item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 financial statements incorporated herein reference appropriate portions pages 48 67 companys annual report security holders fiscal year ended september 30 1996 see part ii separate financial statements subsidiaries consolidated 50 percent less owned persons omitted since entity constitutes significant subsidiary pursuant provisions regulation sx article 309 3 exhibits identified parentheses file sec incorporated herein reference exhibits hereto company furnish without charge security holder upon request copy annual report security holders proxy statement portions incorporated herein reference thereto company furnish exhibit cost b reports form 8k form 8k dated july 18 1996 filed pursuant items 5 events 7c exhibits 8 change fiscal year form 8k dated september 6 1996 filed pursuant item 7c exhibits report independent auditors shareowners lucent technologies inc report consolidated financial statements lucent technologies inc subsidiaries incorporated reference form 10k page 48 1996 annual report shareowners lucent technologies inc connection audits financial statements also audited related consolidated financial statement schedule listed index page 21 form 10k opinion consolidated financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information required included therein coopers lybrand llp new york new york october 24 1996 lucent technologies inc schedule ii valuation qualifying accounts millions amounts written uncollectible payments reversals b see note 4 notes consolidated financial statements background information c includes 194 related business restructuring fourth quarter 1995 relates net asset additions net liability reductions att see note 1 notes consolidated financial statements background information signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized james lusk vice president controller december 30 1996 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated exhibit index exhibits identified parentheses file sec incorporated herein reference exhibits heretoitem 14 exhibits financial statement schedules reports form 8k documents filed part report 1 financial statements pages report management incorporated herein reference appropriate portions pages 34 63 companys annual report security holders fiscal year ended september 30 1997 see part ii report independent auditors statements consolidated statements income consolidated balance sheets consolidated statements changes shareowners equity consolidated statements cash flows notes consolidated financial statements 2 financial statement schedules report independent auditors 23 schedules ii valuation qualifying accounts 24 separate financial statements subsidiaries consolidated 50 percent less owned persons omitted since entity constitutes significant subsidiary pursuant provisions regulation sx article 309 3 exhibits identified parentheses file sec incorporated herein reference exhibits hereto exhibit number 3i articles incorporation registrant amended april 8 1996 exhibit 3i form 8k dated july 18 1996 file 00111639 3ii bylaws registrant amended july 17 1996 exhibit 3ii form 8k dated july 18 1996 file 00111639 4a indenture dated april 1 1996 lucent technologies inc bank new york trustee exhibit 4a registration statement form s3 33301223 4b instruments addition exhibit 4a define rights holders long term debt registrant consolidated subsidiaries filed herewith pursuant regulation sk item 601b4iiia pursuant regulation registrant hereby agrees furnish copy instrument sec upon request 10i1 separation distribution agreement among lucent technologies inc att corp ncr corporation dated february 1 1996 amended restated march 29 1996 exhibit 101 registration statement form s1 33300703 10i2 tax sharing agreement among lucent technologies inc att corp ncr corporation dated february 1 1996 amended restated march 29 1996 exhibit 106 registration statement form s1 33300703 10i3 employee benefits agreement att lucent technologies inc dated february 1 1996 amended restated march 29 1996 exhibit 102 registration statement form s1 33300703 10i4 lucent technologies inc operating agreement lucent technologies att capital corporation dated april 2 1996 exhibit 1013 registration statement form s1 33300703 10i5 rights agreement lucent technologies inc first chicago trust company new york rights agent dated april 4 1996 exhibit 42 registration statement form s1 33300703 10iib1 general purchase agreement att corp lucent technologies inc dated february 1 1996 amended restated march 29 1996 exhibit 103 registration statement form s1 33300703 10iib2 interim services systems replication agreement among att lucent technologies inc ncr dated february 1 1996 amended restated march 29 1996 exhibit 104 registration statement form s1 33300703 10iib3 brand license agreement lucent technologies inc att dated february 1 1996 exhibit 105 registration statement form s1 33300703 10iib4 patent license agreement among att ncr lucent technologies inc effective march 29 1996 exhibit 107 registration statement form s1 33300703 10iib5 amended restated technology license agreement among att ncr lucent technologies inc effective march 29 1996 exhibit 108 registration statement form s1 33300703 10iiia1 lucent technologies inc 1996 long term incentive program exhibit10iiia1 annual report form 10k transition period ended september 30 1996 10iiia2 lucent technologies inc deferred compensation plan 10iiia3 pension plan lucent nonemployee directors exhibit 1011 registration statement form s1 33300703 10iiia4 lucent technologies inc stock retainer plan nonemployee directors 10iiia5 lucent technologies inc excess benefit compensation plan exhibit 10iiia5 annual report form 10k transition period ended september 30 1996 10iiia6 lucent technologies inc midcareer pension plan exhibit 10iiia6 annual report form 10k transition period ended september 30 1996 10iiia7 lucent technologies inc nonqualified pension plan exhibit 10iiia7 annual report form 10k transition period ended september 30 1996 10iiia8 lucent technologies inc officer longterm disability survivor protection plan exhibit 10iiia8 annual report form 10k transition period ended september 30 1996 10iiia9 employment agreement mr verwaayen dated june 12 1997 10iiia10 employment agreement mr peterson dated august 8 1995 10iiia11 description lucent technologies inc supplemental pension plan 12 computation ratio earnings fixed charges 13 specified portions pages 34 63 companys annual report security holders year ended september 30 1997 21 list subsidiaries lucent technologies inc management contract compensatory plan arrangement 23 consent coopers lybrand llp 24 powers attorney executed officers directors signed report 27 financial data schedule company furnish without charge security holder upon request copy annual report security holders proxy statement portions incorporated herein reference thereto company furnish exhibit cost b reports form 8k reports form 8k filed company last quarter fiscal year covered report form 10k report independent auditors shareowners lucent technologies inc report consolidated financial statements lucent technologies inc subsidiaries incorporated reference form 10k page 45 1997 annual report shareowners lucent technologies inc connection audits financial statements also audited related consolidated financial statement schedule listed index page 20 form 10k opinion consolidated financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information required included therein coopers lybrand llp new york new york october 21 1997 amounts written uncollectible payments recoveries b see note 5 notes consolidated financial statements background information c includes 194 related business restructuring fourth quarter 1995 relates net asset additions net liability reductions att see note 1 notes consolidated financial statements background information signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized james lusk vice president controller december 22 1997 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated principal executive officer richard mcginn chief executive officer president principal financial officer donald k peterson executive vice president chief financial officer principal accounting officer james lusk vice president james lusk controller attorneyinfact directors december 22 1997 paul allaire carla hills drew lewis richard mcginn paul h oneill donald perkins henry b schacht franklin thomas john young principal accounting officer power attorney exhibit index exhibits identified parentheses file sec incorporated herein reference exhibits hereto exhibit number 3i articles incorporation registrant amended april 8 1996 exhibit 3i form 8k dated july 18 1996 file 00111639 3ii bylaws registrant amended july 17 1996 exhibit 3ii form 8k dated july 18 1996 file 00111639 4a indenture dated april 1 1996 lucent technologies inc bank new york trustee exhibit 4a registration statement form s3 33301223 4b instruments addition exhibit 4a define rights holders long term debt registrant consolidated subsidiaries filed herewith pursuant regulation sk item 601b4iiia pursuant regulation registrant hereby agrees furnish copy instrument sec upon request 10i1 separation distribution agreement among lucent technologies inc att corp ncr corporation dated february 1 1996 amended restated march 29 1996 exhibit 101 registration statement form s1 33300703 10i2 tax sharing agreement among lucent technologies inc att corp ncr corporation dated february 1 1996 amended restated march 29 1996 exhibit 106 registration statement form s1 33300703 10i3 employee benefits agreement att lucent technologies inc dated february 1 1996 amended restated march 29 1996 exhibit 102 registration statement form s1 33300703 10i4 lucent technologies inc operating agreement lucent technologies att capital corporation dated april 2 1996 exhibit 1013 registration statement form s1 33300703 10i5 rights agreement lucent technologies inc first chicago trust company new york rights agent dated april 4 1996 exhibit 42 registration statement form s1 33300703 10iib1 general purchase agreement att corp lucent technologies inc dated february 1 1996 amended restated march 29 1996 exhibit 103 registration statement form s1 33300703 10iib2 interim services systems replication agreement among att lucent technologies inc ncr dated february 1 1996 amended restated march 29 1996 exhibit 104 registration statement form s1 33300703 10iib3 brand license agreement lucent technologies inc att dated february 1 1996 exhibit 105 registration statement form s1 33300703 10iib4 patent license agreement among att ncr lucent technologies inc effective march 29 1996 exhibit 107 registration statement form s1 33300703 10iib5 amended restated technology license agreement among att ncr lucent technologies inc effective march 29 1996 exhibit 108 registration statement form s1 33300703 10iiia1 lucent technologies inc 1996 long term incentive program exhibit10iiia1 annual report form 10k transition period ended september 30 1996 10iiia2 lucent technologies inc deferred compensation plan 10iiia3 pension plan lucent nonemployee directors exhibit 1011 registration statement form s1 33300703 10iiia4 lucent technologies inc stock retainer plan nonemployee directors 10iiia5 lucent technologies inc excess benefit compensation plan exhibit 10iiia5 annual report form 10k transition period ended september 30 1996 10iiia6 lucent technologies inc midcareer pension plan exhibit 10iiia6 annual report form 10k transition period ended september 30 1996 10iiia7 lucent technologies inc nonqualified pension plan exhibit 10iiia7 annual report form 10k transition period ended september 30 1996 10iiia8 lucent technologies inc officer longterm disability survivor protection plan exhibit 10iiia8 annual report form 10k transition period ended september 30 1996 10iiia9 employment agreement mr verwaayen dated june 12 1997 10iiia10 employment agreement mr peterson dated august 8 1995 10iiia11 description lucent technologies inc supplemental pension plan 12 computation ratio earnings fixed charges 13 specified portions pages 34 63 companys annual report security holders year ended september 30 1997 21 list subsidiaries lucent technologies inc management contract compensatory plan arrangement 23 consent coopers lybrand llp 24 powers attorney executed officers directors signed report 27 financial data scheduleitem 14 exhibits financial statement schedules reports form 8k documents filed part form 10k separate financial statements subsidiaries consolidated 50 percent less owned persons omitted since entity constitutes significant subsidiary pursuant provisions regulation sx article 309 incorporated herein reference appropriate portions pages 34 67 companys annual report security holders fiscal year ended september 30 1998 see part ii exhibit 13 6 exhibits following documents filed exhibits report form 10k incorporated reference herein document incorporated reference identified parenthetical referencing sec filing included document management contract compensatory plan arrangement company furnish without charge security holder upon request copy annual report security holders proxy statement portions incorporated herein reference thereto company furnish exhibit cost b reports form 8k reports form 8k filed company last quarter fiscal year covered report form 10k report independent accountants shareowners lucent technologies inc report consolidated financial statements lucent technologies inc subsidiaries incorporated reference form 10k page 48 1998 annual report shareowners lucent technologies inc connection audits financial statements also audited related consolidated financial statement schedule listed index page 24 form 10k opinion consolidated financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information required included therein pricewaterhousecoopers llp new york new york october 21 1998 lucent technologies inc schedule ii valuation qualifying accounts dollars millions amounts written uncollectible payments recoveries b included deductions cash payments 176 483 456 years ended september 30 1998 1997 nine months ended september 30 1996 respectively addition lucent reversed 100 201 98 years ended september 30 1998 1997 nine months ended september 30 1996 respectively see note 6 notes consolidated financial statements background information c relates net asset additions net liability reductions att see note 1 notes consolidated financial statements background information certain prior year amounts reclassified conform 1998 presentation signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized james lusk james lusk vice president controller attorneyinfact december 22 1998 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated exhibit index following documents filed exhibits report form 10k incorporated reference herein document incorporated reference identified parenthetical referencing sec filing included document management contract compensatory plan arrangementitem 14 exhibits financial statement schedules reports form 8k documents filed part form 10k separate financial statements subsidiaries consolidated 50 percent less owned persons omitted since entity constitutes significant subsidiary pursuant provisions regulation sx article 309 incorporated herein reference appropriate portions pages 29 64 companys annual report security holders fiscal year ended september 30 1999 see part ii exhibit 13 6 exhibits following documents filed exhibits report form 10k incorporated reference herein document incorporated reference identified parenthetical referencing sec filing included document management contract compensatory plan arrangement company furnish without charge security holder upon request copy annual report security holders proxy statement portions incorporated herein reference thereto company furnish exhibit cost b reports form 8k last quarter fiscal year covered report august 2 1999 lucent filed report form 8k presented 1 restated consolidated financial information including restated consolidated financial statements september 30 1998 1997 years ended september 30 1998 1997 nine months ended september 30 1996 2 restated financial information including restated condensed consolidated financial statements march 31 1999 six months ended march 31 1999 1998 case giving retroactive effect merger lucent ascend periods presented report independent accountants board directors shareowners lucent technologies inc audits consolidated financial statements referred report dated october 25 1999 appearing 1999 annual report shareowners lucent technologies inc report consolidated financial statements incorporated reference annual report form 10k also included audit consolidated financial statement schedule listed item 145ii form 10k opinion consolidated financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp new york new york october 25 1999 lucent technologies inc schedule ii valuation qualifying accounts dollars millions amounts written uncollectible payments recoveries b included deductions cash payments 77 176 483 years ended september 30 1999 1998 1997 respectively addition lucent reversed 141 100 201 years ended september 30 1999 1998 1997 respectively c certain prior year amounts reclassified conform 1999 presentation signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized lucent technologies inc james lusk james lusk senior vice president controller december 21 1999 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated exhibit index following documents filed exhibits report form 10k incorporated reference herein document incorporated reference identified parenthetical referencing sec filing included document management contract compensatory plan arrangement company furnish without charge security holder upon request copy annual report security holders proxy statement portions incorporated herein reference thereto company furnish exhibit costitem 14 exhibits financial statement schedules reports form 8k 1 financial statements separate financial statements subsidiaries consolidated 50 percent less owned persons omitted since entity constitutes significant subsidiary pursuant provisions regulation sx article 309 5 exhibits following documents filed exhibits report form 10k incorporated reference herein document incorporated reference identified parenthetical referencing sec filing included document management contract compensatory plan arrangement company furnish without charge security holder upon request copy proxy statement portions incorporated herein reference thereto company furnish exhibit cost b reports form 8k last quarter fiscal year covered report july 20 2000 lucent filed report form 8k announcing plan spin microelectronics business includes optoelectronics components integrated circuits ic divisions separate new company later named agere systems inc july 28 2000 lucent filed report form 8k presented pro forma financial statements reflecting treatment enterprise networks business avaya discontinued operations pursuant accounting principles board opinion 30 reporting results operation reporting effects disposal segment business extraordinary unusual infrequently occurring events transactions apb 30 statements include lucents pro forma consolidated statements income six months ended march 31 2000 march 31 1999 three years ended september 30 1999 1998 1997 pro forma consolidated balance sheets march 31 2000 september 30 1999 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized lucent technologies inc james lusk james lusk principal accounting officer december 27 2000 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated index financial statements financial statement schedule report independent accountants board directors shareowners lucent technologies inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position lucent technologies inc subsidiaries september 30 2000 1999 results operations cash flows three years period ended september 30 2000 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 2 consolidated financial statements 2000 company changed accounting method computer software developed obtained internal use also discussed note 12 1999 company changed method calculating annual net pension postretirement benefit costs pricewaterhousecoopers llp new york new york december 20 2000 lucent technologies inc subsidiaries consolidated statements income see notes consolidated financial statements lucent technologies inc subsidiaries consolidated balance sheets see notes consolidated financial statements lucent technologies inc subsidiaries consolidated statements changes shareowners equity lucent technologies inc subsidiaries consolidated statements changes shareowners equity continued see notes consolidated financial statements lucent technologies inc subsidiaries consolidated statements cash flows see notes consolidated financial statements notes consolidated financial statements dollars millions except per share amounts 1 basis presentation september 30 2000 lucent technologies inc company spun enterprise networks business avaya transaction resulted distribution avaya common stock holder lucent common stock record september 20 2000 result transaction consolidated financial statements related footnotes restated present results business discontinued operations see note 3 fiscal year 2000 company merged excel switching corporation international network services ins fiscal year 1999 company merged ascend communications inc kenan systems corporation mergers accounted poolingofinterests method accounting therefore consolidated financial statements lucent restated periods prior mergers include accounts operations excel ins ascend kenan see note 4 2 summary significant accounting policies basis consolidation consolidated financial statements include majorityowned subsidiaries lucent exercises control investments lucent exercises significant influence control generally 20 50 ownership interest accounted equity method accounting material intercompany transactions balances eliminated use estimates preparation financial statements related disclosures conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements revenues expenses period reported actual results could differ estimates used accounting among things longterm contracts allowances uncollectible receivables inventory obsolescence product warranty depreciation employee benefits taxes restructuring reserves contingencies estimates assumptions reviewed periodically effects revisions reflected consolidated financial statements period determined necessary foreign currency translation operations outside us prepare financial statements currencies us dollar results operations cash flows translated average exchange rates period assets liabilities translated endofperiod exchange rates translation adjustments included separate component accumulated comprehensive income loss shareowners equity revenue recognition revenue generally recognized significant contractual obligations satisfied collection resulting receivable reasonably assured revenue product sales hardware software recognized time delivery acceptance consideration terms conditions customer contract sales services recognized time performance rental revenue recognized proportionately contract term revenues estimated profits longterm contracts generally recognized percentageofcompletion method accounting using either unitsofdelivery costtocost methodology profit estimates revised periodically based changes facts losses contracts recognized immediately notes consolidated financial statements dollars millions except per share amounts continued research development software development costs research development costs charged expense incurred however costs incurred development computer software sold leased otherwise marketed capitalized technological feasibility established capitalized costs subject ongoing assessment recoverability based anticipated future revenues changes hardware software technologies costs capitalized include direct labor related overhead amortization capitalized software development costs begins product available general release amortization provided productbyproduct basis either straightline method periods exceeding two years sales ratio method unamortized capitalized software development costs determined excess net realizable value product expensed immediately effective october 1 1999 lucent adopted statement position 981 accounting costs computer software developed obtained internal use sop 981 result certain costs computer software developed obtained internal use capitalized part assets amortized threeyear period impact adopting sop 981 reduction costs operating expenses 252 fiscal year ended september 30 2000 cash equivalents highly liquid investments original maturities three months less considered cash equivalents inventories stated lower cost determined principally firstin firstout basis market contracts process contracts process stated cost plus accrued profits less progress billings property plant equipment property plant equipment stated cost less accumulated depreciation determined using combination accelerated straightline methods estimated useful lives various asset classes useful lives buildings building improvements furniture fixtures machinery equipment principally range 10 40 years five 10 years two 10 years respectively financial instruments lucent uses various financial instruments including foreign exchange forward contracts interest rate swap agreements manage risk lucent generating cash flows offset cash flows certain transactions foreign currencies underlying financial instruments relation amount timing lucents derivative financial instruments purposes trading lucents nonderivative financial instruments include letters credit commitments extend credit guarantees debt lucent generally require collateral support financial instruments goodwill acquired intangibles goodwill acquired intangibles amortized straightline basis periods benefited principally range 5 10 years goodwill excess purchase price fair value identifiable net assets acquired business combinations accounted purchases notes consolidated financial statements dollars millions except per share amounts continued impairment goodwill longlived assets goodwill longlived assets reviewed impairment whenever events product discontinuance plant closures product dispositions changes circumstances indicate carrying amount may recoverable events occur lucent compares carrying amount assets undiscounted expected future cash flows comparison indicates impairment amount impairment typically calculated using discounted expected future cash flows discount rate applied cash flows based lucents weighted average cost capital represents blended aftertax costs debt equity reclassifications certain prior year amounts reclassified conform 2000 presentation 3 discontinued operations september 30 2000 lucent completed spinoff avaya taxfree distribution shareowners lucent shareowner received one share avaya common stock every 12 shares lucent common stock held record date september 20 2000 avaya represented significant segment lucents business pursuant accounting principles board opinion 30 reporting results operations reporting effects disposal segment business extraordinary unusual infrequently occurring events transactionsapb 30 consolidated financial statements lucent reclassified reflect spinoff avaya accordingly revenues costs expenses assets liabilities cash flows avaya spun segregated consolidated statements income consolidated balance sheets consolidated statements cash flows net operating results net assets net cash flows business reported discontinued operations historical carrying amount net assets transferred avaya spinoff date recorded stock dividend 1009 following summarized financial information discontinued operations 1 income discontinued operations includes allocation lucents interest expense totaling 64 91 112 fiscal years ended september 30 2000 1999 1998 respectively based upon notes consolidated financial statements dollars millions except per share amounts continued amount debt assumed avaya approximately 780 commercial paper borrowings assumed avaya part spinoff transaction 2 loss disposal avaya recorded companys results year ended september 30 2000 reflects costs directly associated spinoff net loss avaya measurement date spin date september 30 2000 costs reflect components avaya reorganization plan including business restructuring charge directlyrelated asset writedowns 545 recorded year along transaction costs 56 spinoff major components charge include 365 employee separation 101 real estate consolidation included net assets transferred avaya september 30 2000 reserves 499 associated remaining actions reorganization plan principally employee separation real estate consolidation avaya responsible completing plan 4 business combinations acquisitions following table presents information acquisitions lucent fiscal years ended september 30 2000 1999 1998 acquisitions accounted purchase method accounting acquired technology valuation included existing technology purchased inprocess research development iprd intangibles iprd charges recorded quarter transaction completed pro forma basis following fiscal 2000 acquisitions occurred october 1 1999 amortization goodwill acquired intangibles would increased approximately 931 fiscal year ended september 30 2000 notes consolidated financial statements dollars millions except per share amounts continued 1 spring tide networks provider network switching equipment 2 chromatis networks inc supplier metropolitan optical networking systems 3 herrmann technology inc supplier devices nextgeneration dense wavelength division multiplexing dwdm optical networks 4 ortel corporation developer optoelectronic components cable tv networks 5 agere inc developer programmable network processor technology 6 deltakabel telecom cv developer cable modem internet protocol ip telephony solutions european market 7 vtc inc supplier semiconductor components computer hard disk drive manufacturers 8 stratus computer inc manufacturer faulttolerant computer systems acquired ascend 9 acquisitions include ethernet lan business enable semiconductor enable ethernet sybarus technologies waveaccess ltd quadritek systems inc xnt systems inc quantum telecom solutions inc intercall communications consulting inc 10 yurie systems inc provider atm access technology equipment data voice video networking 11 livingston enterprises inc global provider equipment used internet service providers connect subscribers internet 12 acquisitions include jna telecommunications limited massmedia communicationsinc optimay gmbh na applicable 24 purchased inprocess research development subsequently reversed march 1999 connection acquisitions spring tide chromatis certain key employees entitled receive additional lucent common stock based achievement specified milestones value stock distributed recorded compensation expense connection acquisition herrmann certain stockholders entitled receive additional lucent common stock based achievement specified milestones distributed portion recorded compensation expense portion recorded additional goodwill included purchase price acquisitions iprd noncash charge earnings technology reached technological feasibility future alternative use remaining purchase price allocated tangible assets intangible assets including goodwill acquired intangibles less liabilities assumed value allocated iprd determined using income approach included excess earnings analysis reflecting appropriate cost capital investment estimates future cash flows related iprd made project based lucents estimates revenue operating expenses income notes consolidated financial statements dollars millions except per share amounts continued taxes project estimates consistent historical pricing margins expense levels similar products revenues estimated based relevant market size growth factors expected industry trends individual product sales cycles estimated life products underlying technology estimated operating expenses income taxes charges use contributory assets deducted estimated revenues determine estimated aftertax cash flows project estimated operating expenses include cost goods sold selling general administrative expenses research development expenses research development expenses include estimated costs maintain products introduced market generate revenues costs complete inprocess research development discount rates utilized discount projected cash flows based consideration lucents weighted average cost capital well factors including useful life project anticipated profitability project uncertainty technology advances known time stage completion project management primarily responsible estimating fair value assets liabilities acquired conducted due diligence determining fair value management made estimates assumptions affect reported amounts assets liabilities expenses resulting acquisitions actual results could differ amounts terabeam corporation april 9 2000 lucent terabeam corporation entered agreement develop terabeams fiberless optical networking system provides highspeed data networking local wide area networks agreement lucent paid cash contributed research development assets intellectual property freespace optical products valued aggregate 450 lucent owns 30 percent venture develop fiberless optical networking system accounted equity method accounting lucent also preferred supplier optical components networking equipment professional services terabeam addition certain conditions lucent right purchase terabeams equity interest venture total 189 allocated goodwill acquired intangibles amortized five years ignitus communications llc april 4 2000 lucent acquired remaining 44 percent ignitus communications llc startup company focuses highspeed optical communications network edge approximately 33 lucent previously owned 56 percent company spectran corporation july 21 1999 lucent began cash tender offer outstanding shares spectran corporation designer manufacturer specialty optical fiber fiberoptic products tender offer expired august 31 1999 lucent thereafter accepted paid shares giving 61 percent interest spectran acquisition accounted purchase method accounting february 4 2000 lucent acquired remaining shares spectran resulting total purchase price approximately 68 poolingofinterests mergers following table presents information certain mergers lucent accounted poolingofinterests method accounting fiscal years ended september 30 2000 1999 result notes consolidated financial statements dollars millions except per share amounts continued lucents financial statements restated periods prior mergers include accounts operations companies 1 ins previously june 30 fiscal yearend order conform fiscal yearends ins lucent inss results operations cash flows three months ended september 30 1999 reflected lucents financial statements first fiscal quarter 2000 inss revenue net income three months ended september 30 1999 100 11 respectively consolidated balance sheet lucent september 30 2000 includes adjustment retained earnings reflect income recognized ins three months ended september 30 1999 2 lucent assumed ascend stock options equivalent approximately 65 million shares lucent common stock connection merger lucent recorded third fiscal quarter 1999 charge operating expenses approximately 79 nontax deductible mergerrelated costs primarily fees investment bankers attorneys accountants financial printing ascends historical revenue net loss fiscal year ended september 30 1998 1478 20 respectively nine months ended june 30 1999 ascends historical revenue net income 1610 66 respectively included lucents historical revenues income continuing operations respectively year ended september 30 1999 intercompany transactions lucent ascend nine months ended june 30 1999 138 86 eliminated revenues income continuing operations respectively year ended september 30 1999 lucent also completed pooling transactions historical operations entities material lucents consolidated results operations either individual aggregate basis therefore prior periods restated mergers 5 recent pronouncements december 1999 securities exchange commission issued staff accounting bulletin 101 revenue recognition financial statements sab 101 sab 101 provides guidance recognition presentation disclosure revenues financial statements requires adoption later fourth quarter fiscal 2001 company currently evaluating impact sab 101 related interpretations determine effect companys consolidated financial position results operations june 1998 financial accounting standards board fasb issued statement financial accounting standards sfas 133 accounting derivative instruments hedging activities sfas 133 sfas 133 requires recognition fair value derivative instruments balance sheet subsequent issuance sfas 133 fasb received many requests clarify certain issues causing difficulties implementation june 2000 fasb issued sfas 138 responds requests amending certain provisions sfas 133 amendments include allowing foreign notes consolidated financial statements dollars millions except per share amounts continued currency denominated assets liabilities qualify hedge accounting permitting offsetting certain interentity foreign currency exposures reduce need thirdparty derivatives redefining nature interest rate risk avoid sources ineffectiveness lucent adopting sfas 133 corresponding amendments sfas 138 effective october 1 2000 impact adopting sfas 133 amended sfas 138 significant 6 supplementary financial information supplementary income statement information supplementary balance sheet information notes consolidated financial statements dollars millions except per share amounts continued supplementary cash flow information october 1 1997 lucent contributed consumer products business new venture formed lucent philips electronics nv exchange 40 percent ownership philips consumer communications pcc october 22 1998 lucent philips announced intention end pcc venture agreed regain control original businesses results operations net assets remaining businesses lucent previously contributed pcc consolidated october 1 1998 however years ended september 30 1999 1998 consolidated statements cash flows exclude contribution regaining lucents consumer products business year ended september 30 1999 costs operating expenses include 236 charge primarily associated asset impairments integrationrelated charges related ascend nexabit mergers 7 earnings per common share basic earnings per common share calculated dividing net income weighted average number common shares outstanding period diluted earnings per common share calculated dividing net income sum weighted average number common shares outstanding plus additional common shares would outstanding potentially dilutive securities common stock equivalents issued following table reconciles number shares used earnings per share calculations 8 comprehensive income comprehensive income displayed consolidated statements changes shareowners equity represents net income plus results certain shareowners equity changes reflected consolidated statements income notes consolidated financial statements dollars millions except per share amounts continued aftertax components accumulated comprehensive income loss follows foreign currency translation adjustments currently adjusted income taxes since relate indefinite investments nonus subsidiaries 9 business restructuring charges fourth quarter calendar year 1995 pretax charge 2655 recorded cover restructuring costs 2467 asset impairment charges 188 restructuring plans included exit certain businesses well consolidating reengineering numerous corporate business unit operations total deductions lucents business restructuring reserves 16 184 years ended september 30 2000 1999 respectively included deductions cash payments 11 61 years ended september 30 2000 1999 respectively noncash related charges 15 year ended september 30 1999 noncash related charges primarily related assets product lines businesses lucent exited part restructuring activities related costs included 1995 restructuring plan assets benefit activities continue used generate future revenues reserves charged product lines businesses exited 1999 addition 1999 lucent reversed 108 business restructuring reserves primarily related favorable experience employee separations well projects completed cost lower originally estimated year ended september 30 1999 september 30 1999 restructuring plans substantially completed 10 income taxes following table presents principal reasons difference effective tax rate continuing operations us federal statutory income tax rate notes consolidated financial statements dollars millions except per share amounts continued 1 includes nontax deductible purchased inprocess research development goodwill amortization mergerrelated costs following table presents us nonus components income taxes provision income taxes september 30 2000 lucent tax credit carryforwards 112 federal state local nonus net operating loss carryforwards 138 expire primarily year 2004 september 30 2000 lucent recorded valuation allowances totaling 198 carryforwards primarily certain foreign jurisdictions recovery carryforwards uncertain notes consolidated financial statements dollars millions except per share amounts continued components deferred tax assets liabilities follows lucent provided us deferred income taxes foreign withholding taxes 3802 undistributed earnings nonus subsidiaries september 30 2000 since earnings intended reinvested indefinitely 11 debt obligations lucent revolving credit facilities september 30 2000 aggregating 4731 portion used support lucents commercial paper program 4000 domestic lenders 731 foreign lenders total credit facilities available september 30 2000 domestic foreign lenders 4000 455 respectively notes consolidated financial statements dollars millions except per share amounts continued lucent effective shelf registration statement issuance debt securities 1800 1755 remains available september 30 2000 following table shows aggregate maturities year 3841 total longterm debt obligations 1999 lucent sold trade accounts receivable notes receivable unaffiliated financial institutions without recourse certain sales recourse accounted secured borrowings amounted 1037 september 30 1999 result recourse transactions receivables remained consolidated balance sheets increased cash flows financing activities consolidated statements cash flows 1037 year ended september 30 1999 arrangements terminated year ended september 30 2000 sales receivables accounted secured borrowings see note 16 discussion sales receivables 12 employee benefit plans pension postretirement benefits lucent maintains defined benefit pension plans covering majority employees retirees postretirement benefit plans retirees include health care benefits life insurance coverage notes consolidated financial statements dollars millions except per share amounts continued following information summarizes activity pension postretirement benefit plans entire company including discontinued operations pension plan assets include 102 287 lucent common stock september 30 2000 1999 respectively postretirement plan assets include 3 20 lucent common stock september 30 2000 1999 respectively notes consolidated financial statements dollars millions except per share amounts continued asset pension obligation amounts transferred avaya subject final adjustment final amounts transferred avaya expected materially different estimated amounts components net periodic benefit cost effective october 1 1998 lucent changed method calculating marketrelated value plan assets used determining expected returnonplan asset component annual net pension postretirement benefit costs previous accounting method calculation marketrelated value plan assets included interest dividends immediately realized unrealized gains losses amortized straightline basis fiveyear period new method used calculate marketrelated value includes immediately amount based lucents historical asset returns amortizes difference amount actual return straightline basis fiveyear period new method preferable sfas 87 employers accounting pensions notes consolidated financial statements dollars millions except per share amounts continued results calculated plan asset values closer current fair value thereby lessening accumulation unrecognized gains losses still mitigating effects annual market value fluctuations cumulative effect accounting change related periods prior fiscal year 1999 2150 1308 aftertax 042 041 earnings per basic diluted share respectively onetime noncash credit fiscal 1999 earnings accounting change also resulted reduction benefit costs year ended september 30 1999 increased income 427 260 aftertax 008 earnings per basic diluted share compared previous accounting method accounting change applied retroactively year ended september 30 1998 pro forma net income would 1306 earnings per sharebasic would 043 earnings per sharediluted would 042 1999 lucent changed pension plan benefit management technical pay plan nonrepresented occupational employees hired january 1 1999 certain us employees companies acquired since october 1 1996 participating currently defined benefit pension plan employees receive different pension benefit known account balance program effective january 1 2000 expenses related account balance program included previous pension cost table lucent several nonpension postretirement benefit plans postretirement health care benefit plans lucent assumed 76 annual health care cost trend rate 2001 2004 trend rate would decline 39 assumed health care cost trend rate significant effect amounts reported onepercentagepoint change assumed health care cost trend rate would following effects savings plans lucents savings plans allow employees contribute portion compensation pretax andor aftertax basis accordance specified guidelines lucent matches percentage employee contributions certain limits savings plan expense amounted 228 318 317 years ended september 30 2000 1999 1998 respectively lucent savings plan expense charged continuing operations 185 250 254 years ended september 30 2000 1999 1998 respectively employee stock ownership plan lucents leveraged employee stock ownership plan esop funds employer contributions longterm savings security plan ltssp nonmanagement employees esop obligation reported reduction shareowners equity september 30 2000 esop contained 128 million shares lucents common stock 128 million shares 110 million shares allocated esop 18 million shares unallocated september 30 2000 unallocated shares fair value 54 13 stock compensation plans lucent stockbased compensation plans outside directors certain employees receive stock options equitybased awards plans provide grant stock options stock appreciation rights performance awards restricted stock awards stock unit awards notes consolidated financial statements dollars millions except per share amounts continued stock options generally granted exercise price equal 100 market value share common stock date grant twoto10year terms vest within four years date grant subject customary antidilution adjustments certain exceptions total number shares common stock authorized option grants plans 446 million shares september 30 2000 connection certain lucents acquisitions outstanding stock options held employees acquired companies became exercisable according terms lucent common stock effective acquisition date options reduce shares available grant lucents option plans acquisitions accounted purchases fair value options generally included part purchase price july 1 2000 lucent began recording deferred compensation related unvested options held employees companies acquired purchase acquisition accordance fasb interpretation 44 unamortized deferred compensation expense 34 september 30 2000 deferred expense calculation future amortization based graded vesting schedule awards lucent established employee stock purchase plan espp effective october 1 1996 terms espp eligible employees may 10 eligible compensation deducted pay purchase common stock june 30 2001 per share purchase price 85 average high low per share trading price common stock new york stock exchange last trading day month amount may offered pursuant plan 200 million shares 2000 1999 1998 78 million 75 million 94 million shares respectively purchased espp employee stock purchase plans acquired companies weighted average price 4675 4360 2323 respectively lucent adopted disclosure requirements sfas 123 accounting stockbased compensation sfas 123 permitted sfas 123 applies accounting principles board opinion 25 apb 25 related interpretations accounting plans compensation expense recorded apb 25 49 50 79 years ended september 30 2000 1999 1998 respectively lucent elected adopt optional recognition provisions sfas 123 stock option plans espp net income earnings per share would changed pro forma amounts indicated notes consolidated financial statements dollars millions except per share amounts continued fair value stock options used compute pro forma net income earnings per share disclosures estimated fair value grant date using blackscholes optionpricing model following assumptions 1 premerger assumptions companies acquired poolingofinterests presented summary status lucent stock options related transactions years ended september 30 2000 1999 1998 1 includes options converted acquisitions 2 includes options covering 32355 shares common stock granted broadbased employee plan weighted average exercise price 3734 3 effective spinoff avaya september 30 2000 unvested lucent stock options held avaya employees converted avaya stock options remaining unexercised lucent stock options number lucent stock options exercise price adjusted preserve intrinsic value stock options existed prior spinoff weighted average fair value lucent stock options calculated using blackscholes optionpricing model granted years ended september 30 2000 1999 1998 1615 1665 1187 per share respectively notes consolidated financial statements dollars millions except per share amounts continued following table summarizes status stock options outstanding exercisable september 30 2000 considering spinoff adjustments stock unit awards granted certain award plans following table presents total number shares common stock represented awards granted employees years ended september 30 2000 1999 1998 14 operating segments described note 3 lucent reclassified results operations avaya discontinued operations business previously disclosed separate operating segment data included restated exclude amounts related spinoff avaya lucent operates global telecommunications networking industry two reportable operating segments service provider networks spn microelectronics communications technologies mct spn provides public networking systems software services telecommunications service providers public network operators around world mct provides highperformance optoelectronic components integrated circuits power systems optical fiber applications communications computing industries mct also includes lucents new ventures business two reportable operating segments strategic market units offer distinct products services segments determined based customers markets lucent serves market unit managed separately operation requires different technologies marketing strategies intersegment transactions occur based current market prices intersegment profit eliminated consolidation performance measurement resource allocation reportable operating segments based many factors primary financial measure used operating income exclusive goodwill acquired intangibles amortization iprd costs business acquisitions acquisitionintegrationrelated costs lucent employs sharedservice concepts realize economies scale efficient use resources costs shared services corporate center operations managed common basis allocated notes consolidated financial statements dollars millions except per share amounts continued segments based usage possible factors according nature activity accounting policies reportable operating segments described summary significant accounting policies see note 2 1 results smaller units corporate operations reported corporate including eliminations internal business assets included corporate consist principally cash equivalents deferred income taxes prepaid pension costs assets notes consolidated financial statements dollars millions except per share amounts continued reconciling items reconciliation totals reported operating segments income continuing operations provision income taxes consolidated financial statements follows products services revenues table presents external revenue groups similar products services 1 principally includes optical fiber power systems consumer products geographic information 1 revenues attributed geographic areas based location customers 2 represents property plant equipment net goodwill acquired intangibles concentrations historically lucent relied limited number customers substantial portion total revenues verizon accounted approximately 13 consolidated revenues fiscal year 2000 principally spn segment revenues att accounted approximately 10 14 15 consolidated revenues years 2000 1999 1998 respectively principally spn segment notes consolidated financial statements dollars millions except per share amounts continued lucent expects significant portion future revenues continue generated limited number customers loss customers substantial reduction orders customers could materially adversely affect lucents operating results lucent concentration available sources supply materials labor services rights eliminated suddenly could impact operations severely 15 financial instruments carrying values estimated fair values financial instruments including derivative financial instruments follows 1 excluding longterm lease obligations 47 september 30 2000 79 september 30 1999 following methods used estimate fair value class financial instruments carrying amounts cash equivalents investments receivables debt maturing within one year contained consolidated balance sheets approximate fair value credit risk market risk nature financial instruments involve risk including credit risk nonperformance counterparties contract notional amounts instruments reflect extent involvement lucent particular classes financial instruments maximum potential loss may exceed amounts recognized consolidated balance sheets however lucents maximum exposure credit loss event nonperformance party financial instruments commitments extend credit financial guarantees limited amount drawn outstanding instruments lucent seeks reduce credit risk financial instruments dealing financially secure counterparties exposure credit risk controlled credit approvals credit limits continuous monitoring procedures reserves losses established deemed necessary lucent seeks limit exposure credit risks single country region notes consolidated financial statements dollars millions except per share amounts continued financial instruments inherently expose holders market risk including changes currency interest rates lucent manages exposure market risks regular operating financing activities appropriate use derivative financial instruments derivative financial instruments lucent conducts business multinational basis wide variety foreign currencies consequently lucent enters various foreign exchange forward option contracts manage exposure adverse changes foreign exchange rates notional amounts foreign exchange forward option contracts represent us dollar equivalent amounts exchanged generally foreign exchange forward contracts designated firmly committed forecast sales purchases expected occur less one year gains losses hedged contracts firmly committed transactions option contracts anticipated transactions deferred current assets liabilities recognized income transactions occur material consolidated financial statements september 30 2000 1999 gains losses foreign exchange forward contracts recognized incomenet exchange rates change lucent engages foreign currency hedging activities reduce risk changes exchange rates adversely affect eventual net cash flows resulting sale products foreign customers purchases foreign suppliers hedge accounting treatment appropriate derivative instrument changes value derivative instrument substantially equal opposite changes value exposure hedged lucent believes achieved risk reduction hedge effectiveness gains losses derivative instruments substantially offset gains assets liabilities transactions hedged hedge effectiveness periodically measured comparing change fair value hedged foreign currency exposure applicable market rate change market value corresponding derivative instrument following table summarizes notional amounts derivative financial instruments us dollars 2000 notional amounts principally represent contracts canadian dollars brazilian reals australian dollars british pounds japanese yen euros notional amounts represent face amount contractual arrangements basis us dollars exchanged measure market credit exposure lucent may enter certain interest rate swap agreements manage risk fixed variable interest rates longterm shortterm maturity debt instruments material interest rate swap agreements effect 2000 1999 nonderivative offbalancesheet instruments requests providing commitments extend credit financial guarantees reviewed approved senior management regularly reviews outstanding commitments letters credit financial guarantees results reviews considered assessing adequacy lucents reserve possible credit guarantee losses following table presents lucents nonderivative offbalancesheet instruments amounts committed drawndown amounts drawndown instruments may notes consolidated financial statements dollars millions except per share amounts continued expire without drawn upon therefore amounts committed drawndown necessarily represent future cash flows commitments extend credit commitments extend credit third parties conditional agreements generally fixed expiration termination dates specific interest rates purposes certain situations credit may available draw certain conditions precedent met guarantees debt time lucent guarantees financing product purchases customers debt certain unconsolidated joint ventures requests providing guarantees reviewed approved senior management certain financial guarantees assigned thirdparty reinsurer letters credit letters credit purchased guarantees ensure lucents performance payment third parties accordance specified terms conditions amounted 917 910 september 30 2000 1999 respectively 16 securitizations september 2000 lucent thirdparty financial institution arranged creation nonconsolidated special purpose trust purpose allowing lucent time sell limitedrecourse basis maximum 970 customer finance loans receivables loans given point time wholly owned bankruptcyremote subsidiary turn sell loans trust lucent also agreed case foreign currency denominated loans fixed interest rate indemnify trust foreign exchange losses due movements interest rates hedging instruments entered loans lucent receive fee trust either arranging hedging instruments providing indemnity lucent continue service administer collect loans behalf trust receive fee performance services lucent also receive fee referring loans trust purchases lucent september 30 2000 lucent sold 579 loans trust impact transaction increased cash flows operating activities 575 september 1999 subsidiary lucent sold approximately 625 accounts receivable one large nonus customer nonconsolidated qualified special purpose entity qspe turn sold undivided ownership interest receivables entities managed unaffiliated financial institution additionally lucent transferred designated pool qualified accounts receivable approximately 700 qspe collateral initial sale lucents retained interest qspes designated pool qualified accounts receivable included receivables september 30 1999 impact transaction 1999 financial statements reduced receivables increased cash flows operating activities consolidated statements cash flows 600 december 1999 lucent repurchased 408 625 accounts receivable previously reported arrangement terminated notes consolidated financial statements dollars millions except per share amounts continued addition lucent established new arrangement whereby subsidiary sold 750 accounts receivable including repurchased receivables described consortium banks limited recourse result transactions receivables september 30 2000 reduced 342 cash flows operating activities increased 312 fiscal 2000 fourth fiscal quarter 2000 approximately 550 additional receivables customer sold time lucent may sell trade note receivables without recourse andor discounts normal course business 17 commitments contingencies normal course business lucent subject proceedings lawsuits claims including proceedings laws government regulations related environmental matters subject many uncertainties outcomes predictable assurance consequently ultimate aggregate amount monetary liability financial impact respect matters september 30 2000 cannot ascertained matters could affect operating results one quarter resolved future periods assurance respect thereto management believes final disposition monetary liability financial impact lucent matters described next paragraph beyond provided september 30 2000 would material annual consolidated financial statements addition lucent certain former officers defendants several purported shareholder class action lawsuits alleged violations federal securities laws specifically complaints allege among things beginning late october 1999 lucent certain officers misrepresented lucents financial condition failed disclose material facts would adverse impact lucents future earnings prospects growth actions seek compensatory damages costs expenses associated litigation actions early stages company unable determine potential impact consolidated financial statements lucent intends defend actions vigorously connection formation lucent certain units att corp associated assets liabilities units atts distribution remaining interest lucent shareowners lucent att ncr corporation executed delivered separation distribution agreement dated february 1 1996 amended restated certain related agreements separation distribution agreement among things provides lucent indemnify att ncr liabilities relating lucents business operations contingent liabilities relating lucents business operations otherwise assigned lucent addition contingent liabilities relating present former business lucent contingent liabilities relating atts discontinued computer operations ncr assigned lucent separation distribution agreement provides sharing contingent liabilities allocated one parties following proportions att 75 lucent 22 ncr 3 separation distribution agreement also provides party share specified portions contingent liabilities related business parties exceed specified levels connection spinoff avaya lucent avaya executed delivered contribution distribution agreement provides indemnification company respect contingent liabilities primarily relating respective businesses otherwise assigned subject certain sharing provisions event aggregate value amounts paid company respect single contingent liability set group related contingent liabilities excess 50 company share portions excess threshold amount based agreedupon percentages contribution distribution agreement also provides sharing certain contingent liabilities specifically 1 notes consolidated financial statements dollars millions except per share amounts continued contingent liabilities primarily contingent liabilities lucent contingent liabilities associated businesses attributed avaya 2 certain specifically identified liabilities including liabilities relating terminated divested discontinued businesses operations 3 shared contingent liabilities within meaning separation distribution agreement att corp environmental matters lucents current historical operations subject wide range environmental protection laws united states laws often require parties fund remedial action regardless fault lucent remedial investigatory activities way numerous current former facilities addition lucent named successor att potentially responsible party prp numerous superfund sites pursuant comprehensive environmental response compensation liability act 1980 cercla comparable state statutes separation distribution agreement lucent responsible liabilities primarily resulting relating operation lucents business conducted time prior separation including related businesses discontinued disposed prior separation lucents assets including without limitation associated sites addition separation distribution agreement lucent required pay portion contingent liabilities paid excess certain amounts att ncr including environmental liabilities often difficult estimate future impact environmental matters including potential liabilities lucent records environmental reserve probable liability incurred amount liability reasonably estimable practice followed whether claims asserted unasserted management expects amounts reserved paid periods remediation applicable sites typically range five 30 years reserves estimated losses environmental remediation depending site based primarily internal thirdparty environmental studies estimates number participation level financial viability prps extent contamination nature required remedial actions accruals adjusted information develops circumstances change amounts provided lucents consolidated financial statements environmental reserves gross undiscounted amounts reserves without deductions insurance thirdparty indemnity claims cases insurance carriers thirdparty indemnitors agreed pay amounts management believes collectibility amounts probable amounts reflected receivables financial statements although lucent believes reserves adequate assurance amount capital expenditures expenses required relating remedial actions compliance applicable environmental laws exceed amounts reflected lucents reserves material adverse effect lucents financial condition results operations cash flows possible loss range possible loss may incurred excess provided september 30 2000 cannot estimated lease commitments lucent leases land buildings equipment agreements expire various years 2020 rental expense operating leases 522 406 336 years ended september 30 2000 1999 1998 respectively table shows future minimum lease payments due noncancelable leases september 30 2000 payments total 1463 operating leases net present value payments capital leases 62 deducting imputed interest 10 notes consolidated financial statements dollars millions except per share amounts continued 18 subsequent events november 13 2000 lucent entered agreement sell power systems business tyco international ltd diversified manufacturing service company 2500 cash sale subject regulatory approval customary closing conditions expected close december 31 2000 notes consolidated financial statements dollars millions except per share amounts continued 19 quarterly information unaudited notes consolidated financial statements dollars millions except per share amounts continued 1 includes aftertax gain 115 189 pretax associated sale equity investment aftertax charge 40 61 pretax primarily associated mergers ins excel xedia 2 includes aftertax charge 7 11 pretax iprd related acquisition vtc 3 includes aftertax charge 863 nontax impacting iprd related acquisitions chromatis herrmann ortel agere 4 includes aftertax charge 131 nontax impacting iprd related acquisition spring tide 5 result loss reported continuing operations potentially dilutive securities excluded calculation diluted earnings loss per share effect would antidiluted 6 includes aftertax charge 287 295 pretax iprd related acquisitions quadritek stratus xnt quantum 7 includes aftertax charge 15 18 pretax iprd related acquisitions waveaccess enable ethernet sybarus addition 24 stratus iprd reversed result merger vital signs lucent recorded charge operating expenses 7 nontax impacting direct merger related costs 8 includes aftertax charge 81 nontax impacting primarily associated mergers ascend rascom 9 includes pretax costs 258 191 aftertax primarily associated asset impairments integrationrelated charges merger expenses related mergers ascend nexabit costs principally include writeoff livingston goodwill acquired intangibles certain product system integration direct merger expenses related nexabit additionally result 1999 acquisition intercall lucent recorded aftertax charge 2 3 pretax iprd aftertax gain 167 274 pretax associated sale equity investment 10 obtained composite tape stock prices restated reflect twoforone splits companys common stock effective april 1 1998 april 1 1999 lucent technologies inc schedule ii valuation qualifying accounts dollars millions amounts written uncollectible payments recoveries b included deductions cash payments 11 61 162 years ended september 30 2000 1999 1998 respectively addition lucent reversed 5 108 77 years ended september 30 2000 1999 1998 respectively c realization deferred tax assets valuation allowance previously provided primarily writeoff obsolete scrapped inventory amounts reflect continuing operations amounts reclassified exclude avaya exhibit index following documents filed exhibits report form 10k incorporated reference herein document incorporated reference identified parenthetical referencing sec filing included document management contract compensatory plan arrangementitem 14 exhibits financial statement schedule reports form 8k following documents filed part report financial statements financial statement schedule separate financial statements subsidiaries consolidated 50 percent less owned persons omitted since entity constitutes significant subsidiary pursuant provisions regulation sx article 309 5 exhibits see exhibit index page 90 description documents filed exhibits report form 10k incorporated reference herein document incorporated reference identified parenthetical referencing sec filing included document furnish without charge security holder upon request copy proxy statement portions incorporated herein reference thereto furnish exhibit cost b reports form 8k last quarter fiscal year covered report august 23 2001 filed current report form 8k pursuant item 9 regulation fd disclosures furnish slides presented analyst session held new york august 16 2001 filed current report form 8k pursuant item 5 events announce lenders party 364day revolving credit facility agreement amended restated 5year revolving credit facility agreement agreements collateral thereto dated february 22 2001 entered amendment abovereferenced facilities amendments allowed us implement phase ii restructuring program furnish copies amendments august 2 2001 filed current report form 8k pursuant item 9 regulation fd disclosures furnish document entitled recent developments included private offering document convertible preferred stock dated august 2 2001 august 1 2001 filed current report form 8k pursuant item 5 events furnish july 24 2001 announcement entered definitive agreement furukawa electric co ltd sale optical fiber solutions business copy related asset stock purchase agreement august 1 2001 filed current report form 8k pursuant item 9 regulation fd disclosures furnish document entitled recent developments press release announcing intention make private offering redeemable convertible preferred stock issued july 31 2001 july 31 2001 filed current report form 8k pursuant item 5 events furnish restated consolidated financial information reflecting treatment agere power systems business discontinued operations pursuant accounting principles board opinion 30 reporting results operations reporting effects disposal segment business extraordinary unusual infrequently occurring events transactions statements include restated consolidated financial statements september 30 2000 1999 years ended september 30 2000 1999 1998 july 24 2001 filed current report form 8k pursuant item 9 regulation fd disclosures furnish press release reporting earnings results third fiscal quarter signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned hereunto duly authorized lucent technologies inc john kritzmacher john kritzmacher principal accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated report independent accountants board directors shareowners lucent technologies inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position lucent technologies inc subsidiaries september 30 2001 2000 results operations cash flows three years period ended september 30 2001 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 5 consolidated financial statements 2001 company changed accounting methods revenue recognition derivative financial instruments discussed notes 1 12 2000 1999 company changed accounting methods computer software developed obtained internal use calculating annual net pension postretirement benefit costs respectively pricewaterhousecoopers llp new york new york october 23 2001 except fifth paragraph note 10 note 19 date november 20 2001 lucent technologies inc subsidiaries consolidated statements operations amounts millions except per share amounts see notes consolidated financial statements lucent technologies inc subsidiaries consolidated balance sheets dollars millions except per share amounts see notes consolidated financial statements lucent technologies inc subsidiaries consolidated statements changes shareowners equity dollars millions see notes consolidated financial statements lucent technologies inc subsidiaries consolidated statements cash flows dollars millions see notes consolidated financial statements lucent technologies inc notes consolidated financial statements dollars millions except per share amounts 1 summary significant accounting policies basis consolidation consolidated financial statements include majorityowned subsidiaries lucent technologies inc lucent company exercises control investments lucent exercises significant influence control generally 20 50 ownership interest accounted equity method accounting material intercompany transactions balances eliminated except otherwise noted amounts disclosures restated reflect lucents continuing operations see note 3 use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported consolidated financial statements accompanying disclosures actual results could differ estimates assumptions reviewed periodically effects revisions reflected consolidated financial statements period determined necessary foreign currency translation operations outside us prepare financial statements currencies us dollar results operations cash flows translated average exchange rates period assets liabilities translated endofperiod exchange rates translation adjustments included separate component accumulated comprehensive income loss shareowners equity revenue recognition revenue product sales hardware software generally recognized persuasive evidence agreement exists delivery occurred fee fixed determinable collection resulting receivable including receivables customers lucent provided customer financing probable determination whether collectibility receivables reasonably assured based upon assessment creditworthiness customers lucents ability sell receivable instances collection sale receivable reasonably assured revenue related costs deferred value allocated elements multiple element arrangement based objective evidence relative fair values element services revenues generally recognized time performance revenues estimated profits longterm contracts generally recognized percentageofcompletion method accounting using either unitsofdelivery costtocost methodology profit estimates revised periodically based changes facts losses contracts recognized immediately lucent makes certain sales multiple distribution channels including resellers distributors products sold distribution channels revenue generally recognized product sold reseller distributor end user research development software development costs research development costs charged expense incurred however costs incurred development computer software sold leased otherwise marketed capitalized technological feasibility established capitalized costs subject ongoing assessment recoverability based anticipated future revenues changes hardware software technologies costs capitalized include direct labor related overhead amortization capitalized software development costs begins product available general release amortization provided productbyproduct basis straightline method lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts periods exceeding two years unamortized capitalized software development costs determined excess net realizable value product expensed immediately effective october 1 1999 lucent adopted statement position 981 accounting costs computer software developed obtained internal use sop 981 result certain costs computer software developed obtained internal use capitalized part assets amortized threeyear period impact adopting sop 981 reduction costs operating expenses 206 fiscal year ended september 30 2000 cash equivalents highly liquid investments original maturities three months less considered cash equivalents primarily consist money market funds lesser extent certificates deposit commercial paper inventories stated lower cost determined principally firstin firstout basis market contracts process contracts process stated cost plus accrued profits less progress billings net contracts process balances include unbilled receivables 358 1272 september 30 2001 2000 respectively generally billable collectible within one year property plant equipment property plant equipment stated cost less accumulated depreciation determined using combination accelerated straightline methods estimated useful lives various asset classes useful lives buildings building improvements furniture fixtures machinery equipment principally range 10 40 years five 10 years two 10 years respectively financial instruments lucent uses various financial instruments including foreign exchange forward option contracts interest rate swap agreements manage risk lucent generating cash flows offset cash flows certain transactions foreign currencies underlying financial instruments relation amount timing lucents derivative financial instruments purposes trading lucents nonderivative financial instruments include letters credit commitments extend credit guarantees debt see note 5 note 15 discussions derivative financial instruments hedging activities lucents investment portfolio consists equity investments accounted cost equity methods well equity investments publicly held companies generally concentrated hightechnology communications industry investments included assets marketable equity securities readily determinable fair values classified availableforsale securities reported fair value unrealized gains losses changes fair value securities reported net tax component accumulated comprehensive income loss sold see note 8 time sale gains losses recognized income expense net equity investments periodically reviewed determine declines fair value cost basis otherthantemporary significant sustained decreases quoted market prices lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts series historic projected operating losses investee factors considered part review decline fair value determined otherthantemporary impairment loss recorded income expense net individual security written new cost basis securitizations transfers financial instruments sales transfers securitizations financial instruments accounted statement financial accounting standards sfas 140 accounting transfers servicing financial assets extinguishments liabilities sfas 140 time lucent may sell trade receivables notes receivable without recourse andor discounts normal course business receivables removed consolidated balance sheet time sold sales transfers meet criteria surrender control sfas 140 accounted secured borrowings value assigned undivided interests retained securitized trade receivables based relative fair values interest retained sold securitization fair values measured present value estimated future cash flows securitization facility see note 16 discussions securitizations transfers financial instruments goodwill acquired intangibles goodwill acquired intangibles amortized straightline basis periods benefited principally range five 10 years goodwill excess purchase price fair value identifiable net assets acquired business combinations accounted purchases impairment goodwill longlived assets goodwill longlived assets reviewed impairment whenever events product discontinuance plant closures product dispositions changes circumstances indicate carrying amount may recoverable events occur lucent compares carrying amount assets undiscounted expected future cash flows comparison indicates impairment amount impairment typically calculated using discounted expected future cash flows discount rate applied cash flows based lucents weighted average cost capital represents blended aftertax costs debt equity reclassifications certain prior year amounts reclassified conform fiscal year 2001 presentation 2 business restructuring charges asset impairments january 24 2001 july 24 2001 lucent announced phase ii restructuring program restructuring program lucent exited certain nonstrategic wireless optical networking switching access product lines streamlined cost structure various businesses corporate operations resulted pretax charge earnings totaling 11416 year ended september 30 2001 charge includes restructuring costs 4767 asset writedowns 6649 asset writedowns include inventory writedowns 1259 recorded component costs lucent expects complete restructuring program end fiscal year 2002 lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts following table displays activity balances restructuring reserve account year ended september 30 2001 includes proceeds sale product line b september 30 2001 unutilized inventory reserve restructuring 689 employee separations lucent recorded charges fiscal year 2001 associated voluntary involuntary employee separations totaling approximately 39000 employees including 8500 related voluntary earlyretirement offer qualified us paid management employees september 30 2001 approximately 23700 employees terminated addition 5300 employee separations since december 31 2000 included amounts achieved attrition divestiture businesses majority remaining employee separations expected completed end second fiscal quarter 2002 employee separations impact lucents business groups geographic regions 39000 employee separations approximately 70 management 60 involuntary noncash portion employee separations charge reflects 2113 net pension postretirement termination benefits certain us employees expected funded lucents pension assets 560 net pension postretirement postemployment benefit curtailment charges curtailment charges recognized since significant number expected years future service present plan participants either eliminated see note 12 contract settlements contract settlements include settlements purchase commitments suppliers 508 contract renegotiations cancellations contracts customers 436 approximately 50 total purchase commitments relate rationalization certain optical networking products including charges relating discontinuance chromatis product portfolio customer settlements include charges associated switching access product rationalizations lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts companys strategic decision limit investment research development certain wireless technologies facility closings facility closings reflect costs associated consolidation offices production facilities result employee separations product rationalizations transition contract manufacturing goodwill acquired intangibles impairment losses related writedown goodwill acquired intangibles fair value estimated discounting expected future cash flows impairment charges largely relate writeoff 3707 goodwill relating discontinuance chromatis product portfolio writeoff acquired intangibles related impairment terabeam investment rationalizations products associated deltakabel stratus ignitus acquisitions see note 4 inventory writedowns resulted primarily optical networking switching access wireless product rationalizations discontinuances asset writedowns remainder asset writedowns consisted property plant equipment capitalized software assets associated lucents product system rationalizations resulting sales assets closures consolidation offices research development facilities factories 3 agere initial public offering discontinued operations december 29 2000 lucent completed sale power systems business see note 4 april 2 2001 agere systems inc agere lucents microelectronics business completed initial public offering ipo 600 million shares class common stock resulting net proceeds 3440 agere result ipo planned spinoff agere described lucent recorded increase shareowners equity 922 addition april 2 2001 morgan stanley exercised overallotment option purchase additional 90 million shares agere class common stock lucent morgan stanley exchanged 519 lucent commercial paper agere common shares transaction resulted gain 141 included estimated loss disposal agere exercise overallotment option morgan stanley lucent owned 578 agere common stock lucent satisfies certain conditions terms credit facilities see note 10 intends spinoff agere taxfree distribution shareowners company historically reported agere power systems business part single significant segment accordingly lucents consolidated financial statements periods presented reclassified reflect agere power systems business discontinued business segment accordance accounting principles board opinion 30 september 30 2000 lucent completed spinoff avaya inc lucents former enterprise networks business taxfree distribution shareowners historical carrying amount net assets transferred avaya recorded stock dividend 1009 result final transfer assets liabilities avaya stock dividend adjusted 47 reflected lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts reduction additional paidincapital fiscal year 2001 segment also treated discontinued operation summarized financial information discontinued operations follows agere power systems income loss discontinued operations includes income tax provisions 107 398 296 fiscal years ended september 30 2001 2000 1999 respectively loss disposal agere net tax provision 39 composed lucents 578 share estimated net losses separation costs microelectronics business measurement date planned spinoff date partially offset gain 141 associated lucents debt exchange april 2 2001 noted loss disposal agere includes lucents share 2762 impairment charge goodwill acquired intangibles primarily associated product portfolios ortel corporation herrmann technology inc agere inc acquisitions costs associated ageres restructuring initiatives separation expenses related ipo expected spinoff inventory provisions 563 99 409 respectively major components restructuring charge include 386 rationalization underutilized manufacturing facilities restructuringrelated activities 177 work force reductions addition agere recorded 538 tax valuation allowance deferred tax assets b avayas income discontinued operations years ended september 30 2000 1999 net applicable income taxes 160 256 respectively income discontinued operations includes allocation lucents interest expense totaling 64 91 fiscal years ended september 30 2000 1999 respectively based upon amount debt assumed avaya footnotes continued next page lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts footnotes continued previous page approximately 780 commercial paper borrowings assumed avaya part spinoff transaction loss disposal avaya net tax benefit 238 reflects costs directly associated spinoff net loss avaya measurement date spinoff date september 30 2000 loss includes components avaya reorganization plan including business restructuring charge directlyrelated asset writedowns 545 recorded year along transaction costs 56 spinoff major components restructuring charge include 365 employee separation 101 real estate consolidation c includes 2500 shortterm debt assumed agere see note 10 565 reserves associated lucents share ageres estimated future losses planned spinoff date october 4 2001 agere repaid 1000 debt amounts shown net minority interest net assets agere 1026 september 30 2001 summarized cash flow information discontinued operations follows 4 business dispositions combinations dispositions december 29 2000 lucent completed sale power systems business tyco international ltd approximately 2538 cash connection sale lucent recorded extraordinary gain 1182 net tax expense 780 august 31 2001 lucent received 572 closing transaction celestica corporation transition lucents manufacturing operations oklahoma city oklahoma columbus ohio closing lucent entered fiveyear supply agreement celestica primary manufacturer switching access wireless networking systems products inventory sold end user inventory associated transaction remains lucents inventory balance corresponding liability proceeds received inventory amounted approximately 310 september 30 2001 additionally lucent may required repurchase 90 inventory used within one year transaction work force related two operations expected reduced andor transferred celestica result lucent recorded noncash termination curtailment charges approximately 378 fiscal year ended september 30 2001 included component lucents employee separation restructuring costs see note 2 acquisitions lucent fiscal year ended september 30 2001 following table presents information acquisitions lucent fiscal years ended september 30 2000 1999 acquisitions accounted purchase method lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts accounting acquired technology valuation included existing technology purchased inprocess research development iprd intangibles iprd charges recorded quarter transaction completed pro forma basis fiscal year 2000 acquisitions occurred october 1 1999 amortization goodwill acquired intangibles would increased approximately 675 fiscal year ended september 30 2000 spring tide networks provider network switching equipment b chromatis networks inc supplier metropolitan optical networking systems c deltakabel telecom cv developer cable modem internet protocol ip telephony products services european market stratus computer inc manufacturer faulttolerant computer systems acquired ascend communications inc ascend e acquisitions include waveaccess ltd quadritek systems inc xnt systems inc quantum telecom solutions inc intercall communications consulting inc f connection lucents restructuring program impairment charge goodwill acquired intangibles recorded fiscal year 2001 relating acquisitions see note 2 na applicable 24 iprd subsequently reversed march 1999 connection acquisitions spring tide chromatis certain key employees entitled receive additional lucent common stock based achievement specified milestones lucent recorded compensation expense milestones deemed probable milestones met included purchase price acquisitions iprd noncash charge earnings technology reached technological feasibility future alternative use remaining purchase price allocated tangible assets intangible assets including goodwill acquired intangibles less liabilities assumed value allocated iprd determined using income approach included excess earnings analysis reflecting appropriate cost capital investment estimates future cash flows related iprd made project based lucents estimates revenue operating expenses income taxes project estimates consistent historical pricing margins expense levels similar products revenues estimated based relevant market size growth factors expected industry trends individual product sales cycles estimated life products underlying technology estimated operating expenses income taxes charges use contributory assets lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts deducted estimated revenues determine estimated aftertax cash flows project estimated operating expenses include cost goods sold selling general administrative expenses research development expenses research development expenses include estimated costs maintain products introduced market generate revenues costs complete inprocess research development discount rates utilized discount projected cash flows based consideration lucents weighted average cost capital well factors including useful life project anticipated profitability project uncertainty technology advances known time stage completion project management primarily responsible estimating fair value assets liabilities acquired conducted due diligence determining fair value management made estimates assumptions affect reported amounts assets liabilities expenses resulting acquisitions actual results could differ amounts terabeam corporation april 9 2000 lucent terabeam corporation entered agreement develop terabeams fiberless optical networking system provides highspeed data networking local wide area networks agreement lucent paid cash contributed research development assets intellectual property freespace optical products valued aggregate 450 september 26 2001 lucent terabeam agreed terminate existing arrangements parties pursuant agreement 30 interest lucent holds venture develops fiberless optical networking system exchanged 15 interest terabeam corporation second quarter fiscal year 2002 result exiting original arrangement evaluation restructured investment september 30 2001 lucent wrote remaining investment goodwill acquired intangibles 328 included part lucents fiscal year 2001 business restructuring charge see note 2 ignitus communications llc april 4 2000 lucent acquired remaining 44 ignitus communications llc startup company focuses highspeed optical communications network edge approximately 33 lucent previously owned 56 company connection lucents restructuring program impairment charge goodwill acquired intangibles recorded fiscal year 2001 relating product rationalization technology acquired ignitus see note 2 spectran corporation july 21 1999 lucent began cash tender offer outstanding shares spectran corporation designer manufacturer specialty optical fiber fiberoptic products tender offer expired august 31 1999 lucent thereafter accepted paid shares giving 61 interest spectran acquisition accounted purchase method accounting february 4 2000 lucent acquired remaining shares spectran resulting total purchase price approximately 68 spectran corporation part lucents optical fiber business lucent sold november 16 2001 see note 19 poolingofinterests mergers following table presents information material mergers lucent accounted poolingofinterests method accounting fiscal years ended september 30 2000 1999 lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts ins previously june 30 fiscal yearend order conform fiscal yearends ins lucent inss results operations cash flows three months ended september 30 1999 reflected lucents financial statements first quarter fiscal year 2000 inss revenue net income three months ended september 30 1999 100 11 respectively september 30 2000 retained earnings includes adjustment reflect net income recognized ins three months ended september 30 1999 b lucent assumed ascend stock options equivalent approximately 65 million shares lucent common stock connection merger lucent recorded third fiscal quarter 1999 charge operating expenses approximately 79 nontax deductible mergerrelated costs primarily fees investment bankers attorneys accountants financial printing nine months ended june 30 1999 ascends historical revenue net income 1610 66 respectively included lucents historical revenues income loss continuing operations respectively year ended september 30 1999 intercompany transactions lucent ascend nine months ended june 30 1999 138 86 eliminated revenues income loss continuing operations respectively year ended september 30 1999 lucent also completed pooling transactions historical operations entities material lucents consolidated results operations either individual aggregate basis therefore prior periods restated mergers 5 accounting changes staff accounting bulletin 101 revenue recognition financial statements sab 101 december 1999 securities exchange commission issued sab 101 provides guidance recognition presentation disclosure revenues financial statements fourth quarter fiscal year 2001 lucent implemented sab 101 retroactively beginning fiscal year 2001 resulting cumulative effect change accounting principle 68 loss net tax benefit 45 002 loss per basic diluted share reduction 2001 loss continuing operations 11 000 per basic diluted share fiscal year ended september 30 2001 lucent recognized 116 revenue included cumulative effect adjustment october 1 2000 cumulative effect adjustment results primarily change revenue recognized intellectual property license agreements included settlements objective evidence fair value settlement sab 101 absence objective evidence fair value settlement revenue recognized prospectively remaining term intellectual property license agreement addition revenue recognition deferred certain products multiple element agreements certain services primarily installation integration deemed essential functionality delivered elements lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts following pro forma amounts showing effects accounting change applied retroactively sfas 133 accounting derivative instruments hedging activities sfas 133 effective october 1 2000 lucent adopted sfas 133 corresponding amendments sfas 138 sfas 133 requires lucent measure derivatives including certain derivatives embedded contracts fair value recognize consolidated balance sheet asset liability depending lucents rights obligations applicable derivative contract derivatives designated fair value hedges changes fair value derivative instrument hedged item recorded income expensenet derivatives designated cash flow hedges effective portions changes fair value derivative reported comprehensive income oci subsequently reclassified income expensenet hedged item affects income expensenet changes fair value derivative instruments designated hedging instruments ineffective portions hedges recognized income expensenet period incurred adoption sfas 133 october 1 2000 resulted cumulative aftertax reduction net loss 30 net 17 tax provision 001 per basic diluted share 11 credit oci reduction net loss primarily attributable derivatives designated hedging instruments including foreign currency embedded derivatives equity warrants derivatives 6 supplementary financial information lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts noncash transactions april 2 2001 morgan stanley exchanged 519 lucents commercial paper 90 million shares agere common stock see note 3 agere assumed lucent 2500 debt maturing within one year see note 10 7 earnings loss per common share basic earnings loss per common share calculated dividing net income loss applicable common shareowners weighted average number common shares outstanding period diluted earnings loss applicable common shareowners per share reflects potential lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts issuances common stock amounts applicable common shareowners reflect dividends accretion lucents redeemable convertible preferred stock see note 11 diluted earnings loss per share year ended september 30 2001 include effect following potential common shares effect would reduce loss per share continuing operations millions addition options exercise price greater average market price common shares 4070 million 410 million 55 million years ended september 30 2001 2000 1999 respectively excluded computation diluted earnings loss per share 8 comprehensive income loss comprehensive income loss represents net income loss plus results certain shareowners equity changes reflected consolidated statements operations lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts aftertax components accumulated comprehensive income loss follows foreign currency translation adjustments generally adjusted income taxes relate indefinite investments nonus subsidiaries 9 income taxes following table presents principal reasons difference effective tax benefit rate continuing operations us federal statutory income tax benefit rate includes nontax deductible iprd goodwill amortization impairments including goodwill writeoffs recognized restructuring program mergerrelated costs lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts following table presents us nonus components income loss continuing operations income taxes provision benefit income taxes components deferred tax assets liabilities follows september 30 2001 lucent tax credit carryforwards 898 federal state local nonus net operating loss carryforwards 1640 taxeffected expire primarily year 2019 september 30 2001 lucent recorded valuation allowances totaling 742 carryforwards primarily certain state foreign jurisdictions lucent concluded likely carryforwards would realized although realization assured lucent concluded likely remaining deferred tax assets realized based scheduling deferred tax liabilities projected lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts taxable income amount net deferred tax assets actually realized however could vary differences timing amount future reversals existing deferred tax liabilities changes actual amounts future taxable income lucent provided us deferred income taxes foreign withholding taxes 4180 undistributed earnings nonus subsidiaries september 30 2001 since earnings intended reinvested indefinitely practical estimate amount additional taxes might payable earnings 10 debt obligations debt maturing within one year weighted average interest rates commercial paper 74 63 years ended september 30 2001 2000 respectively weighted average interest rates revolving credit facilities 60 year ended september 30 2001 february 22 2001 lucent completed arrangements 6500 credit facilities financial institutions credit facilities consist replacement 364day 2000 credit facility expired february 22 2001 new 364day 2500 assumable credit facility agere assumable credit facility addition two credit facilities lucent amended existing 2000 credit facility expiring february 2003 364day 2000 credit facility loans outstanding maturity may extended lucent february 26 2003 interest rate credit facilities based libor rates plus spread dependent lucents credit rating lucent borrowed 2500 assumable credit facility assumed agere april 2 2001 closing agere ipo august 16 2001 lucent entered amendment credit facilities amendments modified financial covenants certain conditions terms including necessary allow distribution agere stock lucent shareowners credit facilities secured liens substantially lucents assets collateral including pledge agere stock owned lucent certain existing financings obligations certain future financings obligations could similarly secured time collateral arrangements credit facilities effect credit facilities contain affirmative negative covenants including financial covenants requiring maintenance specified consolidated minimum net worth earnings interest taxes depreciation amortization ebitda levels defined credit facilities addition event subsidiary defaults debt defined credit facilities would constitute default lucents credit facilities total lending commitments credit facilities reduced certain debt reduction transactions undertaken additional funds generated specified nonoperating sources excess 2500 sources funds include proceeds received issuing redeemable convertible preferred stock proceeds received sale optical fiber business see note 19 519 debt reduction debt equity exchange see note 3 specified types transactions first 2000 excess amount would result termination lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts 364day 2000 credit facility additional amounts would reduce total lending commitments remaining 2000 credit facility expires february 2003 however lending commitments facility expires february 2003 reduced less 1500 sale optical fiber business november 16 2001 lucent generated 4500 specified nonoperating sources resulted reduction total lending commitments november 20 2001 approximately 2000 pledge agere stock owned lucent released distribution occur lucents request following terms conditions defined credit facilities met lucent event default exists credit facilities generate positive ebitda fiscal quarter immediately preceding distribution meet minimum current asset ratio receipt 5000 cash certain nonoperating sources 364day 2000 credit facility terminated 2000 credit facility expiring february 2003 reduced 1750 less lucent cannot resume payment dividends common stock unless achieves certain credit ratings ebitda levels event default exists credit facilities payment dividends common stock limited rate 002 per share per quarter lucent permitted pay cash dividends redeemable convertible preferred stock see note 11 event default exists credit facilities longterm debt lucent effective shelf registration statement issuance debt securities 1800 1755 remains available september 30 2001 aggregate maturities year 3341 total longterm debt obligations september 30 2001 fiscal year 2002 fiscal year 2006 thereafter 29 33 48 44 950 2237 respectively 11 redeemable convertible preferred stock lucent 250000000 shares preferred stock authorized august 6 2001 lucent designated sold 1885000 shares noncumulative 8 redeemable convertible preferred stock lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts initial liquidation preference 1000 per share subject accretion described private placement resulting net proceeds 1831 redeemable convertible preferred stock annual dividend rate 8 payable semiannually cash lucent common stock lucents option unpaid dividends increase liquidation preference accretion rate 10 per year calculated semiannual basis earlier agere spinoff may 6 2002 holders option share convertible preferred stock convertible lucents common stock initial conversion price 748 per share subject adjustment certain circumstances including agere spinoff although lucent prohibited exercising right current terms credit facilities lucent option require holders exchange shares redeemable convertible preferred stock convertible subordinated debentures terms substantially similar preferred stock redeemable convertible preferred stock redeemable lucents option august 15 2006 option holders august 2 2004 2007 2010 2016 provided certain criteria met lucent option redeem convertible preferred stock cash common stock 5 discount current market price combination cash shares common stock lucent obligated redeem outstanding preferred shares august 1 2031 initial carrying value accreted liquidation value charge shareowners equity earliest redemption period three years holders preferred stock voting rights except required law rank junior lucents debt obligations addition upon dissolution liquidation lucent holders entitled liquidation preference plus accrued unpaid dividends prior distribution net assets common shareowners 12 employee benefit plans pension postretirement benefits lucent maintains defined benefit pension plans covering majority employees retirees postretirement benefit plans retirees include health care dental benefits life insurance coverage fiscal year 2001 lucent recorded final adjustments pension postretirement asset obligation amounts transferred avaya september 30 2000 following information summarizes activity pension postretirement benefit plans entire company including discontinued operations lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts table continued previous page pension plan assets include 17 102 lucent common stock september 30 2001 2000 respectively postretirement plan assets include 1 3 lucent common stock september 30 2001 2000 respectively fiscal year 2001 lucent recorded charges totaling 2151 pension postretirement termination benefits connection voluntary earlyretirement offers involuntary terminations part business restructuring see note 2 amount 2113 reflected termination charges associated lucents business restructuring 28 associated ageres restructuring discontinued operations 10 associated lucents supplemental pension plan fiscal year 2001 lucent recorded charges 660 pension postretirement curtailments 632 included net business restructuring curtailment charge see note 2 28 associated reductions postretirement benefits active management employees lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts components net periodic benefit cost effective october 1 1998 lucent changed method calculating marketrelated value plan assets used determining expected returnonplanasset component annual net pension postretirement benefit costs previous accounting method calculation market related value plan assets included interest dividends immediately realized unrealized gains losses amortized straightline basis fiveyear period new lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts method used calculate marketrelated value includes immediately amount based lucents historical asset returns amortizes difference amount actual return straightline basis fiveyear period cumulative effect accounting change related periods prior fiscal year 1999 2150 1308 aftertax 042 041 earnings per basic diluted share respectively onetime noncash credit fiscal year 1999 earnings accounting change also resulted reduction benefit costs year ended september 30 1999 increased income 427 260 aftertax 008 earnings per basic diluted share compared previous accounting method 1999 lucent changed pension plan benefit management technical pay plan nonrepresented occupational employees hired january 1 1999 certain us employees companies acquired since october 1 1996 participating defined benefit pension plan employees receive different pension benefit known account balance program effective january 1 2000 expenses related account balance program included previous pension cost table lucent several nonpension postretirement benefit plans postretirement health care benefit plans lucent assumed 86 weighted average annual health care cost trend rate 2002 gradually declining 49 excluding postretirement dental benefits annual medical cost trend rate would 91 2002 gradually declining 50 assumed health care cost trend rate significant effect amounts reported onepercentagepoint change assumed health care cost trend rate would following effects entire company including discontinued operations savings plans lucents savings plans allow employees contribute portion compensation pretax andor aftertax basis accordance specified guidelines lucent matches percentage employee contributions certain limits savings plan expense amounted 150 228 318 years ended september 30 2001 2000 1999 respectively lucents savings plan expense charged continuing operations 125 161 222 years ended september 30 2001 2000 1999 respectively employee stock ownership plan lucents leveraged employee stock ownership plan esop previously funded employer contributions longterm savings security plan nonmanagement employees esop obligation reported reduction additional paidin capital 2001 remaining shares lucent common stock esop allocated participants 13 stock compensation plans lucent stockbased compensation plans outside directors certain employees receive stock options equitybased awards plans provide grant stock options stock appreciation rights performance awards restricted stock awards stock unit awards stock options generally granted exercise price equal 100 market value share common stock date grant twoto10year terms vest within four years date grant subject customary antidilution adjustments certain exceptions total number shares common stock authorized option grants plans including options granted acquisitions 963 million shares september 30 2001 lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts connection certain lucents acquisitions outstanding stock options held employees acquired companies became exercisable according terms lucent common stock effective acquisition date options reduce shares available grant lucents option plans acquisitions accounted purchases fair value options generally included part purchase price july 1 2000 lucent began recording deferred compensation related unvested options held employees companies acquired purchase acquisition accordance financial accounting standards board fasb interpretation 44 unamortized deferred compensation expense 5 34 september 30 2001 2000 respectively deferred expense calculation future amortization based graded vesting schedule awards lucent established employee stock purchase plan espp effective october 1 1996 terms espp eligible employees could 10 eligible compensation deducted pay purchase common stock per share purchase price 85 average high low per share trading price common stock new york stock exchange nyse last trading day month fiscal years 2001 2000 1999 176 million 78 million 75 million shares respectively purchased espp employer stock purchase plans acquired companies weighted average per share prices 1004 4675 4360 respectively espp expired june 30 2001 effective july 1 2001 lucent established new espp 2001 espp terms 2001 espp eligible employees may 10 eligible compensation deducted pay purchase common stock offering period consisting four purchase periods generally six months long employee may purchase 500 shares last trading date purchase period per share purchase price 85 average high low per share trading price common stock nyse either employees entry date relevant offering period last trading day relevant purchase period whichever lower amount may offered pursuant new plan 250 million shares september 30 2001 shares purchased 2001 espp lucent adopted disclosure requirements sfas 123 accounting stockbased compensation sfas 123 permitted sfas 123 applies accounting principles board opinion 25 apb 25 related interpretations accounting plans compensation expense recorded apb 25 147 49 50 years ended september 30 2001 2000 1999 respectively lucent elected adopt optional recognition provisions sfas 123 stock option purchase plans net income loss earnings loss per share would changed pro forma amounts indicated pro forma information presented includes lucents share ageres compensation expense related agere stock options issued agere employees subsequent ipo lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts september 30 2001 agere 1428 million stock options outstanding weighted average exercise price per share 581 fair value stock options used compute pro forma net income loss earnings loss per share disclosures estimated fair value grant date using blackscholes optionpricing model following assumptions premerger assumptions companies acquired poolingofinterests na applicable fair value employees purchase rights 2001 espp calculated using blackscholes model following assumptions fiscal year 2001 dividend yield 0 expected life four 10 16 22 months corresponding purchase period initial offering period expected volatility 85 four 10month purchase periods 104 16 22month periods riskfree interest rates ranging 32 41 period weighted average fair value purchase rights granted fiscal year 2001 353 weighted average fair value stock options calculated using blackscholes optionpricing model granted years ended september 30 2001 2000 1999 459 1615 1665 per share respectively presented summary status lucent stock options related activity years ended september 30 2001 2000 1999 lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts footnotes continued previous page b effective spinoff avaya september 30 2000 unvested lucent stock options held avaya employees converted avaya stock options remaining unexercised lucent stock options number lucent stock options exercise price adjusted preserve intrinsic value stock options existed prior spinoff c lucent stock options held agere employees convert agere stock options upon lucents intended spinoff agere following table summarizes status stock options outstanding exercisable september 30 2001 stock unit awards granted certain award plans following table presents total number shares common stock represented awards granted employees years ended september 30 2001 2000 1999 14 operating segments lucent operates global telecommunications networking industry designs develops manufactures services communication systems software related products lucent reported results operations related agere power systems business avaya discontinued operations see note 3 agere power systems business previously disclosed within microelectronics communications technologies segment avaya previously disclosed enterprise networks segment lucents remaining operations include two reportable segments products services two reportable segments managed separately products segment provides public networking systems software telecommunications service providers public network operators around world optical fiber applications communications computing industries services segment includes full life cycle planning design consulting integration support services well network engineering provisioning installation warranty support prior years data reclassified reflect current segment structure performance measurement resource allocation reportable operating segments based many factors primary financial measure contribution margin includes revenues costs expenses directly controlled reportable segment addition contribution margin includes allocations provision uncollectibles customer financings related assets lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts managed common basis contribution margin reportable segments excludes certain personnel costs including related pension postretirement certain costs related shared services general corporate functions regional sales marketing managed common basis order realize economies scale efficient use resources contribution margin reportable segments also excludes acquisitionrelated costs goodwill acquired intangibles amortization iprd costs business acquisitions fiscal year 2001 business restructuring charges asset impairments however related goodwill acquired technology asset balances reflected reportable segment appropriate accounting policies reportable segments essentially applied consolidated financial statements extent related items included within contribution margin see note 1 intersegment sales based current market prices material intersegment profit eliminated consolidation july 2001 lucent announced realigning business two customer focused segments integrated network solutions unit targeting wireline customers mobility solutions unit targeting wireless customers result change reportable segments first quarter fiscal year 2002 following tables present lucents revenues contribution margin reportable operating segment reconciliation totals reported contribution margin segments operating income loss primarily includes results smaller units eliminations internal business unallocated costs shared services addition includes companys remaining consumer products business fiscal years 2000 1999 sold second quarter fiscal year 2000 lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts supplemental segment information assets included reportable segments consist primarily inventory property plant equipment goodwill acquired intangibles b consists principally cash equivalents deferred income taxes receivables prepaid pension costs property plant equipment supporting corporate research operations assets net assets discontinued operations c depreciation amortization reportable segments excludes goodwill acquired intangibles amortization included products services revenues table presents external revenues groups similar products services principally includes billing customer care software products messaging products fiscal years 2000 1999 consumer products business lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts geographic information revenues attributed geographic areas based location customers b represents property plant equipment net goodwill acquired intangibles net concentrations historically lucent relied limited number customers substantial portion total revenues verizon accounted approximately 17 14 11 consolidated revenues years ended september 30 2001 2000 1999 respectively principally products segment revenues att accounted approximately 11 16 consolidated revenues years ended september 30 2000 1999 respectively principally products segment lucent expects significant portion future revenues continue generated limited number customers loss customers substantial reduction orders customers could materially adversely affect lucents operating results lucent concentration available sources supply materials labor services rights eliminated suddenly could impact operations severely transition manufacturing operations several contract manufacturers may cause concentration fiscal year 2002 see note 17 15 financial instruments fair values carrying values cash equivalents investments receivables payables debt maturing within one year contained consolidated balance sheets approximate fair value carrying values foreign exchange forward option contracts september 30 2001 equals fair value see derivative financial instruments carrying values estimated fair values foreign exchange forward option contracts september 30 2000 31 32 respectively assets 8 13 respectively liabilities carrying value estimated fair value longterm debt september 30 2001 3274 2324 respectively september 30 2000 3030 2731 respectively fair values foreign exchange forward option contracts longterm debt determined using quoted market rates credit risk market risk nature financial instruments involve risk including credit risk nonperformance counterparties contract notional amounts instruments reflect extent involvement lucent particular classes financial instruments maximum potential loss may exceed amounts recognized consolidated balance sheets however lucents maximum exposure credit loss event nonperformance party financial instruments lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts commitments extend credit financial guarantees limited amount drawn outstanding instruments exposure credit risk controlled credit approvals credit limits continuous monitoring procedures reserves losses established deemed necessary lucent seeks limit exposure credit risks single country region although lucents customers primarily telecommunications service provider industry financial instruments inherently expose holders market risk including changes currency interest rates lucent manages exposure market risks regular operating financing activities appropriate use derivative financial instruments derivative financial instruments foreign currency risk lucent conducts business multinational basis wide variety foreign currencies objective lucents foreign currency risk management policy preserve economic value cash flows nonfunctional currencies toward end lucents policy hedge significant booked firmly committed cash flows identified creating foreign currency exposure rolling 12month basis addition lucent typically hedges portion exposure resulting identified anticipated cash flows providing flexibility deal variability longerterm forecasts well changing market conditions cost hedging may excessive relative level risk involved manage risk lucent enters various foreign exchange forward option contracts cases lucent may hedge foreign exchange risk certain sales purchase contracts embedding terms contracts affect ultimate amount cash flows contract principal currencies hedged september 30 2001 follows lucents policy designate certain freestanding foreign currency derivatives hedging instruments sfas 133 intercompany external foreigncurrencydenominated loans exposures make large proportion notional value lucents total foreign currency risk well defined amounts timing repayments derivatives hedging exposures designated cash flow hedging instruments anticipated cash flows exceed 12 months lucent continue hedge types foreign currency risk preserve economic cash flows company accordance corporate risk management policies generally expect designate related derivative instruments hedges sfas 133 costbenefit reasons accordingly changes fair value undesignated freestanding foreign currency derivative instruments recorded income expense net period change material lucent due short maturities instruments lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts lucents foreign currency embedded derivatives consist sales purchase contracts cash flows indexed changes denominated currency neither party contract uses functional currency changes fair value embedded derivatives significant year ended september 30 2001 prior adoption sfas 133 foreign exchange forward contracts designated hedges firmly committed forecasted sales purchases expected occur less one year gains losses derivative contracts either deferred current assets liabilities recognized income expense net depending upon nature transaction hedged type derivative instrument used gains losses material consolidated financial statements september 30 2000 interest rate risk lucent uses combination financial instruments including mediumterm shortterm financings variablerate debt instruments lesser extent interest rate swaps manage interest rate mix total debt portfolio related overall cost borrowing manage mix costeffective manner lucent time may enter interest rate swap agreements agrees exchange various combinations fixed andor variable interest rates based agreed upon notional amounts objective maintaining mix fixed floating rate debt allows lucent manage overall value cash flows attributable debt instruments material interest rate swaps effect september 30 2001 2000 derivatives time lucent may obtain warrants purchase equity securities companies complement investment portfolio warrants provide net share settlement considered derivative instruments generally eligible designated hedging instruments corresponding underlying exposure fair value warrants material september 30 2001 nonderivative offbalance sheet instruments requests providing commitments extend credit financial guarantees reviewed approved senior management regularly reviews outstanding commitments letters credit financial guarantees results reviews considered assessing adequacy lucents reserve possible credit guarantee losses following table presents lucents nonderivative offbalance sheet instruments amounts drawn available drawn available drawn instruments may expire without drawn upon therefore amounts available drawn available necessarily represent future cash flows amounts drawn instruments generally collateralized substantially assets respective creditors lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts commitments extend credit commitments extend credit third parties conditional agreements generally fixed expiration termination dates specific interest rates purposes certain situations credit may available draw certain conditions precedent met guarantees debt time lucent guarantees financing product purchases customers requests providing guarantees reviewed approved senior management certain financial guarantees assigned thirdparty reinsurer letters credit letters credit purchased guarantees ensure lucents performance payment third parties accordance specified terms conditions amounted 900 897 september 30 2001 2000 respectively estimated fair value letters credit 12 2 september 30 2001 2000 respectively valued based fees paid obtain obligations 16 securitizations transfers financial instruments june 2001 lucent established 750 revolving accounts receivable securitization facility expiring june 2003 terms facility lucent may sell undivided interest collateralized accounts receivable specified customers exchange cash subordinated retained interest remaining outstanding accounts receivables september 30 2001 unrelated third parties held undivided interest 286 collateralized accounts receivables balance retained interests included receivables varies based changes lucents credit ratings credit ratings customers included securitization facility changes sufficiency eligible accounts receivable concentration credit risk among obligors accordingly unfavorable changes factors require lucent repurchase undivided interests securitized accounts receivable favorable changes factors allow lucent sell additional undivided interests accounts receivable order maintain facility level lucent must continue generate eligible accounts receivable sufficient support level terms facility reduced 500 october 19 2001 lucent services securitized receivables fee approximates lucents cost servicing fees significant investors securitized receivables recourse lucents assets result debtors defaults except retained interests collateralized accounts receivable following table provides cash flows year ended september 30 2001 related securitization facility following table provides valuation retained interests september 30 2001 lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts retained interests valued based historical payment patterns discount rate implicit underlying invoices expected reserve credit losses 127 discount imputed based expected number days receivables remain outstanding discount rate commensurate risks involved assuming hypothetical simultaneous unfavorable variations 20 credit losses discount rate used pretax impact value retained interests would significant september 2000 lucent thirdparty financial institution arranged creation nonconsolidated special purpose trust purpose allowing lucent time sell limitedrecourse basis maximum 970 customer finance loans receivables loans given point time wholly owned bankruptcyremote subsidiary turn would sell loans trust lucent originally intended periodically sell loans trust however due lucents credit downgrade february 2001 lucent unable sell additional loans trust defined agreements lucent trust lucent also agreed case foreign currency denominated loans fixed interest rate indemnify trust foreign exchange losses due movements interest rates hedging instruments entered loans lucent receive fee trust either arranging hedging instruments providing indemnity lucent continue service administer collect loans behalf trust receive fee performance services loans either fully collected sold trust unrelated third party lucent also receives fee referring loans trust purchased lucent cash flows received paid trust 2001 2000 follows september 1999 subsidiary lucent sold approximately 625 accounts receivable one large nonus customer nonconsolidated qualified special purpose entity qspe turn sold undivided ownership interest receivables entities managed unaffiliated financial institution additionally lucent transferred designated pool qualified accounts receivable approximately 700 qspe collateral initial sale december 1999 lucent repurchased 408 625 accounts receivable previously reported arrangement terminated lucent established new arrangement whereby subsidiary sold 750 accounts receivable including repurchased receivables consortium banks limited recourse 17 commitments contingencies normal course business lucent subject proceedings lawsuits claims including proceedings laws government regulations related environmental labor product matters subject many uncertainties outcomes predictable assurance consequently ultimate aggregate amount monetary liability financial impact respect matters september 30 2001 cannot ascertained matters could affect operating results one quarter resolved future periods assurance respect thereto management believes final disposition monetary lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts liability financial impact lucent matters described next paragraph beyond provided september 30 2001 would material annual consolidated financial statements lucent certain former officers defendants several purported shareowner class action lawsuits alleged violations federal securities laws consolidated single action specifically complaint alleges among things beginning late october 1999 lucent certain officers misrepresented lucents financial condition failed disclose material facts would adverse impact lucents future earnings prospects growth action seeks compensatory damages costs expenses associated litigation action early stages lucent unable determine potential impact consolidated financial statements lucent intends defend action vigorously july 2001 purported class action complaint filed erisa alleging among things lucent certain unnamed officers breached fiduciary duties respect lucents employee savings plans claiming defendants aware lucent stock inappropriate retirement investment continued offer stock plan investment option complaint seeks damages injunctive equitable relief interest fees expenses associated litigation august 2001 separate purported class action complaint filed erisa alleging among things lucent breached fiduciary duties respect employee benefit compensation plans offering lucent stock investment employees participating plans despite fact lucent allegedly knew experiencing significant business problems august complaint seeks declaration lucent breached fiduciary duties plan participants order compelling lucent return losses plans injunctive relief prevent future breaches fiduciary duties well costs expenses associated litigation actions early stages company unable determine potential impact either case consolidated financial statements lucent intends defend actions vigorously separation agreements connection formation lucent certain units att corp associated assets liabilities units atts distribution remaining interest lucent shareowners lucent att ncr corporation executed delivered separation distribution agreement dated february 1 1996 amended restated certain related agreements separation distribution agreement among things provides lucent indemnify att ncr liabilities relating lucents business operations contingent liabilities relating lucents business operations otherwise assigned lucent addition contingent liabilities relating present former business lucent contingent liabilities relating atts discontinued computer operations ncr assigned lucent separation distribution agreement provides sharing contingent liabilities allocated one parties following proportions att 75 lucent 22 ncr 3 separation distribution agreement also provides party share specified portions contingent liabilities related business parties exceed specified levels connection spinoff avaya lucent avaya executed delivered contribution distribution agreement cda provides indemnification company respect contingent liabilities primarily relating respective businesses otherwise assigned subject certain sharing provisions event aggregate value amounts paid company respect single contingent liability set group related contingent liabilities excess 50 company share portions excess threshold amount based agreedupon percentages cda also provides sharing certain contingent liabilities specifically 1 contingent liabilities primarily contingent liabilities lucent contingent lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts liabilities associated businesses attributed avaya 2 certain specifically identified liabilities including liabilities relating terminated divested discontinued businesses operations 3 shared contingent liabilities within meaning separation distribution agreement att corp connection intended spinoff agere contribution certain businesses lucent agere entered separation distribution agreement sda provides indemnification company respect contingent liabilities primarily relating respective businesses otherwise assigned subject certain sharing provisions event aggregate value amounts paid company respect single contingent liability set group related contingent liabilities excess net insurance proceeds company share portions excess threshold amount based agreedupon percentages sda also provides sharing certain contingent liabilities specifically 1 contingent liabilities primarily contingent liabilities lucent contingent liabilities associated businesses attributed agere 2 certain specifically identified liabilities including liabilities relating terminated divested discontinued businesses operations 3 shared contingent liabilities within meaning separation distribution agreement att corp commitments connection intended spinoff agere lucent entered purchase agreement governs purchase goods services lucent agere agreement lucent committed purchase least 2800 products agere threeyear period beginning february 1 2001 limited circumstances lucents purchase commitment may reduced term may extended period february 1 2001 september 30 2001 lucents purchases agreement 325 agere lucent currently discussing ways restructure lucents obligations agreement connection lucents transaction celestica see note 4 lucent entered fiveyear supply agreement whereby celestica primary manufacturer lucents switching access wireless products north america environmental matters lucents current historical operations subject wide range environmental protection laws united states laws often require parties fund remedial action regardless fault lucent remedial investigatory activities way numerous current former facilities addition lucent named successor att potentially responsible party prp numerous superfund sites pursuant comprehensive environmental response compensation liability act 1980 cercla comparable state statutes separation distribution agreement att lucent responsible liabilities primarily resulting relating operation lucents business conducted time prior separation att including related businesses discontinued disposed prior separation lucents assets including without limitation associated sites addition separation distribution agreement lucent required pay portion contingent liabilities paid excess certain amounts att ncr including environmental liabilities often difficult estimate future impact environmental matters including potential liabilities lucent records environmental reserve probable liability incurred amount liability reasonably estimable practice followed whether claims asserted unasserted management expects amounts reserved paid periods remediation applicable sites typically range five 30 years reserves estimated losses environmental remediation depending site based primarily internal lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts thirdparty environmental studies estimates number participation level financial viability prps extent contamination nature required remedial actions accruals adjusted information develops circumstances change amounts provided lucents consolidated financial statements environmental reserves gross undiscounted amounts reserves without deductions insurance thirdparty indemnity claims cases insurance carriers thirdparty indemnitors agreed pay amounts management believes collectibility amounts probable amounts reflected receivables consolidated financial statements although lucent believes reserves adequate assurance amount capital expenditures expenses required relating remedial actions compliance applicable environmental laws exceed amounts reflected lucents reserves material adverse effect lucents financial condition results operations cash flows possible loss range possible loss may incurred excess provided september 30 2001 cannot estimated lease commitments lucent leases land buildings equipment agreements expire various years 2020 rental expense net sublease rentals operating leases 476 420 341 years ended september 30 2001 2000 1999 respectively future minimum lease payments due noncancelable operating leases september 30 2001 fiscal year 2002 fiscal year 2006 thereafter 304 248 205 165 117 727 respectively 18 recent pronouncements june 2001 fasb issued sfas 141 business combinations sfas 142 goodwill intangible assets new standards acquisitions subsequent june 30 2001 must accounted purchase method accounting purchased goodwill longer amortized useful life rather goodwill subject periodic impairment test based upon fair value august 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 sfas 143 establishes accounting standards recognition measurement liability costs asset retirement obligations sfas 143 costs retiring asset recorded liability retirement obligation arises amortized expense life asset october 2001 fasb issued sfas 144 accounting impairment disposal longlived assets sfas 144 sfas 144 addresses financial accounting reporting impairment disposal longlived assets discontinued operations lucent currently evaluating impact pronouncements determine effect may consolidated financial position results operations lucent required adopt standards first quarter fiscal year 2003 19 subsequent event sale optical fiber business november 16 2001 lucent completed sale optical fiber business furukawa electric co ltd 2300 approximately 200 commscope inc securities transaction result gain first quarter fiscal year 2002 addition lucent entered agreement july 24 2001 sell two chinese joint ventures lucent technologies shanghai fiber optic co ltd lucent technologies beijing fiber optic cable co ltd corning incorporated 225 transaction subject us foreign governmental approvals lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts customary closing conditions expected close end first quarter fiscal year 2002 20 quarterly information unaudited includes extraordinary gain 1154 034 per basic diluted share related sale power systems business gain cumulative effect accounting change 30 001 per basic diluted share related adoption sfas 133 loss cumulative effect accounting change 68 002 loss per basic diluted share related adoption sab 101 b includes total business restructuring onetime charges 2710 536 inventory writedowns included gross margin lucent technologies inc notes consolidated financial statements continued dollars millions except per share amounts c includes total business restructuring onetime charges 684 143 inventory writedowns included gross margin includes total business restructuring onetime charges 8022 580 inventory writedowns included gross margin e includes extraordinary gain 28 001 per basic diluted share related sale power systems business f result loss reported continuing operations potentially dilutive securities excluded calculation diluted earnings loss per share effect would antidilutive addition fourth fiscal quarter loss per common share continuing operations net loss per share includes 28 impact preferred dividends accretion g includes gain 189 associated sale equity investment charge 61 primarily associated mergers ins excel xedia h includes charge 428 iprd related acquisition chromatis includes charge 131 iprd related acquisition spring tide j fourth quarter fiscal year 2001 lucent implemented sab 101 retroactively beginning fiscal year 2001 resulting loss cumulative effect accounting change 68 002 loss per basic diluted share results first three quarters fiscal year 2001 restated pro forma basis lucent adopted sab 101 prior october 1 2000 revenue gross margin loss continuing operations net loss fourth quarter fiscal year 2000 would 7220 2407 306 496 respectively basic diluted loss continuing operations per share net loss per share would 009 015 respectively lucent technologies inc schedule ii valuation qualifying accounts represents amounts written uncollectible net recoveries b realization deferred tax assets valuation allowance previously provided c charged costs expenses include 1259 inventory related lucents business restructuring program 570 written included deductions remaining balance deductions primarily related writeoff obsolete scrapped inventory primarily related writeoff obsolete scrapped inventory amounts reflect continuing operations amounts reclassified exclude avaya agere power systems business exhibit index following documents filed exhibits report form 10k incorporated reference herein document incorporated reference identified parenthetical reference sec filing included document management contract compensatory plan arrangement statement differences trademark symbol shall expressed astm registered trademark symbol shall expressed asritem 14 controls procedures within 90day period prior filing report evaluation carried supervision participation management including chief executive officer “ceo” chief financial officer “cfo” effectiveness disclosure controls procedures based evaluation ceo cfo concluded disclosure controls procedures effective ensure information required disclosed us reports file submit securities exchange act 1934 recorded processed summarized reported within time periods specified securities exchange commission rules forms subsequent date management’s evaluation significant changes internal controls factors could significantly affect controls including corrective actions regard significant deficiencies material weaknesses item 15item 14 principal accounting fees services information required item included definitive proxy statement 2004 annual meeting shareowners held february 18 2004 incorporated herein reference item 15item 14 principal accounting fees services information required item included definitive proxy statement 2006 annual meeting shareowners held february 15 2006 incorporated herein reference part iv item 15item 14 principal accounting fees services information required item included definitive proxy statement 2005 annual meeting shareowners held february 16 2005 incorporated herein reference part iv item 15item 14 principal accounting fees services accordance instructions form 10k information required item 14 included either 1 definitive proxy statement 2007 annual meeting shareowners 2 amendment form 10k filed later 120 days end fiscal year covered form 10k part iv item 15 nannannannanitem 7 managements discussion analysis results operations financial condition overview fiscal 2000 lucent technologies inc lucent company completed plan spin enterprise networks business shareowners forming separate independent company new company called avaya inc avaya see discontinued operations addition july 20 2000 lucent announced intention spin microelectronics business includes optoelectronics components integrated circuits divisions separate independent company new company called agere systems inc agere systems december 11 2000 form s1 registration statement filed sec anticipation initial public offering ipo agere systems lucent intends distribute remaining shares taxfree distribution report constitute offering securities made prospectus filed sec connection spinoff lucent may adjusting capital structure including possible reduction amount debt outstanding ipo expected completed quarter ending march 31 2001 completion spinoff expected end 2001 fiscal year ipo spinoff subject certain conditions including favorable tax ruling irs november 13 2000 lucent entered agreement sell power systems business tyco international ltd diversified manufacturing service company 2500 million cash sale subject regulatory approval customary closing conditions expected close december 31 2000 result onetime gain recorded extraordinary item net tax quarter sale closes actions allow lucent concentrate investments resources management attention optical data wireless solutions along network design consulting integration services support lucent expects take business restructuring charge associated redesign business quarter ending march 31 2001 lucent expects give details charge late january 2001 review internal processes continue throughout 2001 may result additional restructuring associated charges see key business challenges total basis lucent reported net income 1219 million 037 per share diluted year ended september 30 2000 compared yearago net income 4789 million 149 per share diluted fiscal 2000 net income includes 462 million loss 014 per share diluted discontinued operations net tax compared 455 million income 014 per share diluted net tax fiscal 1999 fiscal 2000 net income also includes reduction costs operating expenses 252 million representing impact adopting statement position 981 accounting costs computer software developed obtained internal use sop 981 addition fiscal 1999 lucent changed method determining annual net pension postretirement benefit costs result included 1999 net income 1308 million 041 per share diluted cumulative effect accounting change lucents income cumulative effect accounting change 3481 million year ended september 30 1999 see note 12 accompanying consolidated financial statements details accounting change discontinued operations march 1 2000 lucent announced plans spin avaya september 30 2000 spinoff accomplished taxfree distribution shares lucents shareowners avaya represented significant segment companys business pursuant accounting principles board opinion 30 reporting results operations reporting effects disposal segment business extraordinary unusual infrequently occurring events transactions apb 30 lucent reclassified consolidated financial statements reflect spinoff avaya revenues costs expenses assets liabilities cash flows avaya segregated consolidated statements income consolidated balance sheets consolidated statements cash flows net operating results net assets net cash flows business reported discontinued operations accompanying consolidated financial statements lucent recorded 462 million loss discontinued operations net tax benefit 78 million year ended september 30 2000 net loss comprised 303 million net income discontinued operations period prior measurement date 765 million net loss disposal avaya loss disposal avaya reflects costs directly associated spinoff net loss avaya measurement date spinoff date september 30 2000 costs reflect components avaya reorganization plan including business restructuring charge directly related asset writedowns 545 million recorded year along transaction costs 56 million spinoff major components charge include 365 million employee separation 101 million real estate consolidation addition loss discontinued operations includes allocation lucents interest expense based amount debt assumed avaya approximately 780 million commercial paper borrowings assumed avaya part spinoff transaction lucents financial results discontinued operations different results reported avaya due different assumptions allocations required made two companies following discussion focus lucents results continuing operations financial highlights lucent reported income continuing operations 1681 million 051 per share diluted year ended september 30 2000 compared yearago income continuing operations 3026 million 094 per share diluted income continuing operations 2000 includes 1005 million 1001 million aftertax purchased inprocess research development iprd expenses related acquisitions spring tide networks chromatis networks herrmann technology ortel corporation agere inc vtc inc pretax gain 189 million 115 million aftertax associated sale equity investment reduction costs operating expenses 252 million related impact adopting sop 981 pretax charge 61 million 40 million aftertax primarily associated mergers international network services ins excel switching corporation xedia corporation income continuing operations 1999 includes 108 million 71 million aftertax reversal business restructuring charges 110 million nontax deductible charge mergerrelated costs 236 million charge 169 million aftertax primarily associated asset impairments integrationrelated charges related ascend communications inc nexabit networks inc mergers 274 million gain 167 million aftertax sale equity investment 292 million 280 million aftertax iprd expenses related acquisitions stratus computer inc xnt systems inc quantum telecom solutions inc intercall communications consulting inc quadritek systems inc sybarus technologies waveaccess ltd ethernet local area network lan component business enable semiconductor enable acquisitions part lucents continuing efforts provide customers endtoend communications solutions company completed numerous acquisitions mergers three years ended september 30 2000 information see note 4 accompanying consolidated financial statements operating segments lucent operates global telecommunications networking industry two reportable segments service provider networks spn microelectronics communications technologies mct spn provides public networking systems software services telecommunications service providers public network operators around world mct provides highperformance optoelectronic components integrated circuits power systems optical fiber applications communications computing industries addition mct also includes lucents new ventures business results smaller units corporate operations reported corporate two reportable operating segments strategic market units offer distinct products services segments determined based customers markets lucent serves market unit managed separately operation requires different technologies marketing strategies result reorganization initiatives see key business challenges company evaluating changes management model organizational structure result changes reportable segments next fiscal year chart segment revenues years ended september 30 1998 1999 2000 lucents service provider networks segment represents 78 total external sales 2000 lucent offers wide range products services representing fullservice package next generation networks chart product service revenues year ended september 30 2000 key business challenges lucent process reorganizing business become focused better positioned capitalize market opportunities reorganization includes recent spinoff avaya expected sale power systems business announced ipo spinoff agere systems well comprehensive review restructuring lucents internal systems processes specific initiatives include performing comprehensive product service portfolio review aimed aligning research development effective redeployment sales marketing teams investments appropriate consolidating corporate infrastructure improving supply chain management lucent expects take significant business restructuring charge quarter ending march 31 2001 lucent expects give details charge late january 2001 review internal processes continue throughout 2001 may result additional restructuring associated charges reorganization including spinoff agere systems expected completed september 30 2001 limited number large customers provide substantial portion lucents revenues customers include verizon att certain incumbent competitive local exchange carriers spending patterns customers vary significantly year elimination change spending patterns significant reduction orders one customers could negatively affect lucents operating results lucents fiscal year 2000 results negatively affected decline sales one large us customer one large nonus customer communications industry recently experienced consolidation us nonus companies result lucents operating results could become dependent smaller number large carriers lucent continually endeavors diversify customer base adding new different types customers lucent however often required provide arrange longterm financing customers condition obtain bid infrastructure contracts thus ability develop certain customer relationships may dependent upon ability raise capital extend credit lucent operates highly competitive industry expects level competition relating pricing product offerings intensify lucent expects new competitors enter markets result expansion market participants advancements technology competitors may include entrants telecommunications software data networking cable television semiconductor industries may strong financial capabilities technological expertise established name recognition lucent attempts direct companys resources meet market needs competitive challenges based ongoing assessments market conditions however due misjudgment market demand specific product offerings lucents results fiscal year 2000 adversely affected larger expected reduction revenue gross margin traditional circuit switching products related software lower revenues gross margins specific optical networking products first fiscal quarter 2001 lucent anticipates substantial decline revenues compared yearago quarter substantial loss continuing operations reflects significant sales decline north america due overall softening competitive local exchange carrier market slowdown capital spending established service providers lower software sales focused use vendor financing lucent december 21 2000 moodys investors service lowered lucents credit rating senior unsecured longterm debt a2 a3 commercial paper prime1 prime2 a3 rating remains review possible downgrade moodys concluded review commercial paper rating also december 21 2000 standard poors lowered lucents credit rating senior unsecured longterm debt bbb commercial paper rating a1 a2 remain creditwatch possibility downgrades lucent believes sufficient capital resources fulfill operational capital needs well extend credit customers appropriate although assurance occur results operations revenues total revenues 2000 increased 104 33813 million compared 1999 due increases sales reportable operating segments partially offset decrease corporate predominantly remaining consumer products business sold second fiscal quarter 2000 revenue growth driven sales increases globally 2000 sales within united states grew 109 compared 1999 nonus revenues increased 97 compared 1999 nonus sales represented 339 total revenues compared 342 1999 chart revenues nonus regions years ended september 30 1998 1999 2000 revenues attributed geographic areas based location customers total revenues 1999 increased 256 30617 million compared 1998 revenue growth driven sales increases globally 1999 us sales grew 156 compared 1998 nonus sales increased 508 compared 1998 nonus sales represented 342 total revenues compared 285 1998 following table presents lucents revenues segment percentage total revenues years ended september 30 2000 1999 1998 revenues 2000 spn segment increased 68 1676 million compared 1999 increased 234 4717 million 1999 compared 1998 2000 increases driven sales service provider internet infrastructure wireless systems professional services offset part decline optical networking products primarily due lower revenues fiscal fourth quarter decline switching revenues lower expected revenues optical networking due primarily late market oc192 product affected entire product cycle engineering manufacturing deployment launch negative impact fiscal years revenue growth addition lower revenues switching products primarily due shift customer spending away circuit switching pricing pressures impact substantial reduction major longterm foreign project also negatively impacted growth 1999 increases resulted primarily higher sales switching wireless systems products associated software optical networking data networking systems communications software us revenues 2000 spn segment increased 71 1999 109 comparing 1999 1998 2000 1999 us revenue increases included revenue gains sales incumbent local exchange carriers certain cases provide wireless service competitive local exchange carriers revenues 2000 increased despite decline revenues att historically significant customer addition 1999 us revenue increase included long distance carriers nonus revenues 2000 increased 60 compared 1999 reflecting gains regions except europemiddle eastafrica emea negatively impacted substantial reduction revenues major longterm foreign project represented 326 revenues 2000 compared 328 1999 nonus revenues 1999 increased 607 compared 1998 due revenue growth emea region primarily due major longterm foreign project caribbeanlatin america asiapacific regions represented 328 revenues 1999 compared 252 1998 lucent expects product transition associated decline circuit switching revenue substantial reduction revenues att major longterm foreign project fully offset immediately rampup newer products addition component shortages led longer expected fullvolume rampup optical networking revenues 2000 mct segment increased 383 1927 million compared 1999 increase driven sales optical fiber optoelectronic components power systems wired wireless lan systems customized chips computing highspeed communications systems revenues 1999 increased 216 892 million compared 1998 due higher sales optoelectronic components integrated circuits highspeed communications data networking wireless computing systems increased sales power systems also contributed increase us sales 2000 increased 518 compared 1999 162 1999 compared 1998 nonus revenues increased 225 compared 1999 revenue growth regions nonus revenues increased 286 1999 compared 1998 driven sales asiapacific emea regions non us revenues represented 407 sales 2000 compared 460 1999 435 1998 previously discussed fiscal 2001 lucent intends spin agere systems currently part mct segment revenues 2000 sales corporate decreased 407 million compared 1999 due lower revenues companys remaining consumer products business sold second fiscal quarter 2000 revenues 1999 increased 641 million compared 1998 primarily due consolidation businesses regained pcc venture october 22 1998 lucent philips announced would end pcc venture terminated late 1998 results operations net assets remaining businesses lucent previously contributed pcc consolidated october 1 1998 revenues included corporate december 1998 lucent sold certain assets wireless handset business motorola inc completed sale remaining consumer products business second fiscal quarter 2000 costs gross margin total costs 2000 increased 3934 million 252 compared 1999 percentage revenue gross margin decreased 422 490 1999 decrease primarily due decreased volumes margins optical networking switching businesses including lower software revenues increased pricing pressures product lines continued expansion overseas markets generally yield lower margins decrease gross margin percentage partially offset 400 million resulting lower personnel costs including lower incentive compensation awards higher net pension credit impact adopting sop 981 addition lucent anticipates shift higher margin switching products newer products initially lower margins total costs 1999 increased 2667 million 206 compared 1998 due increase sales volume gross margin percentage increased 21 percentage points 1998 increase gross margin percentage year due favorable mix products operating expenses sga expenses increased 460 million 79 decreased 05 percentage points percentage revenues 2000 compared 1999 increased 1382 million 312 increased 08 percentage points percentage revenues 1999 compared 1998 dollar increases attributable higher sales volume increased amortization goodwill acquired intangibles current year expense also negatively impacted increased reserves bad debt trade receivables due specific credit concerns primarily emerging service provider market increases partially offset 500 million resulting lower personnel costs including lower incentive compensation awards higher net pension credit impact adopting sop 981 addition included current year expense 61 million primarily associated mergers ins excel xedia included 1999 expense 110 million associated mergers ascend nexabit rascom vitalsigns amortization expense associated goodwill acquired intangibles 551 million 310 million 105 million years ended september 30 2000 1999 1998 respectively result 2000 acquisition activity lucent expects amortization goodwill acquired intangibles significantly increase future periods pro forma basis assuming 2000 acquisitions occurred october 1 1999 amortization goodwill acquired intangibles would increased approximately 931 million year ended september 30 2000 1999 increase largely relates 109 million writeoff livingston goodwill acquired intangibles details see inprocess research development addition 1999 includes 85 million reversal 1995 business restructuring charges rd expenses 2000 decreased 202 million 48 decreased 19 percentage points percentage revenues compared 1999 increased 553 million 151 decreased 12 percentage points 1999 percentage revenues compared 1998 2000 dollar decrease well percentage revenues decrease 2000 largely result 350 million lower personnel costs including lower incentive compensation awards higher net pension credit impact adopting sop 981 1999 dollar increase primarily due increased expenditures support substantially product lines 1999 decrease rd percentage revenues reflects custom contract work recorded costs opposed rd iprd expenses 2000 1005 million reflecting charges associated acquisitions spring tide chromatis herrmann ortel agere vtc 2000 compared 292 million related primarily acquisitions stratus xnt quantum intercall quadritek sybarus waveaccess enable 1999 see discussion inprocess research development income net interest expense provision income taxes excludes nontax deductible iprd expenses mergerrelated costs amortization goodwill acquired intangibles certain onetime gains sales equity investments 2000 1999 gain sale companys ats business 1998 2000 income net included interest income 125 million net gains sales settlements financial instruments 361 million including 189 million gain sale equity investment 1999 income net included interest income 133 million net gains sales settlements financial instruments 302 million including 274 million gain sale equity investment 1998 income net included interest income 122 million gains sale businesses 208 million including gain related sale advanced technology systems unit 149 million net equity losses investments 207 million primarily related investment pcc interest expense increased primarily due higher debt levels 2000 1999 addition interest expense 2000 increased higher weighted average interest rates commercial paper effective income tax rates exceed us federal statutory income tax rates primarily due writeoffs iprd costs mergerrelated expenses deductible tax purposes adjusted income tax rate decreased 29 percentage points 2000 compared 1999 decrease primarily due increased research tax credits tax impact nonus activity adjusted income tax rate decreased 14 percentage points 1999 compared 1998 decrease primarily due reduced state effective tax rate tax impact nonus activity 1998 effective income tax rate include federal income tax provision kenan since kenan scorporation prior merger lucent cash flows cash provided operating activities increased 1266 million 304 million 2000 compared 1999 improvement primarily due smaller increases receivables operating assets liabilities larger tax benefit stock options exercised current year change receivables resulted smaller revenue growth fiscal fourth quarter 2000 compared period 1999 partially offset higher average days outstanding see financial condition improvements partially offset increased inventories contracts process meet current anticipated sales commitments customers startup several longterm projects lower accounts payable due timing payments lower net income adjusted noncash operating items cash operating activities decreased 2414 million 1999 compared 1998 primarily due larger increases receivables inventories well lower decreases payroll benefitrelated liabilities cash payments 61 million charged 1995 business restructuring reserves 1999 compared 162 million 1998 projects associated 1995 business restructuring reserve substantially completed september 30 1999 cash used investing activities increased 698 million 2480 million 2000 compared 1999 increase primarily due increased capital expenditures see decreased proceeds sales investments partially offset decreased purchases investments higher proceeds dispositions businesses cash used investing activities decreased 915 million 1999 compared 1998 primarily due increased proceeds sales investments reduction cash used acquisitions purchases investments partially offset increased capital expenditures capital expenditures 2701 million 2042 million 1615 million 2000 1999 1998 respectively increases capital expenditures primarily relate expenditures equipment facilities used manufacturing research development including expansion manufacturing capacity expenditures efficiency improvements nonus growth addition 2000 capital expenditures included capitalized internal use software cash provided financing activities decreased 1134 million 2211 million 2000 compared 1999 decrease primarily due lower issuances longterm debt increases repayments longterm debt partially offset increase shortterm borrowings increase proceeds issuances common stock primarily stock option exercises cash provided financing activities increased 2493 million 1999 compared 1998 increase primarily due increased issuances debt financial condition total assets september 30 2000 increased 13420 million 379 september 30 1999 increase primarily increases 8985 million goodwill acquired intangibles well increases receivables inventories contracts process prepaid pension costs assets 759 million 1437 million 779 million 981 million 994 million respectively increases partially offset decrease net assets discontinued operations 907 million result completing avaya spinoff september 30 2000 increase goodwill acquired intangibles due acquisitions made fiscal 2000 see acquisitions receivables increased primarily due higher sales volume coupled higher average days outstanding see fourth fiscal quarter 2000 approximately 550 million receivables one large nonus customer sold increase inventories resulted need meet current anticipated sales commitments customers contracts process increased result startup several longterm projects prepaid pension costs increased primarily due higher return plan assets increase discount rate 2000 assets increased due largely capitalization internal use software increased investments increase intangible assets fair value lucents pension plan assets greater projected pension obligations lucent records pension income expected return plan assets plus amortization transition asset greater interest cost projected benefit obligation plus service cost year amortization prior service cost total liabilities increased 1184 million 55 september 30 1999 increase due primarily higher commercial paper balances working capital defined current assets less current liabilities increased 523 million september 30 1999 primarily resulting increase receivables inventories contracts process partially offset increase shortterm debt total capital decreased 96 basis points 2000 compared 1999 decrease related 2000 increase additional paidin capital primarily associated issuance common stock business acquisitions made year lesser extent exercise stock options sales stock employee stock purchase plan year ended september 30 2000 lucents inventory turnover ratio decreased 41x compared 44x year ended september 30 1999 decrease due higher inventory fiscal 2000 inventory turnover ratio calculated dividing cost sales three months ended september 30 fiscal fourth quarter average ending inventory balance using twopoint average days outstanding receivables 13 days 102 days 2000 compared 1999 reflecting growth lucents sales outside united states typically carry longer payment terms growth competitive emerging markets currently require longer payment terms average days outstanding calculated dividing fiscal fourth quarter average ending receivables balance using twopoint average total revenues three months ended september 30 liquidity capital resources lucent expects time outstanding commercial paper balances may replaced short longterm borrowings market conditions permit september 30 2000 lucent maintained approximately 47 billion credit facilities portion used support lucents commercial paper program september 30 2000 approximately 45 billion unused future financings arranged meet lucents requirements timing amount form issue depending prevailing market general economic conditions lucent anticipates borrowings bank credit facilities issuance additional commercial paper cash generated operations short longterm debt financings receivable securitizations expected proceeds sale power systems business planned ipo agere systems adequate satisfy future cash requirements although assurance case lucents customers worldwide requiring suppliers arrange provide longterm financing condition obtaining bidding infrastructure projects may require financing amounts ranging modest sums billion dollars lucent increasingly provided arranged longterm financing customers continually monitors reviews creditworthiness arrangements market conditions permit lucents intention sell transfer longterm financing arrangements may include commitments drawndown borrowings financial institutions investors enables lucent reduce amount commitments free additional financing capacity september 30 2000 lucent made commitments entered agreements extend credit certain customers aggregate approximately 67 billion excluding amounts available customer yet satisfied conditions precedent borrowing september 30 2000 approximately 33 billion loan commitments undrawn available borrowing approximately 13 billion advanced outstanding part revenue recognition process lucent determines whether notes receivable contracts reasonably assured collection based various factors among ability lucent sell notes addition lucent made commitments guarantee customer debt 14 billion september 30 2000 excluding amounts available guarantee conditions precedent satisfied approximately 600 million guarantees undrawn available 770 million outstanding september 30 2000 addition arrangements lucent continue provide commit financing appropriate business ability lucent arrange provide financing customers depend number factors including lucents capital structure credit rating level available credit continued ability sell transfer commitments drawndown borrowings acceptable terms lucent believes able access capital markets terms amounts satisfactory lucent able obtain bid performance bonds arrange provide customer financing necessary engage hedging transactions commercially acceptable terms although assurance case discussion companys sales receivables notes see note 16 accompanying consolidated financial statements risk management lucent exposed market risk changes foreign currency exchange rates interest rates could impact results operations financial condition lucent manages exposure market risks regular operating financing activities deemed appropriate use derivative financial instruments lucent uses derivative financial instruments risk management tools trading purposes addition derivative financial instruments entered diversified group major financial institutions order manage lucents exposure nonperformance instruments certain securities held lucents equity investment portfolio subject equity price risk lucent generally hedge equity price risk however occasion may use equity derivative financial instruments subject equity price risks complement investment strategies september 30 2000 lucent outstanding positions lucent uses foreign exchange forward options contracts reduce significant exposure risk eventual net cash inflows outflows resulting sale products nonus customers purchases nonus suppliers adversely affected changes exchange rates foreign exchange forward contracts designated recorded firmly committed anticipated purchases sales use derivative financial instruments allows lucent reduce overall exposure exchange rate movements since gains losses contracts substantially offset losses gains assets liabilities transactions hedged september 30 2000 lucents primary net foreign currency market exposures dispersed various countries primarily included euro legacy currencies september 30 1999 lucents primary net foreign currency market exposures included canadian dollars brazilian reals lucent changed policy regarding exposures managed since year ended september 30 1999 management foresee expect significant changes foreign currency exposure near future fair value foreign exchange forward contracts sensitive changes foreign currency exchange rates september 30 2000 1999 10 appreciation value foreign currencies us dollar prevailing market rates would result incremental net unrealized loss approximately 59 million 31 million respectively conversely 10 depreciation currencies prevailing market rates would result incremental net unrealized gain approximately 59 million 31 million september 30 2000 1999 respectively consistent nature economic hedge foreign exchange forward contracts unrealized gains losses would offset corresponding decreases increases respectively underlying instrument transaction hedged lucent hedges certain foreign currency transactions decline value nonus dollar currencies may reversed adversely affect lucents ability contract product sales us dollars lucents products may become expensive purchase us dollars local customers business countries affected currencies lucent manages ratio fixed floating rate debt objective achieving mix management believes appropriate manage mix costeffective manner lucent time enters interest rate swap agreements agrees exchange various combinations fixed andor variable interest rates based agreedupon notional amounts lucent material interest rate swap agreements effect september 30 2000 1999 management foresee expect significant changes exposure interest rate fluctuations exposure managed near future fair value lucents fixedrate longterm debt sensitive changes interest rates interest rate changes would result gainslosses market value debt due differences market interest rates inception debt obligation based hypothetical immediate 150 basis point increase interest rates september 30 2000 1999 market value lucents fixedrate longterm debt would reduced approximately 317 million 360 million respectively conversely 150 basis point decrease interest rates would result net increase market value lucents fixedrate longterm debt outstanding september 30 2000 1999 approximately 397 million 456 million respectively inprocess research development connection acquisitions livingston yurie stratus agere ortel chromatis spring tide lucent allocated nontax impacting charges 427 million 620 million 267 million 94 million 307 million 428 million 131 million respectively total purchase price iprd part process analyzing acquisitions lucent made decision buy technology yet commercialized rather develop technology internally lucent based decision number factors including amount time would take bring technology market lucent also considered bell labs resource allocation progress comparable technology lucent management expects use decision process future lucent estimated fair value iprd acquisitions using income approach involved estimating fair value iprd using present value estimated aftertax cash flows expected generated iprd using riskadjusted discount rates revenue forecasts appropriate selection discount rate based consideration lucents weighted average cost capital well factors including useful life technology profitability levels technology uncertainty technology advances known time stage completion technology lucent believes estimated iprd amounts determined represent fair value exceed amount third party would pay projects appropriate lucent deducted amount reflecting contribution core technology anticipated cash flows iprd project date acquisition iprd projects yet reached technological feasibility alternative future uses accordingly value allocated projects capitalized immediately expensed acquisition projects successful completed timely manner managements anticipated product pricing growth rates may achieved lucent may realize financial benefits expected projects set forth descriptions significant acquired iprd projects livingston december 15 1997 lucent completed purchase livingston involved development equipment used internet service providers connect subscribers internet allocation iprd 427 million represented estimated fair value using methodology described approximately 421 million allocated portmaster4 remoteaccess concentrator targeted large independent telecommunication companies cable television companies internet service providers remaining 6 million allocated another project revenues attributable portmaster4 estimated 48 million 1998 261 million 1999 revenue expected peak 2002 decline thereafter end products life 2007 new product technologies expected introduced lucent revenue growth expected decrease 69 2000 11 2002 negative remainder projection period acquisition date costs complete research development efforts related portmaster4 expected 5 million riskadjusted discount rate 20 used discount projected cash flows livingstons portmaster4 commercially released july 1998 started generating revenues immediately commercial launch result merger lucent ascend june 1999 decision made discontinue future development sales portmaster4 platform order maximize research development efficiency concentrating max tnt platform instead two platforms address full spectrum access switching products lucent able one platform address broad spectrum applications minimizing duplicative research development yurie may 29 1998 lucent completed purchase yurie involved development atm access solutions allocation iprd 620 million represented estimated fair value using methodology described 620 million allocated following projects ldr 50200250 609 million ii ldr 4 11 million revenues attributable ldr 50200250 estimated 132 million 1999 revenue expected peak 2000 decline thereafter end products life 2009 new product technologies expected introduced lucent revenue growth expected decrease 84 2000 9 2007 negative remainder projection period costs complete research development efforts related ldr 50200250 expected 29 million acquisition date riskadjusted discount rate 20 used discount projected cash flows ldr 50 ldr 200 ldr 250 completed time met scheduled milestones product releases renamed stratus october 20 1998 ascend completed purchase stratus manufacturer faulttolerant computer systems allocation iprd 267 million represented estimated fair value using methodology described primary projects made iprd follows hpux continuum 1248 continuum 448 m708 sphinx harmony lnp core personal number portability pn signaling system 7 ss7 gateway internet gateway revenues attributable projects estimated 84 million 1999 345 million 2000 revenue expected peak 2002 decline thereafter end products life 2009 new product technologies expected introduced lucent revenue growth expected decrease 310 2000 6 2002 negative remainder projection period acquisition date costs complete research development efforts related projects expected 48 million riskadjusted discount rate 35 used discount projected cash flows actual results date consistent material respects assumptions time acquisition except noted fiscal 1999 product development relating harmony sphinx continuum 448 projects discontinued due managements reprioritization product direction addition decided development relating continuum 1248 would cease quarter ended december 31 1999 consequently lucent realize forecast revenues projects agere inc april 20 2000 lucent completed purchase agere involved development programmable network processors use managing traffic highspeed voice data networks allocation iprd 94 million represented estimated fair value using methodology described 94 million allocated development fully programmable multiprotocol network processor oc48 25 gigabits per second wire speeds revenues attributable oc48 product estimated 21 million 2001 65 million 2002 revenue expected peak 2007 decline thereafter end products life 2009 new product technologies expected introduced lucent revenue growth expected decrease 205 2002 5 2007 negative remainder projection period acquisition date costs complete research development efforts related product expected 3 million riskadjusted discount rate 30 used discount projected cash flows ortel corporation april 27 2000 lucent completed purchase ortel involved development semiconductorbased optoelectronic components used fiberoptic systems telecommunications cable television networks allocation iprd 307 million represented estimated fair value using methodology described 307 million allocated following projects 10g new products 61 million 10g oc192 receiverdaytona 105 million 980 95 million 1550 27 million catv 19 million revenues attributable 10g new products estimated 5 million 2001 30 million 2002 revenue expected peak 2009 decline thereafter end products life new product technologies expected introduced lucent revenue growth expected decrease 447 2002 8 2009 negative remainder projection period acquisition date costs complete research development efforts related product expected 3 million revenues attributable 10g oc192 receiverdaytona estimated 16 million 2001 33 million 2002 revenue expected peak 2009 decline thereafter end products life new product technologies expected introduced lucent revenue growth expected decrease 166 2003 8 2009 negative remainder projection period acquisition date costs complete research development efforts related product expected 1 million revenues attributable 980 estimated 44 million 2001 108 million 2002 revenue expected peak 2008 decline thereafter end products life new product technologies expected introduced lucent revenue growth expected decrease 143 2002 17 2008 negative remainder projection period acquisition date costs complete research development efforts related product expected 1 million revenues attributable 1550 estimated 2 million 2001 63 million 2002 revenue expected peak 2008 decline thereafter end products life new product technologies expected introduced lucent revenue growth expected decrease 33 2003 17 2008 negative remainder projection period acquisition date costs complete research development efforts related product expected 2 million revenues attributable catv product estimated 28 million 2001 58 million 2002 revenue expected peak 2004 decline thereafter end products life new product technologies expected introduced lucent revenue growth expected decrease 107 2002 4 2004 negative remainder projection period acquisition date costs complete research development efforts related product expected 1 million riskadjusted discount rate 25 used discount projected cash flows chromatis networks june 28 2000 lucent completed purchase chromatis involved development nextgeneration optical transport solutions provide telecommunications carriers improvements cost efficiency scale management multiservice metropolitan networks allocation iprd 428 million represented estimated fair value using methodology described 428 million allocated first generation metropolis product integrate data voice video services metropolitan networks combine traffic onto wave division multiplexing wdm system revenues attributable metropolis product estimated 375 million 2001 1 billion 2002 revenue expected peak 2005 decline thereafter end products life new product technologies expected introduced lucent revenue growth expected decrease 196 2002 10 2004 negative remainder projection period acquisition date costs complete research development efforts related product expected 78 million riskadjusted discount rate 25 used discount projected cash flows spring tide networks september 19 2000 lucent completed purchase spring tide spring tide involved development carrierclass network equipment enables service providers offer new valueadded internet protocol ip services virtual private networks vpn low cost complexity spring tide involved development versions 20 21 ip service switch next generations spring tides flagship product allocation iprd 131 million represented estimated fair value using methodology described approximately 128 million allocated nextgeneration ip service switch products carrierclass platforms combine connectivity remote access server network intelligence remote access server switching capacity quality service qos capabilities atm switch one integrated solution remaining 3 million allocated projects designed enhance capabilities decrease production costs associated ip service switch revenues attributable ip service switch products estimated 109 million 2001 337 million 2002 revenue expected peak 2006 decline thereafter end products life new product technologies expected introduced lucent revenue growth expected decrease 209 2002 44 2006 negative remainder projection period acquisition date costs complete research development efforts related product expected 05 million 43 million 2000 2001 respectively riskadjusted discount rate 25 used discount projected cash flows given uncertainties development process aforementioned estimates subject change assurance given deviations estimates occur management expects continue development efforts believes reasonable chance successfully completing development efforts however risk associated completion projects assurance projects realize either technological commercial success failure successfully develop commercialize iprd would result loss expected economic return inherent fair value allocation forwardlooking statements managements discussion analysis results operations financial condition sections report contain forwardlooking statements based current expectations estimates forecasts projections industries lucent operates managements beliefs assumptions made management addition written oral statements constitute forwardlooking statements may made behalf lucent words expects anticipates intends plans believes seeks estimates variations words similar expressions intended identify forwardlooking statements guarantees future performance involve certain risks uncertainties assumptions future factors difficult predict therefore actual outcomes results may differ materially expressed forecast forwardlooking statements lucent undertakes obligation update publicly forwardlooking statements whether result new information future events otherwise future factors include increasing price products services competition us nonus competitors including new entrants rapid technological developments changes companys ability continue introduce competitive new products services timely costeffective basis mix products services availability manufacturing capacity components materials ability recruit retain talent achievement lower costs expenses credit concerns emerging service provider market customer demand companys products services ability successfully integrate operations business acquired companies timely completion proposed ipo spinoff agere systems sale power systems business successful implementation strategic reorganization us nonus governmental public policy changes may affect level new investments purchases made customers changes environmental us nonus governmental regulations protection validity patent intellectual property rights reliance large customers significant suppliers ability supply customer financing technological implementation costfinancial risks use large multiyear contracts companys credit ratings outcome pending future litigation governmental proceedings continued availability financing financial instruments financial resources amounts times terms required support companys future business representative future factors could affect outcome forwardlooking statements addition statements could affected general industry market conditions growth rates general us nonus economic conditions including interest rate currency exchange rate fluctuations future factors competition see discussion key business challenges dependence new product development markets companys principal products characterized rapidly changing technology evolving industry standards frequent new product introductions evolving methods building operating communications systems service providers customers companys operating results depend significant extent ability continue introduce new systems products software services successfully timely basis reduce costs existing systems products software services success new offerings dependent several factors including proper identification customer needs cost timely completion introduction differentiation offerings companys competitors market acceptance addition new technological innovations generally require substantial investment assurance available commercial viability including cases certification nonus us standardsetting bodies reliance major customers see discussion key business challenges european monetary union euro several member countries european union established fixed conversion rates existing sovereign currencies euro adopted euro new single legal currency legacy currencies remain legal tender participating countries transition period january 1 2002 transition period cashless payments made euro january 1 2002 july 1 2002 participating countries introduce euro notes coins withdraw legacy currencies longer available lucent place joint europeanunited states team representing affected functions within company team evaluating eurorelated issues affecting company include pricingmarketing strategy conversion information technology systems existing contracts euro conversion may affect crossborder competition creating crossborder price transparency lucent continue evaluate issues involving introduction euro accounting tax governmental legal regulatory guidance available based current information lucents current assessment lucent expect euro conversion material adverse effect business financial condition multiyear contracts lucent significant contracts sale infrastructure systems network operators extend multiyear periods expects enter similar contracts future uncertainties affecting recognition revenues stringent acceptance criteria implementation new technologies possible significant initial cost overruns losses see also discussion liquidity capital resources key business challenges future capital requirements see discussion liquidity capital resources nonus growth foreign exchange rates interest rates lucent intends continue pursue growth opportunities nonus markets many nonus markets longstanding relationships potential customers lucent local providers protective regulations including local content requirements type approvals create barriers entry addition pursuit nonus growth opportunities may require significant investments extended period returns investments realized projects investments could adversely affected reversals delays opening nonus markets new competitors exchange controls currency fluctuations investment policies repatriation cash nationalization social political risks taxation factors depending country opportunity arises difficulties nonus financial markets economies nonus financial institutions could adversely affect demand customers affected countries see discussion risk management respect foreign exchange interest rates significant change value us dollar currency one countries lucent sells products local customers makes purchases local suppliers may materially adversely affect lucents results lucent attempts mitigate effects use foreign currency exchange contracts although assurances attempts successful legal proceedings environmental matters see discussion note 17 accompanying consolidated financial statements item 8item 7 managements discussion analysis results operations financial condition overview lucent technologies designs delivers networks worlds largest communications service providers backed bell labs research development rely strengths mobility optical data voice networking technologies well software services develop nextgeneration networks systems services software designed help customers quickly deploy better manage networks create new revenuegenerating services help businesses consumers fiscal year 2001 reorganized company become focused better positioned capitalize market opportunities reorganization included august 31 2001 sold oklahoma ohio manufacturing operations celestica corporation see liquidity capital resources liquidity sale manufacturing operations july 24 2001 announced entered agreements sell optical fiber business sale completed november 16 2001 see liquidity capital resources liquidity sale optical fiber business april 2 2001 agere systems inc microelectronics business completed initial public offering ipo 600 million shares class common stock intend spinoff 578 remaining interest agere taxfree distribution shareowners see note 3 consolidated financial statements filed part report liquidity capital resources agere spinoff update january 24 2001 july 24 2001 announced phase ii restructuring program connection program recorded pretax charges 114 billion year ended september 30 2001 see results operations gross margin operating expenses restructuring charges asset impairments liquidity capital resources liquidity restructuring program december 29 2000 completed sale power systems business tyco international ltd 25 billion cash strategic direction realigning business around two customerfocused units integrated network solutions unit targeting wireline service providers mobility solutions unit targeting wireless service providers part realignment expect orient product lines research development efforts sales marketing supply chain services meet needs worlds largest service providers market demand continues uncertain believe strategy target worlds largest service providers offers stable attractive opportunity us substantial experience building supporting complex networks large service providers use meet needs customers strong relationships large service providers united states well many large service providers outside united states successful implementation restructuring efforts essential implementing new strategy manner timeline intend see liquidity capital resources liquidity restructuring program results operations revenues following table presents us nonus revenues approximate percentage total revenues dollars millions decrease revenues globally year ended september 30 2001 compared prior fiscal year primarily due deterioration global telecommunications market conditions significant decrease competitive local exchange carrier clec market significant reduction capital spending established service providers addition implemented selective customer financing program also impact revenues approximately 50 decline us related lower spending largest customers limited number large customers provide substantial portion revenues customers include among others verizon att verizon wireless att wireless sbc bellsouth sprint qwest remainder revenue decrease primarily due deteriorating clec market decrease nonus revenues year ended september 30 2001 compared prior year reflects winddown project saudi telecommunications company stc saudi arabia lower revenues two projects including onetel corp went receivership fiscal year 2001 increase us revenues year ended september 30 2000 compared fiscal year 1999 included higher revenue sales incumbent local exchange carriers wireline wireless clecs revenues fiscal year 2000 increased despite decline revenues att historically significant customer higher nonus revenues reflected increases regions except europemiddle eastafrica region negatively affected substantial reduction revenues stc project result sale optical fiber business dispositions may undertake new strategic direction focuses large service providers continued uncertainty telecommunications market expect revenues year ended september 30 2002 less year ended september 30 2001 segment revenues following table presents us nonus revenues segment approximate percentage total revenues dollars millions decreases products services revenues year ended september 30 2001 compared year ended september 30 2000 primarily attributable factors noted products revenues decreased product lines except optical fiber sales products primary driver services revenues therefore services revenues tend follow trend products revenues major customers us att largest contributor revenue decline compared prior year revenues att declined 17 billion 16 billion products segment decrease negatively affected wireless switching access optical networking products nonus revenues affected stc project noted revenues stc project approximately 1 billion less prior year 646 million decrease products segment addition stc project represented 40 volume decline services segment increases products revenues year ended september 30 2000 compared year ended september 30 1999 driven sales service provider internet infrastructure wireless systems offset part decline switching optical networking products lower expected revenues optical networking largely due delayed market entry oc192 product addition lower revenues switching products primarily due shift customer spending away circuit switching competitive pricing impact substantial reduction stc project increases services revenues us year ended september 30 2000 compared year ended september 30 1999 driven factors noted products revenues discussion along increased installation revenues driven improved sales large service providers nonus services revenues increased fiscal year 2000 compared prior fiscal year primarily due increased system support business europemiddle eastafrica asiapacific regions december 1999 securities exchange commission issued staff accounting bulletin 101 revenue recognition financial statements sab 101 sab 101 provides guidance recognition presentation disclosure revenues financial statements adoption sab 101 fiscal year 2001 significant impact segment revenues comparability results operations periods presented see note 5 consolidated financial statements filed part report gross margin telecommunications market conditions noted revenues section significantly reduced gross margin gross margin percentage revenues year ended september 30 2001 gross margin percentage year ended september 30 2001 decreased 97 405 prior fiscal year fiscal year 2001 gross margin percentage includes inventory charges approximately 12 billion associated product rationalizations discontinuance products business restructuring program excluding amount gross margin percentage would 156 factors contributing gross margin percentage decline reduced spending service providers caused lower sales volumes across product lines services consequently resulted less absorption fixed costs onetime charges associated customers experiencing financial difficulties lower software revenues compared prior year costs associated supplier customer contract settlements impact several international contracts lower margins higher provisions slowmoving obsolete inventory shift approximately 4 geographic revenue mix us region typically yields higher gross margins nonus regions expect gross margin percentage increase year ended september 30 2001 level based upon estimated view telecommunications market future improved product mix reduction onetime charges successful implementation cost reductions initiated fiscal year 2001 market product rationalization work introduction new products gross margin percentage improve future however future market conditions economic conditions could affect achievement objective percentage revenue gross margin decreased 405 year ended september 30 2000 480 fiscal year 1999 decrease primarily due decreased volumes margins optical networking switching products including lower software revenues increase competitive pricing product lines continued expansion overseas markets generally yield lower margins decrease gross margin percentage partially offset 350 million lower personnel costs including lower incentive compensation awards higher net pension credit impact adopting statement position 981 accounting costs computer software developed obtained internal use sop 981 operating expenses following table presents operating expenses dollars millions sga expenses excluding amortization goodwill acquired intangibles provision uncollectibles customer financings sga expenses lower year ended september 30 2001 compared fiscal year 2000 resulting primarily headcount reductions restructuring program company directed savings initiatives limited discretionary spending expect sga expenses continue decline fiscal year 2002 reasons see liquidity capital resources liquidity restructuring program sga expenses excluding amortization goodwill acquired intangibles provision uncollectibles customer financings decreased year ended september 30 2000 compared year ended september 30 1999 due lower personnel costs 475 million including lower incentive compensation awards higher net pension credit impact adopting sop 981 partially offset 61 million expenses primarily associated mergers international network services excel switching corporation xedia included sga expenses year ended september 30 1999 reversal 1995 business restructuring charges 85 million expenses associated mergers ascend nexabit rascom vitalsigns aggregate approximately 110 million provision uncollectibles customer financings deterioration certain customers credit worthiness resulted higher provisions uncollectibles customer financings fiscal year 2001 compared prior year three customer financings including provisions amounts due onetel winstar accounted approximately 60 fiscal year 2001 expense see liquidity capital resources customer financing increase provision uncollectibles customer financings year ended september 30 2000 compared fiscal year 1999 due increased reserves bad debt trade receivables due specific credit concerns certain customers financing provided amortization goodwill acquired intangibles fullyear effect acquisitions chromatis networks inc june 2000 spring tide networks september 2000 primary reason increase amortization goodwill acquired intangibles fiscal year 2001 compared prior fiscal year restructuring program discontinued rationalized certain product lines product development efforts including discontinuing chromatis product portfolio result actions certain goodwill impairment charges recorded actions result lower amortization goodwill acquired intangibles future years see restructuring charges asset impairments increase amortization goodwill acquired intangibles year ended september 30 2000 compared fiscal year 1999 associated acquisitions noted rd increase rd expenses year ended september 30 2001 compared prior fiscal year primarily due acquisitions made late fiscal year 2000 new product development particularly nextgeneration wireless products optical networking products switching access products partially offset program reductions included restructuring program result restructuring program expect rd expenses decline fiscal year 2002 see liquidity capital resources liquidity restructuring program decrease rd expenses year ended september 30 2000 compared fiscal year 1999 largely result 325 million lower personnel costs including lower incentive compensation awards higher net pension credit impact adopting sop 981 iprd 559 million year ended september 30 2000 reflected 131 million 428 million spring tide chromatis acquisitions respectively iprd 276 million year ended september 30 1999 related primarily acquisition stratus 243 million lesser extent acquisitions xnt quantum intercall quadritek waveaccess see discussion inprocess research development restructuring charges asset impairments january 24 2001 july 24 2001 announced phase ii restructuring program restructuring program exited certain nonstrategic wireless optical networking switching access product lines streamlined cost structure various businesses corporate operations actions expected significantly enhance ability achieve goals associated new strategic direction total charge business restructuring asset impairments 114 billion 102 billion included operating expenses operating expense charge includes restructuring costs 48 billion asset writedowns 54 billion remaining 12 billion business restructuring charge relates inventory charged costs restructuring costs included employee separation costs 34 billion associated approximately 39000 voluntary involuntary employee separations contract settlements 944 million including settlements purchase commitments suppliers 508 million contract renegotiations cancellations contracts customers 436 million facility closings costs 383 million asset writedowns included impairment charges goodwill acquired intangibles 41 billion primarily related writeoff 37 billion goodwill acquired intangibles result discontinuance chromatis product portfolio property plant equipment net writedowns 425 million capitalized software writedowns 362 million asset writedowns 522 million additional information see liquidity capital resources liquidity restructuring program note 2 consolidated financial statements filed part report income expense net income expense net consisted following items dollars millions decrease income expense net primarily related otherthantemporary writedowns investments lower net gains sales settlements financial instruments partially offset higher interest income fiscal year 2001 compared prior year due adverse market conditions fiscal year 2001 recorded impairment charges several investments conversely fiscal year 2000 gains sales investments primarily attributable gain 189 million sale certain equity investment writeoff embedded derivative assets primarily related onetel interest expense interest expense year ended september 30 2001 increased 518 million compared 342 million fiscal year 2000 increase interest expense due higher weighted average shortterm debt levels primarily related borrowings credit facilities addition interest expense included amortization fees associated entering credit facility arrangements fiscal year 2001 september 30 2001 reduced total debt level approximately 21 billion prior year current debt levels maintained reduced expect interest expense lower fiscal year 2002 interest expense year ended september 30 2000 increased 24 million 342 million compared 318 million fiscal year 1999 primarily due higher weighted average interest rates commercial paper provision benefit income taxes following table presents provision benefit income taxes related effective tax benefit rates dollars millions effective tax benefit rate year ended september 30 2001 lower us statutory rate primarily impact nontax deductible goodwill amortization certain nontax deductible business restructuring charges asset impairments decreased effective tax benefit rate offset part research development tax credits increased effective tax benefit rate pretax loss continuing operations recorded tax benefit resulting related net deferred tax assets 52 billion september 30 2001 reflecting net operating loss credit carryforwards deductible temporary differences although realization assured concluded likely net deferred tax assets realized based scheduling deferred tax liabilities projected taxable income amount net deferred tax assets actually realized however could vary differences timing amount future reversals existing deferred tax liabilities changes actual amounts future taxable income effective income tax rates exceed us federal statutory income tax rates years ended september 30 2000 1999 primarily due writeoffs iprd costs mergerrelated expenses deductible tax purposes income loss continuing operations result income loss continuing operations related per share amounts follows amounts millions except per share amounts income loss discontinued operations net income loss discontinued operations net three years period ended september 30 2001 32 billion 093 per basic diluted share 214 million 006 per basic diluted share 11 billion 034 per diluted share respectively see liquidity capital resources agere spinoff update note 3 consolidated financial statements filed part report extraordinary gain net year ended september 30 2001 recorded gain 12 billion net 780 million tax provision 035 per basic diluted share sale power systems business see note 4 consolidated financial statements filed part report cumulative effect accounting changes net effective october 1 2000 recorded net 38 million charge cumulative effect certain accounting changes comprised 30 million earnings credit 001 per basic diluted share adoption statement financial accounting standards 133 accounting derivative instruments hedging activities 68 million charge earnings 002 per basic diluted share adoption sab 101 see risk management note 5 consolidated financial statements filed part report effective october 1 1998 recorded cumulative effect accounting change net 13 billion 041 per diluted share resulting changing method calculating annual net pension postretirement benefit costs see note 12 consolidated financial statements filed part report liquidity capital resources cash flow years ended september 30 2001 2000 1999 net cash used operating activities net cash used operating activities 34 billion year ended september 30 2001 primarily due loss continuing operations adjusted noncash items 66 billion decrease accounts payable 759 million changes operating assets liabilities 548 million changes operating assets liabilities primarily include net increase notes receivable higher software development assets offset part business restructuring liabilities increases net cash used operating activities partially offset decreases receivables 36 billion inventories contracts process 881 million receivable improvement largely due improved collections fiscal year 2001 average receivable days outstanding improved 34 days 114 days september 30 2000 80 days september 30 2001 improvements inventory contracts process resulted efforts fiscal year 2001 streamline inventory supply chain operations well lower amounts net contracts process due winddown stc project net cash used operating activities 703 million year ended september 30 2000 primarily result increases receivables inventories contracts process 16 billion 22 billion respectively changes operating assets liabilities 17 billion changes operating assets liabilities primarily include higher software development assets decreases accrued income tax payroll benefit related liabilities net cash used operating activities partially offset income continuing operations adjusted noncash items 36 billion tax benefits stock options 11 billion increase accounts payable 263 million receivable deterioration fiscal year 2000 resulted slower collections partially offset smaller revenue growth fourth fiscal quarter 2000 compared period fiscal year 1999 average receivable days outstanding increased 19 days 114 days september 30 2000 increase inventories contracts process resulted increased production meet current anticipated sales commitments customers startup several longterm projects net cash used operating activities 16 billion year ended september 30 1999 primarily result increases receivables inventories contracts process 32 billion 16 billion respectively changes operating assets liabilities 23 billion offset part income continuing operations adjusted noncash items 43 billion tax benefits stock options 394 million increase accounts payable 636 million changes operating assets liabilities primarily included increases notes receivable prepaid expenses net cash provided used investing activities net cash provided investing activities 20 billion year ended september 30 2001 primarily 25 billion proceeds sale power systems business 572 million sale two manufacturing operations celestica see liquidity sale manufacturing operations sales disposals property plant equipment 177 million proceeds partially offset capital expenditures 14 billion net cash used investing activities 16 billion year ended september 30 2000 primarily capital expenditures 19 billion purchases investments 680 million offset part proceeds sales maturity investments 820 million disposition businesses 250 million largely related sale remaining consumer products business net cash used investing activities 11 billion year ended september 30 1999 primarily includes capital expenditures 14 billion purchases investments 872 million offset part proceeds sales maturity investments 14 billion capital expenditures primarily relate expenditures equipment facilities used manufacturing research development internal use software net cash provided financing activities net cash provided financing activities year ended september 30 2001 26 billion primarily due net proceeds received issuance redeemable convertible preferred stock august 2001 18 billion portion used reduce borrowings credit facilities net borrowings credit facilities 35 billion 25 billion debt associated borrowings assumed agere see note 10 consolidated financial statements filed part report proceeds real estate debt financing 302 million certain real estate transferred separate consolidated whollyowned subsidiary borrowings credit facilities primarily used fund operations pay 21 billion shortterm borrowings primarily represented commercial paper commercial paper outstanding september 30 2001 addition repaid current portion longterm debt matured july 2001 750 million dividends paid common stock fiscal year 2001 204 million july 24 2001 announced longer pay dividends common stock improve cash flow saving would offset annual preferred dividend requirements approximately 150 million elect pay dividends cash net cash provided financing activities year ended september 30 2000 22 billion resulted primarily issuances common stock related exercise stock options 14 billion net increase shortterm borrowings 14 billion partially offset repayments longterm debt 387 million dividends paid 255 million net cash provided financing activities year ended september 30 1999 34 billion resulted primarily issuances longterm debt 22 billion issuances common stock related exercise stock options 725 million net increase shortterm borrowings 705 million partially offset dividends paid 222 million liquidity cash requirements end fiscal year 2002 primarily fund operations including spending rd capital expenditures cash restructuring outlays see restructuring program capital requirements connection customer financing commitments debt service preferred stock dividend requirements elect pay dividends cash although implemented selective customer financing program fiscal year 2001 existing expect continue enter financing arrangements customers involve significant capital requirements addition capital needs associated customer financing may increase ability sell notes representing existing customer financing transfer future funding commitments acceptable terms financial institutions investors limited deterioration credit quality customers extended financing see customer financing restructuring program expect implementation restructuring program reduce annualized basis operating expenses working capital defined compared first fiscal quarter 2001 levels follows reduce annual operating expense run rate 40 billion end fiscal year 2002 september 30 2001 achieved 60 objective annualized basis reduce working capital defined change receivables inventory adjusted noncash charges asset securitizations normalized change quarterly sales 40 billion september 30 2001 achieved 75 objective reduce annual capital spending rate approximately 750 million subject timely successful implementation expect restructuring program yield gross cash savings excess 5 billion annually anticipated savings result primarily reduced headcount total cash outlays restructuring program expected approximately 21 billion approximately 530 million paid current fiscal year majority remainder paid end fiscal year 2002 expect complete restructuring program end fiscal year 2002 implemented manner timeline intend expect realize full benefits restructuring program end fiscal year 2002 cannot assure restructuring program achieve expense reductions benefits anticipate timetable contemplated restructuring program involves realigning business units sales forces may disruptive customer relationships decreases spending large service providers would likely also adverse effect revenues complete restructuring program achieve anticipated expense reductions time frame contemplate cash requirements fund operations likely significantly higher currently anticipate addition market demand continues uncertain currently implementing restructuring program new business strategy difficult estimate ongoing cash requirements restructuring program may also unanticipated adverse effects business restructuring program successful expect fund currently expected cash requirements fiscal year 2002 combination following sources cash equivalents september 30 2001 available credit facilities see credit facilities proceeds sale optical fiber business accounts receivable securitization facility capital market transactions dispositions sales assets cash flows operations subject successful implementation business strategy net liquidity approximately 54 billion september 30 2001 resulting cash equivalents 24 billion availability credit facilities 30 billion september 30 2001 10 billion outstanding credit facilities repaid november 20 2001 june 28 2001 established 750 million revolving accounts receivable securitization facility september 30 2001 obtained net proceeds 286 million collateralized 13 billion accounts receivable ability maintain facility september 30 2001 level subject ability generate amount eligible accounts receivable sufficient support level terms facility ability obtain proceeds depends combination factors including credit ratings increasing level eligible accounts receivable facility reduced 500 million october 2001 credit facilities september 30 2001 364day 2 billion credit facility expires february 21 2002 2 billion credit facility expires february 26 2003 credit facilities secured liens substantially assets including pledge agere stock owned us ability access credit facilities subject compliance terms conditions credit facilities including financial covenants financial covenants require us minimum earnings interest taxes depreciation amortization ebitda minimum net worth measured end fiscal quarter september 30 2001 compliance covenants amended see addition event subsidiary defaults debt defined credit facilities would constitute default credit facilities august 16 2001 amended credit facilities amendments modified financial covenants certain conditions terms including necessary allow distribution agere stock shareowners see agere spinoff update addition cannot resume payment dividends common stock unless achieve certain credit ratings ebitda levels event default exists credit facilities payment dividends common stock limited rate dividends paid prior discontinuation cash dividend permitted pay cash dividends convertible preferred stock event default exists credit facilities total lending commitments credit facilities reduced undertake certain debt reduction transactions generate additional funds specified nonoperating sources excess 25 billion first 2 billion excess amount would result termination 364day 2 billion credit facility additional amounts would reduce total lending commitments remaining 2 billion credit facility expires february 2003 however lending commitment reduced less 15 billion outstanding borrowings credit facilities exceed reduced lending commitments required repaid november 16 2001 generated 45 billion funds specified nonoperating sources including 18 billion proceeds received issuance redeemable convertible preferred stock 21 billion proceeds sale optical fiber business 519 million debt reduction debt equity exchange see note 3 consolidated financial statements filed part report balance specified types transactions november 20 2001 total lending commitments credit facilities reduced approximately 2 billion credit ratings credit ratings october 31 2001 follows rating senior unsecured longterm debt negative outlook standard poors moodys fitch ratings investment grade expect recent future lowering ratings debt result higher financing costs reduced access capital markets result reductions credit ratings fiscal year 2001 commercial paper types borrowings became unavailable financing costs increased cannot assure credit ratings reduced future standard poors moodys fitch sale optical fiber business november 16 2001 completed sale optical fiber business furukawa electric co ltd 23 billion approximately 200 million paid us commscope inc securities furukawa commscope agreed enter one joint ventures formed operate optical fiber business transaction expected result gain first quarter fiscal year 2002 addition entered agreement july 24 2001 sell two chinese joint ventures lucent technologies shanghai fiber optic co ltd lucent technologies beijing fiber optic cable co ltd corning incorporated 225 million transaction subject us foreign governmental approvals customary closing conditions expected close end first calendar quarter 2002 sale manufacturing operations august 2001 received 572 million closing transaction celestica corporation transition manufacturing operations oklahoma city oklahoma columbus ohio closing entered fiveyear supply agreement celestica primary manufacturer switching access wireless networking systems products inventory sold end user inventory associated transaction remains inventory balance corresponding liability proceeds received inventory amounted approximately 310 million september 30 2001 additionally may required repurchase 90 million inventory used within one year transaction work force related two operations expected reduced andor transferred celestica first quarter fiscal year 2002 resulting noncash charge approximately 380 million included component business restructuring employee separation charge future capital requirements believe cash hand availability credit facilities planned sources liquidity currently sufficient meet requirements end fiscal year 2002 cannot assure however additional sources liquidity available needed actual cash requirements greater currently expect described liquidity credit facilities receipt proceeds specified asset sales excess specified threshold results reduction amount available borrowings credit facilities remaining sources liquidity available cannot generate positive cash flow operations required obtain additional sources funds additional operating improvements asset sales capital market transactions financing third parties combination thereof although believe ability take actions cannot assure additional sources funds available would available reasonable terms agere spinoff update agreement agere provides agere distribution completed september 30 2001 would complete agere spinoff promptly practicable following satisfaction waiver conditions agreement also provides may terminate obligation complete distribution consultation agere senior management board directors determines sole discretion distribution best interests us shareowners amendments credit facilities completed august 16 2001 delayed ability complete spinoff remain committed completing process separating agere company intend move forward distribution shares agere stock taxfree spinoff shareowners however cannot assure conditions obligation complete distribution satisfied particular date terms conditions indebtedness permit distribution particular date amendments credit facilities revised conditions necessary us secure release pledge agere stock pledge released distribution occur request following terms conditions defined credit facilities met event default exists credit facilities generated positive ebitda fiscal quarter immediately preceding distribution meet minimum current asset ratio received 50 billion cash certain nonoperating sources 364day 2 billion credit facility terminated 2 billion credit facility expiring february 2003 reduced 175 billion less current terms credit facilities allow distribution unless time distribution generated 50 billion additional funds reduction debt specified nonoperating sources november 16 2001 generated 48 billion funds satisfy requirement 18 billion proceeds issuance redeemable convertible preferred stock 572 million proceeds received transaction involving oklahoma ohio manufacturing operations 21 billion cash proceeds received sale optical fiber business funds specified types transactions approximately 300 million expect raise additional proceeds satisfy requirement credit facilities received private letter ruling internal revenue service holding distribution shares agere common stock shareowners spinoff holders debt equity exchange tax free us shareowners effectiveness original ruling conditioned completion spinoff september 30 2001 however received supplemental ruling internal revenue service maintains effectiveness original ruling long spinoff completed june 30 2002 supplemental ruling also favorably resolves certain additional tax issues arising issuance preferred stock customer financing following table presents customer financing commitments september 30 2001 september 30 2000 dollars billions customers worldwide requiring suppliers arrange provide longterm financing condition obtaining bidding infrastructure projects may require financing amounts ranging modest sums billion dollars use disciplined credit evaluation business review process takes account credit quality individual borrowers related business plans well market conditions consider requests financing casebycase basis offer financing careful review market conditions permit intention sell transfer longterm financing arrangements may include commitments drawndown borrowings financial institutions investors enables us reduce amount commitments free additional financing capacity part revenue recognition process determine whether notes receivable contracts reasonably assured collection based various factors including ability sell notes credit process monitors drawn undrawn commitments guarantees debt customers reviewed quarterly annual basis depending upon risk profile part review assess customers shortterm longterm liquidity position current operating performance versus plan execution challenges facing company changes competitive landscape industry macroeconomic conditions changes management sponsors depending upon extent deterioration customers credit profile noncompliance legal documentation undertake actions could include canceling commitment compelling borrower take corrective measures increasing efforts mitigate potential losses actions designed mitigate unexpected events could impact future results operations cash flows however assurance case adverse industry conditions continued softening clec market negatively affected creditworthiness several customers participate customer financing program year ended september 30 2001 recorded provisions uncollectibles customer financings 22 billion approximately 13 billion related three customer finance projects including winstar onetel april 18 2001 winstar filed chapter 11 protection late may 2001 onetel filed voluntary administration eg bankruptcy subsequently announced liquidated assets sold built mobile fiberoptic network onetel substantially complete november 2001 entered agreement liquidator affirming ownership network reserves associated total drawn commitments 21 billion reflecting net exposure approximately 900 million overall customer financing exposure coupled continued decline telecommunications market conditions negatively affected revenue results operations cash flows fiscal year 2001 continue provide commit financing appropriate business ability arrange provide financing customers depend number factors including capital structure credit rating level available credit continued ability sell transfer commitments drawndown borrowings acceptable terms due recent economic uncertainties reduced demand financings capital bank markets may required continue hold certain customer financing obligations longer periods prior sale thirdparty lenders addition specific risks associated customer financing including risks associated new technologies new network construction market demand competition customer business plan viability funding risks may require us hold certain customer financing obligations longer term unexpected developments customer financing arrangements could negatively affect revenue results operations cash flows future addition may required record additional reserves related customer financing future risk management exposed market risk changes foreign currency exchange rates interest rates equity prices could affect results operations financial condition manage exposure market risks regular operating financing activities deemed appropriate hedge risks use derivative financial instruments use term hedge mean strategy designed manage risks volatility prices rate movements certain assets liabilities anticipated transactions creating relationship gains losses derivative instruments expected counterbalance losses gains assets liabilities anticipated transactions exposed market risks use derivative financial instruments risk management tools trading speculative purposes addition derivative financial instruments entered diversified group major financial institutions order manage exposure nonperformance instruments risk management objective minimize effects volatility cash flows identifying recognized assets liabilities forecasted transactions exposed risks appropriately hedging either forward contracts lesser extent option contracts swap derivatives embedding terms certain contracts affect ultimate amount cash flows contract generally hedge credit risk customer receivables foreign currency risk use foreign exchange forward contracts lesser extent option contracts minimize exposure risk eventual net cash inflows outflows resulting sale products nonus customers purchases nonus suppliers adversely affected changes exchange rates foreign exchange forward option contracts utilized recognized receivables payables firmly committed anticipated cash inflows outflows use derivative financial instruments allows us reduce overall exposure exchange rate movements since gains losses contracts substantially offset losses gains assets liabilities transactions hedged cash inflows outflows denominated foreign currency netted legal entity basis corresponding net cash flow exposure appropriately hedged hedge net investment nonus entities view investments longterm nature september 30 2001 primary net foreign currency market exposures follows dollars millions exposure positions represent portfolio containing identified booked firmly committed exposures 50 first six months identified anticipated exposures used benchmark us risk management purposes hedge contracts represent actual external derivative transactions executed financial counterparties offset net exposure hedge positions always equal due fact anticipated exposures included within portfolios may hedged little 25 much 100 deemed appropriate accordance corporate policy fair value foreign exchange forward option contracts subject changes foreign currency exchange rates purposes assessing specific risks use sensitivity analysis determine effects market risk exposures may fair value financial instruments results operations financial instruments included sensitivity analysis foreign currency forward option contracts generally durations one three months primarily used hedge recognized receivables payables anticipated transactions lesser extent unrecognized firm commitments sensitivity analysis excludes value foreign currency denominated receivables payables loans short maturities perform sensitivity analysis assess risk loss fair values effect hypothetical 10 change value foreign currencies assuming change interest rates however calculated exposures generally affect use derivative financial instruments described contracts outstanding september 30 2001 2000 10 appreciation value foreign currencies us dollar prevailing market rates would result incremental pretax net unrealized loss approximately 63 million 71 million respectively conversely 10 depreciation currencies prevailing market rates would result incremental pretax net unrealized gain approximately 63 million 71 million september 30 2001 2000 respectively consistent nature economic hedge foreign exchange forward option contracts unrealized gains losses would offset corresponding decreases increases respectively underlying instrument transaction hedged model determine sensitivity assumes parallel shift foreign currency exchange spot rates although exchange rates rarely move direction additionally amounts necessarily represent actual changes fair value would incur normal market conditions variables exchange rates held constant calculations changed foreign exchange risk management strategy prior year reviewing plans centralize foreign exchange liquidity management needs many operating subsidiaries model inhouse bank implementation would change fundamental objective foreign currency risk management policy expected yield benefits way economic efficiency process efficiency improved visibility financial flows conjunction foresee replacing existing sensitivity analysis foreign exchange interest rate instruments one based valueatrisk similar methodologies commonly accepted within financial markets hedge certain foreign currency transactions decline value nonus dollar currencies may reversed adversely affect ability contract product sales us dollars products may become expensive purchase us dollars local customers business countries affected currencies interest rate risk use combination financial instruments including mediumterm shortterm financings variablerate debt instruments lesser extent interest rate swaps manage interest rate mix total debt portfolio related cash flows manage mix costeffective manner time may enter interest rate swap agreements agree exchange various combinations fixed andor variable interest rates based agreedupon notional amounts material interest rate swap agreements effect september 30 2001 september 30 2000 objective maintaining mix fixed floating rate debt mitigate variability cash flows resulting interest rate fluctuations well reduce cash flows attributable debt instruments portfolio customer finance notes receivable predominantly comprises variablerate notes libor plus stated percentage subjects us variability cash flows earnings effect changes libor enter derivative transactions cash equivalents shortterm investments since relatively short maturities create significant risk fair value fixedrate longterm debt sensitive changes interest rates interest rate changes would result gainslosses market value debt due differences market interest rates inception debt obligation perform sensitivity analysis fixedrate longterm debt assess risk changes fair value debt instruments original maturities ranging five years 30 years model determine sensitivity assumes hypothetical 150 basis point parallel shift interest rates september 30 2001 2000 150 basis point increase interest rates would reduce market value fixedrate longterm debt approximately 191 million 317 million respectively conversely 150 basis point decrease interest rates would result net increase market value fixedrate longterm debt outstanding september 30 2001 2000 approximately 232 million 397 million respectively sensitivity analysis debt obligations excludes commercial paper variablerate debt instruments secured borrowings bank loans changes interest rates would significantly affect fair value instruments interest rate swaps also excluded sensitivity analysis since material earnings cash flows received variablerate customer finance notes paid credit facilities sensitive changes libor notes original maturities ranging one year 10 years determine specific risks earnings cash flows portfolio sensitivity analysis performed model assuming 150 basis point parallel shift libor model maximum annual variability earnings cash flows could experience portfolio september 30 2001 would approximately 36 million however model necessarily reflect actual volatility would experience interest income certain notes recognized collected certain notes provide interest capitalized principal balance notes may sold third parties normal course business changed interest rate risk management strategy prior year foresee expect significant changes exposure interest rate fluctuations considering expanding use interest rate swaps near future debt obligations equity price risk investment portfolio consists equity investments accounted cost equity methods well equity investments publiclyheld companies classified availableforsale securities exposed price fluctuations generally concentrated hightechnology communications industry many small capitalization stocks september 30 2001 fair value one availableforsale security totaled 48 million total availableforsale portfolio valued 58 million generally hedge equity price risk however occasion may use equity derivative financial instruments subject equity price risks complement investment strategies september 30 2001 20 adverse change equity prices would result approximate 12 million decrease fair value availableforsale securities september 30 2001 outstanding hedging instruments equity price risk model determine sensitivity assumes corresponding shift equity prices however equity prices individual companies dispersed across many different industries may always move direction analysis excludes stock purchase warrants believe value warrants significant inprocess research development iprd connection acquisitions fiscal years 2000 1999 chromatis spring tide stratus allocated nontax impacting charges 428 million 131 million 267 million respectively total purchase price iprd part process analyzing acquisitions made decision buy technology yet commercialized rather develop technology internally based decision number factors including amount time would take bring technology market also considered bell labs resource allocation progress comparable technology expect use decision process future estimated fair value iprd acquisitions using income approach involved estimating fair value iprd using present value estimated aftertax cash flows expected generated iprd using riskadjusted discount rates revenue forecasts appropriate selection discount rate based consideration weighted average cost capital well factors including useful life technology profitability levels technology uncertainty technology advances known time stage completion technology believe estimated iprd amounts determined represented fair value exceed amount third party would pay projects appropriate deducted amount reflecting contribution core technology anticipated cash flows iprd project date acquisition iprd projects yet reached technological feasibility alternative future uses accordingly value allocated projects capitalized immediately expensed acquisition projects successful completed timely manner anticipated product pricing growth rates may achieved may realize financial benefits expected projects set forth descriptions significant acquired iprd projects stratus october 20 1998 ascend completed purchase stratus manufacturer faulttolerant computer systems allocation iprd 267 million 24 million iprd subsequently reversed march 1999 represented estimated fair value using methodology described primary projects made iprd follows hpux continuum 1248 continuum 448 m708 sphinx harmony lnp core personal number portability signaling system 7 gateway internet gateway revenues attributable projects estimated 84 million 1999 345 million 2000 revenue expected peak fiscal year 2002 decline thereafter end products life 2009 new product technologies expected introduced us revenue growth expected decrease 310 fiscal year 2000 6 fiscal year 2002 negative remainder projection period acquisition date costs complete research development efforts related projects expected 48 million riskadjusted discount rate 35 used discount projected cash flows actual results date consistent material respects assumptions time acquisition except noted fiscal year 1999 product development relating harmony sphinx continuum 448 projects discontinued due reprioritization product direction addition decided development relating continuum 1248 project would cease quarter ended december 31 1999 consequently realize forecasted revenues projects fiscal year 2001 substantially goodwill acquired intangibles related purchase stratus written part restructuring program resulted exit two remaining projects within original portfolio chromatis networks june 28 2000 completed purchase chromatis involved development nextgeneration optical transport solutions provide telecommunications carriers improvements cost efficiency scale management multiservice metropolitan networks allocation iprd 428 million represented estimated fair value using methodology described 428 million allocated first generation metro optical product expected integrate data voice video services metropolitan networks combine traffic onto wave division multiplexing wdm system revenues attributable metro optical product estimated 375 million fiscal year 2001 1 billion fiscal year 2002 revenue expected peak fiscal year 2005 decline thereafter end products life new product technologies expected introduced us revenue growth expected decrease 196 fiscal year 2002 10 fiscal year 2004 negative remainder projection period acquisition date costs complete research development efforts related product expected 78 million riskadjusted discount rate 25 used discount projected cash flows part restructuring program fiscal year 2001 chromatis product portfolio discontinued remaining assets primarily goodwill acquired intangibles written spring tide networks september 19 2000 completed purchase spring tide spring tide involved development carrierclass network equipment enables service providers offer new valueadded internet protocol ip services virtual private networks low cost complexity spring tide involved development versions 20 21 ip service switch next generations spring tides flagship product allocation iprd 131 million represented estimated fair value using methodology described approximately 128 million allocated nextgeneration ip service switch products carrierclass platforms combine connectivity remote access server network intelligence remote access server switching capacity quality service capabilities atm switch one integrated solution remaining 3 million allocated projects designed enhance capabilities decrease production costs associated ip service switch revenues attributable ip service switch products estimated 109 million fiscal year 2001 337 million fiscal year 2002 revenue expected peak fiscal year 2006 decline thereafter end products life new product technologies expected introduced us revenue growth expected decrease 209 2002 44 fiscal year 2006 negative remainder projection period although actual results date significantly less anticipated time acquisition believe shortfall made future years acquisition date costs complete research development efforts related product expected 05 million 43 million fiscal years 2000 2001 respectively riskadjusted discount rate 25 used discount projected cash flows given uncertainties development process aforementioned estimates subject change assurance given deviations estimates occur management expects continue development efforts believes reasonable chance successfully completing development efforts however risks associated completion projects assurance projects realize either technological commercial success failure successfully develop commercialize iprd would result loss expected economic return inherent fair value allocation european monetary union euro several member countries european union established fixed conversion rates existing sovereign currencies euro adopted euro new single legal currency legacy currencies remain legal tender participating countries transition period january 1 2002 transition period cashless payments made euro january 1 2002 march 1 2002 participating countries introduce euro notes coins withdraw legacy currencies longer available place joint european united states team representing affected functions within company coordinated corporate program office team evaluated eurorelated issues affecting pricingmarketing strategy conversion information technology systems existing contracts process completing conversionupgrade affected systems applications data contracts processes continue evaluate issues involving introduction euro accounting tax governmental legal regulatory guidance becomes available based current information current assessment expect euro conversion material adverse effect business financial condition recent pronouncements see discussion note 18 consolidated financial statements filed part report item 8item 7 management’s discussion analysis financial condition results operations information required item included pages 6 19 annual report shareowners fiscal year ended september 30 2002 pages annual report shareowners included exhibit 13 report item 7aitem 7 management’s discussion analysis financial condition results operations information required item included pages annual report shareowners year ended september 30 2003 pages annual report shareowners included exhibit 13 report item 7aitem 7 management’s discussion analysis financial condition results operations information required item included pages annual report shareowners year ended september 30 2005 pages annual report shareowners included exhibit 13 report item 7aitem 7 management’s discussion analysis financial condition results operations information required item included pages annual report shareowners year ended september 30 2004 pages annual report shareowners included exhibit 13 report item 7aitem 7 management’s discussion analysis financial condition results operations information required item included pages annual report shareowners year ended september 30 2006 pages annual report shareowners included exhibit 13 report item 7a nannannannannannanitem 7a qualitative quantitative disclosures market risk information required item included pages 18 19 annual report shareowners fiscal year ended september 30 2002 pages annual report shareowners included exhibit 13 report item 8item 7a quantitative qualitative disclosures market risk information required item included pages annual report shareowners year ended september 30 2003 pages annual report shareowners included exhibit 13 report item 8item 7a quantitative qualitative disclosures market risk information required item included pages annual report shareowners year ended september 30 2005 pages annual report shareowners included exhibit 13 report item 8item 7a quantitative qualitative disclosures market risk information required item included pages annual report shareowners year ended september 30 2004 pages annual report shareowners included exhibit 13 report item 8item 7a quantitative qualitative disclosures market risk information required item included pages annual report shareowners year ended september 30 2006 pages annual report shareowners included exhibit 13 report item 8 nannannannanitem 8 financial statements supplementary data see index financial statements financial statement schedule item 14 item 9item 8 financial statements supplementary data consolidated financial statements financial statement schedule filed part report item 9item 8 financial statements supplementary data information required item included pages 21 51 annual report shareowners fiscal year ended september 30 2002 pages annual report shareowners included exhibit 13 report item 9item 8 financial statements supplementary data information required item included pages annual report shareowners year ended september 30 2003 pages annual report shareowners included exhibit 13 report item 9item 8 financial statements supplementary data information required item included pages annual report shareowners year ended september 30 2005 pages annual report shareowners included exhibit 13 report item 9item 8 financial statements supplementary data information required item included pages annual report shareowners year ended september 30 2004 pages annual report shareowners included exhibit 13 report item 9item 8 financial statements supplementary data information required item included pages annual report shareowners year ended september 30 2006 pages annual report shareowners included exhibit 13 report item 9 nannannannannannanitem 15 exhibits financial statement schedule reports form 8k following documents filed part report separate financial statements subsidiaries consolidated 50 percent less owned persons omitted since entity constitutes ‘significant subsidiary’ pursuant provisions regulation sx article 309 incorporated reference appropriate portions pages 6 51 company’s annual report shareowners fiscal year ended september 30 2002 see part ii exhibit 13 6 exhibits see exhibit index page 49 description documents filed exhibits report form 10k incorporated reference herein document incorporated reference identified parenthetical referencing sec filing included document furnish without charge security holder upon request copy definitive proxy statement 2003 annual meeting shareowners portions incorporated herein reference thereto furnish exhibit cost b reports form 8k last quarter fiscal year covered report company filed following four reports form 8k fiscal quarter ended september 30 2002 date filed item reported upon july 23 2002 company issued press release containing results third fiscal quarter ended june 30 2002 slides made available webcast quarterly results conference call held july 23 2002 august 12 2002 company announced settlement class action lawsuit illinois state court entitled sparks et al v att lucent technologies inc et al august 13 2002 company announced chief executive officer chief financial officer submitted securities exchange commission sworn statements pursuant securities exchange commission order 4460 september 13 2002 company issued press release regarding expectations revenues profits quarter ended september 30 2002 report independent accountants financial statement schedule board directors shareowners lucent technologies inc audits consolidated financial statements referred report dated october 23 2002 except second paragraph note 4 third paragraph note 10 first paragraph note 12 date december 4 2002 appearing 2002 annual report shareowners lucent technologies inc report consolidated financial statements incorporated reference annual report form 10k also included audit consolidated financial statement schedule hereto included form 10k opinion consolidated financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp new york new york october 23 2002 except second paragraph note 4 third paragraph note 10 first paragraph note 12 date december 4 2002 lucent technologies inc schedule ii valuation qualifying accounts dollars millions primarily represents amounts written net recoveries b primarily charged shareowners’ deficit equity minimum pension liability charges comprehensive income c charged costs expenses include 1259 inventory related lucent’s business restructuring program 570 written included deductions primarily represents amounts obsolete scrapped inventory written amounts reflect continuing operations amounts reclassified exclude avaya agere power systems business signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned hereunto duly authorized december 12 2002 lucent technologies inc john kritzmacher john kritzmacher principal accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated december 12 2002 patricia f russo principal executive officer patricia f russo president chief executive officer frank d’amelio principal financial officer frank d’amelio executive vice president chief financial officer john kritzmacher principal accounting officer john kritzmacher senior vice president corporate controller directors paul allaire robert e denham daniel goldin carla hills john kritzmacher patricia f russo attorneyinfact henry b schacht franklin thomas john young chief executive officer certification patricia f russo president chief executive officer lucent technologies inc certify 1 reviewed annual report form 10k lucent technologies inc “registrant” 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officers disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date december 12 2002 patricia f russo president chief executive officer principal executive officer chief financial officer certification frank d’amelio executive vice president chief financial officer lucent technologies inc certify 1 reviewed annual report form 10k lucent technologies inc “registrant” 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officers disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date december 12 2002 frank d’amelio executive vice president chief financial officer principal financial officer exhibit index following documents filed exhibits report form 10k incorporated reference herein document incorporated reference identified parenthetical reference sec filing included document exhibit number description 3i 1 certificate incorporation registrant amended effective february 16 2000 exhibit 31 registration statement form s4 33331400 3i 2 certificate designations 800 redeemable convertible preferred stock setting forth powers preferences rights qualifications limitations restrictions thereof preferred stock lucent technologies inc exhibit 3 quarterly report form 10q quarter ended june 30 2001 3ii bylaws registrant amended january 6 2002 exhibit 3ii quarterly report form 10q quarter ended december 31 2001 4ii 1 indenture dated april 1 1996 lucent technologies inc bank new york trustee exhibit 4a registration statement form s3 33301223 4ii 2 first supplemental indenture dated april 17 2000 indenture dated april 1 1996 exhibit 4 report form 8k filed may 5 2000 4ii 3 form registrant’s common stock certificate exhibit 4iv quarterly report form 10q quarter ended december 31 2001 4ii 4 amended restated trust agreement dated march 19 2002 among registrant depositor bank new york property trustee bank new york delaware trustee individuals named therein administrative trustees relating lucent technologies capital trust exhibit 4v 1 quarterly report form 10q quarter ended march 31 2002 4ii 5 form certificate preferred securities lucent technologies capital trust designated 775 cumulative convertible trust preferred securities liquidation preference 1000 per preferred security exhibit 4v 2 quarterly report form 10q quarter ended march 31 2002 4ii 6 indenture dated march 19 2002 registrant bank new york indenture trustee exhibit 4v 3 quarterly report form 10q quarter ended march 31 2002 4ii 7 form registrant’s 775 convertible subordinated debentures due 2017 exhibit 4v 4 quarterly report form 10q quarter ended march 31 2002 4ii 8 guarantee agreement dated march 19 2002 registrant guarantor bank new york guarantee trustee exhibit 4v 5 quarterly report form 10q quarter ended march 31 2002 4iii instruments addition exhibits 4ii define rights holders longterm debt registrant consolidated subsidiaries filed herewith pursuant regulation sk item 601b4iiia pursuant regulation registrant agrees furnish copy instrument sec upon request 10i 1 separation distribution agreement among lucent technologies inc att corp ncr corporation dated february 1 1996 amended restated march 29 1996 exhibit 101 registration statement form s1 33300703 10i 2 tax sharing agreement among lucent technologies inc att corp ncr corporation dated february 1 1996 amended restated march 29 1996 exhibit 106 registration statement form s1 33300703 10i 3 employee benefits agreement att corp lucent technologies inc dated february 1 1996 amended restated march 29 1996 exhibit 102 registration statement form s1 33300703 10i 4 rights agreement lucent technologies inc bank new york successor first chicago trust company new york rights agent dated april 4 1996 exhibit 42 registration statement form s1 33300703 10i 5 amendment rights agreement lucent technologies inc bank new york successor first chicago trust company new york dated february 18 1998 exhibit 10i 5 annual report form 10k year ended september 30 1998 10i 6 364day revolving credit facility agreement dated february 22 2001 among lucent technologies inc several banks financial institutions entities time parties thereto salomon smith barney inc syndication agent chase manhattan bank administrative agent exhibits 991 current report form 8k filed february 27 2001 10i 7 5year amended restated revolving credit facility agreement dated february 26 1998 amended restated february 22 2001 among lucent technologies inc lenders party thereto salomon smith barney inc syndication agent chase manhattan bank administrative agent exhibit 993 current report form 8k filed february 27 2001 10i 8 guarantee collateral agreement made lucent technologies inc certain subsidiaries favor chase manhattan bank collateral agent dated february 22 2001 exhibit 994 current report form 8k filed february 27 2001 10i 9 collateral sharing agreement among lucent technologies inc various grantors chase manhattan bank collateral agent dated february 22 2001 exhibit 995 current report form 8k filed february 27 2001 10i 10 first amendment 364day revolving credit facility agreement first amendment guarantee collateral agreement dated june 11 2001 exhibit 991 current report form 8k filed august 16 2001 10i 11 first amendment fiveyear revolving credit facility agreement first amendment guarantee collateral agreement dated june 11 2001 exhibit 992 current report form 8k filed august 16 2001 10i 12 second amendment 364day revolving credit facility dated august 16 2001 exhibit 993 current report form 8k filed august 16 2001 10i 13 second amendment fiveyear amended restated revolving credit facility agreement dated august 16 2001 exhibit 994 current report form 8k filed august 16 2001 10i 14 third amendment fiveyear revolving credit facility agreement second amendment guarantee collateral agreement dated june 7 2002 exhibit 991 current report form 8k filed june 13 2002 10i 15 letter agreement dated october 16 2002 among lucent technologies inc certain subsidiaries jpmorgan chase bank collateral agent exhibit 991 current report form 8k filed october 23 2002 10iib 1 brand license agreement lucent technologies inc att dated february 1 1996 exhibit 105 registration statement form s1 33300703 10iib 2 patent license agreement among att corp ncr corporation lucent technologies inc effective march 29 1996 exhibit 107 registration statement form s1 33300703 10iib 3 amended restated technology license agreement among att corp ncr corporation lucent technologies inc effective march 29 1996 exhibit 108 registration statement form s1 33300703 10iiia 1 lucent technologies inc short term incentive program exhibit 10iiia 2 quarterly report form 10q quarter ended march 31 1998 10iiia 2 lucent technologies inc 1996 long term incentive program amended april 21 2002 exhibit 10iiia quarterly report form 10q quarter ended march 31 2002 10iiia 3 lucent technologies inc 1996 long term incentive program plan restricted stock unit award agreement exhibit 10iiia 3 annual report form 10k year ended september 30 2000 10iiia 4 lucent technologies inc 1996 long term incentive program plan nonstatutory stock option agreement exhibit 10iiia 4 annual report form 10k year ended september 30 2000 10iiia 5 lucent technologies inc deferred compensation plan exhibit 10iiia 5 annual report form 10k year ended september 30 2000 10iiia 6 lucent technologies inc stock retainer plan nonemployee directors exhibit 10iiia 5 annual report form 10k year ended september 30 1998 10iiia 7 lucent technologies inc officer longterm disability survivor protection plan exhibit 10iiia 8 annual report form 10k transition period ended september 30 1996 10iiia 8 description lucent technologies inc supplemental pension plan exhibit 10iiia 13 annual report form 10k year ended september 30 1998 10iiia 9 lucent technologies inc 1999 stock compensation plan nonemployee directors exhibit 10iiia 14 annual report form 10k year ended september 30 1998 10iiia 10 lucent technologies inc voluntary life insurance plan exhibit 10iiia 15 annual report form 10k year ended september 30 1998 10iiia 11 employment agreement dated january 6 2002 patricia f russo lucent technologies inc exhibit 10iiia1 quarterly report form 10q quarter ended december 31 2001 10iiia 12 officer severance policy robert holder dated february 14 2001 exhibit 10iiia 15 annual report form 10k year ended september 30 2001 10iiia 13 officer severance policy william o’shea dated february 14 2001 exhibit 10iiia 16 annual report form 10k year ended september 30 2001 10iiia 14 officer severance policy richard j rawson dated february 14 2001 10iiia 15 henry schacht letter robert holder dated december 3 2001 exhibit 10iiia 19 annual report form 10k year ended september 30 2001 10iiia 16 henry schacht letter william o’shea dated december 3 2001 exhibit 10iiia 20 annual report form 10k year ended september 30 2001 10iiia 17 henry schacht letter richard j rawson dated december 3 2001 10iiia 18 henry schacht letter frank d’amelio dated march 13 2001 10iiia 19 pam kimmet letter frank d’amelio dated september 12 2001 10iiib 1 lucent technologies inc 1997 long term incentive plan amended april 21 2002 exhibit 10iiib quarterly report form 10q quarter ended march 31 2002 computation deficiency earnings cover combined fixed charges preferred stock dividend requirements ratio earnings combined fixed charges preferred stock dividend requirements selected portions pages 5 51 company’s annual report shareowners year ended september 30 2002 list subsidiaries lucent technologies inc consent pricewaterhousecoopers llp powers attorney executed directors signed report 991 description capital stock exhibit 99i quarterly report form 10q quarter ended december 31 2001 992 certification patricia f russo chief executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 993 certification frank d’amelio chief financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 management contract compensatory plan arrangementitem 15 exhibits financial statement schedule reports form 8k following documents filed part report separate financial statements subsidiaries consolidated 50 percent less owned persons omitted since entity constitutes “significant subsidiary” pursuant provisions regulation sx article 309 6 exhibits see exhibit index page 32 description documents filed exhibits report form 10k incorporated reference herein document incorporated reference identified parenthetical referencing sec filing included document furnish without charge security holder upon request copy definitive proxy statement 2004 annual meeting shareowners portions incorporated herein reference furnish exhibit cost b reports form 8k last quarter fiscal year covered report september 24 2003 filed current report form 8k pursuant item 5 “other events” announce preliminary court approval agreement announced march 27 2003 settle pending securities related litigation company current former officers directors certain defendants september 8 2003 filed current report form 8k pursuant item 9 “regulation fd disclosure” furnish information regarding cost providing retiree healthcare benefits changes benefits making available retirees various government officials august 22 2003 filed current report form 8k pursuant item 5 “other events” announce result allegations made national group communications companies ltd us department justice securities exchange commission commenced investigation possible violations foreign corrupt practices act connection operations saudi arabia july 23 2003 filed current report form 8k pursuant item 9 “regulation fd disclosure” furnish news release reporting results third quarter fiscal 2003 july 16 2003 filed current report form 8k pursuant item 7 “financial statements exhibits” item 9 “regulation fd disclosure” file amendments letter credit issuance reimbursement agreement external sharing debt agreement amended restated guarantee collateral agreement amended restated collateral sharing agreement furnish news release commenting expectations results third quarter fiscal 2003 lucent technologies inc schedule ii valuation qualifying accounts excludes 60 cash recovery amount previously written b primarily relates reclassifications contracts process c primarily represents amounts written net recoveries primarily relates revenue deferred year e primarily charged shareowners’ deficit equity changes minimum pension liability f primarily represents writeoff expired carryforwards impact trust preferred securities conversions g charges costs expenses include 1259 inventory related lucent’s business restructuring program 570 written included deductions h primarily represents amounts obsolete scrapped inventory written signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned hereunto duly authorized lucent technologies inc pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated exhibit index following documents filed exhibits report form 10k incorporated reference herein document incorporated reference identified parenthetical reference sec filing included document management contract compensatory plan arrangementitem 15 exhibits financial statement schedule following documents filed part report incorporated reference appropriate portions pages annual report shareowners fiscal year ended september 30 2005 see part ii exhibit 13 3 exhibits see exhibit index page 30 description documents filed exhibits report form 10k incorporated reference herein document incorporated reference identified parenthetical referencing sec filing included document furnish without charge security holder upon request copy definitive proxy statement 2006 annual meeting shareowners portions incorporated herein reference furnish exhibit cost b exhibit index page 30 describes documents filed exhibits report form 10k incorporated reference herein c separate financial statements subsidiaries consolidated 50 percent less owned persons omitted since entity constitutes “significant subsidiary” pursuant provisions regulation sx article 309 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned hereunto duly authorized lucent technologies inc john kritzmacher john kritzmacher senior vice president controller principal accounting officer date december 14 2005 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated patricia f russo principal executive officer patricia f russo chairman chief executive officer date december 14 2005 frank d’amelio principal financial officer frank d’amelio executive vice president chief financial officer date december 14 2005 john kritzmacher principal accounting officer john kritzmacher senior vice president controller date december 14 2005 directors linnet deily robert e denham daniel goldin edward e hagenlocker carla hills karl j krapek richard c levin patricia f russo henry b schacht franklin thomas ronald williams john young john kritzmacher attorneyinfact date december 14 2005 exhibit index following documents filed exhibits report form 10k incorporated reference herein document incorporated reference identified parenthetical reference sec filing included document certain confidential portions exhibit omitted filed separately securities exchange commission pursuant request confidential treatment rule 24b2 securities exchange act 1934 management contract compensatory plan arrangementitem 15 exhibits financial statement schedule following documents filed part report incorporated reference appropriate portions pages annual report shareowners fiscal year ended september 30 2004 see part ii exhibit 13 separate financial statements subsidiaries consolidated 50 percent less owned persons omitted since entity constitutes “significant subsidiary” pursuant provisions regulation sx article 309 3 exhibits see exhibit index page 30 description documents filed exhibits report form 10k incorporated reference herein document incorporated reference identified parenthetical referencing sec filing included document furnish without charge security holder upon request copy definitive proxy statement 2005 annual meeting shareowners portions incorporated herein reference furnish exhibit cost signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned hereunto duly authorized lucent technologies inc john kritzmacher john kritzmacher senior vice president controller principal accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated directors robert e denham daniel goldin edward e hagenlocker carla hills karl j krapek richard c levin patricia f russo henry b schacht franklin thomas ronald williams john young john kritzmacher attorneyinfact exhibit index following documents filed exhibits report form 10k incorporated reference herein document incorporated reference identified parenthetical reference sec filing included document exhibit number description 3i 1 certificate incorporation registrant amended effective february 16 2000 exhibit 31 registration statement form s4 33331400 3i 2 certificate amendment restated certificate incorporation registrant dated february 26 2004 exhibit 3i quarterly report form 10q quarter ended march 31 2004 3ii bylaws registrant amended february 18 2004 exhibit 3ii quarterly report form 10q quarter ended march 31 2004 4ii 1 form registrant’s common stock certificate exhibit 4iv quarterly report form 10q quarter ended december 31 2001 4ii 2 indenture dated april 1 1996 lucent technologies inc bank new york trustee exhibit 4a registration statement form s3 33301223 4ii 3 first supplemental indenture dated april 17 2000 indenture dated april 1 1996 exhibit 4 current report form 8k filed may 5 2000 4ii 4 amended restated trust agreement dated march 19 2002 among registrant depositor bank new york property trustee bank new york delaware trustee individuals named therein administrative trustees relating lucent technologies capital trust exhibit 4v1 quarterly report form 10q quarter ended march 31 2002 4ii 5 form certificate preferred securities lucent technologies capital trust designated 775 cumulative convertible trust preferred securities liquidation preference 1000 per preferred security exhibit 4v2 quarterly report form 10q quarter ended march 31 2002 4ii 6 indenture dated march 19 2002 registrant bank new york indenture trustee exhibit 4v 3 quarterly report form 10q quarter ended march 31 2002 4ii 7 form registrant’s 775 convertible subordinated debentures due 2017 exhibit 4v 4 quarterly report form 10q quarter ended march 31 2002 4ii 8 guarantee agreement dated march 19 2002 registrant guarantor bank new york guarantee trustee exhibit 4v 5 quarterly report form 10q quarter ended march 31 2002 4ii 9 indenture dated june 4 2003 lucent technologies inc bank new york trustee exhibit 41 current report form 8k filed june 25 2003 4ii 10 first supplemental indenture dated june 4 2003 lucent technologies inc bank new york trustee exhibit 42 current report form 8k filed june 25 2003 4ii11 indenture dated november 24 2003 lucent technologies inc bank new york trustee exhibit 4ii11 annual report form 10k year ended september 30 2003 4ii12 form registrant’s 8 convertible subordinated debenture due 2031 exhibit indenture attached exhibit 4ii11 4iii instruments addition exhibits 4ii define rights holders longterm debt registrant consolidated subsidiaries filed herewith pursuant regulation sk item 601b4iiia pursuant regulation registrant agrees furnish copy instrument sec upon request 10i 1 separation distribution agreement among lucent technologies inc att corp ncr corporation dated february 1 1996 amended restated march 29 1996 exhibit 101 registration statement form s1 33300703 10i 2 tax sharing agreement among lucent technologies inc att corp ncr corporation dated february 1 1996 amended restated march 29 1996 exhibit 106 registration statement form s1 33300703 10i 3 employee benefits agreement att corp lucent technologies inc dated february 1 1996 amended restated march 29 1996 exhibit 102 registration statement form s1 33300703 10i 4 rights agreement lucent technologies inc bank new york successor first chicago trust company new york rights agent dated april 4 1996 exhibit 42 registration statement form s1 33300703 10i 5 amendment rights agreement lucent technologies inc bank new york successor first chicago trust company new york dated february 18 1998 10i 6 letter agreement dated october 16 2002 among lucent technologies inc certain subsidiaries jpmorgan chase bank collateral agent exhibit 991 current report form 8k filed october 23 2002 10i 7 letter credit issuance reimbursement agreement dated may 28 2003 among lucent technologies inc several banks parties thereto jpmorgan chase bank administrative agent exhibit 991 current report form 8k filed may 28 2003 10i 8 external sharing debt agreement dated may 28 2003 among lucent technologies inc several banks parties thereto jpmorgan chase bank administrative agent exhibit 992 current report form 8k filed may 28 2003 10i 9 amended restated guarantee collateral agreement dated may 28 2003 made lucent technologies inc certain subsidiaries favor jpmorgan chase bank collateral agent exhibit 993 current report form 8k filed may 28 2003 10i 10 amended restated collateral sharing agreement dated may 28 2003 made lucent technologies inc certain subsidiaries favor jpmorgan chase bank collateral agent exhibit 994 current report form 8k filed may 28 2003 10i 11 first amendment dated june 6 2003 letter credit issuance reimbursement agreement dated may 28 2003 among lucent technologies inc several banks parties thereto jpmorgan chase bank administrative agent ii external sharing debt agreement dated may 28 2003 among lucent technologies inc several banks parties thereto jpmorgan chase bank administrative agent iii amended restated guarantee collateral agreement dated may 28 2003 made lucent technologies inc certain subsidiaries favor jpmorgan chase bank collateral agent iv amended restated collateral sharing agreement dated may 28 2003 made lucent technologies inc certain subsidiaries favor jpmorgan chase bank collateral agent exhibit 991 current report form 8k filed july 16 2003 10i 12 second amendment dated july 7 2003 letter credit issuance reimbursement agreement dated may 28 2003 among lucent technologies inc several banks parties thereto jpmorgan chase bank administrative agent ii external sharing debt agreement dated may 28 2003 among lucent technologies inc several banks parties thereto jpmorgan chase bank administrative agent exhibit 992 current report form 8k filed july 16 2003 10i 13 third amendment dated december 22 2003 letter credit issuance reimbursement agreement dated may 28 2003 among lucent technologies inc several banks parties thereto jpmorgan chase bank administrative agent ii external sharing debt agreement dated may 28 2003 among lucent technologies inc several banks parties thereto jpmorgan chase bank administrative agent exhibit 101 quarterly report form 10q quarter ended december 31 2003 10i 14 fourth amendment dated february 4 2004 letter credit issuance reimbursement agreement dated may 28 2003 among lucent technologies inc several banks parties thereto jpmorgan chase bank administrative agent ii external sharing debt agreement dated may 28 2003 among lucent technologies inc several banks parties thereto jpmorgan chase bank administrative agent exhibit 102 quarterly report form 10q quarter ended december 31 2003 10i 15 fifth amendment dated march 26 2004 letter credit issuance reimbursement agreement dated may 28 2003 among lucent technologies inc several banks parties thereto jpmorgan chase bank administrative agent ii external sharing debt agreement dated may 28 2003 among lucent technologies inc several banks parties thereto jpmorgan chase bank administrative agent exhibit 10i1 quarterly report form 10q quarter ended march 31 2004 10i 16 amended restated letter credit issuance reimbursement agreement dated october 1 2004 among lucent technologies inc several banks parties thereto jpmorgan chase bank administrative agent exhibit 991 current report form 8k filed october 7 2004 10i 17 amended restated external sharing debt agreement dated october 1 2004 among lucent technologies inc several banks parties thereto jpmorgan chase bank administrative agent exhibit 992 current report form 8k filed october 7 2004 10i 18 amended restated guarantee collateral agreement dated october 1 2004 made lucent technologies inc certain subsidiaries favor jpmorgan chase bank collateral agent exhibit 993 current report form 8k filed october 7 2004 10i 19 amended restated collateral sharing agreement dated october 1 2004 made lucent technologies inc certain subsidiaries favor jpmorgan chase bank collateral agent exhibit 994 current report form 8k filed october 7 2004 10iib 1 brand license agreement lucent technologies inc att dated february 1 1996 exhibit 105 registration statement form s1 33300703 10iib 2 patent license agreement among att corp ncr corporation lucent technologies inc effective march 29 1996 exhibit 107 registration statement form s1 33300703 10iib 3 amended restated technology license agreement among att corp ncr corporation lucent technologies inc effective march 29 1996 exhibit 108 registration statement form s1 33300703 10iiia 1 lucent technologies inc short term incentive program 10iiia 2 lucent technologies inc 2003 long term incentive plan exhibit 102 current report form 8k filed april 11 2003 10iiia 3 first amendment lucent technologies inc 2003 long term incentive plan 10iiia 4 form lucent technologies inc 2003 long term incentive program “plan” performance award agreement exhibit 10iiia 22 annual report form 10k year ended september 30 2003 10iiia 5 lucent technologies inc 2004 equity compensation plan nonemployee directors exhibit 10iii1 quarterly report form 10q quarter ended march 31 2004 10iiia 6 first amendment lucent technologies inc 2004 equity compensation plan nonemployee directors 10iiia 7 lucent technologies inc deferred compensation plan 10iiia 8 lucent technologies inc supplemental pension plan 10iiia 9 employment agreement dated january 6 2002 patricia f russo lucent technologies inc exhibit 10iiia1 quarterly report form 10q quarter ended december 31 2001 10iiia 10 officer severance policy james k brewington dated january 23 2001 exhibit 10iiia13 annual report form 10k year ended september 30 2003 10iiia 11 officer severance policy janet g davidson dated january 23 2001 exhibit 10iiia14 annual report form 10k year ended september 30 2003 10iiia 12 officer severance policy william o’shea dated february 14 2001 exhibit 10iiia 16 annual report form 10k year ended september 30 2001 10iiia 13 henry schacht letter william o’shea dated december 3 2001 exhibit 10iiia 20 annual report form 10k year ended september 30 2001 10iiia 14 henry schacht letter frank d’amelio dated march 13 2001 exhibit 10iiia 18 annual report form 10k year ended september 30 2002 10iiia 15 henry schacht letter james k brewington dated march 13 2001 exhibit 10iiia18 annual report form 10k year ended september 30 2003 10iiia 16 henry schacht letter janet g davidson dated march 13 2001exhibit 10iiia19 annual report form 10k year ended september 30 2003 10iiia 17 pam kimmet letter frank d’amelio dated september 12 2001 exhibit 10iiia 19 annual report form 10k year ended september 30 2001 10iiia 18 lucent technologies executive officer severance policy computation deficiency earnings cover combined fixed charges preferred stock dividend requirements ratio earnings combined fixed charges preferred stock dividend requirements selected portions pages lucent technologies inc’s annual report shareowners year ended september 30 2004 lucent technologies code ethics chief executive officer senior financial officers exhibit 14 annual report form 10k year ended september 30 2003 list subsidiaries lucent technologies inc consent pricewaterhousecoopers llp powers attorney executed directors signed report 311 certification patricia f russo required rule 13a14a 17 cfr 24013a14a 312 certification frank d’amelio required rule 13a14a 17 cfr 24013a14a certification patricia f russo frank d’amelio pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 991 description capital stock exhibit 99i quarterly report form 10q quarter ended december 31 2001 management contract compensatory plan arrangementitem 15 exhibits financial statement schedules following documents filed part report 3 exhibits see exhibit index page 31 description documents filed exhibits report form 10k incorporated reference herein document incorporated reference identified parenthetical referencing sec filing included document furnish without charge security holder upon request copy definitive proxy statement 2007 annual meeting shareowners furnish exhibit cost b exhibit index page 31 describes documents filed exhibits report form 10k incorporated reference herein c separate financial statements subsidiaries consolidated 50 percent less owned persons omitted since entity constitutes “significant subsidiary” pursuant provisions regulation sx article 309 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned hereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated directors cynthia christylangenfeld frank d’amelio david hitchcock timothy keller hubert de pesquidoux michael quigley exhibit index following documents filed exhibits report form 10k incorporated reference herein document incorporated reference identified parenthetical reference sec filing included document certain confidential portions exhibit omitted filed separately sec pursuant request confidential treatment rule 24b2 securities exchange act 1934 management contract compensatory plan arrangement