESOURCES - Cash
Requirements.
During the three and six months ended March 31, 2001 we initiated our
restructuring program, which resulted in a significant charge to operating
expenses. The charge included restructuring costs of $810 million and asset
impairments of $1.4 billion.
Other Income (Expense), net
The current quarter's other income (expense) was primarily related to investment
write-downs of $36 million, partially offset by interest income of $19 million.
Additionally, the six-month period ended March 31, 2002 included $583 million of
gains from business dispositions, primarily related to a $523 million gain
realized from the sale of OFS, and interest income related to a tax settlement
of $73 million.
Other income (expense) for the fiscal year 2001 interim periods was primarily
from write-downs of certain equity investments of $145 million, partially offset
by interest income of $99 million and $147 million for the three and six months
ended March 31, 2001, respectively.
Interest Expense
Interest expense for the fiscal 2002 interim periods decreased as compared with
the prior fiscal year interim periods due to significantly lower short-term debt
levels.
Benefit from Income Taxes
The following table presents our benefit from income taxes and the related
effective tax benefit rates (dollars in millions):
Three months ended March 31, Six months ended March 31,
---------------------------------------- -------------------------------------
2002 2001 2002 2001
---------------- ------------------- ---------------- -----------------
Benefit from income taxes $(61) $(1,649) $(547) $(2,427)
Effective tax benefit rate (9.3)% (32.7)% (35.0)% (32.8)%
The effective tax benefit rate for the current quarter was less than the U.S.
statutory rate due to a $208 million charge for valuation allowances on foreign
tax credit carryforwards that are more likely than not to expire unused due to
recent net operating loss carrybacks under new legislation. The new legislation
extended the net operating loss carryback period from two to five years.
However, since the net operating loss carryforward provisions were not coupled
with foreign tax credit carryforward relief, the additional allowances were
required. This change in the tax legislation resulted in Lucent receiving a tax
refund of $616 million in April 2002. Also impacting the effective tax benefit
rate, were non-deductible goodwill amortization and valuation allowances on
certain state net operating loss carryforwards, offset in part by research and
development tax credits and a low effective tax rate on the non-U.S. portion of
the gain realized from the sale of our billing and customer care business.
The effective tax benefit rate on a year to date basis approximated the U.S.
statutory rate due to the items noted above, offset by a $60 million favorable
tax settlement and the tax impact from the gain on the sale of our optical fiber
business which had a low effective tax rate due to differences in the book and
tax basis of the assets sold.
The effective tax benefit rates for the three and six months ended March 31,
2001, were lower than the U.S. statutory rate primarily from the impact of
non-tax deductible goodwill amortization and certain non-tax deductible charges
for business restructuring and related asset impairments on the pre-tax loss,
offset in part by research and development tax credits.
20 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Loss from Continuing Operations
As a result of the above, loss from continuing operations and loss per common
share amounts are as follows (amounts in millions, except per share amounts):
Three months ended March 31, Six months ended March 31,
--------------------------------- -------------------------------
2002 2001 2002 2001
-------------- ---------------- ------------- ----------------
Loss from continuing operations $ (595) $(3,388) $(1,018) $(4,963)
Basic and diluted loss per common share from
continuing operations $ (0.19) $ (1.00) $ (0.32) $ (1.46)
Weighted average number of common shares
outstanding - basic and diluted 3,422.6 3,400.8 3,419.4 3,394.0
Other
The income (loss) from discontinued operations during the three and six months
ended March 31, 2002 relates to revised estimates of our share of the expected
loss on disposal of Agere Systems, Inc. ("Agere") through the planned spin-off
date of June 1, 2002. The loss from discontinued operations during the three and
six months ended March 31, 2001 relates to Agere and our power systems business
(see Note 3 to the unaudited consolidated financial statements).
During the six months ended March 31, 2001, we realized an extraordinary gain of
$1.2 billion, net of a $762 million tax provision, or $0.34 per basic and
diluted share, from the sale of our power systems business.
Effective October 1, 2000, we recognized a net $38 million charge for the
cumulative effect of certain accounting changes. This comprised a $30 million
earnings credit ($0.01 per basic and diluted share) from the adoption of
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and a $68 million charge to earnings ($0.02
per basic and diluted share) from the adoption of Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin 101, "Revenue Recognition in
Financial Statements".
RESULTS OF OPERATIONS BY SEGMENT - THREE AND SIX MONTHS ENDED MARCH 31, 2002
VERSUS THREE AND SIX MONTHS ENDED MARCH 31, 2001
INS
The following table presents external revenues, U.S. and non-U.S., and operating
loss (dollars in millions):
Three months ended March 31, Six months ended March 31,
----------------------------------------- --------------------------------------------
2002 2001 % change 2002 2001 % change
--------- ------------ ------------ ------------ ------------ ------------
U.S. $987 $2,281 (56.7%) $2,005 $3,649 (45.1%)
Non-U.S. 805 1,259 (36.1%) 1,670 2,341 (28.7%)
--------- ------------ ------------ ------------
Total INS revenues $1,792 $3,540 (49.4%) $3,675 $5,990 (38.6%)
========= ============ ============ ============
Operating loss $(442) $(1,501) (70.6%) $(1,351) $(2,954) (54.3%)
========= ============ ============ ============
During the three and six month periods ended March 31, 2002, INS revenues
declined as compared with the prior interim fiscal year periods by 49% and 39%.
The declines resulted from continuing reductions and delays in capital spending
by large service providers and were reflected in all product lines and
geographic regions, except for China. The most significant declines were in the
U.S., especially with large service providers. Our five largest customers
represented about 45% of INS revenues during the six months ended March 31, 2002
and about 60% of the revenue decline compared with the prior year interim
period. The deterioration of credit-worthiness or financial condition of
certain service providers also adversely affected revenues, although to a much
lesser degree.
During the current quarter, the operating loss as compared with the prior fiscal
year period declined by approximately $1.1 billion to $442 million. This
improvement was driven by lower operating expenses of $1.4 billion, partially
offset by lower gross margin of $328 million. The gross margin rates declined
slightly primarily due to significantly lower sales volume, partially offset by
lower inventory related charges and cost reductions. The $1.4 billion reduction
in operating expenses resulted from $639 million of lower provisions for bad
debts and customer financing and $748 million of lower expenses, primarily due
to headcount reductions and less discretionary spending. The higher provisions
for bad debts and customer financing in the prior year interim period was
primarily related to significant charges incurred for amounts due from Winstar.
21 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
During the six-month period ended March 31, 2002, the operating loss declined as
compared with the prior fiscal year period by $1.6 billion to an operating loss
of approximately $1.4 billion. The improvement was due to significantly lower
operating expenses of approximately $2.0 billion, partially offset by lower
gross margin of $379 million. The reasons for the slight decline in gross
margin and the reduction in operating expenses were similar to those described
above for the current quarter. Provisions for bad debts and customer financing
were lower by $537 million due to the significant charges incurred for amounts
due from Winstar in the prior year interim period.
Mobility
The following table presents external revenues, U.S. and non-U.S., and operating
income (loss) (dollars in millions):
Three months ended March 31, Six months ended March 31,
----------------------------------------- ----------------------------------------
2002 2001 % change 2002 2001 % change
---------- ---------- ------------ ---------- ----------- ------------
U.S. $1,347 $1,262 6.7% $2,419 $ 2,146 12.7%
Non-U.S. 232 258 (10.1%) 628 563 11.5%
---------- ---------- ---------- -----------
Total Mobility revenues $1,579 $1,520 3.9% $3,047 $ 2,709 12.5%
========== ========== ========== ===========
Operating income (loss) $190 $(145) 231.0% $ 31 $(481) 106.4%
========== ========== ========== ===========
During the three and six month periods ended March 31, 2002, Mobility revenues
as compared with the prior fiscal year periods increased by 4% and 13%. The
increases resulted from growth in CDMA products and services to certain U.S.
service providers as they build out their wireless networks. Our five largest
customers represented about 75% of Mobility revenues during the six months ended
March 31, 2002 and substantially all of the revenue increase compared with the
prior year interim period. The increase in non-U.S. revenues for six months
ended March 31, 2002 resulted from higher revenues in China, partially
offset by reductions in the Asia Pacific region primarily due to a loss of
revenues from One-Tel Corp. in fiscal year 2002, which went into receivership
during 2001.
During the current quarter, operating income improved as compared with the prior
fiscal year period by $335 million to $190 million. This improvement was
primarily driven by higher gross margin of $267 million and lower operating
expenses of $68 million. The gross margin rates increased signifcantly due to
higher sales volume, lower inventory and warranty-related charges and cost
reductions. The $68 million reduction in operating expenses resulted from
headcount reductions and less discretionary spending, partially offset by
higher provisions for bad debts and customer financing of $118 million.
During the six-month period ended March 31, 2002, operating income improved as
compared with the prior fiscal year interim period by $512 million to $31
million. The improvement was driven by higher gross margin of $293 million and
lower operating expenses of $219 million, despite an increase of $123 million
for provisions for bad debts and customer financing. The reasons for the
higher gross margin and reduction in operating expenses were similar to
those described above for the current quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow for the six months ended March 31, 2002
Net cash used in operating activities
Net cash used in operating activities was $472 million for the six months ended
March 31, 2002. This primarily resulted from a loss from continuing operations
(adjusted for non-cash items) of $557 million and changes in other operating
assets and liabilities of $2.3 billion, partially offset by a reduction in
working capital requirements of $2.4 billion. The reduction in working capital,
which includes changes in receivables, inventories and contracts in process and
accounts payable primarily resulted from the $1.6 billion decrease in sales
volume during the current quarter compared to the fourth quarter of fiscal year
2001. The most significant reduction in working capital was a $1.4 billion
decrease in receivables. Consistent with the decrease in receivables during the
six-month period, the average receivable days sales outstanding decreased from
80 days at September 30, 2001 to 77 days at March 31, 2002. Improvements in
inventory and contracts in process resulted from our continued efforts to
streamline inventory supply chain operations and higher billings for our
long-term contracts. The changes in other operating assets and liabilities
include cash outlays under our restructuring program of $593 million and various
other changes, including a reduction in other operating assets and liabilities
due to changes in sales volume, and increases in tax refund receivable and notes
receivables under our customer financing program.
Net cash provided by investing activities
The net cash provided by investing activities of $2.3 billion for the six months
ended March 31, 2002, was primarily from the $2.1 billion of cash proceeds
received from the sale of our optical fiber business and approximately $400
million of cash proceeds from other business dispositions
22 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(see "Business dispositions and asset sales"). These proceeds were partially
offset by capital expenditures of $199 million.
Net cash provided by financing activities
Net cash provided by financing activities of $589 million for the six months
ended March 31, 2002 was primarily due to the $1.75 billion in proceeds received
from the sale of trust preferred securities (see Note 6 to the unaudited
consolidated financial statements), partially offset by repayments under our
credit facilities of $1.0 billion and preferred dividend payments of $73
million.
Cash Requirements
Our cash requirements over the next twelve months are primarily to fund:
o operations, including spending on R&D;
o restructuring requirements;
o capital expenditures;
o capital requirements in connection with our existing customer financing
commitments; and
o debt service and preferred dividend requirements.
Restructuring
Under our restructuring program we:
o compared to our first fiscal quarter of 2001, achieved our objective to
reduce our annual operating expense run rate by $4.0 billion;
o compared to our first fiscal quarter of 2001, achieved 95% of our objective
to reduce working capital (defined as the change in receivables and
inventory adjusted for non-cash charges and asset securitizations, and
normalized for the change in quarterly sales) by $4.0 billion; and
o expect to reduce our capital expenditures to $750 million or less during
fiscal year 2002.
Cash requirements under the restructuring program are expected to be
approximately $2.0 billion, of which approximately $1.1 billion was paid through
March 31, 2002, with the majority of the remainder to be paid by the end of
fiscal year 2002.
We expect to substantially complete the restructuring program by the end of
fiscal year 2002. If implemented in the manner and on the timeline we intend, we
expect to realize the full benefits of our restructuring program by the end of
fiscal year 2002. However, we cannot assure you that our restructuring program
will achieve all of the cost and expense reductions and other benefits we
anticipate or on the timetable contemplated.
Customer finance commitments
The following table presents our customer financing commitments at March 31,
2002 and September 30, 2001 (dollars in billions):
March 31, 2002 September 30, 2001
------------------------------------------- --------------------------------------------
Total loans Total loans
and and
guarantees Loans Guarantees guarantees Loans Guarantees
-------------- ------------ ------------- -------------- ------------ -------------
Drawn commitments $ 1.2 $ 1.0 $ 0.2 $ 3.0 $ 2.6 $0.4
Available but not drawn 0.8 0.8 - 1.4 1.4 -
Not available 0.2 0.2 - 0.9 0.6 0.3
-------------- ------------ ------------- -------------- ------------ -------------
Total commitments $2.2 $2.0 $0.2 $5.3 $ 4.6 $0.7
============== ============ ============= ============== ============ =============
Some of our customers worldwide require 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. We use a disciplined credit
evaluation and business review process that takes into account the credit
quality of individual borrowers and their related business plans, as well as
market conditions. We consider requests for financing on a case-by-case basis
and offer financing only after careful review. As market conditions permit, our
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 us to reduce the amount of our
commitments and free up additional financing capacity. As part of the revenue
recognition process, we determine whether the notes receivable under these
contracts are reasonably assured of collection based on various factors,
including our ability to sell these notes. Deterioration in the credit quality
of our customers may further increase our capital needs if we are unable to sell
the notes representing existing customer financings or to transfer future
funding commitments to financial institutions and investors on acceptable terms
and in the expected
23 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
timeframes. We expect that approximately $500 million of the $1.0 billion
undrawn commitments at March 31, 2002 may be drawn during the remainder of
fiscal year 2002, $300 million to $400 million in fiscal year 2003 and the rest
will likely expire undrawn. In addition, our capital needs associated with
customer financing may increase if our ability to sell the notes representing
existing customer financing, or transfer future funding commitments, on
acceptable terms to financial institutions and investors is limited by a
deterioration in the credit quality of the customers to which we have extended
financing.
In September 2000, we and a third party created a non-consolidated Special
Purpose Trust ("Trust") for the purpose of allowing us from time to time to sell
on a limited-recourse basis customer finance loans and receivables ("Loans") at
any given point in time. Due to our credit downgrade in February 2001, we are
unable to sell additional Loans to the Trust. As of March 31, 2002, the Trust
held approximately $350 million of customer financing loans and receivables.
As part of our credit process we monitor the drawn and undrawn commitments and
guarantees of debt to our customers. Customers are reviewed on a quarterly or
annual basis depending upon their risk profile. As part of our review, we assess
the customer's short-term and long-term liquidity position, current operating
performance versus plan, execution challenges facing the company, changes in
competitive landscape, industry and macroeconomic conditions, and changes in
management and sponsors. Depending upon the extent of any deterioration of a
customer's credit profile or non-compliance with our legal documentation, we
undertake actions that could include canceling the commitment, compelling the
borrower to take corrective measures, and increasing efforts to mitigate
potential losses. These actions are designed to mitigate unexpected events that
could have an impact on our future results of operations and cash flows;
however, there can be no assurance that this will be the case. Adverse industry
conditions have negatively affected the creditworthiness of several customers
that participate in our customer-financing program. The decrease in the drawn
and total commitments from September 30, 2001 was primarily due to the removal
of approximately $1 billion of fully reserved accounts, sales of loans and
cancellations, partially offset by draw-downs. Reserves associated with total
drawn commitments, including guarantees, were approximately $700 million
reflecting a net exposure of approximately $500 million.
Our overall customer financing exposure, coupled with a continued decline in
telecommunications market conditions, negatively affected results of operations
and cash flows in fiscal year 2001 and has continued through the first half of
fiscal year 2002. We will continue to provide or commit to financing, on a more
limited basis, where appropriate for our business. Our ability to arrange or
provide financing for our customers will depend on a number of factors,
including our capital structure, credit rating and level of available credit,
and our continued ability to sell or transfer commitments and drawn-down
borrowings on acceptable terms. Due to recent economic uncertainties and reduced
demand for financings in capital and bank markets, we may be required to
continue to hold certain customer financing obligations for longer periods prior
to the sale to third-party lenders. In addition, specific risks associated with
customer financing, including the risks associated with new technologies, new
network construction, market demand and competition, customer business plan
viability and funding risks have required us to hold certain customer financing
obligations and retain the related credit risk over a longer term. Any
unexpected developments in our customer financing arrangements could negatively
affect revenue, results of operations and cash flows in the future. In addition,
we may be required to record additional reserves related to customer financing
in the future.
Debt service and preferred dividend requirements
Debt service primarily represents interest payments on our short and long-term
debt and trust preferred securities. Preferred dividend requirements represent
payments on our redeemable convertible preferred stock. We expect these
requirements over the next twelve months to be in the range of $500 million to
$600 million.
Sources of Cash
We expect to fund our cash requirements over the next twelve months through a
combination of the following sources:
o cash and cash equivalents as of March 31, 2002;
o federal tax refund of $616 million, which was received in April 2002;
o available credit under our credit facility (see Credit facility);
o business dispositions and asset sales;
o capital market transactions; and
o accounts receivable securitization facility.
Our net liquidity was approximately $6.3 billion on March 31, 2002, which
consisted of cash and cash equivalents of $4.8 billion and availability under
our credit facility of $1.5 billion. As of March 31, 2002, no amounts were
outstanding under our credit facility.
24 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Credit facility
As a result of undertaking certain debt reduction transactions and generating
funds from certain specified non-operating sources, the total lending commitment
under our credit facility was reduced to $1.5 billion. Future transactions will
not result in a further reduction of our lending commitment.
The credit facility is secured by liens on substantially all of our assets,
including the pledge of Agere stock owned by us. Our ability to access our
credit facility is subject to our compliance with its terms and conditions,
including financial covenants. These financial covenants require us to have
minimum earnings before interest, taxes, depreciation, amortization and certain
other items ("EBITDA") and minimum net worth (each as defined under the credit
facility) measured at the end of each fiscal quarter. As of March 31, 2002, we
were in compliance with these covenants, however, we are required to sustain
and/or improve our financial performance in future quarters to remain in
compliance. For example, from the third fiscal quarter of 2002 through the first
fiscal quarter of 2003, we are required to meet or exceed quarterly EBITDA
levels of $50 million of EBITDA loss, $150 million of positive EBITDA and $250
million of positive EBITDA. A continued downturn in our principle markets could
make it more difficult for us to satisfy these requirements, which could result
in a default under our credit facility. In addition, in the event a subsidiary,
including Agere prior to the spin-off, defaults on its debt, as defined in its
credit facility, it would constitute a default under our credit facility. As of
March 31, 2002, Agere was in compliance with its covenants.
We cannot resume payment of dividends on our common stock unless we achieve
certain credit ratings or EBITDA levels and no event of default exists under the
credit facility. Payment of dividends on our common stock is limited to the rate
of dividends paid prior to the discontinuation of the cash dividend. We are
permitted to pay cash dividends on our convertible preferred stock and
distributions on our convertible trust preferred securities if no event of
default exists under the credit facility.
Our credit facility matures in February 2003. We expect to replace this facility
prior to maturity, however, we cannot assure you that we will be able to do so
on acceptable terms for the same amount or at all.
Capital market transaction
On March 19, 2002, we sold 1,750,000 of 7.75% cumulative convertible trust
preferred securities for an aggregate amount of $1.75 billion. Fees paid in
connection with this transaction were approximately $46 million. We intend to
use the net proceeds for general corporate purposes, which over time may be used
to fund certain items discussed in "Cash requirements", however, we do not
currently anticipate using a significant amount of these proceeds to satisfy
these cash requirements in the near term. We invested the net proceeds in
investment grade, interest-bearing securities. For additional information on the
sale, see Note 6 to the unaudited consolidated financial statements.
Business dispositions and asset sales
The following summarizes the significant dispositions during the current fiscal
year. These dispositions are not expected to have a significant impact on our
future results of operations except for the sale of OFS, which had revenues and
pretax income of $2 billion and $541 million, respectively, during fiscal year
2001.
On November 16, 2001, we completed the sale of OFS to The Furukawa Electric Co.,
Ltd. for $2.3 billion, $173 million of which was paid to us in CommScope, Inc.
common stock. In addition, we entered into an agreement on July 24, 2001 to sell
two China-based joint ventures -- Lucent Technologies Shanghai Fiber Optic Co.,
Ltd. and Lucent Technologies Beijing Fiber Optic Cable Co., Ltd. -- to Corning
Incorporated for $225 million. This transaction, which is subject to U.S. and
foreign governmental approvals and other customary closing conditions, is
expected to close by the end of the third quarter of fiscal year 2002.
On December 3, 2001, we completed the sale of our voice enhancement and echo
cancellation business to NMS Communications for $60 million in cash.
On December 21, 2001, we created a new venture capital partnership named New
Venture Partners II LP with Coller Capital of London, an international
specialist investment manager. Under the terms of the agreement, we sold
approximately 80% of our equity stake in our former New Ventures Group business
to Coller Capital for $93 million in cash.
On February 28, 2002, we completed the sale of our billing and customer care
business to CSG Systems International, Inc. for approximately $260 million in
cash, subject to certain post closing purchase price adjustments.
On March 28, 2002, we announced that Solectron Corporation has agreed to pay us
approximately $125 million for certain equipment and inventory at our
manufacturing operations at North Andover, Massachusetts. We also expect to sign
a three-year manufacturing supply agreement for
25 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
optical line systems with Solectron. The transaction is expected to close in the
third fiscal quarter of 2002, and is subject to customary closing conditions,
including regulatory approvals. As we continue to expand the use of outsourcing
arrangements for the manufacture of some of our products, both domestically and
internationally, we may enter into additional sales of manufacturing operations
with contract manufacturers during fiscal year 2002.
On November 6, 2001, we announced our intention to sell the enterprise
professional services portion of our services business.
Accounts receivable securitization facility
At March 31, 2002, $136 million was outstanding under our $500 million
securitization facility that expires in June 2004. However, continued
availability of this facility is contingent on the annual renewal of certain
bank commitments to fund incremental purchases under certain circumstances. Our
ability to obtain additional proceeds depends upon a combination of factors,
including our credit ratings and increasing the level of our eligible accounts
receivable available for securitization. As of March 31, 2002, the total
ownership rights in the receivables (undivided interest) in the securitization
were collateralized by $1.2 billion of accounts receivable.
Future capital requirements
We believe our cash and cash equivalents on hand, availability under our credit
facility and other planned sources of liquidity are currently sufficient to meet
our requirements over the next twelve months. We cannot assure you, however,
that these sources of liquidity will be available when needed or that our actual
cash requirements will not be greater than we currently expect. As market
conditions permit, we may raise additional capital, which would include raising
funds through equity or debt offerings. In addition, our credit facility matures
in February 2003. Although we expect to replace this facility prior to maturity,
we cannot assure you that we will be able to do so on acceptable terms for the
same amount or at all. If our sources of liquidity are not available or if we
cannot generate positive cash flow from operations, we might be required to
obtain additional sources of funds through additional operating improvements,
asset sales and financing from third parties or a combination thereof. Although
we believe that we have the ability to take these actions, we cannot assure you
that these additional sources of funds, if available, would have reasonable
terms.
Credit ratings
Our credit ratings as of May 14, 2002 are as follows:
Trust
Long-term Convertible preferred
debt preferred stock securities Last update
-------------- ---------------- --------------- ---------------------
Rating Agency
Standard & Poor's B+ (s) CCC+ CCC+ March 12, 2002
Moody's B2 (n) Caa2 Caa1 March 22, 2002
Fitch BB- (n) B B March 12, 2002
---------
(s) Ratings outlook is stable.
(n) Ratings outlook is negative.
Our credit ratings remain below investment grade. As a result of past
downgrades, we no longer have the ability to participate in the commercial paper
market and are unable to sell trade and notes receivables to the Trust (see
Customer finance commitments). In addition, a credit downgrade affects our
ability to enter into and maintain certain contracts on favorable terms, and
increases our cost of borrowing. We cannot assure you that our credit ratings
will not be reduced in the future by Standard & Poor's, Moody's or Fitch.
Agere Spin-Off Update
As of March 31, 2002, we satisfied all of the financial conditions and covenants
to complete the spin-off of Agere. Our board of directors approved a
distribution of Agere shares to Lucent's common shareowners, which is planned
for June 1, 2002, to the holders of Lucent common stock as of the close of
business on May 3, 2002, the record date for the distribution. On the
distribution date of June 1, 2002, each Lucent common shareowner will receive
..0108 of a share of Agere's Class A common stock and .2646 of a share of Agere's
Class B common stock for each share of Lucent common stock held on the record
date of May 3, 2002. The pro rata distribution will reduce our shareowners'
equity by approximately $1 billion.
We have received a private letter ruling from the Internal Revenue Service
holding that the distribution of our shares of Agere common stock to our
shareowners in the spin-off and to holders of our debt in the debt for equity
exchange will be tax-free to our shareowners and us. The effectiveness of the
ruling is conditioned on completion of the spin-off by June 30, 2002, unless
that date is extended by the Internal Revenue Service in a supplemental ruling.
26 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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 $784 million and $900 million at March 31, 2002 and September
30, 2001, respectively.
RISK MANAGEMENT
We are exposed to market risk from changes in foreign currency exchange rates,
interest rates and equity prices that could affect our results of operations and
financial condition. We manage our exposure to these market risks through our
regular operating and financing activities and, when deemed appropriate, hedge
these risks through the use of derivative financial instruments. We use 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 by
creating a relationship in which gains or losses on derivative instruments are
expected to counterbalance the losses or gains on the assets, liabilities or
anticipated transactions exposed to such market risks. We use 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
our exposure to nonperformance on such instruments. Our risk management
objective is to minimize the effects of volatility on our 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. We generally do not hedge our credit risk on customer
receivables.
Foreign Currency Risk
We use 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 and option contracts are utilized for
recognized receivables and payables, firmly committed or anticipated cash
inflows and outflows. The use of these derivative financial instruments allows
us to reduce our 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 flow exposure is appropriately hedged. We do not
hedge our net investment in non-U.S. entities because we view those investments
as long-term in nature.
We have not changed our foreign exchange risk management strategy since the year
ended September 30, 2001. However, we have modified our policy to no longer
designate certain freestanding foreign currency derivatives as hedging
instruments for accounting purposes against our intercompany and external
foreign-currency-denominated loans. We will continue to hedge all types of
foreign currency risk to preserve our economic cash flows but generally do not
expect to designate related derivative instruments as hedges under current
accounting standards for cost/benefit reasons unless the benefits of doing so
are material. We are currently in the process of further centralizing the
foreign exchange and liquidity management needs of many of our operating
subsidiaries under the model of an in-house bank. While this implementation
would not change the fundamental objective of our foreign currency risk
management policy, it is expected to yield benefits by way of economic
efficiency, process efficiency and improved visibility of financial flows.
Interest Rate Risk
We use 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 the interest rate mix of our total debt portfolio
and related cash flows. To manage this mix in a cost-effective manner, we, from
time to time, may enter into interest rate swap agreements in which we agree to
exchange various combinations of fixed and/or variable interest rates based on
agreed-upon notional amounts. We had no interest rate swap agreements in effect
at March 31, 2002. The objective of maintaining the mix of fixed and floating
rate debt is to mitigate the variability of cash flows resulting from interest
rate fluctuations as well as reduce the cash flows attributable to debt
instruments. Our portfolio of customer finance notes receivable predominantly
comprises variable-rate notes at LIBOR plus a stated percentage and subjects us
to variability in cash flows and earnings for the effect of changes in LIBOR. We
do not enter into derivative transactions on our cash equivalents and short-term
investments, since their relatively short maturities do not create significant
risk.
We have not changed our interest rate risk management strategy since September
30, 2001 and do not foresee or expect any significant changes in our exposure to
interest rate fluctuations, but we are considering expanding the use of interest
rate swaps in the near future on our debt obligations.
27 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Equity Price Risk
Our 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 and the telecommunications industries, many of which are small
capitalization stocks. At March 31, 2002, the fair value of one
available-for-sale security totaled $151 million out of a total
available-for-sale portfolio of $186 million. Due to the continued weak economic
conditions in the technology sector, we may, from time to time, record
impairment losses and write down the carrying value of certain equity
investments when the declines in fair value are other than temporary. The
impairment losses recorded were $36 million and $58 million for the three months
and six months ended March 31, 2002, respectively. We generally do not hedge our
equity price risk and as of March 31, 2002, we had no outstanding hedge
instruments for our equity price risk, but we are considering expanding the use
of hedging instruments on certain securities in the near future.
OTHER INFORMATION
On November 21, 2000, we announced that we had identified an issue impacting
revenue in the fourth fiscal quarter of 2000. We informed the SEC and initiated
a review by our outside counsel and outside auditors. In late December 2000, we
announced the results of the review, which resulted in certain adjustments to
our fourth fiscal quarter of 2000 results. We are cooperating fully with the
SEC's investigation of these matters.
RECENT PRONOUNCEMENTS
See discussion in Note 11 to the unaudited consolidated financial statements.
LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS
See discussion in Note 10 to the unaudited consolidated financial statements.
FORWARD-LOOKING STATEMENTS AND RISKS RELATED TO OUR BUSINESS
This quarterly report on Form 10-Q and other documents we file with the SEC
contain forward-looking statements that are based on current expectations,
estimates, forecasts and projections about us, our future performance, the
industries in which we operate, our beliefs and our management's assumptions. In
addition, other written or oral statements that constitute forward-looking
statements may be made by or on behalf of us. Words such as 'expects,'
'anticipates,' 'targets,' 'goals,' 'projects,' '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 that 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 SEC, we do not have any intention or
obligation to update publicly any forward-looking statements after the
distribution of this Form 10-Q, whether as a result of new information, future
events, changes in assumptions, or otherwise.
See reports filed by Agere with the SEC for a further list and description of
risks and uncertainties related to Agere.
The following items are representative of the risks, uncertainties and
assumptions that could affect the outcome of the forward-looking statements. In
addition, such forward-looking statements could be affected by general industry
and market conditions and growth rates, general U.S. and non-U.S. economic and
political conditions, including the global economic slowdown and interest rate
and currency exchange rate fluctuations and other future events or otherwise.
IF THE TELECOMMUNICATIONS MARKET DOES NOT IMPROVE, OR IMPROVES AT A SLOWER PACE
THAN WE ANTICIPATE, OUR RESULTS OF OPERATIONS WILL CONTINUE TO SUFFER.
During fiscal year 2001, the global telecommunications market deteriorated,
reflecting a significant decrease in the competitive local exchange carrier
market and a significant reduction in capital spending by established service
providers. This trend has continued during the first and second fiscal quarters
of 2002 and is expected to continue at least throughout calendar 2002. As a
result, our sales and results of operations have been adversely affected.
If capital investment levels continue to decline, or if the telecommunications
market does not improve or improves at a slower pace than we anticipate, our
revenues and profitability will continue to be adversely affected. In addition,
if the volume of our sales and products mix does
28 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
not improve, our gross margin percentage may not improve as much as we expect,
resulting in lower than expected results of operations.
The significant slowdown in capital spending in our target markets has created
uncertainty as to the level of demand in those markets. In addition, the level
of demand can change quickly and can vary over short periods of time, including
from month to month. As a result of the uncertainty and variations in our
markets, accurately forecasting future results, earnings and cash flow is
increasingly difficult.
WE INCURRED A NET LOSS IN FISCAL YEAR 2001 AND IN THE FIRST AND SECOND FISCAL
QUARTERS OF 2002 AND MAY CONTINUE TO INCUR NET LOSSES IN THE FUTURE; IF WE
CONTINUE TO INCUR NET LOSSES, WE MAY BE UNABLE TO COMPLY WITH OUR DEBT
COVENANTS.
If our customers' spending does not increase or if we fail to generate the
benefits we seek from our shift in strategic direction and restructuring
program, our revenues may continue to decline, we may be unable to recover our
deferred tax assets and we may not be able to return to and maintain
profitability. In such event, we will have difficulty complying with our debt
covenants and conditions, including the provisions under our credit facility
that require us to achieve certain quarterly levels of EBITDA and minimum net
worth (each as defined under the credit facility). A breach of our debt
covenants could result in a default under our credit facility, which could have
an adverse effect on our liquidity.
OUR STRATEGIC DIRECTION AND RESTRUCTURING PROGRAM MAY NOT YIELD THE BENEFITS WE
EXPECT AND COULD EVEN HARM OUR FINANCIAL CONDITION, REPUTATION AND PROSPECTS.
In connection with implementing our new strategic direction and restructuring
program, we have, and are in the process of, exiting certain product lines,
outsourcing the manufacturing of certain of our products, selectively disposing
of certain of our businesses and facilities, reducing the number of countries in
which we operate, and significantly reducing our work force. These activities
may not yield the benefits we expect, raise product costs, delay product
production and service delivery, result in or exacerbate labor disruptions and
labor-related legal actions against us, and create inefficiencies in our
business.
Our strategic direction and restructuring program may also give rise to
unforeseen costs, which could wholly or partially offset any expense reductions
or other financial benefits we attain as a result of the changes to our
business. In addition, if the markets for our products do not improve, we will
take additional restructuring actions to address these market conditions. Any
such additional actions could result in additional restructuring charges.
WE HAVE SUBSTANTIAL CASH REQUIREMENTS AND MAY REQUIRE ADDITIONAL SOURCES OF
FUNDS IF OUR SOURCES OF LIQUIDITY ARE UNAVAILABLE OR INSUFFICIENT TO SATISFY
THESE REQUIREMENTS. WE CANNOT ASSURE YOU THAT THE ADDITIONAL SOURCES OF FUNDS
WOULD BE AVAILABLE OR AVAILABLE ON REASONABLE TERMS.
We have substantial cash requirements in connection with our operations, capital
expenditures, restructuring and customer financing programs, debt service
obligations and, if we elect to pay such dividends or redemptions in cash,
preferred stock dividend requirements and redemptions. In addition, new product
development, which is key to the success of our business, is capital intensive.
If the cash we generate from our operations or that we can access under our
credit facility or from our other sources is not available when needed or is
insufficient to satisfy our requirements, we may require additional sources of
funds.
Our credit facility matures in February 2003. While we expect to be able to
replace our credit facility prior to maturity, we cannot assure you that we will
be able to do so on acceptable terms for the same amount or at all. We also
cannot assure you that any required additional sources of funds would be
available or available on reasonable terms. If we do not generate sufficient
amounts of capital to meet our cash requirements at the times and on the terms
required by us, our business will likely be adversely affected.
OUR CREDIT FACILITY IMPOSES SIGNIFICANT OPERATING AND FINANCIAL RESTRICTIONS ON
US, AND IN THE EVENT THAT WE DEFAULT UNDER OUR CREDIT FACILITY, ANY OF OUR
OUTSTANDING BORROWINGS UNDER THE CREDIT FACILITY WOULD BECOME IMMEDIATELY DUE
AND PAYABLE.
Our credit facility imposes operating and other restrictions on us and on many
of our subsidiaries. The credit facility also requires us to have minimum
earnings before interest, taxes, depreciation, amortization and certain other
items (EBITDA) and net worth (each defined under the credit facility) measured
at the end of each fiscal quarter. Our credit facility matures in February 2003
and we may in the future enter into new credit facilities or other transactions
that impose similar or even more stringent restrictions and financial tests. Our
ability to meet those financial tests is dependent upon a variety of factors,
many of which are beyond our control. There can be no assurance that we will be
able to comply with the restrictions and financial tests of our credit facility,
any new credit facilities, or other transactions.
The restrictions contained in our credit facility or any new credit facility
could limit our ability to plan for or react to market conditions or meet
capital needs or otherwise restrict our
29 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
activities or business plans and adversely affect our ability to finance
operations, strategic acquisitions, investments or alliances or to engage in
other business activities that would be in our interest. Some of the current
financial tests in our credit facility require improving financial performance
by us over time. A continuing downturn in our principal markets could make it
more difficult for us to satisfy these financial tests. A breach of any of the
restrictive covenants or our inability to comply with the required financial
tests could result in a default under the credit facility. In addition, a
default by any of our subsidiaries, including Agere prior to the date of the
spin-off, of indebtedness in excess of $100 million would constitute a default
under the credit facility. If any such default occurs, the lenders under the
credit facility may elect to declare all outstanding borrowings, together with
accrued interest and other fees, to be immediately due and payable. The lenders
will also have the right in these circumstances to terminate any commitments
they have to provide further borrowings, which would reduce the liquidity
available to us.
OUR CREDIT RATINGS MAY BE REVIEWED FOR DOWNGRADE, PUT ON CREDIT WATCH OR
DOWNGRADED, WHICH COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Declines in our credit ratings have resulted in increased costs on certain of
our credit facility and other financing arrangements. In addition, we have
experienced reduced access to credit markets and declines in the price of Lucent
common stock. We cannot assure you that our credit ratings will not be reduced
in the future by Moody's, S&P, Fitch or any other ratings agency.
WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY. OUR FAILURE TO COMPETE EFFECTIVELY
WOULD HARM OUR BUSINESS.
The industry in which we operate is highly competitive and we expect that the
level of competition on pricing and product offerings will intensify as
equipment manufacturers seek to strengthen their relationships with large
service providers and as the telecommunications industry undergoes
consolidation. The factors that could impact our ability to compete successfully
in the industry include: the quality, performance, reliability, mix and market
acceptance of our products; market acceptance of our competitors' products;
efficiency and quality of the production and implementation of our products; and
our customer support and reputation.
We have a number of existing competitors, some of whom are very large with
substantial technological and financial resources and brand recognition. In
addition, new competitors may enter the industry as a result of shifts in
technology. These new competitors, as well as existing competitors, may include
entrants from the telecommunications, computer software, data networking, and
semiconductor industries. We cannot assure you that we will be able to compete
successfully against existing or future competitors. Competitors may be able to
offer lower prices, additional or a more attractive mix of products or services,
or services or other incentives that we cannot match or do not offer. These
competitors may be in a stronger position to respond quickly to new or emerging
technologies and may be able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies, and make more attractive offers to
potential customers, employees, and strategic partners. Because we have a
unionized workforce at some locations and many of our main competitors are not
unionized to the same extent, or at all, our costs may be higher and our
profitability may be lower than those competitors. In addition, because we may
have less liquidity and a more limited access to the capital markets as a result
of our credit ratings than some of our competitors, these competitors may be
better positioned to withstand a prolonged downturn in the industry or in the
economy as a whole.
A LIMITED NUMBER OF OUR CUSTOMERS ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR
REVENUES, AND THE LOSS OF ONE OR MORE KEY CUSTOMERS COULD SIGNIFICANTLY REDUCE
OUR REVENUES, PROFITABILITY, AND CASH FLOW.
We rely on a limited number of large customers to provide a substantial portion
of our revenues. These customers include: AT&T, AT&T Wireless, BellSouth,
Cingular, SBC, Sprint, Verizon and Verizon Wireless. A reduction, delay or
cancellation of orders from one or more of our significant customers or the loss
of one or more significant customers in any period could have an adverse effect
on our revenues, profitability and cash flow. For example, certain of our U.S.
based Mobility customers are considering alternatives to our Time Division
Multiple Access technology.
As part of our strategic direction, we are targeting our products and services
to the world's largest service providers. In addition, the telecommunications
industry has recently experienced a consolidation of both United States and
non-United States companies. As a result of these factors, it is likely that in
fiscal year 2002 and subsequent years an even greater percentage of our revenues
will be attributable to a limited number of large service providers than in
years past. Larger than expected decreases in spending by these large service
providers, or a loss of any of them as a customer, could have an adverse effect
on our revenues, profitability and cash flow.
30 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
WE ARE EXPOSED TO THE CREDIT RISK OF OUR CUSTOMERS AS A RESULT OF OUR CUSTOMER
FINANCING ARRANGEMENTS AND ACCOUNTS RECEIVABLES.
Our customer financing arrangements and accounts receivable make us vulnerable
to downturns in the economy and the industry in general, and to adverse changes
in our customers' businesses in particular. Many of the customers to whom we
provide funding or with whom we have contracts have been negatively affected by
the continued softening in the telecommunications market, and some have filed
for bankruptcy or been declared insolvent. As a result, we wrote-off certain
customer financings and receivables and sold others at significant discounts. We
also recorded reserves or write-offs in our financial statements and may have to
record additional reserves or write-offs in the future. Deterioration in the
credit quality of our customers may further increase our capital needs if we are
unable to sell the notes representing existing customer financings or to
transfer future funding commitments to financial institutions and investors on
acceptable terms and in the expected timeframes.
WE HAVE DEVELOPED OUTSOURCING ARRANGEMENTS FOR THE MANUFACTURE OF SOME OF OUR
PRODUCTS. IF THESE THIRD PARTIES FAIL TO DELIVER QUALITY PRODUCTS AND COMPONENTS
AT REASONABLE PRICES ON A TIMELY BASIS, WE MAY ALIENATE SOME OF OUR CUSTOMERS
AND OUR REVENUES, PROFITABILITY AND CASH FLOW MAY DECLINE.
As part of our strategic direction, we are increasing our use of contract
manufacturers as an alternative to our own manufacture of products. If, in
implementing this initiative, we are unable to identify contract manufacturers
willing to contract with us on competitive terms and to devote adequate
resources to fulfill their obligations to us, or if we do not properly manage
these relationships, our existing customer relationships may suffer. In
addition, by undertaking these activities, we run the risk that the reputation
and competitiveness of our products and services may deteriorate as a result of
the reduction of our control over quality and delivery schedules. We may also
experience supply interruptions, cost escalations and competitive disadvantages
if our contract manufacturers fail to develop, implement, or maintain
manufacturing methods appropriate for our products and customers.
If any of these risks is realized, our revenues, profitability and cash flow may
decline. In addition, as we come to rely more heavily on contract manufacturers,
we may have fewer personnel resources with expertise to manage problems that may
arise from these third party arrangements.
WE HAVE LONG-TERM SALES AGREEMENTS WITH A NUMBER OF OUR LARGE CUSTOMERS. SOME OF
THESE AGREEMENTS MAY PROVE UNPROFITABLE AS OUR COSTS AND PRODUCT MIX SHIFT OVER
THE LIFE OF THE AGREEMENT.
We have entered into long-term sales agreements with a number of our large
customers. Some of these sales agreements require us to sell products and
services at fixed prices over the life of the agreement, and some require us to
sell products and services that we would otherwise discontinue, thereby
diverting our resources from the development of more profitable or strategically
important products. The costs we incur in fulfilling certain of our sales
agreements may vary substantially from our initial cost estimates. Any cost
overruns that we cannot pass on to our customers could adversely affect our
results of operations by reducing or eliminating our profit margins.
IF WE FAIL TO MAINTAIN A PRODUCT MIX THAT IS ATTRACTIVE TO OUR CUSTOMERS,
ENHANCE OUR EXISTING PRODUCTS AND KEEP PACE WITH TECHNOLOGICAL ADVANCES IN OUR
INDUSTRIES OR IF WE PURSUE TECHNOLOGIES THAT DO NOT BECOME COMMERCIALLY
ACCEPTED, CUSTOMERS MAY NOT BUY OUR PRODUCTS AND OUR REVENUES, PROFITABILITY AND
CASH FLOW MAY BE ADVERSELY AFFECTED.
The demand for our products can change quickly and in ways that we may not
anticipate because markets for our principal products are characterized by:
rapid, and sometimes disruptive, technological developments; evolving industry
and certification standards; frequent new product introductions and
enhancements; changes in customer requirements and a limited ability to
accurately forecast future customer orders; evolving methods of building and
operating communications systems for our service provider and other customers;
and short product life cycles with declining prices over the life cycle of a
product.
Our operating results depend, to a significant extent, on our ability to
maintain a product mix that is attractive to our customers, enhance our existing
products and continue to successfully introduce new products on a timely basis.
New technological innovations generally require a substantial investment before
any assurance is available as to their commercial viability, including, in some
cases, certification by United States and non-United States standards-setting
bodies.
If we fail to make sufficient investments or we focus on technologies that do
not become widely adopted, new technologies could render our current and planned
products obsolete, resulting in the need to change the focus of our research and
development and our product strategies. This will disrupt our business
significantly. Even if we develop the appropriate technology, we may not bring
our products successfully or timely to market or achieve market acceptance of
them. Being one of the first to make products available is important to the
success of a new product, and any delays in bringing a new product to market
could have a negative effect on our results of operations.
31 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
MANY OF OUR CURRENT AND PLANNED PRODUCTS ARE HIGHLY COMPLEX AND MAY CONTAIN
DEFECTS OR ERRORS THAT ARE DETECTED ONLY AFTER DEPLOYMENT IN COMMUNICATIONS
NETWORKS; IF THAT OCCURS, OUR REPUTATION MAY BE HARMED.
Our products are highly complex and can only be fully tested when deployed in
communications networks and other equipment. From time to time, our products
have contained undetected defects, errors or failures. The occurrence of any
defects, errors or failures could result in cancellation of orders, product
returns, diversion of our resources, legal actions by our customers or our
customers' end-users and other losses to us or to our customers or end-users.
Any of these occurrences could also result in the loss of or delay in market
acceptance of our products and loss of sales, which would harm our business and
adversely affect our revenue and profitability.
OUR SUCCESS DEPENDS ON OUR ABILITY TO RETAIN AND RECRUIT KEY PERSONNEL.
Our success depends in large part on our ability to recruit and retain highly
skilled technical, managerial, sales and marketing personnel. In spite of the
economic slowdown, competition for these personnel remains intense. In addition,
our recent work force reductions have increased our dependence on our remaining
work force, as we are relying on our current personnel to assume additional
responsibilities. The loss of services of any of our key personnel or our
failure to retain and attract qualified personnel in the future could make it
difficult for us to meet our key objectives, such as timely product
introductions.
WE ARE A PARTY TO LAWSUITS, WHICH, IF DETERMINED ADVERSELY TO US, COULD RESULT
IN THE IMPOSITION OF DAMAGES AGAINST US AND COULD HARM OUR BUSINESS AND
FINANCIAL CONDITION.
We and certain of our former officers and current and former members of our
board of directors, are subject to various lawsuits brought by shareowners and
classes of shareowners, customers and participants in certain of our employee
benefit plans, alleging, among other things, violations of federal and state
securities laws, ERISA, consumer fraud laws and breaches of various fiduciary
obligations. The deterioration in the overall telecommunications market, the
decline of our results of operations in fiscal year 2001, and the consequent
impact on Lucent common stock prices, have increased the number and nature of
the actions being brought against us. In addition, our substantial work force
reductions appear to have been the catalyst for employment related actions
against us. The actions and allegations made against us may increase as we
continue to implement our restructuring program, which may involve asset
dispositions and work force reductions. We cannot assure you that actions that
have been or will be brought against us will be resolved in our favor. Any
losses resulting from these claims could adversely affect our profitability and
cash flow.
IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS AND
PROSPECTS MAY BE HARMED.
If we fail to protect our intellectual property, it could seriously harm our
businesses and prospects because we believe that developing new products and
technology that are unique to us is critical to our success. Although we have
numerous United States and foreign patents and numerous pending patents, we
cannot assure you that any patents, whether issued or pending, will provide us
with any competitive advantage, or will not be challenged by third parties.
Moreover, our competitors may already have applied for patents that, once
issued, will prevail over our patent rights or otherwise limit our ability to
sell our products. Our competitors also may attempt to design around our patents
or copy or otherwise obtain and use our proprietary technology. In addition, the
patent applications that we have currently pending may not be granted. If we do
not receive the patents we seek, or if we otherwise fail to secure international
protection for our intellectual property, our competitiveness could be
significantly impaired, which would limit our future revenues.
WE ARE SUBJECT TO INTELLECTUAL PROPERTY LITIGATION AND INFRINGEMENT CLAIMS,
WHICH COULD CAUSE US TO INCUR SIGNIFICANT EXPENSES OR PREVENT US FROM SELLING
OUR PRODUCTS.
We cannot assure you that third parties will not claim that our proprietary or
licensed products, systems and software are infringing their intellectual
property rights or that we do not in fact infringe those intellectual property
rights. From time to time, we receive notices from third parties of potential
infringement and receives claims of potential infringement when we attempt to
license our intellectual property to others. Intellectual property litigation
can be costly and time consuming and divert the attention of management and key
personnel from other business issues. The complexity of the technology involved
and the uncertainty of intellectual property litigation increase these risks. A
successful claim of patent or other intellectual property infringement could
compel us to enter into costly royalty or license agreements or force us to pay
significant damages and may even require us to stop the sale of certain of our
products.
32 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
WE ARE SUBJECT TO ENVIRONMENTAL, HEALTH AND SAFETY LAWS, WHICH COULD INCREASE
OUR COSTS AND RESTRICT OUR FUTURE OPERATIONS.
Our operations are subject to a wide range of environmental, health and safety
laws, including laws relating to the use, disposal, clean-up of, and human
exposure to, hazardous substances. In the United States, these laws often
require parties to fund remedial action regardless of fault. Although we believe
our reserves are adequate to cover our environmental liabilities, factors such
as the discovery of additional contaminants, the extent of remediation and
compliance expenses, and the imposition of additional cleanup obligations at
Superfund and other sites could cause our capital expenditures and other
expenses relating to remediation activities to exceed the amount reflected in
our environmental reserve and adversely affect our results of operations or cash
flows. Compliance with existing or future environmental, health and safety laws
could subject us to future liabilities, cause the suspension of production,
restrict our ability to expand facilities, require us to acquire costly
pollution control equipment or incur other significant expenses or modify
manufacturing processes.
RAPID CHANGES TO EXISTING REGULATIONS OR TECHNICAL STANDARDS OR THE
IMPLEMENTATION OF NEW REGULATIONS OR TECHNICAL STANDARDS UPON PRODUCTS AND
SERVICES NOT PREVIOUSLY REGULATED COULD BE DISRUPTIVE, TIME CONSUMING AND
COSTLY.
Many of the products and services we offer are developed in reliance upon
existing regulations and technical standards, our interpretation of unfinished
technical standards or the lack of such regulations and standards. Rapid changes
to existing regulations and technical standards or the implementation of new
regulations and technical standards upon products and services not previously
regulated could adversely affect development, demand, sale and warranty of our
products and services, thus increasing our costs and decreasing the demand for
our products and services.
WE CONDUCT A SIGNIFICANT AMOUNT OF OUR OPERATIONS OUTSIDE THE UNITED STATES,
WHICH SUBJECTS US TO SOCIAL, POLITICAL AND ECONOMIC RISKS OF DOING BUSINESS IN
FOREIGN COUNTRIES AND MAY CAUSE OUR PROFITABILITY TO DECLINE DUE TO INCREASED
COSTS.
We have significant operations in foreign countries, including manufacturing
facilities, sales personnel and customer support operations. For fiscal year
2001, we derived approximately 35% of our revenues from sales outside the United
States. We manufacture a significant portion of our products outside the United
States. We are also dependent on international suppliers for many of our parts.
We expect to concentrate sales and marketing, product development, services and
supply chain resources to meet the global needs of the world's largest service
providers and have initiated actions to follow the geographic footprint of our
large service provider customers around the world to the approximately 20 core
countries in which these customers do business. We will, therefore, continue to
be subject to the risks inherent in doing business in foreign countries. These
risks include: increases in tariffs and duties, price controls, restrictions on
foreign currencies and trade barriers imposed by foreign countries; exchange
controls and fluctuations in currency exchange rates; difficulties in staffing
and managing international operations; political or social unrest or economic
instability; the risk of nationalization of private enterprises by foreign
governments; and adverse tax consequences, including imposition of withholding
or other taxes on payments by subsidiaries.
Difficulties in foreign financial markets and economies, and of foreign
financial institutions, could also inhibit demand from our customers in the
affected countries. Any or all of these factors could have a material adverse
impact on our global business operations. Although we attempt to manage our
exposure to risks from fluctuations in foreign currency exchange rates, through
our regular operating and financing activities and, when deemed appropriate,
derivative financial instruments, we cannot assure you that our attempts will be
successful. A significant change in the value of the United States dollar
against the currency of one or more countries where we sell products to local
customers or make purchases from local suppliers may materially adversely affect
our operating results.
33 Form 10-Q - Part II
Part II - Other Information
Item 1. Legal Proceedings
In April 2002, a case captioned Preferred Life Insurance Co. of New York, et al
v. Lucent Technologies was filed in New Jersey state court against the Company.
This case involves a group of institutional investors, many of which are
affiliated, that purchased securities issued by Winstar Communications. In March
2002, Lucent was added as a defendant in the Winstar Federal securities
litigation pending in the Southern District of New York, captioned In re Winstar
Communications Litigation. In both of the actions, the plaintiffs allege that
Lucent caused or contributed to the damages the plaintiffs incurred from their
losses in Winstar stock. Both of these actions are in the very early stages, and
Lucent intends to defend these cases vigorously.
Item 2. Changes in Securities and Use of Proceeds
On March 19, 2002, Lucent Technologies Capital Trust I ("the trust") completed
the sale of 1,750,000 7.75% cumulative convertible trust preferred securities
having a liquidation preference of $1,000 per share, in a private placement to
the following initial purchasers: Morgan Stanley & Co. Incorporated, Salomon
Smith Barney Inc., J.P. Morgan Securities Inc., Bear, Stearns & Co. Inc.,
Deutsche Banc Alex. Brown Inc., and SG Cowen Securities Corporation. The
convertible trust preferred securities were offered and sold only to qualified
institutional buyers in the U.S. in reliance on the exemption from registration
provided by Rule 144A and outside the U.S. to non-U.S. persons in reliance upon
Regulation S under the Securities Act of 1933. The aggregate offering price for
the convertible trust preferred securities was $1,750 million.
Lucent owns all of the common securities of the trust. The trust used the
proceeds to purchase 7.75% convertible subordinated debentures issued by Lucent
due March 15, 2017 which represent all of the trust's assets. Since the trust
preferred securities are being treated as debt, the dividends on the securities
are included in interest expense. The terms of the preferred securities are
substantially the same as the terms of the debentures. Lucent may redeem the
debentures, in whole or in part, for cash at premiums ranging from 103.88%
beginning March 20, 2007 to 100.00% on March 20, 2012 and thereafter. To the
extent Lucent redeems debentures, the trust is required to redeem convertible
trust preferred securities. Lucent has irrevocably and unconditionally
guaranteed, on a subordinated basis, the payments due on the convertible trust
preferred securities. In connection with this transaction, Lucent incurred
approximately $48 million of initial purchasers' compensation and expenses that
are deferred and are being amortized over the life of the debentures.
Holders of convertible trust preferred securities are entitled to receive
quarterly cash distributions at an annual rate of 7.75% commencing June 15,
2002. The ability of the trust to pay dividends depends on the receipt of
interest payments on the debentures. Lucent has the right to defer payments of
interest on the debentures for up to 20 consecutive quarters. If Lucent defers
the payment of interest on the debentures, the trust will defer the quarterly
distributions on the convertible trust preferred securities for a corresponding
period. Deferred interest accrues at an annual rate of 9.25%. Beginning the
earlier of March 19, 2003 and the day immediately following the date of the
share distribution related to the spin-off of Agere, each convertible trust
preferred security may convert at the option of the holder into 163.9344 shares
of Lucent common stock (equivalent to a conversion price of $6.10 per share),
subject to adjustment under certain circumstances, including the Agere spin-off.
Lucent intends to use the net proceeds from the sale of the convertible trust
preferred securities for general corporate purposes, but does not anticipate
using a significant amount of the net proceeds for these purposes in the near
future.
34 Form 10-Q - Part II
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders.
Lucent held its 2002 Annual Meeting of Shareowners on February 20, 2002. At that
meeting, shareowners elected Henry B. Schacht as a Director of the Company for a
term to expire at the Annual Meeting to be held in the year 2004 and Paul A.
Allaire and John A. Young as Directors of the Company for terms to expire at the
Annual Meeting to be held in the year 2005. In addition, shareowners rejected
one shareowner proposal. The Directors elected and the results of the voting are
as follows:
Votes Votes
For Withheld
Henry B. Schacht 2,700,339,774 138,602,427
Paul A. Allaire 2,684,785,330 154,156,871
John A. Young 2,685,756,511 153,185,690
Votes Votes Broker
For Against Abstain Non- Votes
Shareowner proposal:
Repeal classified board 953,380,509 654,501,934 50,267,200 1,180,792,557
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit number
(4)(v)1 Amended and Restated Trust Agreement, dated as of
March 19, 2002, among the registrant, as depositor,
The Bank of New York, as property trustee, The Bank
of New York (Delaware), as Delaware trustee, and the
individuals named therein, as administrative
trustees, relating to Lucent Technologies Capital
Trust I.
(4)(v)2 Form of certificate for preferred securities of
Lucent Technologies Capital Trust I, designated as
7.75% Cumulative Convertible Trust Preferred
Securities (liquidation preference $1,000 per
preferred security) (included as Exhibit B to Exhibit
(4)(v)1.
(4)(v)3 Indenture, dated as of March 19, 2002, between the
registrant and The Bank of New York, as indenture
trustee.
(4)(v)4 Form of the registrant's 7.75% convertible
subordinated debentures due 2017 (included as
Exhibit A to Exhibit (4)(v)3.
(4)(v)5 Guarantee Agreement, dated as of March 19, 2002,
between the registrant, as guarantor, and The Bank
of New York, as guarantee trustee.
(10)(iii)(A) Lucent Technologies Inc. 1996 Long Term Incentive
Program, as amended through April 21, 2002.
(10)(iii)(B) Lucent Technologies Inc. 1997 Long Term Incentive
Plan, as amended through April 21, 2002.
(b) Reports on Form 8-K filed during the current quarter:
On March 13, 2002, we filed a Current Report on Form 8-K pursuant to
Item 9 (Regulation FD Disclosures) to furnish a press release with
comments on our second fiscal quarter of 2002.
On March 13, 2002, we filed a Current Report on Form 8-K pursuant to
Item 5 (Other Events) to furnish a press release, announcing our
intention to make a private offering of cumulative convertible trust
preferred securities.
On January 22, 2001, we filed a Current Report on Form 8-K pursuant to
Item 9 (Regulation FD Disclosures) to furnish a press release reporting
results of our first fiscal quarter of 2002 and slides presented in a
webcast of our quarterly earnings conference call.
35 Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lucent Technologies Inc.
Registrant
Date May 14, 2002
/s/ John A. Kritzmacher
-------------------------
John A. Kritzmacher
Senior Vice President and Controller
(Principal Accounting Officer)
36 Form 10-Q
Exhibit Index
Exhibit Number
(4)(v)1 Amended and Restated Trust Agreement, dated as of
March 19, 2002, among the registrant, as depositor,
The Bank of New York, as property trustee, The Bank
of New York (Delaware), as Delaware trustee, and the
individuals named therein, as administrative
trustees, relating to Lucent Technologies Capital
Trust I.
(4)(v)2 Form of certificate for preferred securities of
Lucent Technologies Capital Trust I, designated as
7.75% Cumulative Convertible Trust Preferred
Securities (liquidation preference $1,000 per
preferred security) (included as Exhibit B to Exhibit
(4)(v)1.
(4)(v)3 Indenture, dated as of March 19, 2002, between the
registrant and The Bank of New York, as indenture
trustee.
(4)(v)4 Form of the registrant's 7.75% convertible
subordinated debentures due 2017 (included as
Exhibit A to Exhibit (4)(v)3.
(4)(v)5 Guarantee Agreement, dated as of March 19, 2002,
between the registrant, as guarantor, and The Bank
of New York, as guarantee trustee.
(10)(iii)(A) Lucent Technologies Inc. 1996 Long Term Incentive
Program, as amended through April 21, 2002.
(10)(iii)(B) Lucent Technologies Inc. 1997 Long Term Incentive
Plan, as amended through April 21, 2002.
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as....................................'SS'