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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 001-11639
LUCENT TECHNOLOGIES INC.
A DELAWARE I.R.S. EMPLOYER
CORPORATION NO. 22-3408857
600 MOUNTAIN AVENUE, MURRAY HILL, NEW JERSEY 07974
TELEPHONE NUMBER 908-582-8500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: SEE ATTACHED
SCHEDULE A.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At November 30, 1998, the aggregate market value of the voting stock held
by non-affiliates was approximately $113,500,000,000.
At November 30, 1998, 1,318,615,011 common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's annual report to security holders for the
fiscal year ended September 30, 1998 (Part II)
(2) Portions of the registrant's definitive proxy statement dated December
22, 1998, issued in connection with the annual meeting of shareholders (Part
III)
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SCHEDULE A
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
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Common Stock (Par Value $.01 Per New York Stock Exchange
Share)
6.90% Notes due July 15, 2001 New York Stock Exchange
7.25% Notes due July 15, 2006 New York Stock Exchange
6.50% Debentures due January 15, New York Stock Exchange
2028
5.50% Notes due November 15, 2008 New York Stock Exchange
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TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
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PART I
1. Business.................................................... 3
2. Properties.................................................. 22
3. Legal Proceedings........................................... 22
4. Submission of Matters to a Vote of Security-Holders......... 22
PART II
5. Market for Registrant's Common Equity and Related 22
Stockholder Matters.........................................
6. Selected Financial Data..................................... 22
7. Management's Discussion and Analysis of Financial Condition 22
and Results of Operations...................................
8. Financial Statements and Supplementary Data................. 22
9. Changes in and Disagreements with Accountants on Accounting 22
and Financial Disclosure....................................
PART III
10. Directors and Executive Officers of the Registrant.......... 23
11. Executive Compensation...................................... 23
12. Security Ownership of Certain Beneficial Owners and 23
Management..................................................
13. Certain Relationships and Related Transactions.............. 23
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 24
8-K.........................................................
This Report contains trademarks, service marks and registered marks of the
Company and its subsidiaries, and other companies, as indicated.
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PART I
ITEM 1. BUSINESS.
GENERAL
Lucent Technologies Inc. ("Lucent" or the "Company") was incorporated in
Delaware in November 1995. The Company has its principal executive offices at
600 Mountain Avenue, Murray Hill, New Jersey 07974 (telephone number
908-582-8500). Lucent was formed from the systems and technology units that were
formerly part of AT&T Corp., including the research and development capabilities
of Bell Laboratories. Prior to February 1, 1996, AT&T conducted Lucent's
original business through various divisions and subsidiaries. On February 1,
1996, AT&T began executing its decision to separate Lucent into a stand-alone
company (the "Separation") by transferring to Lucent the assets and liabilities
related to its business. In April 1996, Lucent completed the initial public
offering of its common stock ("IPO") and on September 30, 1996, became
independent of AT&T when AT&T distributed to its shareowners all of its Lucent
shares.
As used herein, references to the "Company" or "Lucent" include the
historical operating results and activities of the business and operations
transferred to the Company in the Separation.
In 1996, the Company changed its fiscal year to begin October 1 and end
September 30, and reported audited financial results for a short fiscal period
beginning January 1, 1996 and ending September 30, 1996. Accordingly, unless the
context otherwise requires, references herein to "fiscal 1996" or similar terms
mean the nine-month period January 1, 1996 through September 30, 1996 and
references to 1998 or this year refer to the fiscal year ended September 30,
1998.
The Company is one of the world's leading designers, developers and
manufacturers of communications systems, software and products. The Company is a
global leader in the sale of public communications systems, and is a supplier of
systems or software to most of the world's largest network operators. The
Company is also a global leader in the sale of business communications systems
and in the sale of microelectronic components for communications applications to
manufacturers of communications systems and computers. The Company's research
and development activities are conducted through Bell Laboratories ("Bell
Labs"), one of the world's foremost industrial research and development
organizations.
The communications industry is undergoing a revolution driven by
technology, global changes in government regulation, the needs of service
providers and enterprises, and customer demand. Communications technology is
moving from voice networking to data networking, and from circuit switching to
packet switching. This revolution is bringing about a convergence of voice and
data, wired and wireless, optical and electronic, audio and video, and the
Internet.
SYSTEMS FOR NETWORK OPERATORS
The Company designs, develops, manufactures and services systems and
software which enable network operators and other service providers (together
referred to as "service providers"), to provide wireline and wireless access,
local, long distance and international voice, data and video services and cable
television service. The Company's networks, which include switching,
transmission and cable systems, are packaged and customized with application
software, operations support systems and associated professional services.
Systems and Services
Communications Networking Systems. The Company designs, develops,
manufactures and services advanced communications networking systems, which
include equipment, software and associated professional services. These systems
connect, route, manage and store voice, data and video in any combination, and
are used for: wireline access; local and long distance switching; intelligent
network services and signaling; wireless communications, including both cellular
and personal communications services ("PCS"); and high-speed, broadband
multifunctional communications.
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The Company supplies each of the five broad elements that comprise
communications networks: switching systems, which route information through the
network; transmission systems, which provide the communications path through the
network that carries information between points in the network; operation
support systems, which enable service providers to manage the work flow,
planning, surveillance, management, provisioning and continuous testing of their
networks; intelligent network/application software, which enables service
providers to offer a broad array of enhanced and differentiated services; and
cable systems, which provide the transport media between points in a network.
These systems collectively comprise the infrastructure that enables
telecommunications network operators to provide traditional narrowband voice and
data services and that enables both new and traditional network operators to
offer broadband multimedia services.
The Company has a wireline local access installed base (the number of
access lines serviced by switches manufactured by the Company) of approximately
120 million lines. The Company's primary switching products are the 5ESS(R)
switch for local and long distance switching and international gateways and the
4ESS(TM) Digital Switch for long distance and international switching.
The 5ESS switch is used throughout the world to provide a combination of
network applications, including local and long distance switching and
international gateways, operator services, network signaling, intelligent
networking and wireless switching. The 5ESS switch, with the Company's 5E12
AnyMedia(TM) software, enables network operators to offer a large number of new
data services and local number portability, as well as simultaneous wireline and
wireless, local, long distance and international services.
The Company has announced new products, with expected 1999 deliveries, to
address the convergence of voice and data in the network including the AnyMedia
FAST Access System which provides both narrowband and wideband services, and the
PacketStar(TM) Gateway Solution for converged voice/data networks. The AnyMedia
Fast Access System can be deployed throughout the world to provide low cost
telephony and ATM-based broadband services. The AnyMedia FAST Access System will
deliver more bandwidth to the subscriber. The PacketStar Gateway Solution
provides a single virtual transport system to interconnect voice capable edge
elements and to implement both toll and tandem voice feature sets for both data
and voice applications. The key elements of the PacketStar Gateway Solution
include the PacketStar Voice Gateway to combine voice traffic on a data network;
the PacketStar Connection Gateway which provides interface and connection
management, and the PacketStar Feature Server which provides call services in a
converged voice/data network.
The Company designs, develops, manufactures and services a broad range of
transmission access and transport systems. Network operators use these systems
to transport any combination of voice, data and video between subscribers and
the central office or between points within a network engaged in local, national
or international communications.
Most transmission systems currently comply with one of two similar
standards designed to promote the implementation of maximum transmission
capacity with the greatest simplicity and lowest cost for network operators. The
Synchronous Optical Network ("SONET") standard has been widely adopted in North
America. The Synchronized Digital Hierarchy ("SDH") predominates throughout the
rest of the world. The Company markets systems supporting both standards.
The Company offers a broad line of transmission access systems for the
provision of a wide range of services, including traditional telecommunications
service and broadband multifunctional services. Transmission access systems
transport information between the subscriber and the central office. The
Company's products include SLC(R)-2000, which extends fiber-based optical
transmission into the local loop. The Company's products also include the
SDV-2000, a switched digital video system which extends fiber to the curb, and
ASOS, which enables network operators to manage the work flow, planning,
surveillance, provisioning and continuous testing of their multifunctional
networks.
The Company's transmission transport systems are utilized for high capacity
communications between points within a communications network. Many of these
products are primarily digital and provide for the movement of any combination
of voice, data, and video across fiber, coaxial and microwave based media. The
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Company's products include fiber transport systems (FT 2000), digital
multiplexer systems (DDM 2000) and digital access and cross connect systems
(DACS family of products).
In 1998, Lucent announced the Wavestar(TM) OLS 400G system, which combines
up to 80 optical channels over a single fiber as well as the Wavestar Bandwidth
Manager, which routes voice, Asynchronous Transfer Mode ("ATM"), Internet
protocol and video traffic using significantly less equipment and space.
The Company offers data networking intelligent switching products such as
its PacketStar(TM) ATM Core Switch and application systems such as its
PacketStar Internet Telephony System.
The Company's operation support systems enhance a network operator's
ability to activate, manage and maintain its networks. These systems
continuously monitor network performance and activity level, and allow for rapid
trouble identification, load balancing and planning for network utilization. The
Company's systems support the efforts of network operators to reduce operating
costs and minimize labor by automating labor intensive tasks.
The Company's network management systems offer a broad array of modular
software, including element managers designed for traditional telephony, video
and wireless; network managers that monitor, test and optimize the utilization
of a network; service managers that manage work flow; and business managers that
include customer service systems. For example, the Company's NetMinder system is
an advanced network management routing system that mitigates network congestion
through efficient call routing and completion.
The Company's A-I-NET(R) intelligent network products enable network
operators to offer new services that can be created, deployed or managed by
themselves, the Company, or third parties. Services created with A-I-NET
products include toll free calling (800 and 888 service in the United States),
call forwarding, call waiting, voice dialing and messaging.
The Company has introduced products to address the growing demand for
emerging broadband multifunctional services which permit the simultaneous
transmission of any combination of voice, data and video, such as its high
capacity switching product ATM, the GLOBEVIEW(R)-2000 Broadband System.
In addition, the Company designs, develops, manufactures and services cable
systems, which include optical fiber, fiber optic cable, and apparatus for both
fiber and copper cable systems. The Company's cable systems are used to connect
various devices in a network and terminal devices to public and private
networks. These cable systems are deployed for outside plant and central office
wiring, and for traditional telephony, cable television, wireless networks and
broadband applications.
The Company also supplies fiber optic cable systems, high strength, high
performance fiber for underseas cablers and outside plant turn-key systems,
which are generally large capital projects in emerging markets for the
engineering and construction of telecommunications infrastructure. The Company's
TRUEWAVE(R) optical fiber enables network operators to reduce their costs by
increasing the distance between optical amplifiers.
Wireless Network Systems. The Company designs, develops, manufactures and
services wireless network infrastructure systems, which include the 5ESS switch,
base stations, wireless network software and operation support systems. These
systems provide network operators with the capability to offer a wide range of
cellular and other wireless communications services, including PCS, wireless
data and fixed wireless access.
The Company's wireless cellular or PCS systems are in operation in 49 of
the top 50 United States Metropolitan Statistical Areas. The Company's primary
wireless system is the AUTOPLEX(R) System 1000 product family, which includes
the high capacity Series II base station. The base station contains the radio
transceiver that establishes wireless communications with a mobile telephone.
Base stations are arranged geographically so that mobile customers can be
"handed off" seamlessly from one base station to the next as they travel. The
network intelligence to accomplish this is housed in the Company's Mobile
Switching Center, which includes the 5ESS switch and which connects the base
stations to the public telephone network. The Company also offers base stations
for start-up applications and smaller markets, a minicell product for rural and
international markets and a microcell for congested, high traffic areas.
Wireless technology is evolving
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from analog to digital. The Company provides networks based on a variety of the
leading air interface standards: AMPS, CDMA, TDMA and GSM.
In addition, the Company designs, develops, manufactures and services fixed
wireless access systems. The Company offers the AIRLOOP(R) Wireless Local Loop
system, which utilizes CDMA technology, as well as systems based on the DECT
(digital enhanced cordless telephone) standard. Both systems enable service
providers to expand their networks in markets where traditional wireline systems
are not cost justified and to provide telephone services as an alternative to
traditional network operators.
The Company designs, develops, manufactures, and services CDPD-based
wireless data systems which enable wireless network operators to offer data
services as an overlay to their existing analog voice infrastructure without
acquiring additional spectrum or upgrading to a digital network. These systems
offer the increased reliability and efficiency of switched digital packet data
systems.
Due to the complexity of wireless systems, the Company also offers a broad
range of professional services, which include project management, site
acquisition, radio frequency engineering, microwave relocation, construction
management, cellular optimization and wireless data support.
During fiscal year 1998, Lucent acquired Livingston Enterprises, Inc.,
Yurie Systems, Inc., JNA Telecommunications Limited and MassMedia Communications
Inc. Livingston and Yurie develop and provide remote access and ATM technologies
which increase Lucent's data networking product offerings to network operators.
JNA, an Australia based manufacturer and system integrator, gives Lucent added
sales and support capabilities and technology in the Asia/Pacific region.
MassMedia, a developer of next-generation network interoperability software will
add enhanced voice, data and video internetworking capabilities to Lucent's data
networking portfolio.
Markets
The principal customers for the Company's systems are network operators
that provide wireline and wireless local, long distance and international
telecommunications services, including local, long distance and international
telecommunications companies, cable television companies and internet service
providers. The Company's systems for network operators are installed to expand
the capacity and features offered by existing networks, to replace older
technology in existing networks and to establish new networks for entrants into
deregulated or previously unserved markets. See "Outlook -- Reliance on Major
Customers/Multi-Year Contracts."
As a result of structural, public policy and technological changes, since
the mid-1980's the telecommunications industry has undergone a period of
significant growth in the number of lines in service and applications offered.
In developed markets, deregulation has permitted new market entrants to
construct networks in previously monopolistic markets. In response, existing
network operators have expanded beyond traditional franchises and are offering
new services. In emerging markets, privatization, competition and economic
expansion have increased demand for networking systems. At the same time,
technological advances also have increased demand by reducing operating costs
and facilitating new applications, including multifunctional services.
The Company markets and sells its products worldwide primarily through a
direct sales force due to the complexity of these systems. Most of the Company's
sales of systems for network operators are made pursuant to general purchase
agreements, which establish the terms and conditions and provide for price
determination to be made on a contract bid basis. In addition, certain of the
large infrastructure projects are conducted under long-term, fixed-price
contracts. See "Outlook -- Reliance on Major Customers/Multi-Year Contracts" and
"-- Seasonality."
As a result of the increased complexity of systems for network operators
and the high cost of developing and maintaining in-house expertise, network
operators typically demand complete, integrated and turn-key projects. Network
operators increasingly are seeking overall network or systems solutions that
require an increased software content which would enable them to deploy rapidly
new and differentiable services. In response, the Company has formed an
organization focused on turn-key network engineering projects for both
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public and private sector customers. The Company markets integrated solutions
for the project, and engineers, designs and installs the network, including
equipment and software manufactured by both the Company and third parties.
Increasingly, as a result of the financial demands of major network
deployments, network operators are looking to their suppliers to arrange for
financing. The ability to provide financing is a requirement to conduct business
in certain emerging U.S. and foreign markets, and in some cases the Company
furnishes or guarantees financing for customers. As a result, the Company works
with its customers to structure and place financing packages. See
"Outlook -- Future Capital Requirements."
In order to market its product line worldwide, the Company has established
wholly owned subsidiaries and joint ventures with local companies in many
countries.
Competition
The Company believes that its key competitive factors are its broad product
line, large installed base, relationship with key customers, technological
expertise and new product development capabilities. The Company's primary
competitors in the market for telecommunications systems are four very large
European and North American companies which have substantial technological and
financial resources and which offer similar broad product catalogs. These
competitors are Alcatel Alsthom, Northern Telecom Limited, Siemens AG and
Telefonaktiebolaget LM Ericsson ("Ericsson"). In 1997, the Company and these
four competitors collectively accounted for about 40% of the world's public
network systems sales, with the Company's sales accounting for about 10% of
world sales.
In addition, in all of the Company's product areas, the Company faces
significant competition from other companies which do business in one or a
number of such product areas. For example, in wireless systems, Northern Telecom
Limited, Telefonaktiebolaget LM Ericsson, Motorola, Inc. and Nokia Corporation,
which are very large companies with substantial technological and financial
resources, are significant competitors. In transmission and cable systems,
competition in the markets includes hundreds of smaller competitors. The Company
is also encountering competition from companies that design and manufacture data
network equipment such as Cisco Systems Inc.
BUSINESS COMMUNICATIONS SYSTEMS
The Company designs, develops, manufactures and services communications
systems and products for large and small business customers, home offices and
government agencies. The Company's business communications systems can be
upgraded regularly with new software releases, support local and wide area voice
and data networking and are often integral components of global enterprise
networks. The Company's systems primarily are customer premises-based private
switching systems and products, call center systems, voice processing systems,
which include voice messaging and voice response systems, and the associated
application software and professional support services. In addition, the Company
has begun to participate in the emerging multi-media products business. The
Company serves over 1.4 million business locations in the United States and
approximately 100,000 business locations in over 90 other countries.
Systems and Services
The Company's core business communications system products are private
switching systems, generally PBXs and key systems, usually located at the
customer's premises, that permit a number of local telephones or terminals to
communicate with one another, with or without use of the public telephone
network. The Company offers wired and wireless communications systems, including
the DEFINITY(R) family of products for large customers and the MERLIN LEGEND(R)
and PARTNER(R) systems for smaller businesses and home offices. The DEFINITY
Enterprise Communication Server provides real-time voice and mixed-media call
processing. The FREEWORKS(TM) family of business mobility solutions enables
communication throughout the workplace with full freedom of movement.
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The Company's messaging and response systems store and forward voice, data
and images and conduct initial call processing, which integrates PBX and
computer functions. In addition, the Company is a technological leader in the
development of speech recognition algorithms, which have been incorporated into
both public and private call processing applications, such as operator services.
The Company's principal systems include the INTUITY(TM), AUDIX(R) and
DEFINITY(R) voice messaging systems and Octel Messaging Division systems, for
use with the Company's or a competitor's PBX; INTUITY(TM) CONVERSANT(R), a
multi-lingual interactive voice response system which can recognize speech in
nine languages/dialects; and the INTUITY Multimedia Messaging System, a system
that combines voice messaging and voice-response technology into a single
desktop application.
In September 1997, the Company acquired Octel Communications Corporation, a
provider and developer of voice, fax and electronic messaging technologies that
complement those offered by the Company. Octel's enterprise voice mail products,
including unified messaging, work behind almost all types and models of PBX,
central office and wireless switches and can be networked together.
The Company's call center systems integrate the hardware and software
associated with computing, telephony, and multimedia messaging and response
applications. Call centers are the initial entry point for customers to access a
business' telephone sales and support operation. The Company's systems permit
the routing and administration of a large volume of incoming calls, and the
integration with business databases of customer and product information. The
Company's call center systems are used by companies in diverse industries such
as financial services, retailing and transportation. The call center environment
in which these companies operate is characterized by hundreds of telephone
service agents located in geographically dispersed networked sites, processing
tens of thousands of calls per hour. For example, using these systems,
businesses can provide their customers with the ability to check balances or
order status, to place orders, and to receive additional information and
support.
In September 1997, the Company introduced an enhanced portfolio of
intelligent switching, access and network management products to improve data
network performance. In addition, the Company introduced DEFINITY ATM to meet
customer demand for voice-over-ATM solutions. In 1998, the Company acquired
Prominet Corporation, a developer of Gigabit Ethernet networking technologies,
SDX Business Systems plc, a United Kingdom provider of business communication
servers and LANNET, an Israeli based networking company. Prominet enables Lucent
to incorporate switching and data networking applications into its private
branch exchange product lines. SDX and LANNET provide sales and distribution
channels for Lucent products in Europe, Africa and Asia.
In addition, the Company's SYSTIMAX(R) structured wiring system for
business customers provides broadband multifunctional LAN interconnections
within a building or campus. These systems are comprised of fiber optic and
copper cable and associated apparatus.
The Company offers NetCare(R) Services, a wide range of professional
service options, including call center design, voice and data network
engineering, training, remote diagnostics and dedicated on-site technicians.
Their on-demand services involve routine testing and diagnostics, maintenance
and repair, moves and rearrangements, and software and hardware upgrade
installations.
The Company's remote diagnostics and repair capability permits the Company
to monitor, test, maintain and resolve problems from its regional service
centers. Many of the Company's systems are designed with intelligent software
which establishes a real-time link between the customer premises and a regional
service center's expert system. This permits the customer to reduce its system
down-time and enables the Company to automate many maintenance and repair tasks.
Markets
The Company markets its systems and services to large and small businesses
and government agencies through a large, direct sales force and through a
network of agents, dealers and distributors. In the United States, the Company
effects these sales primarily through the direct sales force, while sales
elsewhere occur through the efforts of dealers and distributors as well as the
direct sales force. The Company's systems are
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deployed in applications for customer sales and service, conferencing and
collaboration, mobility and distributed work force, messaging and enterprise
networking. The Company fields a large group of application specialists to
design call center, distance learning and other customized applications.
The Company believes that premises-based communications is transforming
from distinct voice and data networks to multimedia networks that will be able
to support any combination of voice, video and data communications
simultaneously. The Company is designing certain business communications systems
to enable its customers to simplify their premises networks by combining
separate voice, video and data networks into a single architecture.
Competition
The Company considers its working relationships with its customers and
knowledge of their individual business needs to be important competitive
factors. The Company competes principally with three other large companies with
substantial technological and financial resources in the sale of business
communication systems. These competitors are Alcatel Alsthom, Northern Telecom
Limited and Siemens AG. Together with the Company, in 1997 these competitors
accounted for approximately 42% of the sales of business communications systems
globally, with the Company accounting for approximately 9%. In addition, as the
market transforms to multimedia systems, the Company is starting to encounter
competition from companies that design and manufacture data network equipment.
The Company believes that key competitive factors in this market are
service support, the ability to upgrade existing systems for new applications,
price and reliability.
MICROELECTRONICS PRODUCTS
The Company designs, manufactures and sells integrated circuits ("ICs"),
electronic power systems and optoelectronic components for communications and
computer applications. The Company supplies these components to manufacturers of
communications systems and computers and also provides these components for many
of the Company's own systems and products. The Company offers products in
several IC product areas critical to communications applications, including
digital signal processors ("DSPs") for digital cellular phones and modems and
standard-cell application specific integrated circuits ("ASICs").
Products
The Company's ICs are designed to provide advanced communications and
control functions for a wide variety of electronic products and systems. The
Company focuses on IC products that are used in communications and computing and
that require high-performance and low power chip architectures; complex
large-scale chip design in digital, analog and mixed-signal technologies; DSP
architectures and algorithms; high-frequency and high-voltage technologies; and
high speed data and signal processing. The Company offers a wide variety of
standard, semi-custom and custom products for cellular equipment, communications
networks, computers and computer peripherals, modems and consumer communications
products. Products include DSPs, ASICs, field programmable gate arrays and
communications ICs. The Company's products are manufactured using a variety of
technologies, from low-power, low-voltage submicron CMOS (complementary metal
oxide semiconductors) to high-frequency and high-voltage bipolar processes.
The Company designs, develops and manufactures energy systems, electronic
power supplies and associated magnetic components for the telecommunications and
electronic data processing industries. These products serve applications ranging
from modems for personal computers to large telephone central offices. Products
include DC/DC converters, AC/DC switching power supplies, transformers,
inductors and energy systems that provide alarm, control, and backup power
management.
The Company designs, develops and manufactures optoelectronic products
which convert electricity to light (emitters) and light to electricity
(detectors), thereby facilitating optical transmission of information. These
products include semiconductor lasers, photodetectors, integrated transmitters
and receivers, and advanced-technology erbium-doped fiber amplifiers. The
Company provides these products worldwide to
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manufacturers serving the telecommunications, cable television and network
computing markets. Optoelectronic products extend the transmission capacity of
fiber to meet the requirements of such applications as internet access
video-on-demand, interactive video, teleconferencing, image transmission and
remote database searching. The Company markets a number of advanced products,
including critical optoelectronic components that support telecommunication
transmission; long-wavelength optical data modules for data networking; and
analog lasers for use in cable television fiber optic transmission. The Company
believes that its optoelectronic products have higher photonics reliability than
those of its competitors due to their low field failure rate and the Company's
evaluation methodologies in manufacturing that allow the detection and
elimination of early failures.
The Company and Motorola have established a joint development center to
design architectures and circuit implementations (cores) for future DSP
products. In addition, the Company and Furukawa Electric Co. Ltd. have formed a
partnership between two of their subsidiaries to manufacture optoelectronic
components. The Company also is part of the DTV team currently consisting of the
Company, Microsoft Corporation, Intel Corporation and Compaq Computer
Corporation, which is an informal arrangement with the objective of accelerating
the development of digital broadcast technology. In 1998, Lucent acquired
Optimay GmbH, a German developer of software and chip sets for GSM cellular
phones. Also in 1998, the Company made an equity investment in Chip Express
Corporation, a developer of programmable logic ICs that enable quick delivery of
products for their customers.
In December 1996, the Company sold its operations for the design and
manufacture of printed circuit boards and backplanes.
Markets
The Company's microelectronic products are sold globally to manufacturers
of communications systems and computers. In addition, the Company's energy power
systems are sold directly to U.S. and foreign telephone companies. The Company's
customers are competing in markets characterized by rapid technological changes,
decreasing product life cycles, price competition and increased user
applications. These markets have experienced significant expansion in the number
and types of products they offer to end-users, particularly in personal
computing and portable access communication devices. As a result, the Company's
customers continue to demand components which are smaller, require less power,
are more complex, provide greater functionality, and are produced with shorter
design cycles and less manufacturing lead time.
Since 1995, the Company has also introduced a succession of GSM hardware
platforms based upon a highly integrated multiple-chip design for digital
cellular phones that performs all the key handset functions between the
microphone and the antenna in both voice and data services. The Company also
sells the associated software product elements necessary to support the GSM
standard.
In addition to the revenues from sales to third parties included in the
Company's consolidated financial results, the Company's microelectronics
products are also key components of its systems for network operators and
business communications systems. The Company's microelectronics products compete
with products of third-party manufacturers for inclusion in the Company's
systems and products.
Competition
The Company considers its technological leadership, product leadership, and
relationships with key customers to be important competitive factors. The market
for microelectronic products is global and generally highly fragmented. The
Company's competitors differ widely among product categories. The Company's
competitors in certain IC product categories include Texas Instruments
Incorporated, Rockwell International Corporation and LSI Logic Corp.; in
electronic power systems include Astec Industries, Inc. and Unitech plc (through
its subsidiary, NEMEC-Lambda); and in optoelectronics include Fujitsu Limited
and Northern Telecom Limited.
The Company believes that key competitive factors in the microelectronics
marketplace are the early involvement in customers' future applications
requirements, the speed of product and technological innova-
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tion, price, customer service, and manufacturing capacity. Other important
competitive factors include quality, reliability and local manufacturing
presence.
OTHER SYSTEMS AND PRODUCTS
Other systems and products include products, services and integrated
solutions provided to the United States Government for military and civilian
use.
In October 1997, the Company sold its Advanced Technology Systems ("ATS")
unit. ATS designed and manufactured custom defense systems for the United States
government. The Company sold its subsidiary, Paradyne, which designed and
manufactured modems and other data communications equipment, in July 1996, and
in December 1996 sold its Custom Manufacturing Services business.
BELL LABORATORIES
The Company has been and will continue to be supported by the technological
expertise provided by Bell Labs, one of the world's foremost industrial research
and development organizations. Bell Labs provides support for the businesses of
the Company and conducts basic research. Bell Labs has made significant
discoveries and advances in communications science and technology, software
design and engineering, and networking. These contributions include the
invention of the transistor and the design and development of ICs and many types
of lasers. Areas of Bell Labs research and development work in recent years
include: networking software; data networking; lightwave transmission,
especially the wavelength division multiplexing systems which offer greater
transmission capacity than other transmission systems; electronic switching
technology, which enables rapid call processing, increased reliability and
reduced network costs; and microelectronics components, which bring the latest
advantages of very large scale integration to the full range of products offered
by the Company. Bell Labs' research and development activities continue to focus
on the core technologies critical to the Company's success, which are software,
network design and engineering, microelectronics, photonics, data networking and
wireless/cellular.
Bell Labs is a leader in software research, development and engineering for
communications applications. For example, its innovations in fault-tolerant
software have enabled the Company to achieve a level of system reliability with
off-the-shelf commercial processors that allows the Company to reduce its
reliance on custom microprocessors.
Bell Labs has contributed many innovations in voice quality, is a leader in
the development of digital signal processing, and has developed a number of
innovative algorithms for high-quality speech and audio. These innovations have
contributed to the Company's implementation of speech processing applications
which include text-to-speech synthesis, speech recognition and automatic
translation of speech from one language to another. They are used in many of the
Company's products, including the elemedia(R) products for Internet applications
and are sold to outside customers.
Bell Labs also has led in the development of software-based networking
technologies that support the Company's systems and products. Recently, it has
developed systems for digital cellular, PCS, mobile computing and wireless LANs,
and its research in ATM led to the Company's offering of the first large ATM
switch in 1993. Bell Lab's technology has allowed the recent introduction of
data networking products such as the Internet Telephony Server SP, PacketStar IP
switch, PacketStar IP Services platform and the Wavestar(TM) 400G high capacity
WDM optical networking system.
Similarly, Bell Labs' advances extend to the microlasers used in today's
broadband multifunctional transmission systems, and to today's optical
amplifiers and TRUEWAVE fiber. Current photonic research includes work on
passive optical networks, photonic switching and quantum wire lasers.
RECENT DEVELOPMENT
On October 1, 1997, Lucent contributed its Consumer Products business to a
new venture formed by Lucent and Philips Electronics N.V. ("Philips") in
exchange for 40% ownership of the venture. The venture, Philips Consumer
Communications ("PCC"), was formed to create a worldwide provider of personal
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communications products. On October 22, 1998, Lucent and Philips announced their
intention to end the venture in PCC. It is expected that Lucent and Philips will
each regain control of the original businesses they contributed to the venture.
Lucent plans to sell or close its portions of PCC.
BACKLOG
The Company's backlog, calculated as the aggregate of the sales price of
orders received from customers less revenue recognized, was approximately $9,856
million and $12,141 million on September 30, 1998 and 1997, respectively. The
decrease in backlog is due to completion of a majority of the milestones related
to the Sprint Spectrum Holding LP ("Sprint PCS") purchase contract referred to
under Outlook -- Future Capital Requirements below and a large long-term
contract with the Ministry of Post and Telecommunications of Saudi Arabia.
Approximately $3,400 million of the orders included in the September 30, 1998
backlog are scheduled for delivery after September 30, 1999. However, all orders
are subject to possible rescheduling by customers. Although the Company believes
that the orders included in the backlog are firm, some orders may be canceled by
the customer without penalty, and the Company may elect to permit cancellation
of orders without penalty where management believes that it is in the Company's
best interest to do so. About $3,900 million of the amount at September 30, 1998
is under large, multi-year contracts of which about $3,000 million is scheduled
for delivery after September 30, 1999 and is included in the $3,400 million
referred to above. Of the $3,900 million under large, long-term contracts, the
majority of the amount is with the Ministry of Post and Telecommunications of
Saudi Arabia which require annual appropriations by the Saudi Arabian
government.
SOURCES AND AVAILABILITY OF MATERIALS
The Company makes significant purchases of electronic components, copper,
glass, silicon, and other materials and components from many domestic and
foreign sources. The Company has been able to obtain sufficient materials and
components from sources around the world to meet its needs. The Company also
develops and maintains alternative sources for essential materials and
components. Occasionally, additional inventories of specific components are
maintained to minimize the effects of potential shortages. The Company does not
have a concentration of sources of supply of materials, labor or services that,
if suddenly eliminated, could severely impact its operations. See also
Outlook -- Readiness for Year 2000.
PATENTS AND TRADEMARKS
From October 1, 1997 to September 30, 1998, the Company was issued 917
patents in the United States and 1,507 in foreign countries. The Company owns
approximately 9,260 patents in the United States and 16,426 in foreign
countries. These foreign patents are, for the most part, counterparts of the
Company's United States patents. Many of the patents owned by the Company are
licensed to others and the Company is licensed to use certain patents owned by
others. In connection with the Separation, the Company has entered into an
extensive cross-licensing agreement with AT&T and NCR Corporation ("NCR"). See
"Separation Agreements -- Patent Licenses and Related Matters."
The Company markets its products primarily under its own name and mark. The
Company considers its many trademarks to be valuable assets. Most of its
trademarks are registered throughout the world.
OUTLOOK
Forward Looking Statements
This Outlook section and other sections of this Form 10-K report contain
forward-looking statements, that are based on current expectations, estimates,
forecasts and projections about the industries in which Lucent operates,
management's beliefs and assumptions made by management. In addition, other
written or oral statements which constitute forward-looking statements may be
made by or on behalf of the Company. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions ("Future
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Factors") which are difficult to predict. Therefore, actual outcomes and results
may differ materially from what is expressed or forecasted in such
forward-looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
Future Factors include increasing price and product/services competition by
foreign and domestic competitors, including new entrants; rapid technological
developments and changes and the Company's ability to continue to introduce
competitive new products and services on a timely, cost-effective basis; the mix
of products/services; the achievement of lower costs and expenses; the outcome
and impact of Year 2000 issues; domestic and foreign governmental and public
policy changes which may affect the level of new investments and purchases made
by customers; changes in environmental and other domestic and foreign
governmental regulations; protection and validity of patent and other
intellectual property rights; reliance on large customers; technological,
implementation and cost/financial risks in the increasing use of large,
multi-year contracts; the cyclical nature of the Company's business; the outcome
of pending and future litigation and governmental proceedings and continued
availability of financing, financial instruments and financial resources in the
amounts, at the times and on the terms required to support the Company's future
business. These are representative of the Future Factors that could affect the
outcome of the forward-looking statements. In addition, such statements could be
affected by general industry and market conditions and growth rates, general
domestic and international economic conditions including interest rate and
currency exchange rate fluctuations and other Future Factors.
For a further description of Future Factors that could cause actual results
to differ materially from such forward-looking statements, see the remainder of
this Outlook section, including the other sections referred to in this section.
Competition
Lucent continues to face significant competition and expects that the level
of competition on pricing and product offerings will intensify. Lucent expects
that new competitors will enter its markets as a result of the trend toward
global expansion by foreign and domestic competitors as well as continued
changes in technology and public policy. These competitors may include entrants
from the telecommunications, software, data networking and semiconductor
industries. Existing competitors have, and new competitors may have, strong
financial capability, technological expertise, well-recognized brand names and a
global presence. Such competitors may include Alcatel Alsthom, Cisco Systems,
Inc., Ericsson, Northern Telecom Limited, and Siemens AG. As a result, Lucent's
management periodically assesses market conditions and redirects the Company's
resources to meet the challenges of competition. Steps Lucent may take include
acquiring or investing in new businesses and ventures, partnering with existing
businesses, delivering new technologies, closing and consolidating facilities,
disposing of assets, reducing work force levels or withdrawing from markets.
Dependence on New Product Development
New product development is being driven by the communications revolution
described under GENERAL, above. The markets for the Company's principal products
are characterized by rapidly changing technology, evolving industry standards,
frequent new product introductions and evolving methods of building and
operating communications systems for network operators and business customers.
The Company's operating results will depend to a significant extent on its
ability to continue to introduce new systems, products, software and services
successfully on a timely basis and to reduce costs of existing systems,
products, software and services. The success of these and other new offerings is
dependent on several factors, including proper identification of customer needs,
cost, timely completion and introduction, differentiation from offerings of the
Company's competitors and market acceptance. In addition, new technological
innovations generally require a substantial investment before any assurance is
available as to their commercial viability, including, in some cases,
certification by international and domestic standards-setting bodies.
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Reliance on Major Customer/Multi-Year Contracts
The purchasing behavior of Lucent's largest customers has increasingly been
characterized by the use of fewer, larger contracts. Lucent has significant
contracts for the sale of infrastructure systems to network operators which
extend over a multi-year period, and expects to enter into similar contracts in
the future. These contracts typically involve longer negotiating cycles, require
the dedication of substantial amounts of working capital and other resources,
and in general require costs that may substantially precede recognition of
associated revenues. Moreover, in return for larger, longer-term purchase
commitments, customers often demand more stringent acceptance criteria, which
can also cause revenue recognition delays. Lucent has increasingly provided or
arranged long-term financing for customers as a condition to obtain or bid on
infrastructure projects. Certain multi-year contracts involve new technologies
that may not have been previously deployed on a large-scale commercial basis. On
its multi-year contracts, Lucent may incur significant initial cost overruns and
losses that are recognized in the quarter in which they become ascertainable.
Further, profit estimates on such contracts are revised periodically over the
lives of the contracts, and such revisions can have a significant impact on
reported earnings in any one quarter. See also discussion below under Future
Capital Requirements.
Lucent has been successful in diversifying its customer base and seeking
out new types of customers globally. These new types of customers include
competitive access providers, competitive local exchange carriers, wireless
service providers, cable television network operators, computer manufacturers
and internet service providers.
Historically, a limited number of customers have provided a substantial
portion of Lucent's total revenues. These customers include AT&T, which
continues to be a significant customer, as well as other large service providers
such as Sprint PCS, and the Regional Bell Operating Companies ("RBOCs"). The
loss of any of these customers, or any substantial reduction in orders by any of
these customers, could materially adversely affect the Company's operating
results.
In terms of total revenues, the Company's largest customer has been AT&T,
although other large customers may purchase more of any particular system or
product line. The contribution of AT&T to the Company's total revenues and
percentage of total revenues for the two years and nine months ended September
30, 1998, 1997 and 1996 were $3,775 million (12.5%), $3,731 million (14.2%), and
$1,970 million (12.4%), respectively. In addition, sales to seven network
operators including AT&T (reduced from 9 in 1996 due to merger), some of which
may vary from year to year, constituted approximately 35.4%, 37.5%, and 38% of
total revenues in the twelve months ended September 30, 1998, 1997 and 1996,
respectively.
Readiness for Year 2000
Lucent is engaged in a major effort to minimize the impact of the Year 2000
date change on Lucent's products, information technology systems, facilities and
production infrastructure. Lucent has targeted June 30, 1999 for completion of
these efforts.
The Year 2000 challenge is a priority within Lucent at every level of the
company. Primary Year 2000 preparedness responsibility rests with program
offices which have been established within each of Lucent's product groups and
corporate centers. A corporate-wide Lucent Year 2000 Program Office ("LYPO")
monitors and reports on the progress of these offices. Each program office has a
core of full-time individuals augmented by a much larger group who have been
assigned specific Year 2000 responsibilities in addition to their regular
assignments. Further, Lucent has engaged third parties to assist in its
readiness efforts in certain cases. LYPO has established a methodology to
measure, track and report Year 2000 readiness status consisting of five steps:
inventory; assessment; remediation; testing and deployment.
Lucent is completing programs to make its new commercially available
products Year 2000 ready and has developed evolution strategies for customers
who own non-Year 2000 ready Lucent products. The majority of the upgrades and
new products needed to support customer migration are already generally
available. By the end of 1998, all but a few of these products are targeted for
general availability.
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Lucent has launched extensive efforts to alert customers who have non-Year
2000 ready products, including direct mailings, phone contacts and participation
in user and industry groups. Recently, Lucent has set up a Year 2000 website
www.lucent.com/y2k that provides Year 2000 product information. Lucent continues
to cooperate in the Year 2000 information sharing efforts of the Federal
Communications Commission and other governmental bodies.
Lucent believes it has sufficient resources to provide timely support to
its customers that require product migrations or upgrades. However, because this
effort is heavily dependent on customer cooperation, Lucent continues to monitor
customer response and will take steps to improve customer responsiveness, as
necessary. Also, Lucent has begun contingency planning to address potential
spikes in demand for customer support resulting from the Year 2000 date change.
These plans are targeted for completion by April 30, 1999.
Lucent has largely completed the inventory and assessment phases of the
program with respect to its factories, information systems, and facilities.
Approximately, two-thirds of the production elements included in the factory
inventory were found to be Year 2000 ready. The factories have commenced the
remediation phase of their effort through a combination of product upgrades and
replacement. Plans have been developed to facilitate the completion of this
work, as well as the related testing and deployment, by June 30, 1999.
Currently, approximately 60% of Lucent's information technology
infrastructure has been determined to be Year 2000 ready and is deployed for
use. Approximately, 45% of the applications requiring Year 2000 remediation that
are supported by Lucent's information technology group are now Year 2000 ready
and have been deployed or are awaiting deployment. LYPO is monitoring the
progress of readiness efforts across the Company, with a special emphasis on the
early identification of any areas where progress to-date could indicate
difficulty in meeting the Company's June 1999 internal readiness target date.
Lucent is developing specific contingency plans, as appropriate.
Lucent is also assessing the Year 2000 readiness of the large number of
facilities that it owns or leases world-wide. Priority is being placed on
Lucent-owned facilities, leased facilities that Lucent manages and other
critical facilities that house large numbers of employees or significant
operations. Based on the results of these assessment activities, Lucent plans to
complete remediation efforts by March 31, 1999 and complete development of
applicable contingency plans by May 31, 1999.
To ensure the continued delivery of third party products and services,
Lucent's procurement organization has analyzed Lucent's supplier base and has
sent surveys to approximately 5,000 suppliers. Follow-up efforts have commenced
to obtain feedback from critical suppliers. To supplement this effort, Lucent
plans to conduct readiness reviews of the Year 2000 status of the suppliers
ranked as most critical based on the nature of their relationship with Lucent,
the product/service provided and/or the content of their survey responses.
Almost all of Lucent's suppliers are still deeply engaged in executing
their Year 2000 readiness efforts and, as a result, Lucent cannot, at this time,
fully evaluate the Year 2000 risks to its supply chain. Lucent will continue to
monitor the Year 2000 status of its suppliers to minimize this risk and will
develop appropriate contingent responses as the risks become clearer.
The risk to Lucent resulting from the failure of third parties in the
public and private sector to attain Year 2000 readiness is the same as other
firms in Lucent's industry or other business enterprises generally. The
following are representative of the types of risks that could result in the
event of one or more major failures of Lucent's information systems, factories
or facilities to be Year 2000 ready, or similar major failures by one or more
major third party suppliers to Lucent: (1) information systems -- could include
interruptions or disruptions of business and transaction processing such as
customer billing, payroll, accounts payable and other operating and information
processes, until systems can be remedied or replaced; (2) factories and
facilities -- could include interruptions or disruptions of manufacturing
processes and facilities with delays in delivery of products, until
non-compliant conditions or components can be remedied or replaced; and (3)
major suppliers to Lucent -- could include interruptions or disruptions of the
supply of raw materials, supplies and Year 2000 ready components which could
cause interruptions or disruptions of manufacturing and delays in delivery of
products, until the third party supplier remedied the problem or contingency
measures were implemented. Risks of major failures of Lucent's principal
products could include adverse
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functional impacts experienced by customers, the costs and resources for Lucent
to remedy problems or replace products where Lucent is obligated or undertakes
to take such action, and delays in delivery of new products.
Lucent believes it is taking the necessary steps to resolve Year 2000
issues; however, given the possible consequences of failure to resolve
significant Year 2000 issues, there can be no assurance that any one or more
such failures would not have a material adverse effect on Lucent. Lucent
estimates that the costs of efforts to prepare for Year 2000 from calendar year
1997 through 2000 is about $535 million, of which an estimated $210 million has
been spent as of September 30, 1998. Lucent has been able to reprioritize work
projects to largely address Year 2000 readiness needs within its existing
organizations. As a result, most of these costs represent costs that would have
been incurred in any event. These amounts cover costs of the Year 2000 readiness
work for inventory, assessment, remediation, testing and deployment including
fees and charges of contractors for outsourced work and consultant fees. Costs
for previously contemplated updates and replacements of Lucent's internal
systems and information systems infrastructure have been excluded without
attempting to establish whether the timing of non-Year 2000 replacement or
upgrading was accelerated.
While the Year 2000 cost estimates above include additional costs, Lucent
believes, based on available information, that it will be able to manage its
total Year 2000 transition without any material adverse effect on its business
operations, products or financial prospects. The actual outcomes and results
could be affected by Future Factors including, but not limited to, the continued
availability of skilled personnel, cost control, the ability to locate and
remediate software code problems, critical suppliers and subcontractors meeting
their commitments to be Year 2000 ready and provide Year 2000 ready products,
and timely actions by customers.
European Monetary Union -- Euro
On January 1, 1999, several member countries of the European Union will
establish fixed conversion rates between their existing sovereign currencies,
and adopt the Euro as their new common legal currency. As of that date, the Euro
will trade on currency exchanges and the legacy currencies will remain legal
tender in the participating countries for a transition period between January 1,
1999 and January 1, 2002.
During the transition period, cash-less payments can be made in the Euro,
and parties can elect to pay for goods and services and transact business using
either the Euro or a legacy currency. Between January 1, 2002 and July 1, 2002,
the participating countries will introduce Euro notes and coins and withdraw all
legacy currencies so that they will no longer be available.
Lucent has begun planning for the Euro's introduction. For this purpose,
Lucent has in place a joint European-United States team representing affected
functions within the Company.
The Euro conversion may affect cross-border competition by creating
cross-border price transparency. Lucent is assessing its pricing/marketing
strategy in order to insure that it remains competitive in a broader European
market. Lucent is also assessing its information technology systems to allow for
transactions to take place in both the legacy currencies and the Euro and the
eventual elimination of the legacy currencies, and reviewing whether certain
existing contracts will need to be modified. Lucent's currency risk and risk
management for operations in participating countries may be reduced as the
legacy currencies are converted to the Euro. Final accounting, tax and
governmental legal and regulatory guidance generally has not been provided in
final form. Lucent will continue to evaluate issues involving introduction of
the Euro. Based on current information and Lucent's current assessment, Lucent
does not expect that the Euro conversion will have a material adverse effect on
its business, results of operations, cash flows or financial condition.
Seasonality
Lucent has taken measures to manage the seasonality of its business by
changing the date on which its fiscal year ends and its compensation programs
for employees. As a result, Lucent has achieved a more uniform distribution of
revenues -- accompanied by a related redistribution of earnings -- throughout
the year. Revenues and earnings still remain higher in the first fiscal quarter
primarily because many of Lucent's
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large customers historically delay a disproportionate percentage of their
capital expenditures until the fourth quarter of the calendar year (Lucent's
first fiscal quarter).
Future Capital Requirements
The Company's working capital requirements and cash flow provided by (or
used in) operating activities can vary greatly from quarter to quarter,
depending on the volume of production, the timing of deliveries, the build-up of
inventories, the payment terms offered to customers, and the extension of credit
to customers.
Network operators, inside and outside the United States, increasingly have
required their suppliers to arrange or provide long-term financing for them as a
condition to obtaining or bidding on infrastructure projects. These projects may
require financing in amounts ranging from modest sums to over a billion dollars.
Lucent has increasingly provided or arranged long-term financing for customers.
As market conditions permit, Lucent's intention is to lay off these long-term
financing arrangements, which may include both commitments and drawn down
borrowings, to other financial institutions and investors. This enables Lucent
to reduce the amount of its commitments and free up additional financing
capacity.
As of September 30, 1998, Lucent had made commitments or entered into an
agreement to extend credit to certain customers, including Sprint PCS, up to an
aggregate of approximately $2,300 million. As of September 30, 1998,
approximately $400 million had been advanced and was outstanding. Included in
the $2,300 million is approximately $1,230 million to six other PCS or wireless
network operators (including fixed wireless) for possible future sales. As of
September 30, 1998, approximately $130 million had been advanced under four of
these arrangements. In addition, Lucent had made commitments or entered into
agreements to extend credit up to an aggregate of approximately $370 million for
two network operators other than PCS or wireless network operators. As of
September 30, 1998, no amount was advanced under either of these agreements. In
November 1998, a commitment for $110 million, included in the $370 million, was
terminated.
In October 1996, Lucent entered into a credit agreement to provide Sprint
PCS long-term financing of $1,800 million for purchasing Lucent's equipment and
services for its PCS network. In May 1997, Lucent closed transactions to lay off
$500 million of loans and undrawn commitments and $300 million of undrawn
commitments under the $1,800 million credit facility to a group of institutional
investors and Sprint Corporation (a partner in Sprint PCS), respectively. As of
September 30, 1998, all of these commitments were drawn down by Sprint PCS. On
June 8, 1998, Lucent sold $645 million of loans in a private sale. As of
September 30, 1998, Lucent has $253 million of undrawn commitments and $226
million of drawn loans outstanding. In November 1998, Sprint PCS repaid the
entire outstanding loan balance and canceled the remaining undrawn commitments.
On October 22, 1998, Lucent announced that it had entered into a five-year
agreement with WinStar Communications, Inc. to provide WinStar with a fixed
wireless broadband telecommunications network in major domestic and
international markets. In connection with this agreement, Lucent entered into a
credit agreement with WinStar to provide up to $2,000 million in equipment
financing to fund the buildout of this network. The maximum amount of credit
that Lucent is obligated to extend to WinStar at any one time is $500 million.
In addition to the above arrangements, Lucent will continue to provide or
commit to financing where appropriate for its business. The ability of Lucent to
arrange or provide financing for its customers will depend on a number of
factors, including Lucent's capital structure and level of available credit, and
its continued ability to lay off commitments and drawn down borrowings on
acceptable terms.
The Company believes that its credit facilities, cash flow from operations
and long- and short-term debt financings, will be sufficient to satisfy its
future working capital, capital expenditure, research and development and debt
service requirements. The Company has a shelf registration statement to register
the possible offering from time to time of long-term debt of which $1,160
million remains available at September 30, 1998 after deducting $500 million of
10-year 5.5% Notes sold by Lucent on November 19, 1998. The Company believes
that it will be able to access the capital markets on terms and in amounts that
will be satisfactory to it, and that it will be able to obtain bid and
performance bonds, to arrange or provide customer financing as necessary, and
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to engage in hedging transactions on commercially acceptable terms, although
there can be no assurance that the Company will be successful in this regard.
Growth Outside the United States, Foreign Exchange and Interest Rates
Lucent intends to continue to pursue growth opportunities in markets
outside the United States. In many markets outside the United States,
long-standing relationships between potential customers of Lucent and their
local providers, and protective regulations, including local content
requirements and type approvals, create barriers to entry. In addition, pursuit
of such growth opportunities outside the United States may require significant
investments for an extended period before returns on such investments, if any,
are realized. Such projects and investments could be adversely affected by
reversals or delays in the opening of foreign markets to new competitors,
exchange controls, currency fluctuations, investment policies, repatriation of
cash, nationalization, social and political risks, taxation, and other factors,
depending on the country in which such opportunity arises. Difficulties in
foreign financial markets and economies, and of foreign financial institutions,
could adversely affect demand from customers in the affected countries.
Lucent is exposed to market risk from changes in foreign currency exchange
rates and interest rates, which could impact its results of operations and
financial condition. Lucent manages its exposure to these market risks through
its regular operating and financing activities and, when deemed appropriate,
through the use of derivative financial instruments. A significant change in the
value of the dollar against the currency of one or more countries where Lucent
sells products to local customers or makes purchases from local suppliers may
materially adversely affect Lucent's results. Lucent attempts to mitigate any
such effects through the use of foreign currency contracts, although there can
be no assurances that such attempts will be successful.
While Lucent hedges actual and anticipated transactions with customers, the
decline in value of the Asia/Pacific currencies or currencies in other regions
may, if not reversed, adversely affect future product sales because Lucent
products may become more expensive for customers to purchase in their local
currency.
Legal Proceedings and Environment
See discussion below under Environmental Matters and Item 3. Legal
Proceedings.
Employee Relations
See discussion below under Employee Relations.
Intellectual Property
The Company relies on patent, trademark, trade secret and copyright laws
both to protect its proprietary technology and to protect the Company against
claims from others. The Company believes that it has direct intellectual
property rights or rights under cross-licensing arrangements covering
substantially all of its material technologies. Given the technological
complexity of the Company's systems and products, however, there can be no
assurance that claims of infringement will not be asserted against the Company
or against the Company's customers in connection with their use of the Company's
systems and products, nor can there be any assurance as to the outcome of any
such claims. The Company was assigned ownership of the substantial majority of
AT&T's patents in connection with the Separation. Pursuant to the patent license
agreement entered into among the Company, AT&T and NCR, the Company has been
given rights, subject to specified limitations, to pass through to its customers
certain rights under approximately 400 patents retained by AT&T. There can be no
assurance that the Company's customers and potential customers will be satisfied
with the pass-through rights available to them under the patents retained by
AT&T or with any indemnification commitments the Company may be willing to
provide in connection therewith. See "Separation Agreements -- Patent Licenses
and Related Matters" and "-- Technology Licenses and Related Matters."
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OPERATING REVENUE, RESEARCH AND DEVELOPMENT EXPENSE AND FOREIGN AND DOMESTIC
OPERATIONS
For information about the consolidated operating revenues contributed by
the Company's major classes of products and services, consolidated research and
development expenses, and foreign and domestic operations, see revenue tables
and discussion on pages 38 through 41, Consolidated Statements of Income on page
49 and Note 11 thereto on pages 62-63 of the Company's annual report to security
holders for the fiscal year ended September 30, 1998. Such information is
incorporated herein by reference pursuant to General Instruction G(2).
EMPLOYEE RELATIONS
On September 30, 1998, Lucent employed approximately 141,600 persons,
including 78.9% located in the United States. Of these domestic employees, about
40% are represented by unions, primarily the Communications Workers of America
("CWA") and the International Brotherhood of Electrical Workers ("IBEW"). During
1998, Lucent signed new five-year agreements with the CWA and IBEW expiring May
31, 2003.
ENVIRONMENTAL MATTERS
Lucent's current and historical operations are subject to a wide range of
environmental protection laws. In the United States, these laws often require
parties to fund remedial action regardless of fault. Lucent has remedial and
investigatory activities underway at numerous current and former facilities. In
addition, Lucent was named a successor to AT&T as a potentially responsible
party ("PRP") at numerous "Superfund" sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or
comparable state statutes. Under the Separation and Distribution Agreement,
Lucent is responsible for all liabilities primarily resulting from or relating
to the operation of Lucent's business as conducted at any time prior to or after
the Separation including related businesses discontinued or disposed of prior to
the Separation, and Lucent's assets including, without limitation, those
associated with these sites. In addition, under such Separation and Distribution
Agreement, Lucent is required to pay a portion of contingent liabilities paid
out in excess of certain amounts by AT&T and NCR, including environmental
liabilities.
It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. Lucent records an environmental
reserve when it is probable that a liability has been incurred and the amount of
the liability is reasonably estimable. This practice is followed whether the
claims are asserted or unasserted. Management expects that the amounts reserved
will be paid out over the periods of remediation for the applicable sites which
range from 5 to 30 years. Reserves for estimated losses from environmental
remediation are, depending on the site, based primarily upon internal or
third-party environmental studies, and estimates as to the number, participation
level and financial viability of any other PRPs, the extent of the contamination
and the nature of required remedial actions. Accruals are adjusted as further
information develops or circumstances change. The amounts provided for in
Lucent's consolidated financial statements for environmental reserves are the
gross undiscounted amount of such reserves, without deductions for insurance or
third-party indemnity claims. In those cases where insurance carriers or
third-party indemnitors have agreed to pay any amounts and management believes
that collectibility of such amounts is probable, the amounts are reflected as
receivables in the financial statements. Although Lucent believes that its
reserves are adequate, there can be no assurance that the amount of capital
expenditures and other expenses which will be required relating to remedial
actions and compliance with applicable environmental laws will not exceed the
amounts reflected in Lucent's reserves or will not have a material adverse
effect on Lucent's financial condition, results of operations or cash flows. Any
amounts of environmental costs that may be incurred in excess of those provided
for at September 30, 1998 cannot be determined.
On November 16, 1998, Lucent signed a Consent Order with the Pennsylvania
Department of Environmental Protection settling alleged violations resulting
from etching equipment being installed in 1991 and 1992 without undergoing the
proper state air permit with payment of a civil penalty of approximately
$294,000, a portion of which will be devoted to the creation of community
environmental projects.
19
21
SEPARATION AGREEMENTS
For the purposes of governing certain of the relationships between the
Company and AT&T (including NCR) following the Separation, the Company, AT&T and
NCR entered into the Separation and Distribution Agreement and the Ancillary
Agreements to which they are parties (collectively, the "Separation
Agreements"). The Ancillary Agreements include the Employee Benefits Agreement;
the Brand License Agreement; the Patent License Agreement and other
patent-related agreements; the Technology License Agreement and other
technology-related agreements; and the Tax Sharing Agreement and other
tax-related agreements. Certain of the Separation Agreements, including certain
of the Agreements summarized below, are exhibits to this Form 10-K.
Reference is made to such exhibits for the full text of the provisions of
those Agreements, and the agreement summaries below are qualified in their
entirety by reference to the full text of such Agreements. Capitalized terms
used in this section and not otherwise defined in this Form 10-K shall have
their respective meanings set forth in the Separation and Distribution Agreement
(except that the term "Company" is used in lieu of the term "Lucent") or other
Separation Agreement.
Separation and Distribution Agreement
Under the Separation and Distribution Agreement, the Company assumed or
agreed to assume, and agreed to perform and fulfill, all the "Lucent
Liabilities" (as defined in such Agreement) in accordance with their respective
terms. Without limitation, the Lucent Liabilities generally include all
liabilities and contingent liabilities relating to Lucent's present and former
business and operations, and contingent liabilities otherwise assigned to
Lucent; contingent liabilities related to AT&T's discontinued computer
operations (other than those of NCR) were assigned to the Company. The
Separation and Distribution Agreement provides for the sharing of contingent
liabilities not allocated to one of the parties in specified proportions, and
also provides that each party will share specified portions of contingent
liabilities related to the business of any of the other parties that exceed
specified levels.
Ability to Terminate Certain Rights. The Separation and Distribution
Agreement provides that certain rights granted to the Company and the members of
the Company Group will be subject to the following provisions. Except as
otherwise expressly provided, in the event that, at any time prior to February
1, 2001, the Company or any member of the Company Group offers, furnishes or
provides any Telecommunications Services of the type offered by the AT&T
Services Business as of the Closing Date, then AT&T may, in its sole discretion:
(a) terminate all or any portion of the rights granted by AT&T under the Brand
License Agreement; (b) terminate all or any remaining portion of the purchase
commitments made by AT&T and the members of the AT&T Group in the General
Purchase Agreement; (c) exercise the right to require the Company to transfer to
AT&T certain personnel, information, technology and software under the
Supplemental Agreements; (d) terminate all or any portion of the rights to
patents and technology of AT&T or any member of the AT&T Group granted to the
Company and the members of the Company Group pursuant to the Patent License
Agreement and the Technology License Agreement; and (e) direct the Company and
the members of the Company Group to reconvey to AT&T all interests in any and
all patents and technology in which the Company or any member of the Company
Group was granted an undivided one-half interest pursuant to the Patent
Assignments or the Technology Assignment and Joint Ownership Agreements. The
Company and the members of the Company Group will not be deemed to offer,
furnish or provide any Telecommunications Services (and the foregoing provisions
will not apply) solely by virtue of certain specified investments in Persons
that offer, furnish or provide Telecommunications Services or by virtue of
offering, furnishing or providing Telecommunications Services below a specified
de minimis amount.
Employee Benefits Agreement
AT&T and the Company entered into the Employee Benefits Agreement that
governs the employee benefit obligations of the Company, including both
compensation and benefits, with respect to active employees and retirees
assigned to the Company. Pursuant to the Employee Benefits Agreement, the
Company assumed and agreed to pay, perform, fulfill and discharge, in accordance
with their respective terms,
20
22
all Liabilities (as defined) to, or relating to, former employees of AT&T or its
affiliates employed by the Company and its affiliates and certain former
employees of AT&T or its affiliates (including retirees) who either were
employed in the Company Business (as defined) or who otherwise are assigned to
the Company for purposes of allocating employee benefit obligations (including
all retirees of Bell Labs).
Patent Licenses and Related Matters
The Company, AT&T and NCR executed and delivered assignments and other
agreements, including a patent license agreement, related to patents then owned
or controlled by AT&T and its subsidiaries. The patent assignments divided
ownership of patents, patent applications and foreign counterparts among the
Company, AT&T and NCR, with the substantial portion of those then owned or
controlled by AT&T and its subsidiaries (other than NCR) being assigned to the
Company. A small number of the patents assigned to the Company are jointly owned
with either AT&T or NCR. Certain of the patents that the Company jointly owns
with AT&T are subject to a joint ownership agreement under which each of the
Company and AT&T has full ownership rights in the patents. The other patents
that the Company jointly owns with AT&T, and the patents that the Company
jointly owns with NCR, are subject to defensive protection agreements with AT&T
and NCR, respectively, under which the Company holds most ownership rights in
the patents exclusively. Under these defensive protection agreements, AT&T or
NCR, as the case may be, has the ability, subject to specified restrictions, to
assert infringement claims under the patents against companies that assert
patent infringement claims against them, and has consent rights in the event the
Company wishes to license the patents to certain third parties or for certain
fields of use under specified circumstances. The defensive protection agreements
also provide for one-time payments from AT&T and NCR to the Company.
The patent license agreement entered into by the Company, AT&T and NCR
provides for cross-licenses to each company, under each of the other company's
patents that are covered by the licenses, to make, use, lease, sell and import
any and all products and services of the businesses in which the licensed
company (including specified related companies) is now or hereafter engaged. The
cross-licenses also permit each company, subject to specified limitations, to
have third parties make items under the other companies' patents, as well as to
pass through to customers certain rights under the other companies' patents with
respect to products and services furnished to customers by the licensed company.
In addition, the rights granted to the Company and AT&T include the right to
license third parties under each of the other company's patents to the extent
necessary to meet existing patent licensing obligations as of March 29, 1996,
and AT&T has the right, subject to specified restrictions and procedures, to ask
the Company to license third parties under a limited number of identified
patents that were assigned to the Company.
Technology Licenses and Related Matters
The Company, AT&T and NCR executed and delivered assignments and other
agreements, including the Technology License Agreement, related to technology
then owned or controlled by AT&T and its subsidiaries. Technology includes
copyrights, mask works and other intellectual property other than trademarks,
trade names, trade dress, service marks and patent rights. The technology
assignments divide ownership of technology among the Company, AT&T and NCR, with
the Company and AT&T owning technology that was developed by or for, or
purchased by, the Company's business or AT&T's services business, respectively,
and NCR owning technology that was developed by or for, or purchased by, NCR.
Technology that is not covered by any of these categories is owned jointly by
the Company and AT&T or, in the case of certain specified technology, owned
jointly by the Company, AT&T and NCR.
The Technology License Agreement entered into by the Company, AT&T and NCR
provides for royalty-free cross-licenses to each company to use the other
companies' technology existing as of April 10, 1996, except for specified
portions of each company's technology as to which use by the other companies is
restricted or prohibited.
21
23
ITEM 2. PROPERTIES.
At September 30, 1998, the Company operated 30 manufacturing sites, of
which 14 were located in the United States, occupying in excess of 19.0 million
square feet, of which approximately 1.0 million square feet were leased. The
remaining 16 sites were located in 10 countries.
At September 30, 1998, the Company operated 228 warehouse sites, of which
192 were located in the United States, occupying in excess of 6.0 million square
feet, substantially all of which were leased. The remaining 30 sites were
located in 21 countries.
At September 30, 1998, the Company operated 835 office sites
(administration, sales, field service), of which 614 were located in the United
States, occupying in excess of 20.0 million square feet, half of which were
leased. The remaining 221 sites were located in 56 countries.
At September 30, 1998, the Company operated additional sites in 19 cities,
of which 7 were located in the United States, with significant research and
development activities, occupying in excess of 9.0 million square feet, of which
approximately 1.4 million square feet were leased.
The Company believes its plants and facilities are suitable and adequate,
and have sufficient productive capacity, to meet its current needs.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of business, the Company is subject to proceedings,
lawsuits and other claims, including proceedings under laws and regulations
related to environmental and other matters. (Also see Item 1.
"Business -- Separation Agreements -- Separation and Distribution Agreement"
regarding the assumption by the Company of certain liabilities and contingent
liabilities.) All such matters are subject to many uncertainties and outcomes
are not predictable with assurance. Consequently, the Company is unable to
ascertain the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at September 30, 1998. While these matters
could affect operating results of any one quarter when resolved in future
periods and, while there can be no assurance with respect thereto, it is
management's opinion that after final disposition, any monetary liability or
financial impact to the Company beyond that provided in the consolidated balance
sheet at September 30, 1998 would not be material to the Company's annual
consolidated financial statements.
See also the discussion in Item 1. "Business -- Environmental Matters" for
additional legal proceedings, and environmental matters and proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
During the fourth quarter of the fiscal year covered by this report on Form
10-K, no matter was submitted to a vote of Shareowners.
PART II
ITEMS 5. THROUGH 8.
The information required by these items is included in pages 34 through 67
of the Company's annual report to security holders for the fiscal year ended
September 30, 1998. The referenced pages of the Company's annual report to
security holders have been filed as Exhibit 13 to this document. Such
information is incorporated herein by reference, pursuant to General Instruction
G(2). The New York Stock Exchange is the principal market for the Company's
Common Shares. As of November 30, 1998, there were approximately 1,764,000
shareholders of record.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
22
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding executive officers required by Item 401 of Regulation
S-K is furnished in this separate disclosure because the Company did not furnish
such information in its definitive proxy statement prepared in accordance with
Schedule 14A.
EXECUTIVE OFFICERS OF THE REGISTRANT
(AS OF DECEMBER 1, 1998)
BECAME LUCENT
EXECUTIVE
NAME AGE OFFICER ON
---- ----- -------------
Richard A. McGinn......................... 52 Chairman of the Board and 2-96
Chief Executive Officer
Donald K. Peterson........................ 49 Executive Vice President and 2-96
Chief Financial Officer
Richard J. Rawson......................... 46 Senior Vice President, 2-96
General Counsel and Secretary
Patricia F. Russo......................... 46 Executive Vice President, 2-96
Corporate Staff Operations
Daniel C. Stanzione....................... 53 Executive Vice President and 2-96
Chief Operating Officer
Bernardus J. Verwaayen.................... 46 Executive Vice President and 9-97
Chief Operating Officer
All of the above executive officers have held high level managerial
positions with the Company and prior thereto with AT&T or its affiliates for
more than the past five years, except in the case of Messrs. Peterson and
Verwaayen who have held such positions since September 1, 1995 and September 1,
1997, respectively. Prior to joining AT&T, Mr. Peterson held various senior
executive positions at Northern Telecom, Inc., a telecommunications equipment
company, which included President of Nortel Communications Systems, Inc. (from
January 1993 to September 1995), Vice President of Finance of Northern Telecom,
Inc. (from January 1991 to January 1993) and Group Vice President of Northern
Telecom, Inc. (from September 1987 to January 1991). Mr. Verwaayen joined the
Company after serving as President of PTT Telecom, the national
telecommunications operator of the Netherlands since May 1988. He was a
co-founder of Unisource, the pan-European alliance of Telia of Sweden, Swiss
Telecom and PTT Telecom.
Officers are not elected for a fixed term of office but hold office until
their successors have been elected.
The other information required by Item 10 is included in the Company's
definitive proxy statement dated December 22, 1998, on pages 12 through 15. Such
information is incorporated herein by reference, pursuant to General Instruction
G(3).
ITEMS 11. THROUGH 13.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Directors and officers to file reports of holdings and transactions in the
Company's Common Shares with the Securities and Exchange Commission ("SEC") and
the New York Stock Exchange. Based on Company records and other information, the
Company believes that all SEC filing requirements applicable to its Directors
and officers with respect to the Company's fiscal year ending September 30, 1998
were complied with.
The other information required by Items 11 through 13 is included in the
Company's definitive proxy statement dated December 22, 1998, on pages 8 through
11 and pages 35 through page 44. Such information is incorporated herein by
reference, pursuant to General Instruction G(3).
23
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of Form 10-K:
PAGES
-----
(1) Management's Discussion and Analysis of
Results of Operations and Financial
Condition................................... *
(2) Report of Management.......................... *
(3) Report of Independent Accountants............. *
(4) Financial Statements:
(i) Consolidated Statements of Income....... *
(ii) Consolidated Balance Sheets............. *
(iii) Consolidated Statements of Changes in
Shareowners' Equity........................... *
(iv) Consolidated Statements of Cash Flows... *
(v) Notes to Consolidated Financial
Statements.................................... *
(5) Financial Statement Schedules:
(i) Report of Independent Accountants........ 27
(ii) Schedule II -- Valuation and Qualifying
Accounts...................................... 28
Separate financial statements of subsidiaries not consolidated and 50
percent or less owned persons are omitted since no such entity constitutes a
"significant subsidiary" pursuant to the provisions of Regulation S-X, Article
3-09.
- ---------------
* Incorporated herein by reference to the appropriate portions in pages 34
through 67 of the Company's annual report to security holders for the fiscal
year ended September 30, 1998. (See Part II and Exhibit 13.)
24
26
(6) Exhibits:
The following documents are filed as Exhibits to this report on
Form 10-K or incorporated by reference herein. Any document
incorporated by reference is identified by a parenthetical
referencing the SEC filing which included such document.
EXHIBIT
NUMBER
- -------
(3)(i) Articles of Incorporation of the registrant, as amended
April 8, 1996 (Exhibit 3(i) to Form 8-K dated July 18, 1996,
File No. 001-11639).
(3)(ii) By-Laws of the registrant, as amended July 17, 1996 (Exhibit
3(ii) to Form 8-K dated July 18, 1996, File No. 001-11639).
(4)(i) Indenture dated as of April 1, 1996 between Lucent
Technologies Inc. and the Bank of New York, as Trustee
(Exhibit 4A to Registration Statement on Form S-3 No. 333-
01223).
(4)(iii) Other instruments in addition to Exhibit 4(i) which define
the rights of holders of long term debt, of the registrant
and all of its consolidated subsidiaries, are not filed
herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A).
Pursuant to this regulation, the registrant hereby agrees to
furnish a copy of any such instrument to the SEC upon
request.
(10)(i)1 Separation and Distribution Agreement by and among Lucent
Technologies Inc., AT&T Corp. and NCR Corporation, dated as
of February 1, 1996 and amended and restated as of March 29,
1996 (Exhibit 10.1 to Registration Statement on Form S-1 No.
333-00703).
(10)(i)2 Tax Sharing Agreement by and among Lucent Technologies Inc.,
AT&T Corp. and NCR Corporation, dated as of February 1, 1996
and amended and restated as of March 29, 1996 (Exhibit 10.6
to Registration Statement on Form S-1 No. 333-00703).
(10)(i)3 Employee Benefits Agreement by and between AT&T and Lucent
Technologies Inc., dated as of February 1, 1996 and amended
and restated as of March 29, 1996 (Exhibit 10.2 to
Registration Statement on Form S-1 No. 333-00703).
(10)(i)4 Rights Agreement between Lucent Technologies Inc. and First
Chicago Trust Company of New York, as Rights Agent, dated as
of April 4, 1996 (Exhibit 4.2 to Registration Statement on
Form S-1 No. 333-00703).
(10)(i)5 Amendment to Rights Agreement between Lucent Technologies
Inc. and First Chicago Trust Company of New York, dated as
of February 18, 1998.
(10)(ii)(B)1 General Purchase Agreement by and between AT&T Corp. and
Lucent Technologies Inc., dated February 1, 1996 and amended
and restated as of March 29, 1996 (Exhibit 10.3 to
Registration Statement on Form S-1 No. 333-00703).
(10)(ii)(B)2 Interim Services and Systems Replication Agreement by and
among AT&T, Lucent Technologies Inc. and NCR, dated as of
February 1, 1996 and amended and restated as of March 29,
1996 (Exhibit 10.4 to Registration Statement on Form S-1 No.
333-00703).
(10)(ii)(B)3 Brand License Agreement by and between Lucent Technologies
Inc. and AT&T, dated as of February 1, 1996 (Exhibit 10.5 to
Registration Statement on Form S-1 No. 333-00703).
(10)(ii)(B)4 Patent License Agreement among AT&T, NCR and Lucent
Technologies Inc., effective as of March 29, 1996 (Exhibit
10.7 to Registration Statement on Form S-1 No. 333-00703).
25
27
EXHIBIT
NUMBER
- -------
(10)(ii)(B)5 Amended and Restated Technology License Agreement among
AT&T, NCR and Lucent Technologies Inc., effective as of
March 29, 1996 (Exhibit 10.8 to Registration Statement on
Form S-1 No. 333-00703).
(10)(iii)(A)(1) Lucent Technologies Inc. Short Term Incentive Program
(Exhibit (10)(iii)(A)(2) to the Quarterly Report on Form
10-Q for the quarter ended March 31, 1998).*
(10)(iii)(A)2 Lucent Technologies Inc. 1996 Long Term Incentive Program
(Exhibit(10)(iii)(A)1 to Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998).*
(10)(iii)(A)3 Lucent Technologies Inc. Deferred Compensation Plan.*
(10)(iii)(A)4 Pension Plan for Lucent Non-Employee Directors (Exhibit
10.11 to Registration Statement on Form S-1 No. 333-00703).*
(This plan has been terminated)
(10)(iii)(A)5 Lucent Technologies Inc. Stock Retainer Plan for
Non-Employee Directors.*
(10)(iii)(A)6 Lucent Technologies Inc. Excess Benefit and Compensation
Plan (Exhibit (10)(iii)(A)5 to Annual Report on Form 10-K
for Transition Period ended September 30, 1996).*
(10)(iii)(A)7 Lucent Technologies Inc. Mid-Career Pension Plan (Exhibit
(10)(iii)(A)6 to Annual Report on Form 10-K for Transition
Period ended September 30, 1996).*
(10)(iii)(A)8 Lucent Technologies Inc. Non-Qualified Pension Plan (Exhibit
(10)(iii)(A)7 to Annual Report on Form 10-K for Transition
Period ended September 30, 1996).*
(10)(iii)(A)9 Lucent Technologies Inc. Officer Long-Term Disability and
Survivor Protection Plan (Exhibit (10)(iii)(A)8 to the
Annual Report on Form 10-K for Transition Period ended
September 30, 1996).*
(10)(iii)(A)10 Employment Agreement of Mr. Verwaayen dated June 12, 1997
(Exhibit (10)(iii)(A)(1)) to the Annual Report on Form 10-K
for the period ended September 30, 1997).*
(10)(iii)(A)11 Employment Agreement of Mr. Peterson dated August 8, 1995
(Exhibit (10)(iii)(A)(9) to the Annual Report on Form 10-K
for the period ended September 30, 1997).*
(10)(iii)(A)12 Consulting Agreement of Mr. Schacht, effective March 1, 1998
(Exhibit (10)(iii)(A)5 to the Quarterly Report on Form 10-Q
for the period ended March 31, 1998).*
(10)(iii)(A)13 Description of the Lucent Technologies Inc. Supplemental
Pension Plan.*
(10)(iii)(A)14 Lucent Technologies Inc. 1999 Stock Compensation Plan for
Non-Employee Directors.*
(10)(iii)(A)15 Lucent Technologies Inc. Voluntary Life Insurance Plan.
(12) Computation of Ratio of Earnings to Fixed Charges.
(13) Specified portions (pages 34 through 67) of the Company's
Annual Report to security holders for the year ended
September 30, 1998.
(21) List of subsidiaries of Lucent Technologies Inc.
(23) Consent of PricewaterhouseCoopers LLP
(24) Powers of Attorney executed by officers and directors who
signed this report.
(27) Financial Data Schedule.
- ---------------
* Management contract or compensatory plan or arrangement.
The Company will furnish, without charge, to a security holder upon request
a copy of the annual report to security holders and the proxy statement,
portions of which are incorporated herein by reference thereto. The Company will
furnish any other exhibit at cost.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed by the Company during the last quarter of
the fiscal year covered by this Report on Form 10-K.
26
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners of Lucent Technologies Inc.:
Our report on the consolidated financial statements of Lucent Technologies
Inc. and subsidiaries has been incorporated by reference in this Form 10-K from
page 48 of the 1998 Annual Report to the Shareowners of Lucent Technologies Inc.
In connection with our audits of such financial statements, we have also audited
the related consolidated financial statement schedule listed in the index on
page 24 of this Form 10-K.
In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers LLP
New York, New York
October 21, 1998
27
29
LUCENT TECHNOLOGIES INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------- ------------ ------------------------ ---------- ---------
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING OF COSTS & OTHER AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------- ------------ ---------- ---------- ---------- ---------
Year 1998
Allowance for doubtful
accounts...................... 352 113 (59) 16(a) 390
Reserves related to business
restructuring and facility
consolidation................. 569 -- -- 318(b) 251
Deferred tax asset valuation
allowance..................... 234 31 45 49 261
Inventory valuation.............. 637 146 30 177 636
Year 1997
Allowance for doubtful
accounts...................... 273 111 5 37(a) 352
Reserves related to business
restructuring and facility
consolidation(d).............. 1,289 -- -- 720(b) 569
Deferred tax asset valuation
allowance..................... 208 86 3 63 234
Inventory valuation.............. 644 221 19 247 637
Year 1996
Allowance for doubtful
accounts...................... 248 64 -- 39(a) 273
Reserves related to business
restructuring and facility
consolidation(d).............. 1,907 -- -- 618(b) 1,289
Deferred tax asset valuation
allowance..................... 142 7 102(c) 43 208
Inventory valuation.............. 790 92 9 247 644
- ---------------
(a) Amounts written off as uncollectible, payments or recoveries.
(b) Included in these deductions were cash payments of $176, $483 and $456 for
the years ended September 30, 1998 and 1997, and for the nine months ended
September 30, 1996, respectively. In addition, Lucent reversed $100, $201
and $98 for the years ended September 30, 1998 and 1997, and for the nine
months ended September 30, 1996, respectively. See Note 6 of the Notes to
Consolidated Financial Statements for background information.
(c) Relates to net asset additions and net liability reductions from AT&T. See
Note 1 of the Notes to Consolidated Financial Statements for background
information.
(d) Certain prior year amounts have been reclassified to conform to the 1998
presentation.
28
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
By /s/ JAMES S. LUSK
---------------------------------------------
James S. Lusk
Vice President and Controller
(attorney-in-fact)*
December 22, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Principal Executive Officer
Richard A. McGinn
Chief Executive
Officer and President
Principal Financial Officer
Donald K. Peterson
Executive Vice President and
Chief Financial Officer
Principal Accounting Officer By /s/ JAMES S. LUSK
James S. Lusk ---------------------------------------------
Vice President James S. Lusk
Vice President and Controller
(attorney-in-fact)*
December 22, 1998
Directors
Paul A. Allaire
Carla A. Hills
Drew Lewis
Richard A. McGinn
Paul H. O'Neill
Donald S. Perkins
Henry B. Schacht
Franklin A. Thomas
John A. Young
- ------------------------------------------ * As Principal Accounting Officer and by power
of attorney
29
31
EXHIBIT INDEX
The following documents are filed as Exhibits to this report on Form 10-K
or incorporated by reference herein. Any document incorporated by reference is
identified by a parenthetical referencing the SEC filing which included such
document.
EXHIBIT
NUMBER
- -------
(3)(i) Articles of Incorporation of the registrant, as amended
April 8, 1996 (Exhibit 3(i) to Form 8-K dated July 18, 1996,
File No. 001-11639).
(3)(ii) By-Laws of the registrant, as amended July 17, 1996 (Exhibit
3(ii) to Form 8-K dated July 18, 1996, File No. 001-11639).
(4)(i) Indenture dated as of April 1, 1996 between Lucent
Technologies Inc. and the Bank of New York, as Trustee
(Exhibit 4A to Registration Statement on Form S-3 No. 333-
01223).
(4)(iii) Other instruments in addition to Exhibit 4(i) which define
the rights of holders of long term debt, of the registrant
and all of its consolidated subsidiaries, are not filed
herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A).
Pursuant to this regulation, the registrant hereby agrees to
furnish a copy of any such instrument to the SEC upon
request.
(10)(i)1 Separation and Distribution Agreement by and among Lucent
Technologies Inc., AT&T Corp. and NCR Corporation, dated as
of February 1, 1996 and amended and restated as of March 29,
1996 (Exhibit 10.1 to Registration Statement on Form S-1 No.
333-00703).
(10)(i)2 Tax Sharing Agreement by and among Lucent Technologies Inc.,
AT&T Corp. and NCR Corporation, dated as of February 1, 1996
and amended and restated as of March 29, 1996 (Exhibit 10.6
to Registration Statement on Form S-1 No. 333-00703).
(10)(i)3 Employee Benefits Agreement by and between AT&T and Lucent
Technologies Inc., dated as of February 1, 1996 and amended
and restated as of March 29, 1996 (Exhibit 10.2 to
Registration Statement on Form S-1 No. 333-00703).
(10)(i)4 Rights Agreement between Lucent Technologies Inc. and First
Chicago Trust Company of New York, as Rights Agent, dated as
of April 4, 1996 (Exhibit 4.2 to Registration Statement on
Form S-1 No. 333-00703).
(10)(i)5 Amendment to Rights Agreement between Lucent Technologies
Inc. and First Chicago Trust Company of New York, dated as
of February 18, 1998.
(10)(ii)(B)1 General Purchase Agreement by and between AT&T Corp. and
Lucent Technologies Inc., dated February 1, 1996 and amended
and restated as of March 29, 1996 (Exhibit 10.3 to
Registration Statement on Form S-1 No. 333-00703).
(10)(ii)(B)2 Interim Services and Systems Replication Agreement by and
among AT&T, Lucent Technologies Inc. and NCR, dated as of
February 1, 1996 and amended and restated as of March 29,
1996 (Exhibit 10.4 to Registration Statement on Form S-1 No.
333-00703).
(10)(ii)(B)3 Brand License Agreement by and between Lucent Technologies
Inc. and AT&T, dated as of February 1, 1996 (Exhibit 10.5 to
Registration Statement on Form S-1 No. 333-00703).
(10)(ii)(B)4 Patent License Agreement among AT&T, NCR and Lucent
Technologies Inc., effective as of March 29, 1996 (Exhibit
10.7 to Registration Statement on Form S-1 No. 333-00703).
32
EXHIBIT
NUMBER
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(10)(ii)(B)5 Amended and Restated Technology License Agreement among
AT&T, NCR and Lucent Technologies Inc., effective as of
March 29, 1996 (Exhibit 10.8 to Registration Statement on
Form S-1 No. 333-00703).
(10)(iii)(A)(1) Lucent Technologies Inc. Short Term Incentive Program
(Exhibit (10)(iii)(A)(2) to the Quarterly Report on Form
10-Q for the quarter ended March 31, 1998).*
(10)(iii)(A)2 Lucent Technologies Inc. 1996 Long Term Incentive Program
(Exhibit(10)(iii)(A)1 to Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998).*
(10)(iii)(A)3 Lucent Technologies Inc. Deferred Compensation Plan.*
(10)(iii)(A)4 Pension Plan for Lucent Non-Employee Directors (Exhibit
10.11 to Registration Statement on Form S-1 No. 333-00703).*
(This plan has been terminated)
(10)(iii)(A)5 Lucent Technologies Inc. Stock Retainer Plan for
Non-Employee Directors.*
(10)(iii)(A)6 Lucent Technologies Inc. Excess Benefit and Compensation
Plan (Exhibit (10)(iii)(A)5 to Annual Report on Form 10-K
for Transition Period ended September 30, 1996).*
(10)(iii)(A)7 Lucent Technologies Inc. Mid-Career Pension Plan (Exhibit
(10)(iii)(A)6 to Annual Report on Form 10-K for Transition
Period ended September 30, 1996).*
(10)(iii)(A)8 Lucent Technologies Inc. Non-Qualified Pension Plan (Exhibit
(10)(iii)(A)7 to Annual Report on Form 10-K for Transition
Period ended September 30, 1996).*
(10)(iii)(A)9 Lucent Technologies Inc. Officer Long-Term Disability and
Survivor Protection Plan (Exhibit (10)(iii)(A)8 to the
Annual Report on Form 10-K for Transition Period ended
September 30, 1996).*
(10)(iii)(A)10 Employment Agreement of Mr. Verwaayen dated June 12, 1997
(Exhibit (10)(iii)(A)(1)) to the Annual Report on Form 10-K
for the period ended September 30, 1997).*
(10)(iii)(A)11 Employment Agreement of Mr. Peterson dated August 8, 1995
(Exhibit (10)(iii)(A)(9) to the Annual Report on Form 10-K
for the period ended September 30, 1997).*
(10)(iii)(A)12 Consulting Agreement of Mr. Schacht effective March 1, 1998
(Exhibit (10)(iii)(A)5 to the Quarterly Report on Form 10-Q
for the period ended March 31, 1998).*
(10)(iii)(A)13 Description of the Lucent Technologies Inc. Supplemental
Pension Plan.*
(10)(iii)(A)14 Lucent Technologies Inc. 1999 Stock Compensation Plan for
Non-Employee Directors.*
(10)(iii)(A)15 Lucent Technologies Inc. Voluntary Life Insurance Plan.
(12) Computation of Ratio of Earnings to Fixed Charges.
(13) Specified portions (pages 34 through 67) of the Company's
Annual Report to security holders for the year ended
September 30, 1998.
(21) List of subsidiaries of Lucent Technologies Inc.
(23) Consent of PricewaterhouseCoopers LLP
(24) Powers of Attorney executed by officers and directors who
signed this report.
(27) Financial Data Schedule.
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* Management contract or compensatory plan or arrangement.