Alcatel-lucent Temporis 12 Manual
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(1) (2) (3) DellOro. Ovum RHK. Ovum RHK.
Activities focus on the three main market segments: access, optics and IP (Internet Protocol). The portfolio of products offered by the wireline group may be deployed anywhere in legacy and next-generation networks from the core to the access, facilitating the delivery of voice, data and video services (Triple Play) over broadband.
#1 in Broadband Access with 44% of DSL (1) market share (in revenues) #1 in optics (Terrestrial and Submarine) with (2) 23.5% of market share (in revenues) #2 in IP/MPLS service EDGE Routers with (3) 18% of market share (in revenues)
One of the worlds leading suppliers of wireless communications product offerings across a variety of wireless technologies; designing and supplying mobile telecommunications infrastructure for telecommunications operators.
Activities focus on wireless product offerings for 2G (GSM/GPRS/EDGE, CDMA), 3G (UMTS/HSPA/EV-DO) and 4G networks (WiMAX, LTE) from access to core switching.
#3 in GSM/GPRS/EDGE Radio Access Networks with 10.1% of market share (in (4) revenues) #3 in W-CDMA with 10.5% of market share (5) (in revenues) #1 in CDMA with 47.4% of market share (in (6) revenues) (7) Included in 1st tier WiMAX vendors
(4) (5) (6) (7)
DellOro. DellOro. DellOro. Current Analysis Inc.
8 - 2007 ANNUAL REPORT ON FORM 20-F
A leading supplier of communications product offerings that enable the delivery of innovative voice and multimedia services across a variety of devices and converged networks to serve some of the worlds largest fixed and mobile service providers.
Develop IP multimedia subsystems (IMS), and create advanced multimedia applications, including TV over IP, fixed and mobile video, music services, IP communication applications, and billable end-user services (charging and billing with converged payment, subscriber data management).
A leader in IMS with broad field experience, including 25 deployments or advanced trials and a leader in subscriber data management applications that have been deployed in more than 190 networks.
2.2 ENTERPRISE SEGMENT
A world leader in the delivery of secure, dynamic communication product offerings for enterprises and government agencies, with emphasis on education, finance, healthcare and hospitality industries.
Supply IP communication product offerings that interconnect networks, people, business processes and knowledge with real time communications (secure networking, telephony, Genesys contact center and mobile applications) for small, medium, large and extra-large companies and public agencies.
#1 in Western Europe Enterprise Telephony (8) with 21.2% of market share (in revenues)
Synergy Research Group.
2.3 SERVICES SEGMENT
5.8 INTELLECTUAL PROPERTY
In 2007 we obtained more than 3,000 patents worldwide, resulting in a portfolio of more than 25,000 active patents worldwide across a vast array of technologies. We also actively pursue a strategy of licensing selected technologies through the Alcatel-Lucent program in order to expand the reach of our technologies and to generate licensing revenues. We rely on patent, trademark, trade secret and copyright laws both to protect our proprietary technology and to protect us against claims from others. We believe that we have direct intellectual property rights or rights under licensing arrangements covering substantially all of our material technologies. We consider patent protection to be particularly important to our businesses due to the emphasis on Research and Development and intense competition in our markets.
36 - 2007 ANNUAL REPORT ON FORM 20-F
5.9 SOURCES AND AVAILABILITY OF MATERIALS
We make significant purchases of electronic components and other materials from many sources. While there have been some shortages in components and some other materials in technology commodities common across the industry, we have generally been able to obtain sufficient materials and components from various sources around the world to meet our needs. We continue to develop and maintain alternative sources of supply for essential materials and components. We do not have a concentration of sources of supply of materials, labor or services that, if suddenly eliminated, could severely impact our operations, and we believe that we will be able to obtain sufficient materials and components from U.S., European and other world market sources to meet our production requirements.
The quarterly pattern in our 2007 revenues a weak first quarter, a strong fourth quarter and second and third quarter results that fell between those two extremes generally reflects the underlying pattern of service providers capital expenditures. However, the magnitude of the swings in our first and fourth quarter revenues in 2007 also reflects the significant impact of other non-seasonal factors. They include, for example, business combination-related uncertainty on the part of our customers early in the year and progress integrating the operations of historical Alcatel and Lucent later in the year. We expect the impact of seasonality in our 2008 revenues to be more in line with the traditional pattern described above.
5.11 OUR ACTIVITIES IN CERTAIN COUNTRIES
42 - 2007 ANNUAL REPORT ON FORM 20-F
ALCATEL-LUCENT STOCK OPTION PLANS
Creation Number Number of of the of options plan (1) recipients granted
03.29.2000 12.13.2000 12.13.2000 03.07.2001 04.02.2001 04.02.2001 06.15.2001 09.03.2001 11.15.2001 12.19.2001 12.19.2001 02.15.2002 04.02.2002 05.13.2002 06.03.2002 09.02.2002 10.07.2002 11.14.2002 12.02.2002 03.07.2003 03.07.2003 Plan AL 06.18.2003 07.01.2003 09.01.2003 10.01.2003 11.14.2003 12.01.2003 03.10.2004 04.01.2004 05.17.2004 07.01.2004 09.01.2004 10.01.2004 11.12.2004 12.01.2004 01.03.2005 03.10.2005 06.01.2005 09.01.2005 11.14.2005 03.08.2006 05.15.2006 08.16.2006 11.08.2006 03.01.2007 03.28.2007 08.16.2007 11.15.2007 3,340 30,25,23,650 31,64 14,183 9,8,42 15,33 15,239,250 1,235,500 306,700 37,668,588 48,850 2,500 977,410 138,200 162,000 27,871,925 565,800 123,620 55,750 54,300 281,000 1,181,050 30,500 111,750 54,050 25,626,865 827,348 338,200 53,950 149,400 101,350 63,600 201,850 18,094,315 48,100 65,100 313,450 38,450 221,300 69,600 42,900 497,500 16,756,690 223,900 72,150 54,700 17,009,320 122,850 337,200 121,100 204,584 40,078,421 339,570 294,300
Number Number of of options options cancelled exercised
13,27,265,0 656,190 8,667 80,424 20,602 7,240,272 179,636 59,361 15,868 4,0 8,2,18,0 7,558 292,370 7,0 7,692,945 690,150 110,700 12,157,826 42,259,960 44,150 53,000 14,380,340 204,614 74,040 28,500 18,500 84,500 318,992 13,274 11,408 23,648 3,983,935 321,335 50,574 33,081 21,439 49,126 55,000 118,417 3,943,058 27,300 15,850 107,050 8,078 100,754 36,900 9,100 118,914 2,441,767 68,523 13,000 14,200 1,754,182 18,388 42,180 19,500 17,500 1,349,0
Number of options outstanding Held by all employees
7,533,305 545,350 196,000 25,510,762 6,000 2,500 717,450 94,050 82,000 13,491,585 95,201 49,580 27,250 35,800 196,500 205,868 8,559 19,918 9,800 14,402,658 326,377 228,265 5,001 123,463 51,318 8,600 75,211 14,150,557 20,800 49,250 204,001 29,550 101,768 32,700 33,800 371,028 14,022,553 147,801 59,150 40,500 15,255,138 104,462 295,020 101,600 187,084 38,729,286 339,570 294,300 210,000 3,330,000 510,000 417,000 475,000 70,000 329,252,500 222,500
Option exercise period (3) From
04.01.2005 12.13.2005 12.13.2001/12.13.2004 03.07.2002/03.07.2005 04.02.2002 04.02.2002 06.15.2002/06.15.2005 09.03.2002/09.03.2005 11.15.2002 12.19.2002/12.19.2005 12.19.2002/12.19.2005 02.15.2003/02.15.2006 04.02.2003 05.13.2003/05.13.2006 06.03.2003/06.03.2006 09.02.2003 10.07.2003 11.14.2003 12.02.2003 03.07.2004/03.07.2007 07.01.2007 06.18.2004/06.18.2007 07.01.2004 09.01.2004/09.01.2007 10.01.2004/10.01.2007 11.14.2004/11.14.2007 12.01.2004/12.01.2007 03.10.2005/03.10.2008 04.01.2005/04.01.2008 05.17.2005/05.17.2008 07.01.2005/07.01.2008 09.01.2005 10.01.2005/10.01.2008 11.12.2005 12.01.2005 01.03.2006 03.10.2006/03.10.2009 06.01.2006/06.01.2009 09.01.2006 11.14.2006 03.08.2007/03.08.2010 05.15.2007 08.16.2007/08.16.2010 11.08.2007/11.08.2010 03.01.2008/03.01.2011 03.28.2008/03.28.2011 08.16.2008/08.16.2011 11.15.2008/11.15.2011
(In millions of euros)
TOTAL - REVENUES Of which : - Wireline - Wireless - Convergence Income (loss) from operating activities before restructuring costs, impairment of intangible assets and gain/(loss) on disposal of consolidated entities Capital expenditures for tangible and intangible assets
8,989 4,463 3,049 1,477
58 - 2007 ANNUAL REPORT ON FORM 20-F
8,463 3,876 2,806 1,781
Revenues of the carrier segment were 8,989 million in 2006, an increase of 6.2% over revenues of 8,463 million in 2005. Most of the increase was attributable to Lucents activity in December 2006. Within the carrier segment, demand for the wireline groups products was particularly strong, driven by the continued migration to all-IP networks in carriers core as well as their access networks, and continued spending to enhance broadband access capabilities. There was also an acceleration in carrier spending to deploy video and voice-over IP (or VoIP) services as part of their new offer of triple-play services, enabled by their upgraded access networks. The increased volume of high-bandwidth traffic like video also added to carrier spending for additional capacity in both their metro area and long-haul optical networks. Revenues of our wireline business group were 4,463 million for 2006, compared to 3,876 million for 2005, an increase of 15.1%. Lucents activity in December 2006 did not contribute materially to such increase. Our wireless business group was impacted by a number of developments. Carriers continued to introduce and enhance their high-speed data capabilities, continuing to add capacity to their networks as subscribers and traffic volumes increased. However, we experienced certain adverse developments in 2006, including (i) the diminishing number of 2G greenfield deployment projects in emerging countries, (ii) our selective commercial policy to deliberately abstain from large contracts where risks are high in the medium term and (iii) customers hesitation to make investments in 3G projects with us pending completion of the Nortel UMTS radio access transaction. Revenues of our wireless business group were 3,049 million for 2006, compared to 2,806 million for 2005, an increase of 8.7% that was primarily attribuable to Lucents activity in December 2006 Our convergence business group revenues were primarily impacted by the decline in our fixed and mobile line voice circuitbased switching businesses as our customers transition to next generation networks and therefore reduce their capital expenditures for legacy, narrow band switching. At the same time, there has been increasing interest in next-generation network architecture like IMS and the new service capabilities of that architecture. However, the evolution of carrier networks to that architecture is a long-term cycle, and spending for next-generation IMS products and capabilities is not yet sufficient to offset the decline in spending for core legacy equipment. Revenues of our convergence business group were 1,477 million for 2006, compared to 1,781 million for 2005, a decrease of 17.1%, which was partially offset by the inclusion of Lucents results in December 2006. Income from operating activities before restructuring costs, impairment of intangible assets and gain/(loss) on disposal of consolidated entities was 393 million for 2006 compared with 778 million in 2005, a decrease of 49.5%. The decrease resulted from a competitive pricing environment; from our significant investments in next generation technologies such as NGN, IMS, and WiMAX, aimed at securing leading positions in future network builds; and from the negative impact of purchase accounting entries resulting from the Lucent business combination.
Cash flow overview
Cash and cash equivalents decreased by 493 million in 2007 to 4,377 million at December 31, 2007. This decrease was mainly due to the cash used by financing activities of 1,106 million (mainly due to repayment of short-term and long-term debt and dividend paid), which was partially offset by cash provided by investing activities of 539 million, due primarily to the cash proceeds from the sale of marketable securities and previously consolidated entities, less capital expenditures. Net cash provided (used) by operating activities. Net cash provided by operating activities before changes in working capital, interest and taxes was 413 million compared to 929 million for 2006. This decrease was primarily due to the effect of noncash items (mainly impairment losses which amounted to (2,944) million) that contributed to our net loss (group share) of 3,518 million in 2007, as compared with net loss of 106 million in 2006, which included an impairment of assets of (141) million. In order to calculate net cash provided by operating activities before changes in working capital, interest and taxes, the 3,518 million net loss for 2007 must be adjusted for financial, tax and non-cash items (primarily restructuring reserves, depreciation, amortization, impairments and provisions), net gain on disposal of non-current assets and changes in fair values and share based payments, and adjusted further for cash outflows that had been previously reserved (mainly for ongoing restructuring programs). Impairment of assets and changes in pension and other post-retirement benefit obligations represented a non-cash net positive adjustment of 2,265 million in 2007, mainly related to the impairment recorded in connection with the CDMA-EVDO and the UMTS businesses, as compared with 19 million in 2006. The positive impact of adjustments related to depreciation and amortization of tangible and intangible assets, finance costs and share-based payments increased from 792 million in 2006 to 1,731 million in 2007 due mainly to the impact of the consolidation of Lucent for the entire year 2007, compared to one month only in 2006. Income taxes and related reduction of goodwill represented also a positive adjustment of the net result for an amount of 316 million in 2007 (corresponding mainly to deferred taxes and, to a lesser extent, to current income taxes), to be compared to a negative adjustment of 37 million in 2006. On the other hand, the negative adjustment of the net income to exclude income from discontinued activities represented 610 million in 2007 (mainly due to the capital gain on the disposal of the two joint ventures in the space sector to Thales) compared to 158 million in 2006, corresponding mainly to the net result of the discontinued activities. Net cash used by operating activities was 24 million in 2007 compared to net cash provided by operating activities of 351 million in 2006. These amounts take into account the net cash used by the increase in operating working capital, vendor financing and other current assets and liabilities, which amounted to 212 million in 2007 and 409 million in 2006, which represents 197 million of less cash used in 2007 compared to 2006. The change between the two periods related to the decrease in cash used by other assets and liabilities (302 million of less cash used in 2007 compared to 2006), and was partially offset by the increase in cash used related to working capital due to a bigger increase of working capital in 2007 than in 2006, as result of the inclusion of twelve months of the activity of Lucent in 2007 compared to one month in 2006 (105 million of more cash used in 2007 compared to 2006).
60 - 2007 ANNUAL REPORT ON FORM 20-F
Net cash provided (used) by investing activities. Net cash provided by investing activities was 539 million in 2007 compared to 761 million in 2006. Excluding the impact of the cash and cash equivalents held by Lucent at acquisition date, equal to 1,391 million, net cash used by investing activities would have been 630 million in 2006. This increase in 2007 in net cash provided (excluding the impact of the Lucent transaction) was mainly due to the disposal of marketable securities that amounted to 1,050 million in 2007, compared to 144 million in 2006, and to the cash used for the acquisition of Nortels UMTS business in 2006 for 240 million. The cash proceeds from disposal of fixed assets (tangible and intangible assets and previously consolidated entities) was relatively stable in 2007 compared to 2006. On the other hand capital expenditures increased from 684 million in 2006 to 842 million in 2007 mainly due to the inclusion of twelve months of Lucent activity in 2007 compared to one month in 2006. Net Cash Provided (Used) by Financing Activities. Net cash used by financing activities amounted to 1,106 million in 2007 compared to net cash used of 699 million in 2006. The primary changes were the increase in the amount of repayment of short-term and long term debt (760 million in 2007 compared with 505 million in 2006) and the dividend payment of 366 million we made on our ordinary shares and ADSs in 2007 compared with a dividend of 219 million in 2006. Disposed of or discontinued operations. Disposed of or discontinued operations represented net cash provided of 223 million in 2007 (including the proceeds of 670 million related to the disposal of our ownership interest in two joint ventures in the space sector to Thales and the cash used by operating activities and financing activities of the discontinued activities during the period) compared with net cash used of 11 million used in 2006.
Resources and cash flow outlook. We derive our capital resources from a variety of sources, including the generation of positive cash flow from on-going operations (although this was not the case this year), the issuance of debt and equity in various forms, and banking facilities, including the revolving credit facility of 1.4 billion maturing in April 2012 and on which we have not drawn (see Syndicated facility below). Our ability to draw upon these resources is dependent upon a variety of factors, including our customers ability to make payments on outstanding accounts receivable, the perception of our credit quality by lenders and investors, our ability to meet the financial covenant for our revolving facility and debt and equity market conditions generally. Our short-term cash requirements are primarily related to funding our operations, including our restructuring program, capital expenditures and short-term debt repayments. We believe that our cash, cash equivalents and marketable securities, including short-term investments, aggregating 5,271 million as of December 31, 2007, are sufficient to fund our cash requirements for the next 12 months. Approximately 415 million of our cash and cash equivalents are held in countries, primarily China, which are subject to exchange control restrictions. These restrictions can limit the use of such funds by our subsidiaries outside of the local jurisdiction. We do not expect that such restrictions will have an impact on our ability to meet our cash obligations. During 2008 we expect to make cash outlays for our restructuring programs of approximately 800 million and to make capital expenditures of approximately 800 million, including development expenditures that are capitalized. We will repay approximately 137 million in aggregate principal amount of our 5.50% bonds that mature on November 2008. During 2008, depending upon market and other conditions, we may also continue our bond repurchase program in order to redeem certain of our outstanding bonds. We can provide no assurance that the currently estimated cash resources will be sufficient to cover our actual cash requirements. If we cannot generate sufficient cash from operations to meet cash requirements in excess of our current expectations, we might be required to obtain supplemental funds through additional operating improvements or through external sources, such as capital market proceeds, assets sales or financing from third parties, the availability of which is dependent upon a variety of factors, as noted above. Credit ratings. As of April 3, 2008, our credit ratings were as follows:
Government investigations related to Lucent
In August 2003, the DOJ and the SEC informed Lucent that they had each commenced an investigation into possible violations of the FCPA with respect to Lucents operations in Saudi Arabia. These investigations followed allegations made by National Group for Communications and Computers Ltd. (NGC) in an action filed against Lucent on August 8, 2003, which is described below. Alcatel-Lucent does not expect any further action by the SEC or the DOJ relating to the Saudi allegations.
70 - 2007 ANNUAL REPORT ON FORM 20-F
In April 2004, Lucent reported to the DOJ and the SEC that an internal FCPA compliance audit and an outside counsel investigation found incidents and internal control deficiencies in Lucents operations in China that potentially involve FCPA violations. Lucent cooperated with those agencies. On December 21, 2007, Lucent entered into agreements with the DOJ and the SEC to settle their respective investigations. Lucent signed a non-prosecution agreement with the DOJ. Pursuant to that agreement, the DOJ agreed not to charge Lucent with any crime in connection with the allegations in China. Lucent agreed to pay a 1 million monetary penalty and adopt or modify its existing internal controls, policies, and procedures. On December 21, 2007, the SEC filed civil charges against Lucent in the United States District Court for the District of Columbia alleging violations of the books and records and internal controls provisions of the FCPA. That same day, Lucent and the SEC entered into a consent agreement, resolving those charges. Pursuant to that consent agreement, Lucent, without admitting or denying the allegations in the SECs complaint, agreed to a permanent injunction enjoining Lucent from any future violations of the internal controls and books and records provisions of the FCPA. Lucent further agreed to pay a civil penalty of U.S.$ 1.5 million. If Lucent abides by the terms of its agreements with the DOJ and the SEC, Lucent does not anticipate any further actions by the DOJ and the SEC with respect to allegations regarding Lucents conduct in China.
Subpoenas and discovery requests
In May 2005, Lucent received subpoenas on two different matters, requesting specific documents and records. One of the subpoenas relates to a DOJ investigation of potential antitrust and other violations by various participants in connection with the United States governments E-Rate program. The subpoena requires Lucent to produce documents before a grand jury of the U.S. District Court in Georgia. The second subpoena was from the Office of Inspector General, U.S. General Services Administration and relates to a federal investigation into certain sales to the federal government of telecommunications equipment and related maintenance services. During April 2006, the California Department of Justice served Lucent with discovery requests related to sales to California governmental agencies of telecommunications equipment and related maintenance services.
2007 ANNUAL REPORT ON FORM 20-F - 95
Except in case of an emergency, all information required for the Boards discussions is sent prior to the meeting in a manner that is consistent with the confidentiality to be respected when delivering insider information, and that allows the Directors to carefully review the documents prior to the meeting. This also applies to the specialized committees created by the Board of directors. Board meetings called to prepare the year-end, six-month and quarterly financial statements are systematically preceded by a review of the financial statements by the Audit and Finance Committee.
Activity of the Board in 2007 and early 2008
Our Board of directors met 10 times in 2007. To the meeting schedule for the year 2007 set in the prior year, there were added two extraordinary meetings, in view of new developments. The average attendance rate of its members at these meetings was 93%. Despite the fact that some meetings were held outside the country in which certain Directors reside and although Directors are permitted by law to participate in meetings remotely, 77% of the members attended meetings in person in 2007. In early 2008, our Board of directors met four times, in February, in March and early April, and the attendance rate of its members was 93%. The Boards meetings were held at the companys head office in Paris or in Murray Hill, New Jersey. They lasted three and a half hours on average and were often preceded or followed by informal meetings with members of the Management Committee, which allowed the Directors to discuss on a periodic basis with the Groups main operating executives our strategic and technological direction. In 2007, the Board met on two occasions, and in 2008 on two occasions, without the CEO and employees being in attendance. The main topics addressed by the Board of directors in 2007 and early 2008 were as follows:
Accounts and financial position
In 2007, our Board reviewed and approved the year-end Alcatel-Lucent and the Groups consolidated financial statements for the fiscal year ended December 31, 2006, which were subsequently approved by our Shareholders at the meeting held in June 2007. It approved a budget forecast for 2007, and proposed an appropriation of results, that is, the appropriation of the profit or loss of the final year to legal reserves, statutory reserves or retained earnings. It reviewed certain matters related to the accounting principles either temporarily or permanently applicable as a result of the business combination with Lucent, such as the election of the SORIE method (Statement of Recognized Income and Expense) as permitted by the IASB for recognizing actuarial gains/losses and changes in asset ceiling outside the income statement. It also studied the impact of eliminating the reconciliation of our net income and shareholders equity, prepared in accordance with IFRS, with U.S. GAAP, which new SEC regulations allow, in certain circumstances. In addition, it reviewed and approved the quarterly and half-year consolidated financial statements for the year ended December 31, 2007. At each of these meetings, the accounts were examined in the presence of our Statutory Auditors and a report was presented on the work of the Audit and Finance Committee. More generally, our Board monitored changes in the Groups results and financial structure as well as the progress of restructuring and cost reduction plans. This prompted the Board to convene two extraordinary meetings and to request various specific reports from senior management as well as the preparation of a general action plan in late October 2007. Moreover, on several occasions the Board addressed the specific issue of Lucents pension fund management. The Board concluded that it was incumbent upon the Board to establish general guidelines for allocating the assets of these funds, and to appoint the members of the advisory committee responsible for overseeing this management (Pension Benefits Investment Committee). The Board therefore appointed the members of this Committee and approved a change to the asset allocation policy. Our Board was also informed of the terms and conditions under which the revolving syndicated lines of credit previously issued to historical Alcatel and Lucent were renegotiated for the benefit of the Group following the business combination with Lucent. In 2008, our Board reviewed and approved the year-end Alcatel-Lucent and consolidated financial statements for the year ended December 31, 2007, to be submitted to the shareholders for definitive approval. It approved a budget forecast for 2008, and proposed an appropriation of results.
2007 (1) $(5,138) 60 5,(454) (1,000) (42) 295 (517) (107) (35) 136 (1,230) (605) (45) (35) 428 1,(367) (743) (534) (1,615) (112) 952 (514) (183) (720) 6,935 6,-
2007 (3,518) 41 3,(311) (685) (29) 202 (354) (73) (24) 93 (842) (414) (31) (24) 293 1,(251) (509) (366) (1,106) (77) 652 (352) (125) (493) 4,749 4,-
2006 (106) 929 (116) (137) (5) 229 (100) (280) (207) (71) (684) (386) (424) 1,11 (516) (219) (699) 172 (24) (159) (42) 360 4,510 4,749 121
Translation of amounts from into $ has been made merely for the convenience of the reader at the Noon Buying Rate of 1 = $1.4603 on December 31, 2007. Includes 415 million of cash and cash equivalents held in countries subject to exchange control restrictions as of December 31, 2007 (622 million as of December 31, 2006 and 337 million as of December 31, 2005). Such restrictions can limit the use of such cash and cash equivalents by other group subsidiaries and the parent.
2007 ANNUAL REPORT ON FORM 20-F - 155
CONSOLIDATED STATEMENTS OF RECOGNIZED INCOME AND EXPENSE
Financial assets available for sale: Valuation gains/(losses) taken to equity Transferred to profit or loss on sale Cumulative translation adjustments Cash flow hedging Amount taken to equity Recycling in income (loss) Actuarial gains (losses) and adjustments arising from asset ceiling limitation Tax on items recognized directly in equity Other adjustments Net gains (losses) recognized in equity Of which transferred to profit and loss Net income (loss) for the period Total recognized profits (losses) for the period Attributable to: - Equity holders of the parent - Minority interests
47 (27) (993) (4) (7) 68 (14) (917) (24) (3,477) (4,394) (4,432) 38
36 (323) (4) 4 (8) 656 (216) (8) (61) 10
$(40) (1,450) (6) (10) 99 (20) (1,339) (35) (5,078) (6,417) (6,472) 55
2005 (69) (13) (56) 2 (27) (52) (56) 963 1,264 1,153 111
Translation of amounts from into $ has been made merely for the convenience of the reader at the Noon Buying Rate of 1 = $1.4603 on December 31, 2007.
156 - 2007 ANNUAL REPORT ON FORM 20-F
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(In millions of euros except useful lives expressed in number of years) Lucents carrying (1) (2) amount Fair value Useful lives 2,814 2,814 1,180 1-40 years 2,737 5-10 years 5-7 years 938 5-8 years months 501 Indefinite 1,060 (3) 760 (1,071) (1,082) (1,601) 114 (3,099) (3,885) (951) (950) (2,405) 216 1,840
Cash and cash equivalents and marketable securities Property, plant and equipment Goodwill Acquired technologies In process research & development Customer relationships long term Customer relationships short term (backlog) Trade names Inventories Trade and other receivables Payables and advance billings Pensions, retirement indemnities and other post-retirement benefits Bonds and notes issued Provisions Deferred taxes Deferred compensation (unvested outstanding stock options) Other assets and liabilities Net assets acquired
(1) (2) (3) Amounts indicated are the carrying values under U.S. GAAP.
Amounts indicated in this column include both purchase price allocation adjustments and conversion of Lucents U.S. GAAP historical data to IFRS. Estimated liquidation period of the inventory step-up is 6 months.
Determination of the goodwill:
(In millions of euros) Cost of the business combination (A) Net assets acquired (B) Goodwill (A) (B) Amount 9,891 1,840 8,051
The business acquired from Lucent contributed 278 million to 2006 net loss including adjustments subsequent to purchase accounting entries (such adjustments primarily include an amortization of intangible and tangible assets for an amount of 60 million before tax, the partial liquidation of the inventory step-up for 167 million before tax, the restructuring costs described in the following paragraph for an amount of 234 million before tax and a positive tax impact of 179 million) for the period from December 1, 2006 to December 31, 2006. If the acquisition had occurred on January 1, 2006, assuming no other change to the business because the transaction occurred during the year, and based upon accounting principles previously applied in 2006, the 2006 Group's revenue would have been 18,254 million, the 2006 income (loss) from operating activities would have been a loss of (988) million, the net loss would have been (231) million, and the 2006 basic and diluted earnings per share would have been (0.12) including adjustments subsequent to purchase accounting entries (such adjustments primarily include amortization of intangible and tangible assets for an amount of 606 million
2007 ANNUAL REPORT ON FORM 20-F - 173
before tax, the liquidation of the inventory step-up for an amount of 451 million before tax, the restructuring costs described in the following paragraph for an amount of 246 million before tax and a positive tax impact of 508 million). Pursuant to business combination with Lucent and to the acquisition of Nortel Networks Corporation's (Nortel) UMTS radio access business (see description of the transaction below), certain of Lucents product lines were abandoned. The corresponding asset write-off, as well as the estimated associated costs to which the Group was committed at period end, have been recorded in restructuring costs at 234 million (based upon current assumptions at the closing date of the balance sheet at December 31, 2006). During the second quarter 2006, Alcatel acquired privately-held VoiceGenie for 30 million in cash. Founded in 2000, VoiceGenie is a leader in voice self-service solutions, with a software platform based on Voice XML, an open standard used for developing self-service applications by both enterprises and carriers. The initial allocation of the cost of the business combination led to recognizing U.S.$ 12 million of depreciable intangible assets and U.S.$ 19 million of goodwill, with the net assets of this company amounting to U.S.$ 7 million at the acquisition date (of which U.S.$ 4 million of cash and cash equivalents). The contribution of this company to Alcatel-Lucents 2006 results was not significant. On April 5, 2006, historical Alcatel announced that the Board of Directors of Thales had approved the acquisition in principle of Alcatel's ownership interest in two joint ventures in the space sector, its railway signaling business and its integration and services activities for mission-critical systems not dedicated to operators or suppliers of telecommunications services. On December 4, 2006, Alcatel-Lucent and Thales signed a final agreement. This agreement follows the signature of a new Space Alliance agreement between Thales, Alcatel-Lucent and Finmeccanica, in which Finmeccanica agreed to the transfer to Thales of Alcatel-Lucents share in Alcatel Alenia Space and Telespazio. The transaction primarily consisted of the contribution and disposal by Alcatel-Lucent to Thales of the following assets: 1. In the Space sector: Alcatel-Lucent's 67% stake in the capital of Alcatel Alenia Space (this joint venture company, created in 2005, is the result of combining historical Alcatel's and Finmeccanica's Space assets, the latter holding a 33% stake). Alcatel-Lucent's 33% share in the capital of Telespazio, a worldwide leader in satellite services, of which 67% is held by Finmeccanica. With respect to this contribution of the space activities, a cash payment of 670 million was made to Alcatel-Lucent, subject to an adjustment to be made by an independent expert at the beginning of 2009, which may trigger an upward value adjustment. The Transport Systems activities, a worldwide leader in signaling solutions for rail transport and urban metros. Critical Systems Integration activities not dedicated to operators or suppliers of telecommunications services and covering mainly the transport and energy sectors.
190 - 2007 ANNUAL REPORT ON FORM 20-F
c/ Changes in property, plant and equipment, net
(In millions of euros) Plant, equipment and tools (193) (59) 153 (177) (76) 237 (13) 209 (262) (29) (21) 5 (26) 40 537
At December 31, 2004 Additions Depreciation charge Impairment losses Reversals of impairment losses Assets held for sale, discontinued operations and disposals Business combinations Net effect of exchange rate changes Other changes At December 31, 2005 Additions Depreciation charge Impairment losses Reversals of impairment losses (1) Assets held for sale, discontinued operations and disposals (2) Business combinations Net effect of exchange rate changes Other changes At December 31, 2006 Additions Depreciation charge Impairment losses Reversals of impairment losses Assets held for sale, discontinued operations and disposals Business combinations Net effect of exchange rate changes Other changes At December 31, 2007
(2) Mainly related to Lucent business combination (refer to note 3)
Land (1) (12) (1) (35) 239 (2) 1 (96) (21) (2) 161
Buildings (55) (1) (79) 28 (49) (161) 489 (18) (14) (105) (44) (11) 11 (52) (17) 577
Other (35) (12) (59) (24) (2) (31) 50 (1) (47) (49) (21) (3) 2 (4) (43) 153
Total 1,(284) (1) (162) 7 1,(250) (2) (303) 1,015 (34) 4 1,(416) (94) (131) 18 (103) (22) 1,428
Note 15 Finance leases and operating leases
a/ Finance leases (IFRS)
Property, plant and equipment held under finance leases have a net carrying amount of 0 million at December 31, 2007 (45 million at December 31, 2006 and 54 million at December 31, 2005). Such finance leases relate primarily to plant and equipment. Future minimum lease payments under non-cancelable finance leases are shown in note 31a Off balance sheet commitments. The main finance lease contract concerns a company consolidated proportionately at 51%, Alda Marine, which leases four vessels as part of its activity of laying and maintaining submarine cables. The net carrying amount of these vessels recognized in property, plant and equipment was 45 million at December 31, 2006 and 53 million at December 31, 2005). The corresponding obligation to pay future lease payments was 51 million at December 31, 2006 and 59 million at December 31, 2005. The option to purchase the vessels was exercised during 2007 by Alda Marine.
b/ Operating leases
Future minimum lease payments under non-cancelable operating leases are shown in note 31a - Off balance sheet commitments. Future minimum sublease rentals income expected to be received under non-cancelable operating subleases were 180 million at December 31, 2007 (202 million at December 31, 2006 and 27 million at December 31, 2005). Lease payments under operating leases recognized as an expense in the income statement are analyzed as follows:
2007 ANNUAL REPORT ON FORM 20-F - 203
Exercise price Exercise period From To Granted Exercised Forfeited Expired Outstanding at December 31, 2005 Exercised Forfeited Expired Outstanding at December 31, 2006 Exercised Forfeited Expired Outstanding at December 31, 2007
11.41 01/03/06 01/03/09 01/02/13 01/02/13 497,500 (17,400) 480,100 (7,558) (61,087) 411,455 (40,427) 371,028
2005 Plans (in number of options) 10.00 8.80 03/10/06 03/10/09 03/09/13 03/09/13 16,756,690 (707,210) 16,049,480 (158,438) (654,528) 15,236,514 (133,932) (1,080,029) 14,022,553 06/01/06 06/01/09 05/31/13 05/31/13 223,900 (8,800) 215,100 (965) (27,243) 186,892 (6,611) (32,480) 147,801
9.80 09/01/06 09/01/09 08/31/13 08/31/13 72,150 72,150 (7,100) 65,050 (5,900) 59,150
10.20 11/14/06 11/14/09 11/13/13 11/13/13 54,700 54,700 (1,250) (8,350) 45,100 (4,600) 40,500
Exercise price Exercise period From To Granted Exercised Forfeited Expired Outstanding at December 31, 2006 Exercised Forfeited Expired Outstanding at December 31, 2007
11.70 03/08/07 03/08/10 03/07/14 03/07/14 17,009,320 (482,130) 16,527,190 (1,272,052) 15,255,138
2006 Plans (in number of options) 12.00 9.30 05/15/07 08/16/07 05/15/10 08/16/10 05/14/14 05/14/14 122,850 (7,100) 115,750 (11,288) 104,462 08/15/14 08/15/14 337,200 337,200 (42,180) 295,020
10.40 11/08/07 11/08/07 11/07/14 11/07/14 121,100 121,100 (19,500) 101,600
Exercise price Exercise period From To Granted Exercised Forfeited Expired Outstanding at December 31, 2007
10.00 03/11/08 03/11/11 03/10/15 03/10/15 204,584 (17,500) 187,084
2007 Plans (in number of options) 9.10 9.00 03/28/08 08/16/08 03/28/11 08/16/11 03/27/15 03/27/15 40,078,421 (1,349,135) 38,729,286 08/15/15 08/15/15 339,570 339,570
6.30 11/15/08 11/15/08 11/14/15 11/14/15 294,300 294,300
The option plans of companies that were acquired by Alcatel provide for the issuance of Alcatel-Lucent shares or ADSs upon exercise of options granted under such plans in an amount determined by applying the exchange ratio used in the acquisition to the number of shares of the acquired company that were the subject of the options (see the following table).
204 - 2007 ANNUAL REPORT ON FORM 20-F
The following table sets forth the U.S. and Canadian companies (other than Lucent) that issued these plans, the range of exercise prices, the number of outstanding and exercisable options as of December 31, 2007, the weighted average exercise price and the weighted average exercise period.
The effective rate of interest of the debt component is 6.70% for Series A and 6.73% for Series B. At December 31, 2007, the fair value of the debt component of the convertible bonds (see note 26h) was 331 million for Series A and 282 million for Series B (349 million and 386 million respectively as of December 31, 2006) and the market value of the convertible bonds was 467 million for Series A and 473 million for Series B (613 million and 744 million respectively as of December 31, 2006). 7.75% Convertible Securities (Liability to Subsidiary Trust Issuing Preferred Securities) During fiscal 2002, Lucent Technologies Capital Trust I (the Trust) sold 7.75% cumulative convertible trust preferred securities for an aggregate amount of $1.75 billion. The Trust used the proceeds to purchase Lucent Technologies Inc 7.75% convertible subordinated debentures due March 15, 2017, which represent all of the Trusts assets. The terms of the trust preferred securities are substantially the same as the terms of the debentures. Lucent Technologies Inc owns all of the common securities of the Trust and as a result consolidates the Trust. Lucent may redeem the debentures, in whole or in part, for cash at premiums ranging from 103.88% beginning March 20, 2007, to 100.00% on March 20, 2012 and thereafter. To the extent Lucent redeems debentures, the Trust is required to redeem a corresponding amount of trust preferred securities. Lucent has irrevocably and unconditionally guaranteed, on a subordinated basis, the payments due on the trust preferred securities to the extent Lucent makes payments on the debentures to the Trust. The ability of the Trust to pay dividends depends on the receipt of interest payments on the debentures. Lucent has the right to defer payments of interest on the debentures for up to 20 consecutive quarters. If payment of interest on the debentures is deferred, the Trust will defer the quarterly distributions on the trust preferred securities for a corresponding period. Deferred interest accrues at an annual rate of 9.25%. At the option of the holder, each trust preferred security is convertible into AlcatelLucent ADSs, subject to an additional adjustment under certain circumstances. The following table summarizes the terms of this security.
Conversion ratio Conversion price Redemption period at Lucent option Maturity date 40.3306 $24.80 After March 19, 2007 March 15, 2017
The effective rate of interest of the debt component is 9.86%. At December 31, 2007, the fair value of the debt component of the convertible bonds was 478 million and the market value of the convertible bonds was 549 million (725 million and 853 million respectively as of December 31, 2006). 8% Convertible Securities Lucent's 8% convertible securities were redeemed on March 29, 2007 at the option of the issuer for an aggregate amount of U.S.$ 486 million. The consideration was allocated to the liability component (U.S.$ 408 million) and the equity component (U.S.$ 78 million), resulting in a financial loss of 12 million (see notes 8 and 26 (c)).
Alesis QS7 Wheel PC-1260 XV-DV440 DV276 White Evo4 KDL-46EX703 AF50 M Dream Outlet RSG257aars XAA QC5005 10 SAL-18250 KDL-26P5500 Conquer-tiberian SUN AVR 635 ZWD1270S HT-S6305 60840 BE6-II Lexmark Z42 C375BEE VP-D323I Budokai 3 MAC 500E VGN-NS31m S 730BF Minolta XG-A Solution Disk FLS473C EPL-5200 DS24205 1200U Star-1998 WS9024 PIN570 Smartphones UN46C6300SF P5625 CCD-TRV43 SU-A700 Mk3 SC-BT205 Keypad GT-I8510 8 DSC-S750 710MP K1000 WF220ANW DCR600II Cosworth ES-D55S X1600 T-levo N22 Powerlite 62C CQ-C1305 Module SW-305 885LE-lb885cu- RT-20LA30 NV-VX27EG Vega2 NX-P150 Projectors DCS 760 IDL 60 Icfsw35 D-M38 SPD-S F HPD-10 5470C Review Viewstation SP - 2004 LN23R71B 26LC2RA DVD-2500 Kd-pdr50 City 4 Impressa Z7 EH-M2 RDR-HX510 Color 740 4 V-I Stylus C82 VP1000 AW897T WF-B861 FST301 41923 Lovin HUG EU 340 A590 IS Z1034 19DX IV Md481SYS Juno-60 Samsung B100 KDC-W4041 ZEN-soft01-V4 Yamaha RX21 DCM-270
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