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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-11639
LUCENT TECHNOLOGIES INC.
A DELAWARE I.R.S. EMPLOYER
CORPORATION NO. 22-3408857
600 MOUNTAIN AVENUE, MURRAY HILL, NEW JERSEY 07974
TELEPHONE NUMBER 908-582-8500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: SEE ATTACHED
SCHEDULE A.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At November 30, 2000, the aggregate market value of the voting stock held
by non-affiliates was approximately $52,500,000,000.
At November 30, 2000, 3,388,942,883 common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed
pursuant to Regulation 14A on or before January 28, 2001, issued in connection
with the annual meeting of shareholders (Part III)
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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 Share)..................... New York Stock Exchange
6.90% Notes due July 15, 2001............................... New York Stock Exchange
7.25% Notes due July 15, 2006............................... New York Stock Exchange
6.50% Debentures due January 15, 2028....................... New York Stock Exchange
5.50% Notes due November 15, 2008........................... New York Stock Exchange
6.45% Debentures due March 15, 2029......................... New York Stock Exchange
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TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
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PART I
1. Business.................................................... 4
2. Properties.................................................. 20
3. Legal Proceedings........................................... 21
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..................................... 23
7. Management's Discussion and Analysis of Financial Condition 24
and Results of Operations...................................
8. Financial Statements and Supplementary Data................. 41
9. Changes in and Disagreements with Accountants on Accounting 41
and Financial Disclosure....................................
PART III
10. Directors and Executive Officers of the Registrant.......... 41
11. Executive Compensation...................................... 42
12. Security Ownership of Certain Beneficial Owners and 42
Management..................................................
13. Certain Relationships and Related Transactions.............. 42
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 42
8-K.........................................................
This Report contains trademarks, service marks and registered marks of
Lucent and its subsidiaries, and other companies, as indicated.
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PART I
ITEM 1. BUSINESS.
I. GENERAL
Lucent Technologies Inc. ("Lucent") was incorporated in Delaware in
November 1995. Lucent has its principal executive offices at 600 Mountain
Avenue, Murray Hill, New Jersey 07974 (telephone number 908-582-8500). Lucent
was formed from the systems and technology units that were formerly a part of
AT&T Corp. ("AT&T"), including the research and development capabilities of Bell
Laboratories. Prior to February 1, 1996, AT&T conducted Lucent's original
business through various divisions and subsidiaries. On February 1, 1996, AT&T
began executing its decision to separate Lucent into a stand-alone company (the
"Separation") by transferring to Lucent the assets and liabilities related to
its business. In April 1996, Lucent completed the initial public offering
("IPO") of its common stock and on September 30, 1996, became independent of
AT&T when AT&T distributed to its shareowners all of its Lucent shares. Lucent's
fiscal year begins October 1 and ends September 30.
On September 30, 2000 Lucent completed its plan to spin off its enterprise
networks business, forming a separate and independent company. The spin off of
the new company, Avaya Inc., was accomplished through a tax-free distribution of
shares to Lucent shareholders. On July 20, 2000, Lucent announced its intention
to spin off its microelectronics business, which includes the optoelectronics
components and integrated circuits divisions, into a separate, independent
company called Agere Systems Inc. ("Agere Systems"). On December 11, 2000 Agere
Systems filed a Form S-1 registration statement with the Securities and Exchange
Commission (the "SEC") in anticipation of an IPO of Agere Systems and intends to
distribute the remaining shares in a tax-free distribution. This report does not
constitute an offering of any securities, which will be made only by a
prospectus filed with the SEC. The IPO is expected to be completed in the
quarter ending March 31, 2001, and the completion of the spin-off is expected by
the end of the 2001 fiscal year. The IPO and spin-off are subject to certain
conditions, including a favorable tax ruling by the IRS. On November 13, 2000
Lucent entered into an agreement to sell its power systems business to Tyco
International Ltd., a diversified manufacturing and service company, for $2.5
billion in cash. The sale, which is subject to regulatory approval and other
customary closing conditions, is expected to close by December 31, 2000.
Lucent is one of the world's leading designers, developers and
manufacturers of communications systems, software and products. Lucent is a
global leader in the sale of public and private communications systems,
supplying systems and software to most of the world's largest communications
network operators and service providers (together referred to as "service
providers"). Lucent is also a global leader in the sale of microelectronic
components for communications applications to manufacturers of communications
systems and computers. Lucent's research and development activities are
conducted through Bell Laboratories ("Bell Labs"), one of the world's foremost
industrial research and development organizations.
The communications industry is experiencing rapid changes in the
technologies used to service customers' needs. Traditional circuit based
switching and data packet transmission are converging. This convergence of
technologies is driven by the growing demands on the transmission of information
using data, voice, video and fax, or any combination of these. The demand is
driven by the expansion of Internet traffic over existing networks -- both
wireline and wireless -- as well as the buildout of new and improved networks.
Lucent's strategy is to meet its customers' needs by offering an end-to-end
solutions platform, which brings together Lucent's core products with new
offerings obtained through strategic acquisitions and the research and
development of Bell Laboratories. This strategy brings together products related
to data, voice, optical, wireless, software, services and support.
Lucent has two reportable segments: Service Provider Networks ("SPN") and
Microelectronics and Communications Technologies ("MCT"). SPN provides public
networking systems and software to telecommunications service providers and
public network operators around the world. MCT designs and manufactures
high-performance integrated circuits, power systems, optical fiber and fiber
cables, and optoelectronic components for applications in the communications and
computing industries. These two reportable operating
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segments are strategic market units based on the customers and the markets
served. For further information about Lucent's segments and products, see Note
14 to the accompanying consolidated financial statements.
II. SERVICE PROVIDER NETWORKS
A. General
Lucent designs, develops, manufactures and services systems, including
software, which enable service providers to provide wireline and wireless
access, local, long distance and international voice, data and video and cable
services. The SPN segment includes the product groups responsible for Lucent's
optical networking, switching solutions, access, wireless networks and software
products businesses. It also includes the businesses which are focused on the
needs of cable television operators and data networking systems for service
providers as well as the sales and support organizations responsible for offers,
sales, distribution, installation and maintenance for service provider customers
worldwide.
Lucent's systems connect, route, manage and store voice, data and video in
any combination, and are used for: wireline access; local and long distance
switching; intelligent network services and signaling; wireless communications,
including both cellular and personal communications services ("PCS"); and
high-speed, broadband multi-functional communications. Lucent has a wireline
local access installed base (the number of access lines serviced by switches
manufactured by Lucent) of approximately 150 million lines.
Lucent designs, develops, manufactures, sells, and services each of the
five broad elements that comprise communications networks for service providers:
switching systems, which route information through the network; transmission
systems (including optical networking and access products) which provide the
communications path through the network that carries information between points
in the network as well as to and from subscribers; operation support systems,
which enable service providers to manage the work flow, planning, surveillance,
management, provisioning and continuous testing of their networks; intelligent
network/application software, which enables service providers to offer a broad
array of enhanced and differentiated services; and cable systems, which provide
the transport media between points in a network. These systems collectively
comprise the infrastructure that enables communications service providers to
provide traditional narrow band voice and data services and enables both new and
traditional network operators to offer broadband multi-media services.
In fiscal year 2000, Lucent acquired several companies related to the SPN
segment's business, including Chromatis Networks and Spring Tide Networks.
B. Switching Solutions
Lucent manufactures, develops, markets and manages switching products and
software for the service provider market. Lucent's primary switching solutions
products include:
- 7R/E(TM) Packet Solutions -- An entire portfolio of packet data
networking products that deliver traditional telephony as well as data
features and services within a packet environment. Applications cover the
entire range of service providers and network operators regardless of
network size or scope.
- 5ESS(R) Switch -- The most highly-deployed circuit switching solution in
today's global network. Its evolution capabilities allow for complete
migration to packet; scaleable for both incumbent and emerging network
operators and service providers from 3,000 subscribers and higher.
- Lucent SoftSwitch (and Full Circle(SM) Program) -- Robust, programmable
call control and signable platform; targeted at entire range of service
providers and network operators regardless of network size or scope; also
targeted at a large audience of 3rd party application and service
developers.
- ExchangePlus EXS(R) and VSE(TM) Switches -- A scaleable, converged
solution providing tandem, international gateway and/or IP application
servers, targeted at networks of up to 30,000 ports.
- Packet Intelligent Networks -- Carrier grade solutions for wireline and
mobile internet applications.
- Messaging Solutions -- Voice mail, unified messaging, agent and portal
solutions for service providers.
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C. Optical Networking
Lucent designs, manufactures and markets optical networking systems,
offering a complete portfolio of optical networking products. Lucent's family of
optical networking systems provides service providers with fast, efficient
information transport over fiber-optic lines. The enabler of optical networking
is photonics, a technology that uses light particles, or photons, to transport
information over hair-thin glass fibers.
Most transmission systems currently comply with one of two similar
standards designed to promote the implementation of maximum transmission
capacity with the greatest simplicity and lowest cost for service providers. The
Synchronous Optical Network ("SONET") standard has been widely adopted in North
America. The Synchronized Digital Hierarchy ("SDH") predominates throughout the
rest of the world. Lucent markets transmission access systems supporting both
standards.
Lucent's primary optical networking products include:
- Dense Wavelength Division Multiplexing ("DWDM") systems such as the
WaveStar(TM) 40G OLS and 400G OLS which use prism-like technology to
combine the information generated by up to 80 individual lasers onto a
single strand of fiber-optic cable.
- Systems that automatically route large amounts of information from fiber
to fiber, such as the WaveStar(TM) Bandwidth Manager and WaveStar(TM)
Lambda Router(TM) Switches.
- Systems that combine many low-speed electronic signals into a single
high-speed signal, and then convert that signal to an optical signal for
transmission over fiber-optic cable. Examples include the current SONET
and SDH product lines (FT 2000, DDM 2000, ISM 2000, SLM 2000) as well as
the new global product line (WaveStar(TM) 2.5G, WaveStar(TM) 10G,
WaveStar(TM) 40G Express).
D. Wireless Products
Lucent manufactures and markets total-system solutions for the global
wireless networks industry. Lucent provides end-to-end capabilities for
operators to plan, deploy, operate and maintain mobile and fixed wireless
networks to maximum efficiency, and to competitively meet their customers'
needs. Lucent's portfolio includes Mobile Switching Centers, base station
products, and network support software. Lucent also provides global customer
technical support and training.
Lucent's solutions for wireless network operators encompass all of the
major wireless mobile network standards, including AMPS, TDMA, CDMA and GSM,
spreading over a broad frequency spectrum including: 800 MHz, 900 MHz, 1800 MHz
or 1900 MHz. Lucent's solutions offer scaleable platforms for wireless services
that are fully compatible with the larger telecommunications environment of
today, yet are able to evolve to next-generation networks including those that
will make use of new varying technologies collectively referred to as Third
Generation or 3G, including UMTS (Universal Mobile Telecommunications Service),
that will provide enhanced capacity and improved internet access and facilitate
the provision of sophisticated, high speed data applications.
Lucent's primary wireless product families include:
- Mobile Switching centers that provide the transfer of calls within the
wireless network and interface to the public switched telephone networks.
- Operations and maintenance centers which are software systems allowing
for the provisioning, diagnostics and administration of the wireless
networks.
- Base station systems that are the radio systems that transmit and receive
subscriber calls and manage handoffs as customers move from cell to cell.
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E. Software Products
Lucent develops open, standards-based, multi-vendor software products and
services to help service providers manage their complex, converging voice and
data networks. Lucent's portfolio of software solutions includes software for
network and service management, billing and customer care.
Lucent's primary software products represent Operations Support Software
which provides established and growing service providers with service ready
solution sets that include: convergent customer care and billing management;
multiple switching software platforms; network performance and assurance; number
portability; service activation, provisioning, and management; transport
provisioning; and wireless/mobile network management. Some of our modular,
scalable, leading-edge software products include: Arbor(R) Product Suite,
Actiview(R) Service Management, ConnectVu(TM) Configuration Management,
Integrated Transport Management, Mechanized Loop Testing, NetMinder(TM) System
Network Performance, Network Fault Management, and OneVision(R) Network
Management Solution.
F. Data Networking -- Service Providers and Access
Lucent develops, markets, sells and services data networking solutions for
service provider customers worldwide. For the service provider market, Lucent's
product and services portfolio includes WAN Access, Multiservice Core Switching,
Voice-over-Packet/Cell, Secure VPN, Digital Subscriber Line (xDSL), Metropolitan
Optical Network, and Network Management.
Lucent's primary data networking and access solutions for service providers
include:
- GRF multigigabit routers which deliver high performance in dynamic
heavy-traffic IP networking environments. Routers are network controllers
that determine the best routing for data transmission between end
stations. They perform their operations by looking at network layer
information found in data packets and either forwarding the packets
directly to a destination or sending them through a series of
intermediate devices.
- The MAX TNT(R) multiprotocol WAN access switch enables carriers, ISPs,
corporations, and major network providers to offer a variety of access
services such as analog, ISDN, leased T1/E1, and frame relay. Because the
MAX TNT is the highest-density product in its class, it dramatically
reduces rack space requirements while driving down the price per port.
- The GX Smart Core ATM product family which includes the GX 550 Smart Core
ATM Switch, a scalable, high-capacity switching system that provides the
necessary capacity, performance, and port fanout capabilities for carrier
services. ATM switches incorporate a cell-based switching and
multiplexing communications technology which permits transportation of
substantially all traffic types (e.g., video, voice, data, interactive
video, etc.). ATM is a connection-oriented technology, i.e., before data
can be transferred, a connection between the sending and receiving nodes
must be established.
- The NX64000 multi-terabit switch/router, is an architectural innovation
that provides high-speed optical interfaces and integrates substantially
all of the key core requirements onto a single, carrier-class
multi-service device. It provides features of ATM switches and
high-capacity routers.
- B-STDX Multiservice wide area network ("WAN") switches (deployed to build
core frame relay networks), carrier-class switches which are evolving as
an access point to the next-generation WAN with the addition of
internetworking modules for IP and ATM services for high-speed trunking
and low-speed converged access. Frame relay technology allows bits to be
packaged and sent out into the network with source and destination
addresses. Products include the B-STDX 8000, B-STDX 9000 and B-STDX 8200.
Another Lucent multi-service WAN switch is the CBXTM 500 which is of
greater bandwidth than the B-STDX family of products. In addition, Lucent
has its MAX family of WAN access switches.
- The Stinger(TM) DSL Access Concentrator, is a new carrier class DSL
access concentrator. Access concentrators are call aggregation devices
designed for large dial-in applications such as Internet service
providers. They aggregate analog and digital calls over channelized lines
such as T1/E1 and
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T3/E3. The Stinger offers features that ATM brings to multi-service
networks, including effective bandwidth management and high availability.
Addressing the needs of carriers implementing cell-based backbone
networks, it features high-capacity traffic aggregation capabilities and
performance. Other DSL access concentrators include the DSLTNT, DSL MAX
20 and the DSL Terminator 100 Access Concentrators.
G. NetworkCare(R) Professional Services -- Service Providers and Engineering
Services
Lucent's NetworkCare(SM) Professional Services provides a comprehensive
suite of value added services in the communications industry. These services
includes the full lifecycle of planning, design, implementation and operations
support services that allow customers to manage their networks.
The NetworkCare Professional Services provides network planning and design,
consulting, integration and support services, including remote diagnostics and
around-the-clock network monitoring services. In addition, NetworkCare
Professional Services offers specialized solutions focused on clients' network
security, performance and service level management, Microsoft Windows 2000, and
voice/data convergence requirements.
The NetworkCare Network Services unit is focused on network engineering,
provisioning, installation, and warranty and post-warranty support. In addition,
NetworkCare Network Services offers specialized solutions for system upgrades
and conversions, system health assessments, capacity planning, network
optimization, and program/project management services of complex network
implementations.
H. Markets/Sales/Distribution
The principal customers for Lucent's systems in the SPN segment are service
providers that provide wireline and wireless local, long distance and
international telecommunications services, including local, long distance and
international telecommunications companies, cable television companies and
internet service providers. Lucent's systems for service providers are installed
to expand the capacity and features offered by existing networks, to replace
older technology in existing networks and to establish new networks for entrants
into deregulated or previously unserved markets. See "Outlook -- Reliance on
Major Customers/Multi-Year Contracts."
As a result of structural, public policy and technological changes since
the mid-1980's, the telecommunications industry has undergone a period of
significant growth in the number of lines in service and applications offered.
In developed markets, deregulation has permitted new market entrants to
construct networks. In response, existing service providers have expanded beyond
traditional offerings and are offering new services. In emerging markets,
privatization, competition and economic expansion have increased demand for the
systems marketed by the SPN business and its competitors. At the same time,
technological advances also have increased demand by reducing operating costs
and facilitating new applications, including multi-functional services.
Lucent markets and sells its SPN systems worldwide, primarily through a
direct sales force. Many of SPNs sales are made pursuant to general purchase
agreements, which establish the terms and conditions and provide for price
determination to be made on a contract bid basis. In addition, certain of the
large infrastructure projects are conducted under long-term, fixed-price
contracts. See "Outlook -- Reliance on Major Customers/Multi-Year Contracts."
As a result of the increasing complexity of SPN systems and the high cost
of developing and maintaining in-house expertise, service providers typically
demand complete, integrated turn-key projects. Service providers are
increasingly seeking overall network or systems solutions that require an
increased software content which would enable them to rapidly deploy new and
differentiable services. In response, Lucent has formed an organization focused
on turn-key network engineering projects for both public and private sector
customers. Lucent markets integrated solutions for the project and engineers,
designs and installs the network, including equipment and software manufactured
by both Lucent and third parties.
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Increasingly, as a result of the financial demands of major network
deployments, service providers are looking to their suppliers to arrange for
financing. The ability to provide financing is a requirement to conduct business
in certain emerging U.S. and non-U.S. markets and in some cases Lucent furnishes
or guarantees financing for customers. As a result, Lucent works with its
customers to structure and lay off financing packages. See also,
"Outlook -- Future Capital Requirements."
In order to market its product line for service products worldwide, Lucent
has established wholly-owned subsidiaries and joint ventures with local
companies in many countries.
I. Competition
Lucent believes that its key competitive assets in the SPN segment are its
broad product line, large installed base, relationship with key customers,
technological expertise and new product and software development capabilities.
Lucent's primary competitors in the service provider market are four very large
European and North American companies which have substantial technological and
financial resources and which offer similar broad product catalogs. These
competitors are Alcatel Alsthom, Nortel Networks Corporation, Siemens AG and
Telefonaktiebolaget LM Ericsson.
In addition, in each of Lucent's product areas covered in the SPN segment,
Lucent faces significant competition from other companies which do business in
one or a number of such product areas. For example, in wireless systems,
Motorola, Inc. and Nokia Corporation, which are very large companies with
substantial technological and financial resources, are two additional
significant competitors. In optical networking and software products,
competition in the markets includes Nortel Networks Corporation and hundreds of
smaller competitors. Lucent is also encountering competition from companies that
design and manufacture data networking equipment such as Cisco Systems Inc. As
Lucent continues to expand its SPN business, it is likely that other competitors
will arise in each new technology or market area.
J. Customer Dependency
A limited number of customers have provided a substantial portion of SPN's
revenues. These customers include Verizon, AT&T and certain incumbent and
competitive local exchange carriers. The spending patterns of these customers
can vary significantly during the year. An elimination or change in the spending
patterns of, or a significant reduction in orders from, any one of these
customers could negatively affect SPN's operating results. SPN's fiscal year
2000 results were negatively affected by the decline in sales to one large U.S.
customer as well as one large non-U.S. customer due to the completion of a
multi-year contract. Concurrent with this consolidation among the larger service
providers, the dynamics of the marketplace have created opportunities for new
competitors to enter the market. Lucent is diversifying its customer base in the
SPN segment and seeking out new types of customers globally. These new customers
include competitive access providers and local exchange carriers, wireless
service providers, cable television network operators and internet service
providers. See also, "Outlook -- Reliance on Major Customers."
K. Sources and Availability of Raw Materials
Lucent makes significant purchases of electronic components, copper, glass,
silicon, and other materials and components from many U.S. and non-U.S. sources.
While there are some shortages in electrical components and some other
materials, Lucent has generally been able to obtain sufficient materials and
components from sources around the world to meet its needs, although there may
be temporary delays. Lucent also develops and maintains alternative sources for
essential materials and components. Occasionally, additional inventories of
specific components are maintained to minimize the effects of potential
shortages. Lucent does not have a concentration of sources of supply of
materials, labor or services that, if suddenly eliminated, could severely impact
its operations.
L. Seasonality
Revenues and earnings from the SPN segment do not follow a consistent
pattern and are not materially seasonal.
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M. Intellectual Property -- See "Patents, Trademarks and Other Intellectual
Property"
N. Industry Practices Impacting Working Capital
Existing industry practices that affect working capital and operating cash
flow include the level and variability of customer orders relative to the volume
of production, vendor lead times and/or materials availability for critical high
dollar parts, inventory levels held to achieve rapid customer fulfillment, the
provisions of extended payment terms to customers, the provision of return/stock
rotation rights for certain key customers and distributors and the extension of
financing terms. See also, "Outlook -- Future Capital Requirements."
III. MICROELECTRONICS AND COMMUNICATIONS TECHNOLOGIES
A. General
Lucent designs, manufactures and sells integrated circuits ("ICs"),
electronic power systems, optical fiber cables, and optoelectronic components
for communications and computer applications. Lucent supplies these components
to manufacturers of communications systems and computers, as well as many of our
own systems and products. Lucent offers products in several IC product areas
critical to communications applications, including digital signal processors
("DSPs") for digital cellular phones and modems, ICs for voice and data
communications and standard-cell application specific integrated circuits
("ASICs"). High performance cable is utilized in telephony, data and video
applications. Lucent also provides energy reserve systems, power conversion
products and optoelectronic products that are embedded into communications and
computer systems. On November 13, 2000 Lucent entered into an agreement to sell
its power systems business, a part of MCT, to Tyco International Ltd. The sale
is expected to close by December 31, 2000.
During fiscal year 2000, Lucent acquired several companies related to the
MCT segment's business including, Agere, Inc., Ortel Corporation, Herrmann
Technology Inc., and substantially all of the assets of VTC Inc.
B. Integrated Circuits
Lucent's ICs are designed to provide advanced communications and control
functions for a wide variety of electronic products and systems. Lucent focuses
on IC products that are used in communications and computing and that require
high-performance and low-power chip architectures; complex large-scale chip
design in digital, analog and mixed-signal technologies; DSP architectures and
algorithms; high-frequency and high-voltage technologies; and high-speed data
and signal processing. Lucent offers a wide variety of standard, semi-custom and
custom products for cellular equipment, voice and data communications networks,
computers and computer peripherals, modems and consumer communications products.
Lucent has several GSM hardware/software platforms based upon a highly
integrated multiple-chip design for digital cellular phones that performs all
the key handset functions between the microphone and the antenna in both voice
and data services. Lucent also sells wireless local area networking equipment
for use in business enterprises and homes.
Lucent's primary IC product groups include:
- Access Products, products that allow users to gain access to
communications networks including ICs for modems, analog line cards data
network interface cards, and PC and workstation input/output (I/O).
- Networks and Communications Products, products that provide high-speed
switching and transmission of voice and data signals within the
communications network.
- Storage and Analog Products, products targeted at the hard disk drive
market (disk controllers, read channels and associated ICs) and the
analog products market (preamps, line drivers and receivers, power
management and other analog functions).
- Wireless Products, products for cellular and paging networks and
terminals, and short-range wireless connectivity.
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C. Optoelectronics
Lucent designs, develops and manufactures optoelectronic products which
convert electricity to light (emitters) and light to electricity (detectors),
thereby facilitating optical transmission of information. These products include
semiconductor lasers, photodetectors, integrated transmitters and receivers and
advanced-technology erbium-doped fiber amplifiers. Lucent provides these
products worldwide to manufacturers serving the telecommunications, cable
television and network computing markets. Optoelectronic products extend the
transmission capacity of fiber to meet the requirements of such applications as
internet access video-on-demand, interactive video, teleconferencing, image
transmission and remote database searching. Lucent markets a number of advanced
products, including optoelectronic components that support telecommunication
transmission; long-wavelength optical data modules for data networking; and
analog lasers for use in cable television fiber optic transmission.
Lucent's primary optoelectronic product groups include:
- High-Speed Transport Products, including lasers, modulators, transmitters
and receivers that enable high speed fiber optic communications. These
products support DWDM of up to 160 channels over a single optical fiber
at speeds up to 40 Gb/s.
- Fiber Amplifier Products, amplifiers that extend the transmission
distance capabilities of optical signals beyond 700 kilometers.
- Metro and Internetworking Products, highly integrated modules and
subsystems that enable DWDM in metropolitan areas.
- Submarine Products, high reliability products for undersea transmission
system repeaters.
- CATV and Enterprise Products, products that support high-speed optical
connectivity in cable TV (CATV), LAN and enterprise applications.
D. Fiber Optics
Lucent designs, develops, and manufactures an extensive line of fiber optic
products, including singlemode and multimode fiber and fiber cables. With 12
cable manufacturing facilities around the world, Lucent is one of the world's
leading suppliers of optical fiber cables.
Lucent's primary fiber optic products include:
- Applications based fibers (TrueWave(R) optical fiber family for submarine
and long haul, and AllWave(TM) fiber for metropolitan networks).
- AllWave Advantage(TM), a optical end to end fiber cable and connectivity
solution for metro AllWave fiber based networks.
- Smart fiber monitoring and connectorization systems (Smart LGX).
E. Intellectual Property Licensing
The intellectual property licensing organization has the responsibility to
license, protect, and maintain Lucent's intellectual property and to enforce the
company's intellectual property rights. This responsibility includes the
licensing of Lucent's patents and technology to third parties and negotiating
agreements regarding Lucent's licensing of intellectual property from others.
F. Market/Sales/Distribution
Lucent's MCT products are sold globally to service providers and
manufacturers of communications systems and computers through a combination of
direct sales, manufacturers' representatives and distributors. In addition,
Lucent's energy power systems and fiber optics generally are sold directly to
U.S. and foreign service providers. Lucent's MCT customers are competing in
markets characterized by rapid technological changes, decreasing product life
cycles, price competition and increased user applications. These markets have
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experienced significant expansion in the number and types of products and
services they offer to end-users, particularly in personal computing, portable
access communication devices and expanded networking capability. As a result,
Lucent's MCT customers continue to demand products which are smaller, require
less power, are more complex, provide greater functionality and are produced
with shorter design cycles and less manufacturing lead time.
In addition to the revenues from sales to third parties, ICs, power
systems, optoelectronic products and fiber optics are also key components of
Lucent's systems sold to the SPN segment. These MCT products compete with
products of third party manufacturers for inclusion in Lucent's SPN systems and
products.
Lucent has traditionally sold its power products via direct sales to large
service providers and OEM's. Lucent has increased market coverage to both
Service Provider and OEM customers by building indirect sales channels.
G. Competition
Lucent considers its product leadership and relationships with key
customers to be important competitive assets. The market for MCT products is
global and generally highly fragmented. Lucent's competitors differ widely among
product categories. Lucent's competitors in certain IC product categories
include Texas Instruments Incorporated, Conexant Systems Incorporated,
STMicroelectronics Incorporated and LSI Logic Corp.; in electronic power
systems, competitors include Astec, a subsidiary of Emerson Electric Co.,
Artesyn Technologies Inc. and Marconi plc; in optoelectronics, competitors
include Fujitsu Limited, Nortel Networks Corporation and JDS Uniphase
Corporation; and in optical fiber, competitors include Corning, Siecor, Alcatel,
and Societe Internationale Pirelli.
Lucent believes that key competitive factors in the microelectronics and
communications technology marketplace are the early involvement in customers'
future applications requirements, the speed of product and technological
innovation, price, customer service and manufacturing capacity. Other important
competitive factors include quality, reliability and local manufacturing
presence.
H. Customer Dependency
Lucent sells its MCT products to a wide variety of global electronic
systems manufacturers and service providers. Over the past several years, the
proportion of revenues gained from customers outside of Lucent has increased.
Because of the high fixed-cost nature of many MCT manufacturing processes, the
loss of any significant customer could have a material adverse effect on
Lucent's operating results in the MCT segment. See also, "Outlook -- Reliance on
Major Customers".
I. Sources and Availability of Raw Materials
Demand for optoelectronic components is greater than the ability of most
manufacturers of optoelectronic components, including us, to supply products.
Lucent has supply limitations that we believe most of our competitors also have.
Although we have not experienced any significant difficulties in purchasing
these components, we are currently looking to expand alternative sources of
these components. The loss of a significant supplier or the inability of a
significant supplier to meet performance and quality specifications or delivery
schedules could have a material adverse effect on our business and
profitability.
J. Seasonality
The MCT segment may experience variability in revenues due to changes in
market conditions, the timing of product development cycles and the life cycle
of major programs by customers. However, the MCT segment is not materially
seasonal.
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K. Intellectual Property -- See "Patents, Trademarks and Other Intellectual
Property"
L. Industry Practices Impacting Working Capital -- See "Outlook -- Future
Capital Requirements"
IV. BELL LABORATORIES
Lucent's SPN and MCT segments have been and will continue to be supported
by the technological expertise provided by Bell Labs, one of the world's
foremost industrial research and development organizations. Bell Labs provides
support for the businesses of Lucent and conducts basic research. Bell Labs has
made significant discoveries and advances in communications science and
technology, software design and engineering and networking. These contributions
include the invention of the transistor and the design and development of ICs
and many types of lasers. Areas of Bell Labs research and development work in
recent years include: networking software; data networking; lightwave
transmission, especially the wavelength division multiplexing systems ("WDM")
which offer greater transmission capacity than other transmission systems;
electronic switching technology, which enables rapid call processing, increased
reliability and reduced network costs; and microelectronics components, which
bring the latest advantages of very large scale integration to the full range of
products offered by the Company. Bell Labs' research and development activities
continue to focus on the core technologies critical to Lucent's success, which
are software, network design and engineering, microelectronics, photonics, data
networking and wireless/cellular.
Bell Labs is a leader in software research, development and engineering for
communications applications. For example, its innovations in fault-tolerant
software have enabled Lucent to achieve a level of system reliability with
off-the-shelf commercial processors that allows Lucent to reduce its reliance on
custom microprocessors.
Bell Labs has contributed many innovations in voice quality, is a leader in
the development of digital signal processing, and has developed a number of
innovative algorithms for high-quality speech and audio. These innovations have
contributed to Lucent's implementation of speech processing applications which
include text-to-speech synthesis, speech recognition and automatic translation
of speech from one language to another. They are used in many of Lucent's
products, including the elemedia(R) products for Internet applications, and are
sold to outside customers.
Bell Labs also has led in the development of software-based networking
technologies that support Lucent's systems and products. Recently, it has
developed systems for digital cellular, PCS, mobile computing and wireless LANs.
Bell Lab's technology has allowed the recent introduction of data networking
products such as the Internet Telephony Server SP, PacketStar(R) IP switch,
PacketStar(R) IP Services platform and the WaveStar 400G high capacity WDM
optical networking system.
Similarly, Bell Labs' advances extend to the microlasers used in today's
broadband multifunctional transmission systems, and to today's optical
amplifiers and TrueWave fiber. Current photonic research includes work on
passive optical networks, photonic switching and quantum wire lasers.
V. RECENT DEVELOPMENTS
Lucent is in the process of reorganizing its business to become more
focused and better positioned to capitalize on market opportunities. This
reorganization includes the recent spin-off of Avaya, the expected sale of the
power systems business, and the announced IPO and spin-off of Agere Systems, as
well as a comprehensive review and restructuring of Lucent's internal systems
and processes. Specific initiatives include performing a comprehensive product
and service portfolio review aimed at aligning research and development and
effective redeployment of sales and marketing teams and other investments as
appropriate, consolidating corporate infrastructure and improving supply chain
management. The spin-off of Agere Systems is expected to be completed by
September 30, 2001. For a discussion of an anticipated substantial decline in
revenues and a substantial loss from continuing operations, along with lowered
credit ratings and expected restructuring charges, please see "Key Business
Challenges" in Item 7.
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VI. BACKLOG
Lucent's backlog, calculated as the aggregate of the sales price of orders
received from customers less revenue recognized, was approximately $8.7 billion
and $6.3 billion on September 30, 2000 and 1999, respectively. Of these amounts,
approximately $1.9 billion and $600 million at September 30, 2000 and 1999,
respectively, was attributable to the microelectronics business which will be
spun off as Agere Systems. Approximately $1.2 billion of the orders included in
the September 30, 2000 backlog are scheduled for delivery after September 30,
2001. However, all orders are subject to possible rescheduling by customers.
Although Lucent believes that the orders included in the backlog are firm, some
orders may be canceled by the customer without penalty, and Lucent may elect to
permit cancellation of orders without penalty where management believes that it
is in Lucent's best interest to do so. About $330 million of the amount at
September 30, 2000 is under large, multi-year contracts of which about $110
million is scheduled for delivery after September 30, 2001 and is included in
the $1.2 billion referred to above.
VII. PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY RIGHTS
From October 1, 1997 to September 30, 2000, Lucent was issued 4,000 patents
in the United States. Lucent owns approximately 10,000 patents in the United
States and 15,000 in foreign countries. These foreign patents are, for the most
part, counterparts of Lucent's United States patents. Many of the patents owned
by Lucent are licensed to others and Lucent is licensed to use certain patents
owned by others. In connection with the Separation, Lucent has entered into an
extensive cross-licensing agreement with AT&T and NCR Corporation. See also,
"Separation Agreements -- AT&T -- Patent Licenses and Related Matters."
Lucent markets its products primarily under its own name and mark. Lucent
considers its many trademarks to be valuable assets. Many of its trademarks are
registered throughout the world.
Lucent relies on patent, trademark, trade secret and copyright laws both to
protect its proprietary technology and to protect Lucent against claims from
others. Lucent believes that it has direct intellectual property rights or
rights under cross-licensing arrangements covering substantially all of its
material technologies. Given the technological complexity of Lucent's systems
and products, however, there can be no assurance that claims of infringement
will not be asserted against Lucent or against Lucent's customers in connection
with their use of Lucent's systems and products, nor can there be any assurance
as to the outcome of any such claims. Lucent was assigned ownership of the
substantial majority of AT&T's patents in connection with the Separation.
Pursuant to the patent license agreement entered into among Lucent, AT&T and
NCR, Lucent has been given rights, subject to specified limitations, to pass
through to its customers certain rights under approximately 400 patents retained
by AT&T.
Lucent and Avaya executed and delivered assignments and other agreements
related to patents, technology, and trademarks owned by Lucent. Lucent assigned
to Avaya or its subsidiaries approximately 800 issued U.S. patents and their
corresponding foreign counterparts relating principally to the businesses of
Avaya. Lucent assigned to Avaya certain technology, including trade secrets,
software, and copyrights, principally relating to the Avaya businesses. Lucent
also assigned to Avaya several hundred trademarks principally relating to the
Avaya businesses. Lucent and Avaya each granted to the other, under the patents
that each of us has, a non-exclusive, personal license to make, have made, use,
lease, import, sell, and offer for sale any and all products and services in
which the licensed company is now or hereafter engaged. Each company also
granted limited licenses to the other under certain specified technology
existing as of October 1, 2000. See also, "Separation Agreements -- AVAYA."
VIII. OUTLOOK
A. Forward Looking Statements
This Form 10-K report contains forward-looking statements that are based on
current expectations, estimates, forecasts and projections about the industries
in which Lucent operates, management's beliefs and assumptions made by
management. In addition, other written or oral statements which constitute
forward-looking statements may be made by or on behalf of Lucent. Words such as
"expects," "anticipates,"
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"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions ("Future Factors") which
are difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. Lucent undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Future Factors include increasing price, products and services competition
by U.S. and non-U.S. competitors, including new entrants; rapid technological
developments and changes and Lucent's ability to continue to introduce
competitive new products and services on a timely, cost-effective basis; the mix
of products and services; the availability of manufacturing capacity, components
and materials; the ability to recruit and retain talent; the achievement of
lower costs and expenses; credit concerns in the emerging service provider
market; customer demand for Lucent's products and services; the ability to
successfully integrate the operations and business of acquired companies; timely
completion of the proposed IPO and spin-off of Agere Systems and the sale of the
power systems business; the successful implementation of the strategic
reorganization; U.S. and non-U.S. governmental and public policy changes that
may affect the level of new investments and purchases made by customers; changes
in environmental and other domestic and foreign governmental regulations;
protection and validity of patent and other intellectual property rights;
reliance on large customers and significant suppliers; the ability to supply
customer financing when appropriate; technological, implementation and
cost/financial risks in the use of large, multi-year contracts; Lucent's credit
ratings; the outcome of pending and future litigation and governmental
proceedings; the continued availability of financing, financial instruments and
financial resources in the amounts, at the times and on the terms required to
support Lucent's future business. These are representative of the Future Factors
that could affect the outcome of the forward-looking statements. In addition,
such statements could be affected by general industry and market conditions and
growth rates, general U.S. and non-U.S. economic conditions including interest
rate and currency exchange rate fluctuations and other Future Factors.
B. General Market Competition
Lucent operates in a highly competitive industry and expects that the level
of competition on pricing and product offerings will intensify. Lucent expects
that new competitors will enter its markets as a result of expansion by market
participants and advancements in technology. These competitors, as well as
existing competitors, may include entrants from the telecommunications,
software, data networking and semiconductor industries, and may have strong
financial capabilities, technological expertise and established name
recognition. Such competitors include Alcatel Alsthom, Cisco Systems, Inc.,
Ericsson, Nortel Networks Corporation, Motorola, Nokia and Siemens AG. Steps
Lucent may take include acquiring or investing in new businesses and ventures,
partnering with existing businesses, delivering new technologies, closing and
consolidating facilities, disposing of assets, reducing work force levels or
withdrawing from markets. See also, the "Competition" section above under
"Service Provider Networks," and "Microelectronic and Communications
Technologies."
C. Dependence on New Product Development
The markets for Lucent's principal products are characterized by
rapidly-changing technology, evolving industry standards, frequent new product
introductions and evolving methods of building and operating communications
systems for service providers and other customers. Lucent's operating results
will depend to a significant extent on its ability to continue to introduce new
systems, products, software and services successfully on a timely basis and to
reduce costs of existing systems, products, software and services. The success
of these and other new offerings is dependent on several factors, including
proper identification of customer needs, cost, timely completion and
introduction, differentiation from offerings of Lucent's competitors and market
acceptance. In addition, new technological innovations generally require a
substantial investment before any assurance is available as to their commercial
viability, including, in some cases, certification by U.S. and non-U.S.
standards-setting bodies.
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D. Reliance on Major Customers
A limited number of large customers provide a substantial portion of
Lucent's revenues. These customers include Verizon, AT&T and certain incumbent
and competitive local exchange carriers. Revenues from Verizon accounted for
approximately 13% of consolidated revenues in fiscal year 2000, principally in
the SPN segment. Revenues from AT&T accounted for approximately 10%, 14% and 15%
of consolidated revenues in fiscal years 2000, 1999 and 1998, respectively. The
spending patterns of any of these customers can vary significantly during the
year. Elimination or change in the spending patterns of, or a significant
reduction in orders from, any one of these customers could negatively affect
Lucent's operating results. Lucent's fiscal year 2000 results were negatively
affected by the decline in sales to one large U.S. customer and one large
non-U.S. customer. The communications industry has recently experienced a
consolidation of both U.S. and non-U.S. companies. As a result, Lucent's
operating results could become more dependent on a smaller number of large
carriers. Lucent continually endeavors to diversify its customer base by adding
new and different types of customers. Lucent, however, is often required to
provide or arrange for long-term financing for customers as a condition to
obtain or bid on infrastructure contracts. Thus, our ability to develop certain
customer relationships may be dependent upon our ability to raise capital and
extend credit.
E. European Monetary Union -- Euro
Several member countries of the European Union have established fixed
conversion rates between their existing sovereign currencies and the Euro and
have adopted the Euro as their new common legal currency. The legacy currencies
will remain legal tender in the participating countries for a transition period
until January 1, 2002. During the transition period, cashless payments can be
made in the Euro. Between January 1, 2002 and July 1, 2002, the participating
countries will introduce Euro notes and coins and withdraw all legacy currencies
so that they will no longer be available.
Lucent has in place a joint European-United States team representing
affected functions within Lucent. This team has been evaluating Euro-related
issues which may affect Lucent as they develop, including its pricing/marketing
strategy, conversion of information technology systems, and existing contracts.
The Euro conversion may effect cross border competition by creating cross border
price transparency.
Lucent will continue to evaluate issues involving the introduction of the
Euro as further accounting, tax and governmental legal and regulatory guidance
is available. Based on current information and Lucent's current assessment,
Lucent does not expect that the Euro conversion will have a material adverse
effect on its business or financial condition.
F. Future Capital Requirements
Lucent's working capital requirements and cash flow from operating
activities can vary greatly from quarter to quarter, depending on the volume of
production, the timing of deliveries and collection of receivables, the build-up
of inventories, the payment terms offered to customers, and the extension of
credit to customers.
Service providers, inside and outside the United States, increasingly have
required their suppliers to arrange or provide long-term financing for them as a
condition to obtaining or bidding on infrastructure projects. These projects may
require financing in amounts ranging from modest sums to over a billion dollars.
Lucent has increasingly provided or arranged long-term financing for customers.
As market conditions permit, Lucent's intention is to lay off these long-term
financing arrangements, which may include both commitments and drawn down
borrowings, to financial institutions and investors. This enables Lucent to
reduce the amount of its commitments and free up additional financing capacity.
As of September 30, 2000, Lucent had made commitments or entered into an
agreement to extend credit to customers up to an aggregate of approximately $6.7
billion. As of September 30, 2000, approximately $1.3 billion had been advanced
and was outstanding. In addition, as of September 30, 2000, Lucent had made
commitments or entered into agreements to guarantee debt of customers up to an
aggregate of approximately $1.4 billion of which approximately $770 million was
outstanding.
In addition to the above arrangements, Lucent will continue to provide or
commit to financing where appropriate for its business. The ability of Lucent to
arrange or provide financing for its customers will depend
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on a number of factors, including Lucent's capital structure, credit rating and
level of available credit, and its continued ability to lay off commitments and
drawn down borrowings on acceptable terms.
Lucent believes that its credit facilities, cash flow from operations, long
and short-term debt financings and receivables securitizations, will be
sufficient to satisfy its future working capital, capital expenditure, research
and development and debt service requirements. Lucent has a shelf registration
statement for the issuance of debt securities of which approximately $1.8
billion remained available at September 30, 2000. Lucent believes that it will
be able to access the capital markets on terms and in amounts that will be
satisfactory to it, and that it will be able to obtain bid and performance
bonds, to arrange or provide customer financing as necessary, and to engage in
hedging transactions on commercially acceptable terms, although there can be no
assurance that Lucent will be successful in regard to any of the foregoing.
G. Non-U.S. Growth, Foreign Exchange and Interest Rates
Lucent intends to continue to pursue growth opportunities in markets
outside the United States. In many markets outside the United States,
long-standing relationships between potential customers of Lucent and their
local providers and protective regulations, including local content requirements
and type approvals, create barriers to entry. In addition, pursuit of such
growth opportunities outside the United States may require significant
investments for an extended period before returns on such investments, if any,
are realized. Such projects and investments could be adversely affected by
reversals or delays in the opening of foreign markets to new competitors,
exchange controls, currency fluctuations, investment policies, repatriation of
cash, nationalization, social and political risks, taxation and other factors,
depending on the country in which such opportunity arises. Difficulties in
foreign financial markets and economies, and of foreign financial institutions,
could adversely affect demand from customers in the affected countries.
Lucent is exposed to market risk from changes in foreign currency exchange
rates and interest rates, which could impact its results of operations and
financial condition. Lucent manages its exposure to these market risks through
its regular operating and financing activities and, when deemed appropriate,
through the use of derivative financial instruments. A significant change in the
value of the dollar against the currency of one or more countries where Lucent
sells products to local customers or makes purchases from local suppliers may
materially adversely affect Lucent's results. Lucent attempts to mitigate any
such effects through the use of foreign exchange forward or option contracts,
although there can be no assurances that such attempts will be successful.
While Lucent hedges certain foreign currency transactions, the decline in
value of non-U.S. dollar currencies, may, if not reversed, adversely affect
Lucent's ability to contract for product sales in U.S. dollars because Lucent's
products may become more expensive to purchase in U.S. dollars for local
customers doing business in the countries of the affected currencies.
H. Legal Proceedings and Environment -- See "Environmental Matters" and "Item
3. Legal Proceedings."
I. Seasonality -- See "Seasonality" above under "Service Provider Networks,"
and "Microelectronic and Communications Technologies."
J. Intellectual Property -- See "Patents, Trademarks and Other Intellectual
Property Rights" above.
IX. EMPLOYEE RELATIONS
On September 30, 2000, Lucent employed approximately 126,000 persons,
including 73% located in the United States. Of these domestic employees, about
36% are represented by unions, primarily the Communications Workers of America
("CWA") and the International Brotherhood of Electrical Workers ("IBEW").
Lucent's current five-year collective agreements with the CWA and IBEW expire
May 31, 2003.
X. ENVIRONMENTAL MATTERS
Lucent's current and historical operations are subject to a wide range of
environmental protection laws. In the United States, these laws often require
parties to fund remedial action regardless of fault. Lucent has
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remedial and investigatory activities underway at numerous current and former
facilities. In addition, Lucent was named a successor to AT&T as a potentially
responsible party ("PRP") at numerous "Superfund" sites pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA") or comparable state statutes. Under the Separation and Distribution
Agreement, Lucent is responsible for all liabilities primarily resulting from or
relating to the operation of Lucent's business as conducted at any time prior to
or after the Separation including related businesses discontinued or disposed of
prior to the Separation, and Lucent's assets including, without limitation,
those associated with these sites. In addition, under such Separation and
Distribution Agreement, Lucent is required to pay a portion of contingent
liabilities paid out in excess of certain amounts by AT&T and NCR, including
environmental liabilities.
It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. Lucent records an environmental
reserve when it is probable that a liability has been incurred and the amount of
the liability is reasonably estimable. This practice is followed whether the
claims are asserted or unasserted. Management expects that the amounts reserved
will be paid out over the periods of remediation for the applicable sites which
typically range from 5 to 30 years. Reserves for estimated losses from
environmental remediation are, depending on the site, based primarily upon
internal or third-party environmental studies, and estimates as to the number,
participation level and financial viability of any other PRPs, the extent of the
contamination and the nature of required remedial actions. Accruals are adjusted
as further information develops or circumstances change. The amounts provided
for in Lucent's consolidated financial statements for environmental reserves are
the gross undiscounted amount of such reserves, without deductions for insurance
or third-party indemnity claims. In those cases where insurance carriers or
third-party indemnitors have agreed to pay any amounts and management believes
that collectibility of such amounts is probable, the amounts are reflected as
receivables in the financial statements. Although Lucent believes that its
reserves are adequate, there can be no assurance that the amount of capital
expenditures and other expenses which will be required relating to remedial
actions and compliance with applicable environmental laws will not exceed the
amounts reflected in Lucent's reserves or will not have a material adverse
effect on Lucent's financial condition, results of operations or cash flows. Any
amounts of environmental costs that may be incurred in excess of those provided
for at September 30, 2000 cannot be determined.
XI. SEPARATION AGREEMENTS
A. AT&T
For the purposes of governing certain of the relationships between Lucent
and AT&T (including NCR) following the Separation, the Company, AT&T and NCR
entered into a Separation and Distribution Agreement and the Ancillary
Agreements to which they are parties (collectively, the "Separation
Agreements"). The Ancillary Agreements include the Employee Benefits Agreement;
the Brand License Agreement; the Patent License Agreement and other
patent-related agreements; the Technology License Agreement and other
technology-related agreements; and the Tax Sharing Agreement and other
tax-related agreements. Certain of the Separation Agreements, including certain
of the Agreements summarized below, are exhibits to this Form 10-K.
Reference is made to such exhibits for the full text of the provisions of
those Agreements, and the agreement summaries below are qualified in their
entirety by reference to the full text of such Agreements. Capitalized terms
used in this section and not otherwise defined in this Form 10-K shall have
their respective meanings set forth in the Separation and Distribution Agreement
(except that the term "Company" is used in lieu of the term "Lucent") or other
Separation Agreement.
Separation and Distribution Agreement
Under the Separation and Distribution Agreement, Lucent assumed or agreed
to assume, and agreed to perform and fulfill, all the "Lucent Liabilities" (as
defined in such Agreement) in accordance with their respective terms. Without
limitation, the Lucent Liabilities generally include all liabilities and
contingent liabilities relating to Lucent's present and former business and
operations, and contingent liabilities otherwise assigned to Lucent; contingent
liabilities related to AT&T's discontinued computer operations (other than those
of NCR) were assigned to the Company. The Separation and Distribution Agreement
provides for the
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sharing of contingent liabilities not allocated to one of the parties in
specified proportions, and also provides that each party will share specified
portions of contingent liabilities related to the business of any of the other
parties that exceed specified levels.
Ability to Terminate Certain Rights. The Separation and Distribution
Agreement provides that certain rights granted to Lucent and the members of
Lucent Group will be subject to the following provisions. Except as otherwise
expressly provided, in the event that, at any time prior to February 1, 2001,
Lucent or any member of Lucent Group offers, furnishes or provides any
Telecommunications Services of the type offered by the AT&T Services Business as
of the Closing Date, then AT&T may, in its sole discretion: (a) terminate all or
any portion of the rights granted by AT&T under the Brand License Agreement (b)
exercise the right to require Lucent to transfer to AT&T certain personnel,
information, technology and software under the Supplemental Agreements; (c)
terminate all or any portion of the rights to patents and technology of AT&T or
any member of the AT&T Group granted to Lucent and the members of Lucent Group
pursuant to the Patent License Agreement and the Technology License Agreement;
and (d) direct Lucent and the members of Lucent Group to reconvey to AT&T all
interests in any and all patents and technology in which Lucent or any member of
Lucent Group was granted an undivided one-half interest pursuant to the Patent
Assignments or the Technology Assignment and Joint Ownership Agreements. Lucent
and the members of Lucent Group will not be deemed to offer, furnish or provide
any Telecommunications Services (and the foregoing provisions will not apply)
solely by virtue of certain specified investments in Persons that offer, furnish
or provide Telecommunications Services or by virtue of offering, furnishing or
providing Telecommunications Services below a specified de minimis amount.
Employee Benefits Agreement
AT&T and Lucent entered into the Employee Benefits Agreement that governs
the employee benefit obligations of the Company, including both compensation and
benefits, with respect to active employees and retirees assigned to the Company.
Pursuant to the Employee Benefits Agreement, Lucent assumed and agreed to pay,
perform, fulfill and discharge, in accordance with their respective terms, all
Liabilities (as defined) to, or relating to, former employees of AT&T or its
affiliates employed by Lucent and its affiliates and certain former employees of
AT&T or its affiliates (including retirees) who either were employed in Lucent
Business (as defined) or who otherwise are assigned to Lucent for purposes of
allocating employee benefit obligations (including all retirees of Bell Labs).
Patent Licenses and Related Matters
The Company, AT&T and NCR executed and delivered assignments and other
agreements, including a patent license agreement, related to patents then owned
or controlled by AT&T and its subsidiaries. The patent assignments divided
ownership of patents, patent applications and foreign counterparts among the
Company, AT&T and NCR, with the substantial portion of those then owned or
controlled by AT&T and its subsidiaries (other than NCR) being assigned to the
Company. A small number of the patents assigned to Lucent are jointly owned with
either AT&T or NCR. Certain of the patents that Lucent jointly owns with AT&T
are subject to a joint ownership agreement under which each of Lucent and AT&T
has full ownership rights in the patents. The other patents that Lucent jointly
owns with AT&T, and the patents that Lucent jointly owns with NCR, are subject
to defensive protection agreements with AT&T and NCR, respectively, under which
Lucent holds most ownership rights in the patents exclusively. Under these
defensive protection agreements, AT&T or NCR, as the case may be, has the
ability, subject to specified restrictions, to assert infringement claims under
the patents against companies that assert patent infringement claims against
them, and has consent rights in the event Lucent wishes to license the patents
to certain third parties or for certain fields of use under specified
circumstances. The defensive protection agreements also provide for one-time
payments from AT&T and NCR to the Company.
The patent license agreement entered into by the Company, AT&T and NCR
provides for cross-licenses to each company, under each of the other company's
patents that are covered by the licenses, to make, use, lease, sell and import
any and all products and services of the businesses in which the licensed
company (including specified related companies) is now or hereafter engaged. The
cross-licenses also permit each
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company, subject to specified limitations, to have third parties make items
under the other companies' patents, as well as to pass through to customers
certain rights under the other companies' patents with respect to products and
services furnished to customers by the licensed company. In addition, the rights
granted to Lucent and AT&T include the right to license third parties under each
of the other company's patents to the extent necessary to meet existing patent
licensing obligations as of March 29, 1996, and AT&T has the right, subject to
specified restrictions and procedures, to ask Lucent to license third parties
under a limited number of identified patents that were assigned to the Company.
Technology Licenses and Related Matters
The Company, AT&T and NCR executed and delivered assignments and other
agreements, including the Technology License Agreement, related to technology
then owned or controlled by AT&T and its subsidiaries. Technology includes
copyrights, mask works and other intellectual property other than trademarks,
trade names, trade dress, service marks and patent rights. The technology
assignments divide ownership of technology among the Company, AT&T and NCR, with
Lucent and AT&T owning technology that was developed by or for, or purchased by,
Lucent's business or AT&T's services business, respectively, and NCR owning
technology that was developed by or for, or purchased by, NCR. Technology that
is not covered by any of these categories is owned jointly by Lucent and AT&T
or, in the case of certain specified technology, owned jointly by the Company,
AT&T and NCR.
The Technology License Agreement entered into by the Company, AT&T and NCR
provides for royalty-free cross-licenses to each company to use the other
companies' technology existing as of April 10, 1996, except for specified
portions of each company's technology as to which use by the other companies is
restricted or prohibited.
B. AVAYA
For the purpose of governing certain of the relationships between Lucent
and Avaya following the spin off, Lucent and Avaya entered into a Contribution
and Distribution Agreement, as well as other ancillary agreements, including the
Employee Benefits Agreement; the Patent and Technology License Agreement; the
Tax Sharing Agreement; and the Trademark Licensing Agreement. The Contribution
and Distribution Agreement provides for indemnification by each company with
respect to contingent liabilities primarily relating to their respective
businesses or otherwise assigned to each, subject to certain sharing provisions.
In the event the aggregate value of all amounts paid by each company, in respect
of any single contingent liability or any set or group of related contingent
liabilities, is in excess of $50 million, each company will share portions in
excess of the threshold amount based on agreed-upon percentages. The
Contribution and Distribution Agreement also provides for the sharing of certain
contingent liabilities, specifically: (1) any contingent liabilities that are
not primarily contingent liabilities of Lucent or contingent liabilities
associated with the businesses attributed to Avaya; (2) certain specifically
identified liabilities, including liabilities relating to terminated, divested
or discontinued businesses or operations; and (3) shared contingent liabilities
within the meaning of the Separation and Distribution Agreement with AT&T Corp.
Please refer to the Registration Statement on Form 10 (No. 001-15951) of Avaya
for the full text of the Contribution and Distribution Agreement and other
ancillary agreements.
ITEM 2. PROPERTIES.
At September 30, 2000, Lucent operated 36 manufacturing sites, of which 17
were located in the United States, occupying in excess of 17 million square feet
substantially all of which were owned. The remaining 19 sites were located in 11
countries.
At September 30, 2000, Lucent operated 118 warehouse sites, of which 86
were located in the United States, occupying in excess of 4 million square feet,
substantially all of which were leased. The remaining 32 sites were located in
15 countries.
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At September 30, 2000, Lucent operated 627 office sites (administration,
sales, field service), of which 379 were located in the United States, occupying
in excess of 20 million square feet, of which 15 million square feet of which
were leased. The remaining 248 sites were located in 56 countries.
At September 30, 2000, Lucent operated additional sites in 21 cities, of
which 8 were located in the United States, with significant research and
development activities, occupying in excess of 10 million square feet, of which
approximately 2 million square feet were leased.
Lucent believes its plants and facilities are suitable and adequate to meet
its current needs.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of business, Lucent is subject to proceedings,
lawsuits and other claims, including proceedings under the laws and regulations
related to environmental and other matters. (Also see Item 1. "Business -- XI
Separation Agreements" regarding the assumption by Lucent of certain liabilities
and contingent liabilities.) All such matters are subject to many uncertainties
and outcomes are not predictable with assurance. Consequently, Lucent is unable
to ascertain the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at September 30, 2000. While these matters
could affect operating results of any one quarter when resolved in future
periods and, while there can be no assurance with respect thereto, it is
management's opinion that after final disposition, any monetary liability or
financial impact to Lucent beyond that provided in the consolidated balance
sheet at September 30, 2000 would not be material to Lucent's annual
consolidated financial statements.
In addition, Lucent and certain of its former officers are defendants in
several purported shareholder class action lawsuits described in the following
three paragraphs for alleged violations of federal securities laws. The
purported class action suits described in the following three paragraphs are in
the early stages and Lucent is unable to express a view on their outcome. Lucent
intends to defend these actions vigorously.
Lucent and certain former officers of Lucent are defendants in a purported
class action litigation pending in the United States District Court for the
District of New Jersey. That action is the result of several complaints that
were consolidated on February 25, 2000, and amended several times since. The
third Consolidated Amended and Supplemental Class Action Complaint purports to
bring claims on behalf of all persons who allegedly purchased Lucent's common
stock between October 26, 1999, and November 21, 2000, for alleged violations of
the federal securities laws, including Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
Specifically, the complaint alleges, among other things, that beginning in late
October 1999, Lucent and certain of its officers misrepresented Lucent's
financial condition and failed to disclose material facts that would have an
adverse impact on Lucent's future earnings and prospects for growth. The action
seeks compensatory and other damages, and costs and expenses associated with
litigation.
Lucent is aware of five other purported class action lawsuits that have
been filed in the United States District Court for the District of New Jersey.
As with the consolidated action discussed above, those actions purport to bring
claims for alleged violations of the federal securities laws, including Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. The actions seek compensatory and other damages, and
costs and expenses associated with litigation. Because the actions assert claims
that relate to or are similar to the claims in the consolidated litigation
discussed above, it is likely that these actions will be consolidated with that
action.
In addition, Lucent is aware of purported class action lawsuits that have
been filed in Civil District Court in the State of Louisiana and in the United
States District Court for the Eastern District of New York. As with the
consolidated action discussed above, those actions purport to bring claims for
alleged violations of the federal securities laws, including Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The
complaints allege that Lucent misrepresented its financial condition and failed
to disclose material facts about its business, operations and future prospects.
The actions seek compensatory and other damages, and costs and expenses
associated with litigation. Lucent has filed a petition to remove the Louisiana
action from state court to federal court in Louisiana. In addition, because
these actions assert claims
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that relate to or are similar to the claims in the consolidated litigation
discussed above, these actions may ultimately be transferred to the United
States District Court for the District of New Jersey and consolidated with that
action.
From time to time we are subject to unfair labor charges filed by the
unions with the National Labor Relations Board. For example, Lucent has been
advised by Region 6 of the National Labor Relations Board, which is located in
Pittsburgh, Pennsylvania, that it is issuing a complaint alleging that Lucent
has refused to bargain over the outsourcing of certain of its manufacturing
activities. In that proceeding, which will be held before an administrative law
judge in Region 6 of the National Labor Relations Board, the General Counsel of
the National Labor Relations Board will act as prosecutor and the charging
party, IBEW System Council EM-3, which is the union representing the workers at
the manufacturing facilities in question, will be an interested party entitled
to participate in the proceeding.
On December 11, 2000, the former President of Lucent North America filed a
lawsuit against Lucent in the Superior Court of New Jersey. The complaint makes
a number of allegations, including claims under New Jersey's Conscientious
Employee Protection Act and for breach of contract. It seeks unspecified claims,
compensatory damages and punitive damages. Lucent intends to defend this action
vigorously.
See also the discussion of "Environmental Matters" in Item 1. for
additional information on environmental matters and proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the fiscal year covered by this report on Form
10-K, no matter was submitted to a vote of Security Holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
(a) MARKET PRICE AND DIVIDEND INFORMATION
Lucent's common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol LU. The following table presents the reported high and low
sales prices of Lucent's common stock as reported on the NYSE:
DIVIDENDS
PER
HIGH LOW SHARE
---- --- ---------
YEAR ENDED SEPTEMBER 30, 2000
Quarter ended December 31, 1999............................. $84 3/16 $55 1/16 $0.04
Quarter ended March 31, 2000................................ 77 1/2 49 13/16 0.00
Quarter ended June 30, 2000................................. 65 15/16 51 1/16 0.02
Quarter ended September 30, 2000............................ 67 3/16 28 1/16 0.02
YEAR ENDED SEPTEMBER 30, 1999
Quarter ended December 31, 1998............................. $56 15/16 $26 23/32 $0.04
Quarter ended March 31, 1999................................ 60 47 0.00
Quarter ended June 30, 1999................................. 68 11/16 51 7/8 0.02
Quarter ended September 30, 1999............................ 79 3/4 60 0.02
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
As of November 30, 2000, there were approximately 1,602,553 shareholders of
record.
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ITEM 6. SELECTED FINANCIAL DATA
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA (UNAUDITED)
YEARS ENDED NINE MONTHS
SEPTEMBER 30, ENDED
------------------------------------- SEPTEMBER 30,
2000 1999 1998 1997 1996(1)
------- ------- ------- ------- -------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS(5)
Revenues.......................................... $33,813 $30,617 $24,367 $21,483 $12,432
Gross margin...................................... 14,274 15,012 11,429 9,215 4,868
Depreciation and amortization expense............. 2,318 1,580 1,228 1,348 822
Operating income................................ 2,985 4,694 1,953 1,219 256
Income from continuing operations................. 1,681 3,026 769 453 125
Income (loss) from discontinued operations........ (462) 455 296 17 263
Income before cumulative effect of accounting
change.......................................... 1,219 3,481 1,065 470 388
Cumulative effect of accounting change............ -- 1,308 -- -- --
Net income........................................ 1,219 4,789 1,065 470 388
Earnings (loss) per common share -- basic(2)(3):
Income from continuing operations............... $ 0.52 $ 0.97 $ 0.25 $ 0.15 $ 0.04
Income (loss) from discontinued operations...... (0.14) 0.15 0.10 0.01 0.10
Cumulative effect of accounting change.......... -- 0.42 -- -- --
Net income...................................... $ 0.38 $ 1.54 $ 0.35 $ 0.16 $ 0.14
Earnings (loss) per common share -- diluted
(2)(3):
Income from continuing operations............... $ 0.51 $ 0.94 $ 0.25 $ 0.15 $ 0.04
Income (loss) from discontinued operations...... (0.14) 0.14 0.09 0.01 0.10
Cumulative effect of accounting change.......... -- 0.41 -- -- --
Net income...................................... $ 0.37 $ 1.49 $ 0.34 $ 0.16 $ 0.14
Earnings per common share -- pro forma(3)(4)...... n/a n/a n/a n/a $ 0.13
Dividends per common share(3)..................... $ 0.08 $ 0.08 $0.0775 $0.0563 $0.0375
FINANCIAL POSITION(5)
Total assets...................................... $48,792 $35,372 $25,144 $21,045 $20,242
Working capital................................... 10,613 10,090 5,355 1,494 1,963
Total debt........................................ 6,559 5,867 2,861 4,182 2,795
Shareowners' equity............................... 26,172 13,936 7,960 4,570 3,479
OTHER INFORMATION
Gross margin percentage........................... 42.2% 49.0% 46.9% 42.9% 39.2%
Selling, general and administrative expenses as a
percentage of revenues.......................... 18.5% 19.0% 18.2% 19.5% 22.4%
Research and development expenses as a percentage
of revenues..................................... 11.9% 13.8% 15.0% 14.1% 14.7%
Ratio of total debt to total capital (debt plus
equity)......................................... 20.0% 29.6% 26.4% 47.8% 44.5%
Capital expenditures.............................. $ 2,701 $ 2,042 $ 1,615 $ 1,569 $ 981
- - - - ---------------
(1) Beginning September 30, 1996, Lucent changed its fiscal year-end from
December 31 to September 30 and reported results for the nine-month
transition period ended September 30, 1996.
(2) The calculation of earnings per share on a historical basis includes the
retroactive recognition to January 1, 1995, of the 2,098,499,576 shares
(524,624,894 shares on a pre-split basis) owned by AT&T on April 10, 1996.
(3) All per share data have been restated to reflect the two-for-one splits of
Lucent's common stock that became effective on April 1, 1998, and April 1,
1999.
(4) The calculation of earnings (loss) per share on a pro forma basis assumes
that all 2,951,466,467 shares outstanding on April 10, 1996, were
outstanding since January 1, 1996, and gives no effect to the use of
proceeds from the IPO.
(5) Certain prior year amounts have been reclassified to conform to the fiscal
year 2000 presentation.
n/a Not applicable.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
In fiscal 2000, Lucent Technologies Inc. ("Lucent" or the "Company")
completed its plan to spin off its Enterprise Networks business to shareowners,
forming a separate and independent company. The new company is called Avaya Inc.
("Avaya") (See DISCONTINUED OPERATIONS).
In addition, on July 20, 2000, Lucent announced its intention to spin off
its microelectronics business, which includes the optoelectronics components and
integrated circuits divisions, into a separate and independent company. The new
company is called Agere Systems Inc. ("Agere Systems"). On December 11, 2000, a
Form S-1 registration statement was filed with the SEC in anticipation of an
initial public offering ("IPO") of Agere Systems. Lucent intends to distribute
the remaining shares in a tax-free distribution. This report does not constitute
the offering of any securities, which will be made only by a prospectus filed
with the SEC. In connection with the spin-off, Lucent may be adjusting its
capital structure including a possible reduction in the amount of debt
outstanding. The IPO is expected to be completed in the quarter ending March 31,
2001, and completion of the spin-off is expected by the end of the 2001 fiscal
year. The IPO and spin-off are subject to certain conditions, including a
favorable tax ruling by the IRS.
On November 13, 2000, Lucent entered into an agreement to sell its power
systems business to Tyco International Ltd., a diversified manufacturing and
service company, for $2,500 million in cash. The sale, which is subject to
regulatory approval and other customary closing conditions, is expected to close
by December 31, 2000 and result in a one-time gain to be recorded as an
extraordinary item, net of tax, in the quarter in which the sale closes.
These actions will allow Lucent to concentrate its investments, resources
and management attention on optical, data and wireless solutions, along with the
network design, consulting and integration services to support them. Lucent
expects to take a business restructuring charge associated with the redesign of
its business in the quarter ending March 31, 2001. Lucent expects to give
details of the charge in late January, 2001. A review of our internal processes
will continue throughout 2001 and may result in additional restructuring and
associated charges (see KEY BUSINESS CHALLENGES).
On a total basis, Lucent reported net income of $1,219 million, or $0.37
per share (diluted) for the year ended September 30, 2000, as compared with
year-ago net income of $4,789 million, or $1.49 per share (diluted). Fiscal 2000
net income includes a $462 million loss, or $0.14 per share (diluted), from
discontinued operations, net of tax, compared with $455 million of income, or
$0.14 per share (diluted), net of tax, for fiscal 1999. The fiscal 2000 net
income also includes a reduction of costs and operating expenses of $252 million
representing the impact of adopting Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP
98-1"). In addition, in fiscal 1999 Lucent changed its method for determining
annual net pension and postretirement benefit costs. As a result, included in
1999 net income is a $1,308 million, or $0.41 per share (diluted), cumulative
effect of accounting change. Lucent's income before the cumulative effect of
accounting change was $3,481 million for the year ended September 30, 1999. See
Note 12 to the accompanying Consolidated Financial Statements for further
details of the accounting change.
DISCONTINUED OPERATIONS
On March 1, 2000, Lucent announced plans to spin off Avaya and, on
September 30, 2000, the spin-off was accomplished through a tax-free
distribution of shares to Lucent's shareowners.
Avaya represented a significant segment of the Company's business. Pursuant
to Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB
30"), Lucent has reclassified its Consolidated Financial Statements to reflect
the spin-off of Avaya. The revenues, costs and expenses, assets and liabilities,
and cash flows of Avaya have been segregated in the Consolidated Statements of
Income, Consolidated Balance Sheets and Consolidated Statements of Cash Flows.
The net operating results, net assets and net cash flows of this business have
been reported as "Discontinued Operations" in the accompanying Consolidated
Financial Statements.
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Lucent recorded a $462 million loss from discontinued operations (net of a
tax benefit of $78 million) for the year ended September 30, 2000. The net loss
is comprised of $303 million of net income from discontinued operations for the
period prior to the measurement date and a $765 million net loss on disposal of
Avaya. The loss on disposal of Avaya reflects the costs directly associated with
the spin-off and the net loss of Avaya between the measurement date and the
spin-off date of September 30, 2000. The costs reflect those components of Avaya
reorganization plan, including a business restructuring charge and directly
related asset write-downs of $545 million recorded during the year, along with
transaction costs of $56 million for the spin-off. Major components of this
charge include $365 million for employee separation and $101 million for real
estate consolidation.
In addition, the loss from discontinued operations includes an allocation
of Lucent's interest expense based on the amount of debt assumed by Avaya.
Approximately $780 million of commercial paper borrowings were assumed by Avaya
as part of the spin-off transaction.
Lucent's financial results for discontinued operations are different from
the results reported by Avaya due to different assumptions and allocations
required to be made by the two companies.
The following discussion will focus on Lucent's results from continuing
operations.
FINANCIAL HIGHLIGHTS
Lucent reported income from continuing operations of $1,681 million, or
$0.51 per share (diluted), for the year ended September 30, 2000, compared with
year-ago income from continuing operations of $3,026 million, or $0.94 per share
(diluted).
Income from continuing operations for 2000 includes $1,005 million ($1,001
million after-tax) of purchased in-process research and development ("IPRD")
expenses related to the acquisitions of Spring Tide Networks, Chromatis
Networks, Herrmann Technology, Ortel Corporation, Agere, Inc. and VTC Inc., a
pre-tax gain of $189 million ($115 million after-tax) associated with the sale
of an equity investment, a reduction to costs and operating expenses of $252
million related to the impact of adopting SOP 98-1 and a pre-tax charge of $61
million ($40 million after-tax) primarily associated with the mergers with
International Network Services ("INS"), Excel Switching Corporation and Xedia
Corporation.
Income from continuing operations in 1999 includes a $108 million ($71
million after-tax) reversal of business restructuring charges, a $110 million
non-tax deductible charge for merger-related costs and a $236 million charge
($169 million after-tax) primarily associated with asset impairments and
integration-related charges related to the Ascend Communications, Inc. and
Nexabit Networks, Inc. mergers, a $274 million gain ($167 million after-tax) on
the sale of an equity investment, and $292 million ($280 million after-tax) of
IPRD expenses related to the acquisitions of Stratus Computer, Inc., XNT
Systems, Inc., Quantum Telecom Solutions, Inc., InterCall Communications and
Consulting, Inc., Quadritek Systems, Inc., Sybarus Technologies, WaveAccess Ltd.
and the Ethernet local area network ("LAN") component business of Enable
Semiconductor ("Enable").
ACQUISITIONS
As part of Lucent's continuing efforts to provide its customers with
end-to-end communications solutions, the Company completed numerous acquisitions
and mergers during the three years ended September 30, 2000. For more
information, see Note 4 to the accompanying Consolidated Financial Statements.
OPERATING SEGMENTS
Lucent operates in the global telecommunications networking industry and
has two reportable segments: Service Provider Networks ("SPN") and
Microelectronics and Communications Technologies ("MCT"). SPN provides public
networking systems, software and services to telecommunications service
providers and public network operators around the world. MCT provides
high-performance optoelectronic components and integrated circuits, power
systems and optical fiber for applications in the communications and computing
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industries. In addition, MCT also includes Lucent's new ventures business. The
results of other smaller units and corporate operations are reported in Other
and Corporate.
The two reportable operating segments are strategic market units that offer
distinct products and services. These segments were determined based on the
customers and the markets that Lucent serves. Each market unit is managed
separately as each operation requires different technologies and marketing
strategies.
As a result of reorganization initiatives (see KEY BUSINESS CHALLENGES),
the Company is evaluating changes to its management model and organizational
structure which will result in changes to the reportable segments in the next
fiscal year.
[CHART]
SEGMENT REVENUES
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000
1998 1999 2000
----- ----- -----
(DOLLARS IN BILLIONS)
Service Provider Networks................................... $20.1 $24.8 $26.5
Microelectronics and Communications Technologies............ 4.2 5.0 7.0
Other and Corporate......................................... 0.1 0.8 0.3
Lucent's Service Provider Networks segment represents about 78% of the
total external sales for 2000. Lucent offers a wide range of products and
services representing a full-service package for the next generation of
networks.
[CHART]
PRODUCT AND SERVICE REVENUES
FOR THE YEAR ENDED SEPTEMBER 30, 2000
Core Networking Systems..................................... 56%
Wireless Products........................................... 18%
Microelectronics............................................ 11%
NetCare Professional Services............................... 4%
Other....................................................... 11%
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KEY BUSINESS CHALLENGES
Lucent is in the process of reorganizing its business to become more
focused and better positioned to capitalize on market opportunities. This
reorganization includes the recent spin-off of Avaya, the expected sale of the
power systems business and the announced IPO and spin-off of Agere Systems, as
well as a comprehensive review and restructuring of Lucent's internal systems
and processes. Specific initiatives include performing a comprehensive product
and service portfolio review aimed at aligning research and development and
effective redeployment of sales and marketing teams and other investments as
appropriate, consolidating corporate infrastructure and improving supply chain
management. Lucent expects to take a significant business restructuring charge
in the quarter ending March 31, 2001. Lucent expects to give details of the
charge in late January, 2001. A review of our internal processes will continue
throughout 2001 and may result in additional restructuring and associated
charges. The reorganization, including the spin-off of Agere Systems, is
expected to be completed by September 30, 2001.
A limited number of large customers provide a substantial portion of
Lucent's revenues. These customers include Verizon, AT&T and certain incumbent
and competitive local exchange carriers. The spending patterns of these
customers can vary significantly during the year. An elimination or change in
the spending patterns of, or a significant reduction in orders from, any one of
these customers could negatively affect Lucent's operating results. Lucent's
fiscal year 2000 results were negatively affected by the decline in sales to one
large U.S. customer and one large non-U.S. customer. The communications industry
has recently experienced a consolidation of both U.S. and non-U.S. companies. As
a result, Lucent's operating results could become more dependent on a smaller
number of large carriers. Lucent continually endeavors to diversify its customer
base by adding new and different types of customers. Lucent, however, is often
required to provide or arrange for long-term financing for customers as a
condition to obtain or bid on infrastructure contracts. Thus, our ability to
develop certain customer relationships may be dependent upon our ability to
raise capital and extend credit.
Lucent operates in a highly competitive industry and expects the level of
competition relating to pricing and product offerings will intensify. Lucent
expects that new competitors will enter its markets as a result of expansion by
market participants and advancements in technology. These competitors may
include entrants from the telecommunications, software, data networking, cable
television and semiconductor industries, and may have strong financial
capabilities, technological expertise and established name recognition. Lucent
attempts to direct the Company's resources to meet market needs and competitive
challenges based on ongoing assessments of market conditions. However, due to
misjudgment of the market demand for specific product offerings, Lucent's
results for fiscal year 2000 were adversely affected by a larger than expected
reduction in revenue and gross margin for its traditional circuit switching
products and related software, and lower revenues and gross margins for specific
optical networking products.
For the first fiscal quarter of 2001, Lucent anticipates a substantial
decline in revenues compared to the year-ago quarter, and a substantial loss
from continuing operations. This reflects a significant sales decline in North
America due to an overall softening in the competitive local exchange carrier
market, slowdown in capital spending by established service providers, lower
software sales and a more focused use of vendor financing by Lucent.
On December 21, 2000, Moody's Investors Service lowered Lucent's credit
rating on senior unsecured long-term debt from A2 to A3 and on commercial paper
from Prime-1 to Prime-2; the A3 rating remains on review for possible further
downgrade, and Moody's concluded the review of the commercial paper rating. Also
on December 21, 2000, Standard & Poor's lowered Lucent's credit rating on senior
unsecured long-term debt from A to BBB+ and the commercial paper rating from A-1
to A-2, both of which remain on CreditWatch with the possibility of further
downgrades. Lucent believes that it will have sufficient capital resources to
fulfill its own operational and capital needs, as well as to extend credit to
customers when appropriate, although there can be no assurance that this will
occur.
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RESULTS OF OPERATIONS:
REVENUES
Total revenues for 2000 increased 10.4% to $33,813 million compared with
1999, due to increases in sales from both reportable operating segments,
partially offset by a decrease in Other and Corporate, predominantly from the
remaining consumer products business, which was sold in the second fiscal
quarter of 2000. Revenue growth was driven by sales increases globally. For
2000, sales within the United States grew 10.9% compared with 1999. Non-U.S.
revenues increased 9.7% compared with 1999. These non-U.S. sales represented
33.9% of total revenues compared with 34.2% in 1999.
[CHART]
REVENUES BY NON-U.S. REGIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000
1998 1999 2000
----- ----- -----
(DOLLARS IN BILLIONS)
Canada...................................................... $0.4 $0.3 $0.4
Caribbean/Latin America..................................... 0.7 1.3 1.7
Asia/Pacific................................................ 2.7 3.2 4.0
Europe/Middle East/Africa................................... 3.2 5.7 5.3
Revenues are attributed to geographic areas based on the location of
customers.
Total revenues for 1999 increased 25.6% to $30,617 million compared with
1998. Revenue growth was driven by sales increases globally. For 1999, U.S.
sales grew 15.6% compared with 1998 and non-U.S. sales increased 50.8% compared
with 1998. These non-U.S. sales represented 34.2% of total revenues compared
with 28.5% in 1998.
The following table presents Lucent's revenues by segment and the
percentage of total revenues for the years ended September 30, 2000, 1999, and
1998:
2000 1999 1998
---------------- ---------------- ----------------
% OF % OF % OF
TOTAL TOTAL TOTAL
(DOLLARS IN MILLIONS)
Service Provider Networks................ $26,509 78 $24,833 81 $20,116 83
Microelectronics and Communications
Technologies........................... 6,953 21 5,026 16 4,134 17
Other and Corporate...................... 351 1 758 3 117 --
------- --- ------- --- ------- ---
Total Lucent............................. $33,813 100 $30,617 100 $24,367 100
======= === ======= === ======= ===
Revenues in 2000 from the SPN segment increased by 6.8%, or $1,676 million,
compared with 1999, and increased 23.4%, or $4,717 million, for 1999 compared
with 1998. The 2000 increases were driven by sales of service provider Internet
infrastructure, wireless systems and professional services, offset in part by a
decline in optical networking products, primarily due to lower revenues in the
fiscal fourth quarter and a decline in switching revenues. Lower than expected
revenues in optical networking, due primarily to being late to market with the
OC-192 product, which affected the entire product cycle, from engineering and
manufacturing to deployment and launch, had a negative impact on the fiscal
year's revenue growth. In addition, lower revenues from switching products
primarily due to the shift in customer spending away from circuit switching,
pricing pressures and the impact of a substantial reduction in a major long-term
foreign project also negatively
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impacted growth. The 1999 increases resulted primarily from higher sales of
switching and wireless systems products with associated software, optical
networking and data networking systems and communications software.
U.S. revenues in 2000 from the SPN segment increased by 7.1% over 1999, and
by 10.9% comparing 1999 with 1998. The 2000 and 1999 U.S. revenue increases
included revenue gains from sales to incumbent local exchange carriers, which in
certain cases provide wireless service, and competitive local exchange carriers.
Revenues in 2000 increased despite a decline in revenues from AT&T, historically
a significant customer. In addition, the 1999 U.S. revenue increase included
long distance carriers. Non-U.S. revenues for 2000 increased 6.0% compared with
1999, reflecting gains in all regions except Europe/Middle East/Africa ("EMEA"),
which was negatively impacted by the substantial reduction of revenues from a
major long-term foreign project, and represented 32.6% of revenues for 2000
compared with 32.8% for 1999. Non-U.S. revenues for 1999 increased 60.7%
compared with 1998 due to revenue growth in the EMEA region, primarily due to
the same major long-term foreign project, Caribbean/Latin America and
Asia/Pacific regions and represented 32.8% of revenues for 1999 compared with
25.2% in 1998.
Lucent expects that product transition associated with a decline in circuit
switching revenue and the substantial reduction of revenues from AT&T and a
major long-term foreign project will not be fully offset immediately by the
ramp-up of newer products. In addition, component shortages have led to a longer
than expected full-volume ramp-up in optical networking.
Revenues in 2000 from the MCT segment increased 38.3%, or $1,927 million,
compared with 1999. This increase was driven by sales of optical fiber,
optoelectronic components, power systems, wired and wireless LAN systems and
customized chips for computing and high-speed communications systems. Revenues
in 1999 increased 21.6%, or $892 million, compared with 1998, due to higher
sales of optoelectronic components and integrated circuits for high-speed
communications, data networking, wireless and computing systems. Increased sales
of power systems also contributed to the increase.
U.S. sales in 2000 increased 51.8% compared with 1999 and 16.2% in 1999
compared with 1998. Non-U.S. revenues increased 22.5% compared with 1999, with
revenue growth in all regions. Non-U.S. revenues increased 28.6% in 1999
compared with 1998, driven by sales in the Asia/Pacific and EMEA regions. Non-
U.S. revenues represented 40.7% of sales in 2000 compared with 46.0% in 1999 and
43.5% in 1998.
As previously discussed, in fiscal 2001 Lucent intends to spin off Agere
Systems, which is currently part of the MCT segment.
Revenues in 2000 from sales of OTHER AND CORPORATE decreased $407 million
compared with 1999, due to lower revenues from the Company's remaining consumer
products business, which was sold in the second fiscal quarter of 2000. Revenues
in 1999 increased $641 million compared with 1998, primarily due to the
consolidation of the businesses regained from the PCC venture.
On October 22, 1998, Lucent and Philips announced they would end their PCC
venture. The venture was terminated in late 1998. The results of operations and
net assets of the remaining businesses Lucent previously contributed to PCC had
been consolidated as of October 1, 1998. Revenues are included in Other and
Corporate. In December 1998, Lucent sold certain assets of the wireless handset
business to Motorola, Inc. and completed the sale of its remaining consumer
products business in the second fiscal quarter of 2000.
COSTS AND GROSS MARGIN
2000 1999 1998
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(DOLLARS IN MILLIONS)
Costs................................................. $19,539 $15,605 $12,938
Gross margin.......................................... $14,274 $15,012 $11,429
Gross margin percentage............................... 42.2% 49.0% 46.9%
Total costs in 2000 increased $3,934 million, or 25.2%, compared with 1999.
As a percentage of revenue, gross margin decreased to 42.2% from 49.0% in 1999.
This decrease was primarily due to decreased volumes and margins in the optical
networking and switching businesses, including lower software revenues,
increased pricing pressures in other product lines and continued expansion into
overseas markets, which generally yield
29
30
lower margins. This decrease in gross margin percentage was partially offset by
$400 million resulting from lower personnel costs, including lower incentive
compensation awards and a higher net pension credit, and the impact of adopting
SOP 98-1. In addition, Lucent anticipates a further shift from higher margin
switching products to newer products with initially lower margins. Total costs
in 1999 increased $2,667 million, or 20.6%, compared with 1998 due to the
increase in sales volume. Gross margin percentage increased 2.1 percentage
points from 1998. The increase in gross margin percentage for the year was due
to a more favorable mix of products.
OPERATING EXPENSES
2000 1999 1998
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