AT&T spun off its research and development division (the former Bell

Laboratories) in April of 1996, and the newly independent company – renamed Lucent

Technologies – was an instant hit with investors. The company’s stock became the most

widely held in the United States, and over the following 3 years and 9 months its price

increased 892%.1 This remarkable price appreciation tracked a series of steadily

increasing earnings that exceeded analyst expectations. Lucent, in fact, had beaten those

expectations in each of its 15 quarters of operations (Zacks, 2000).

Lucent Technologies manufactures, sells and services voice and data

communications systems and software. By the end of its fiscal-year 1999, Lucent

generated over thirty-eight billion dollars in annual revenues, employed over 150,000

people, and had offices in more than ninety countries worldwide.

On October 26, 1999, Lucent issued a press release describing record earnings for

both the quarter and the fiscal year ended September 30, 1999 (Lucent, 1999a). Lucent’s

revenues were up 23 percent, and earnings were up 50 percent from the fourth quarter of

the previous year. For the fiscal year, Lucent’s revenues and earnings were up 20 and 46

percent respectively. Lucent’s chairman and CEO, Richard McGinn, described the results

saying: “Lucent enters the new millennium with momentum. This was the strongest

quarter and the strongest year in Lucent’s history.”

The report of these record results was accompanied by another press release. This

second announcement outlined a realignment of Lucent into “four core businesses.” This

realignment was, in the words of McGinn, “…intended to mirror the way we are

approaching customers today – with converged network solutions. We are sharpening our

focus on high-growth areas – such as data networking, optical networking, wireless

semiconductors, e-business and professional services – while speeding our growth in

international markets. And, we will also be aligning our management structure to

increase productivity and accelerate our response to customer needs” (Lucent, 1999b).

Over the ensuing days and weeks, Lucent’s share price soared. Climbing steadily

from $59 7/8 on October 25, 1999, it traded at prices over $82 during December 1999,

and closed at $72 3/8 on January 5, 2000.

On January 6, however, Lucent filed a Form 8-K with the U.S. Securities and

Exchange Commission. Form 8-Ks are used to report “material events,” and Lucent’s

“event” was that first quarter earnings for the quarter ended December 31, 1999 would be

significantly below expectations. Lucent reported that its revenue from Service Provider

Networks was down 2%. A result, company executives said, that was caused by the

domino effect of unanticipated customer shifts to new optical systems and the

manufacturing deployment and capacity problems that ensued. Indeed, analysts estimated

that Lucent lost up to $1 billion in sales because of production delays, delivery problems

and cancelled orders during the quarter (Dow Jones, 1/20/00).

1 Lucent’s beta as reported by Yahoo Finance was 1.6 on January 6, 2000.

EXHIBIT 1

LUCENT TECHNOLOGIES

Selected Earnings Per Share Data

For the Quarters Ended:

Dec-99 Sep-99 Jun-99 Mar-99 Dec-98

Earnings Per Share 0.36 0.31 0.26 0.17 0.52

Analyst Expected Earnings Per Share 0.43 0.29 0.23 0.15 0.50

Difference (0.07) 0.02 0.03 0.02 0.02

% Surprise -16.28% 6.90% 13.04% 13.33% 5.00%

Although Richard McGinn, said the company expected its problems to be

resolved by the end of the second quarter, and Lucent’s Chief Financial Officer, Don

Peterson described the shortfall as a “bump in the road,” (Burns, 1/27/00) the response of

investors was harsh. The company’s stock price fell from $72 3/8 to $52. Erasing in that

single day, more than $80 billion in market capitalization and a year’s worth of gains.

Furthermore, a number of class action lawsuits were filed on behalf of investors who had

purchased Lucent’s stock between October 27, 1999 and January 6, 2000 (PRNewswire,

1/20/00). The suits claimed that Lucent violated Sections 10(b) and 20(a) of the

Securities Act of 1934 by issuing a series of materially false and misleading statements

that failed to disclose the weaker-than-expected performance in a timely fashion.

REQUIRED

1. Conduct a DuPont decomposition of Lucent’s ROE by quarter. What factors

contributed to the differences in Lucent’s performance between those quarters?

2. Evaluate the seasonally adjusted change (i.e., quarter i in year t to quarter i in

year t-1) in Lucent’s: Sales, Accounts Receivable, Inventory and Gross Margin for the

five quarterly periods: December 1998 through December 1999. Be sure to include an

evaluation of the Footnote disclosures regarding Lucent’s inventories in your

examination. Does the explanation for the earnings shortfall provided by Lucent’s

managers make sense in light of your analysis?

3. Based on your analysis:

a) When might you have determined that Lucent would be unable to maintain its

streak of record earnings?

b) Do you think the class-action lawsuits have merit?

c) Would you expect Lucent’s earnings to ‘recover’ by the second quarter of 2000?

What obstacles to Lucent’s earnings recovery present themselves?

EXHIBIT 2

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

——————————————-

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported):

January 6, 2000

————————————————————-

Lucent Technologies Inc.

———————————-

Item 5. Other Events.

On January 6, 2000, Lucent Technologies Inc. announced that, based on

preliminary estimates for its first fiscal quarter of 2000 ended December 31,

1999, the company expects to report revenues in the range of $9.8 to $9.9

billion for the quarter, flat with the prior year period.(1) The company expects

earnings per share for the quarter to be in the range of 36 to 39 cents compared

to 48 cents for the year-ago quarter.(2)

The company attributed the lower than expected revenue and earnings for the

first fiscal quarter to several factors, including:

— faster than anticipated shifts in customers’ purchases to

Lucent’s newest 80-channel DWDM optical product line and

greater than expected demand for OC-192 capability on the

80-channel systems, which resulted in near-term manufacturing

capacity and deployment constraints;

— changes in implementation plans by a number of customers

inside and outside the United States, which led to delays in

network deployments by enterprises and service providers;

— lower software revenues, reflecting an acceleration in the

continuing trend by service providers to acquire software more

evenly throughout the year. In the past, these purchases

occurred primarily in the quarter ending December 31; and

— preliminary results show lower than anticipated gross margins

this quarter from ramp-up costs associated with introducing

and implementing new products and lower software revenues.

The information provided in this Form 8-K is based on preliminary financial

results, which are subject to further review and adjustment, and contains

forward-looking statements based on current expectations, forecasts and

assumptions that involve risks and uncertainties that could cause actual

outcomes and results to differ materially. These risks and uncertainties include

price and product competition, dependence on new product development, reliance

on major customers, customer demand for our products and services, the ability

to successfully integrate acquired companies, control of costs and expenses,

international growth, general industry and market conditions, growth rates and

general domestic and international economic conditions, including interest rate

and currency exchange rate fluctuations. For a further list and description of

such risks and uncertainties, see the discussion in Lucent’s Form 10-K for the

fiscal year ended September 30, 1999 in Item 1 in the section entitled “X.

OUTLOOK, A. Forward Looking Statements” and the remainder of the X. OUTLOOK

section.

———

(1) All items in both the 1999 and 2000 periods include the results of recent

mergers with International Network Services and Excel Switching.

(2) All earnings per share amounts reported in this Form 8-K are diluted EPS

figures.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,

the registrant has duly caused this report to be signed on its behalf by the

undersigned hereunto duly authorized.

LUCENT TECHNOLOGIES INC.

By: /s/ JAMES S. LUSK

Name: James S. Lusk

Senior Vice President and Controller

Date: January 7, 2000

EXHIBIT 3

LUCENT TECHNOLOGIES

Consolidated Balance Sheets

For the Quarters Ended:

Dec-99 Sep-99 Jun-99 Mar-99 Dec-98 Sep-98 Jun-98 Mar-98 Dec-97 Sep-97

Assets

Cash $ 2 ,219 $ 1,816 $ 1,495 $ 792 $ 940 $ 685 $ 1,099 $ 969 $ 1,225 $ 1,350

Receivables 1 0,143 10,438 9,486 8,752 9,185 6,939 5,792 5,576 6,295 5,373

Less Allowance 381 362 393 349 346 390 374 369 344 352

Inventory 5,380 5,048 5,179 4,332 3,778 3,081 2,973 2,874 2,604 2,926

Contracts in Process, net 1,164 1,103 1,338 1,106 1,060 1,259 1,405 1,332 1,214 1,046

Deferred Taxes, net 1,504 1,583 1,784 1,632 1,620 1,623 1,554 1,477 1,469 1,333

Other Current Assets 1,168 1,943 1,528 1,160 768 491 482 481 449 473

Total Current Assets $ 2 1,578 $ 21,931 $ 20,810 $ 1 7,774 $ 17,351 $ 1 4,078 $ 13,305 $ 12,709 $ 13,256 $ 12,501

Property & Equipment (net) 6,986 6,847 6,257 5,751 5,645 5,403 4,957 4,805 4,729 5,147

Accumulated Depreciation 7,693 7,445 7,274 6,935 6,886 6,382 6,253 6,132 6,121 6,407

Pre-paid Pension Costs 6,078 6,485 6337 6,210 6,068 3,754 3,597 3,462 3,322 3,172

Deferred Taxes, net – – – – – 750 832 1,002 1,120 1,262

Capitalized Software Development Costs 506 470 412 346 306 298 289 279 246 293

Other Assets 3,486 3,002 3,340 2,759 2,271 2,437 2,299 2,407 2,079 1,436

Total Assets $ 3 8,634 $ 38,735 $ 37,156 $ 3 2,840 $ 31,641 $ 2 6,720 $ 25,279 $ 24,664 $ 24,752 $ 23,811

Liabilities and Shareholders’ Equity

Accounts Payable $ 2 ,162 $ 2,878 $ 2,705 $ 2,410 $ 2,468 $ 2,040 $ 1,727 $ 1,659 $ 1,496 $ 1,931

Payroll and Benefit Liabilities 1,321 2,300 2,001 1,724 1,857 2,511 2,354 2,048 2,178 2,178

Post-retirement and Post-employment Benefit Liabilities 103 137 169 184 186 187 194 195 221 239

Debt Maturing within One Year 2,672 2,864 3,080 3,185 3,763 2,231 2,423 1,898 1,757 2,538

Other Current Liabilities 3,659 3,599 4,001 4,059 4,167 3,459 3,498 3,618 4,310 3,852

Total Current Liabilities $ 9 ,917 $ 11,778 $ 11,956 $ 1 1,562 $ 12,441 $ 1 0,428 $ 10,196 $ 9,418 $ 9,962 $ 10,738

Post-retirement and Post-employment Benefit Liabilities 6,013 6,615 6,533 6,471 6,413 6,380 6,286 6,249 6,136 6,073

Long Term Debt 3,832 3,812 3,712 3,716 2,404 2,409 1,899 1,918 1,945 1,665

Other Liabilities 2,793 2,908 2,552 2,040 1,946 1,969 1,976 2,043 2,038 1,948

Total Liabilities $ 2 2,555 $ 25,113 $ 24,753 $ 2 3,789 $ 23,204 $ 2 1,186 $ 20,357 $ 19,628 $ 20,081 $ 20,424

Common Stock $ 32 $ 31 $ 30 $ 27 $ 13 $ 13 $ 13 $ 13 $ 6 $ 6

Additional Paid-in Capital 9,032 7,763 7,339 4,996 4,706 4,468 4,251 4,076 3,717 3,047

Guaranteed ESOP Obligations (30) (33) (34) (34) (49) (49) (63) ( 63) (77) (77)

Retained Earnings 7,296 6,105 5,240 4,384 3,565 1,364 1,028 1,314 1,298 602

Accumulated Other Comprehensive Income or Loss (251) (244) (172) (322) (198) (262) (307) ( 304) (273) (191)

Total Shareholders Equity $ 1 6,079 $ 13,622 $ 12,403 $ 9,051 $ 8,437 $ 5,534 $ 4,922 $ 5,036 $ 4,671 $ 3,387

Total Liabilities and Shareholders’ Equity $ 3 8,634 $ 38,735 $ 37,156 $ 3 2,840 $ 31,641 $ 2 6,720 $ 25,279 $ 24,664 $ 24,752 $ 23,811

EXHIBIT 4

LUCENT TECHNOLOGIES

Consolidated Statements of Income*

For the Quarters Ended:

Dec-99 Sep-99 Jun-99 Mar-99 Dec-98 Sep-98 Jun-98 Mar-98 Dec-97 Sep-97

Total Revenues $ 9,905 $ 10,575 $ 9,315 $ 8,220 $ 9,842 $ 8,574 $ 7,642 $ 6,184 $ 8,724 $ 6,933

Cost of Sales 5,259 5,706 4,834 4,327 4,630 4,443 4,087 3,436 4,519 3,873

Gross Margin 4,646 4,869 4,481 3,893 5,212 4,131 3,555 2,748 4,205 3,060

Selling, General and Administrative Expenses 1,908 2,251 1,984 1,902 1,937 1,972 1,673 1,501 1,555 1,608

Research and Development 978 1,131 1,141 1,139 1,013 1,050 1,002 932 829 835

Total Operating Expenses 2,886 3,382 3,125 3,041 2,950 3,022 2,675 2,433 2,384 2,443

Operating Income 1,760 1,487 1,356 852 2,262 1,109 880 315 1,821 617

Other Income (Expense), net 66 92 19 (65) 116 (43) (17) 31 14 51

Interest Expense 98 114 119 95 78 71 63 58 79 72

Income Before Taxes 1,728 1,465 1,256 692 2,300 995 800 288 1,756 596

Income Tax Expense 553 493 427 235 777 348 282 102 632 227

Net Income $ 1,175 $ 972 $ 829 $ 457 $ 1,523 $ 647 $ 518 $ 186 $ 1,124 $ 369

* Excludes one-time events and the cumulative effect of accounting changes

EXHIBIT 5

Notes to Consolidated Financial Statements

Supplementary Balance Sheet Information

Dec-99 Sep-99 Jun-99 Mar-99 Dec-98 Sep-98 Jun-98 Mar-98 Dec-97 Sep-97

Inventories

Finished Goods 3062.00 2946.00 2917.00 2281.00 1777.00 1578.00 1594.00 1463.00 1291.00 1611.00

Work in Process 2318.00 2102.00 2262.00 2051.00 2001.00 1503.00 1379.00 1411.00 1313.00 1315.00

Total Inventories 5380.00 5048.00 5179.00 4332.00 3778.00 3081.00 2973.00 2874.00 2604.00 2926.00

EXHIBIT 6

LUCENT TECHNOLOGIES

Common Stock Price

(Adjusted for Splits)

0

10

20

30

40

50

60

70

80

90

4/1/96

7/1/96

10/1/96

1/1/97

4/1/97

7/1/97

10/1/97

1/1/98

4/1/98

7/1/98

10/1/98

1/1/99

4/1/99

7/1/99

10/1/99

1/1/00

April 1996 through January 2000

$ Price per Share

I need help with question number 2 above.