2008 ANNUAL REPORT ON FORM 20-F

Transcription

1 00 ANNUAL REPORT ON FORM 0F

2

3 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 0 FORM 0F REGISTRATION STATEMENT PURSUANT TO SECTION (b) OR (g) OF THE SECURITIES EXCHANGE ACT OF OR ANNUAL REPORT PURSUANT TO SECTION OR (d) OF THE SECURITIES EXCHANGE ACT OF For the fiscal year ended December, 00 OR TRANSITION REPORT PURSUANT TO SECTION OR (d) OF THE SECURITIES EXCHANGE ACT OF OR SHELL COMPANY REPORT PURSUANT TO SECTION OR (d) OF THE SECURITIES EXCHANGE ACT OF Commission file number: 0 (Exact name of Registrant as specified in its charter) N/A (Translation of Registrant s name into English) Republic of France (Jurisdiction of incorporation or organization), rue La Boétie 00 Paris, France (Address of principal executive offices) Rémi Thomas Telephone Number () Facsimile Number () 0 00, rue La Boétie 00 Paris, France (Name, Telephone, and/or Facsimile Number and Address of Company Contact Person) Securities registered pursuant to Section (b) of the Act: Title of each class American Depositary Shares, each representing one ordinary share, nominal value per share* Name of each exchange on which registered New York Stock Exchange * Listed, not for trading or quotation purposes, but only in connection with the registration of the American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission. Securities registered or to be registered pursuant to Section (g) of the Act: None Securities for which there is a reporting obligation pursuant to Section (d) of the Act: None Indicate the number of outstanding shares of each of the issuer s classes of capital or common stock as of the close of the period covered by the annual report.,,0, ordinary shares, nominal value per share Indicate by check mark if the registrant is a wellknown seasoned issuer, as defined in Rule 0 of the Securities Act. Yes No If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section or (d) of the Securities Exchange Act of. Yes No Note checking the box above will not relieve any registrant required to file reports pursuant to Section or (d) of the Securities Exchange Act of from their obligations under those sections. Indicate by check mark whether the registrant: () has filed all reports required to be filed by Section or (d) of the Securities Exchange Act of during the preceding months (or for such shorter period that the registrant was required to file such reports), and () has been subject to such filing requirements for the past 0 days. Yes No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a nonaccelerated filer. See definition of accelerated filer and large accelerated filer in Rule b of the Exchange Act. (Check one): Large accelerated filer Accelerated filer Nonaccelerated filer Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP [ ] International Financial Reporting Standards as issued by the International Accounting Standards Board [X] Other [ ] If Other has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow: Item Item If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule b of the Exchange Act). Yes No

4 Table of Contents SELECTED FINANCIAL DATA. Condensed consolidated income statement and balance sheet data Exchange rate information ACTIVITY OVERVIEW. Carrier Segment Enterprise Segment Services Segment RISK FACTORS. Risks relating to the business Legal risks Risks relating to ownership of our ADSs INFORMATION ABOUT THE GROUP. General History and development Structure of the principal companies consolidated in the Group as of December, Real estate and equipment DESCRIPTION OF THE GROUP S ACTIVITIES. Business organization Carrier Segment Enterprise Segment Services Segment Marketing and distribution of our products..... Competition Technology, Research and Development Intellectual Property Sources and availability of materials Seasonality Our activities in certain countries Environmental matters Human Resources OPERATING AND FINANCIAL REVIEW AND PROSPECTS. Overview of Consolidated results of operations for the year ended December, 00 compared to the year ended December, Results of operations by business segment for the year ended December, 00 compared to the year ended December, Consolidated results of operations for the year ended December, 00 compared to the year ended December, Results of operations by business segment for the year ended December, 00 compared to the year ended December, Liquidity and capital resources Contractual obligations and offbalance sheet contingent commitments Outlook for Qualitative and quantitative disclosures about market risk Legal matters Research and Development expenditures....0 CORPORATE GOVERNANCE. Governance code Management Powers of the Board of Directors Committees of the Board Compensation Statement of business principles and Code of ethics Regulated agreements, commitments and related party transactions Major Differences between our Corporate Governance Practices and NYSE Requirements. Operating Rules of the Board of Directors ANNUAL REPORT ON FORM 0F

5 Table of Contents INFORMATION CONCERNING OUR CAPITAL. Share capital and voting rights Diluted capital at December, Delegations of authority and authorizations... Use of authorizations Changes in our capital over the last five years. Purchase of AlcatelLucent shares by the company Outstanding Instruments giving right to shares CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER, 00 Report of independent registered public accounting firms Consolidated income statements Consolidated balance Sheets Consolidated statements of cash flows Consolidated statements of recognized income and expense Consolidated statements of changes in shareholders equity Notes to Consolidated Financial Statements STOCK EXCHANGE AND SHAREHOLDING. Listing Trading over the last five years Shareholder profile Breakdown of capital and voting rights Changes of shareholdings Shareholders General Meeting Trend of dividend per share over years ADDITIONAL INFORMATION 0. Legal information Specific provisions of the bylaws and of law.. 0. American Depositary Shares, taxation and certain other matters Documents on display CONTROLS AND PROCEDURES, STATUTORY AUDITORS FEES AND OTHER MATTERS. Controls and procedures Report of independent registered public accounting firms Statutory auditors Statutory auditors fees Audit Committee financial expert Code of Ethics Financial Statements Exhibits Crossreference table between Form 0F and this document ANNUAL REPORT ON FORM 0F

6 00 ANNUAL REPORT ON FORM 0F

7 SELECTED FINANCIAL DATA Our consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as adopted by the European Union. IFRS, as adopted by the European Union, differs in certain respects from the International Financial Reporting Standards issued by the International Accounting Standards Board. However, our consolidated financial statements presented in this document in accordance with IFRS would be no different if we had applied International Financial Reporting Standards issued by the International Accounting Standards Board. As permitted by U.S. securities laws, we no longer provide a reconciliation of our net income and shareholders equity as reflected in our consolidated financial statements that are prepared in accordance with IFRS, as adopted by the European Union and that are also in conformity with IFRS as issued by the International Accounting Standards Board, to U.S. GAAP. On November 0, 00, historical Alcatel and Lucent Technologies Inc., since renamed AlcatelLucent USA Inc. ( Lucent ), completed a business combination pursuant to which Lucent became a wholly owned subsidiary of Alcatel. On December, 00, we and Thales signed a definitive agreement for the acquisition by Thales of our ownership interests in two joint ventures in the space sector created with Finmeccanica and our railway signaling business and integration and services activities for missioncritical systems not dedicated to operators or suppliers of telecommunications services. In January 00, the transportation and security activities were contributed to Thales, and in April 00, we completed the sale of our ownership interests in the two joint ventures in the space sector. As a result of the Lucent transaction, our 00 consolidated financial results include (i) months of results of only historical Alcatel and (ii) one month of results of the combined company. As a result of the Thales transaction, our 00, 00 and 00 financial results pertaining to the businesses transferred to Thales are treated as discontinued operations. Further, our 00 and 00 financial results take into account the effect of the change in accounting policies on employee benefits with retroactive effect from January, 00 and our 00 and 00 financial results take into account the effect of the application of the interpretation IFRIC with retroactive effect from January, 00, as described in the section Changes in accounting standards as of January, 00 and in Note of our consolidated financial statements included elsewhere in this document. 0 As a result of the purchase accounting treatment of the Lucent business combination required by IFRS, our results for 00, 00 and 00 included several negative, noncash impacts of purchase accounting entries. 00 ANNUAL REPORT ON FORM 0F

8 SELECTED FINANCIAL DATA CONDENSED CONSOLIDATED INCOME STATEMENT AND BALANCE SHEET DATA. CONDENSED CONSOLIDATED INCOME STATEMENT AND BALANCE SHEET DATA (in millions, except per share data) 00 () 00,0, For the year ended December, , 0, Income Statement Data Revenues Income (loss) from operating activities before restructuring costs, impairment of assets, gain/ (loss) on disposal of consolidated entities and postretirement plan amendments Restructuring costs Income (loss) from operating activities Income (loss) from continuing operations Net income (loss) Net income (loss) attributable to equity holders of the parent,, () () (,) (,) (,00) () () (,0) (,0) (,) (0) () (,) (,0) (,) (0) () () (),0 (),0,00 () 0 (,) (,) (,) (0) 0 Earnings per Ordinary Share Net income (loss) (before discontinued operations) attributable to the equity holders of the parent per share basic () diluted () Dividend per ordinary share () Dividend per ADS () $(.) $(.) (.) (.) 00 () 00 U.S. $,0,,,,,,,,0,,0,,,,,, (in millions) (.) (.) (0.) (0.) At December, ,0,,0,,,,0,,0, 0,,,,,,,, Balance Sheet Data Total assets Marketable securities and cash and cash equivalents Bonds, notes issued and other debt Longterm part Current portion of longterm debt Capital stock Shareholders equity attributable to the equity holders of the parent after appropriation () Minority interests () Translated solely for convenience into dollars at the noon buying rate of.00 = U.S. $. on December, 00. () Based on the weighted average number of shares issued after deduction of the weighted average number of shares owned by our consolidated subsidiaries at December, without adjustment for any share equivalent: ordinary shares:,,,0 in 00;,,0, in 00;,,000, in 00;,,, in 00 and,,, in 00 (including 0,0, shares related to bonds mandatorily redeemable for ordinary shares). () Diluted earnings per share takes into account share equivalents having a dilutive effect after deduction of the weighted average number of share equivalents owned by our consolidated subsidiaries. Net income is adjusted for aftertax interest expense related to our convertible bonds. The dilutive effect of stock option plans is calculated using the treasury stock method. The number of shares taken into account is as follows: ordinary shares:,,,0 in 00;,,0, in 00;,,000, in 00;,,,0 in 00 and,,, in 00. () Under French company law, payment of annual dividends must be made within nine months following the end of the fiscal year to which they relate. Our Board of Directors has announced that it will propose to not pay a dividend for 00 at our Annual Shareholders Meeting to be held on May, 00. () Amounts presented are net of dividends distributed. Shareholders equity attributable to holders of the parent before appropriation are, million,, million,, million,,0 million and, million as of December, 00, 00, 00, 00 and 00 respectively and dividends proposed or distributed amounted to 0 million, 0 million, 0 million, million and 0 million as of December, 00, 00, 00, 00 and 00 respectively. 00 ANNUAL REPORT ON FORM 0F

9 SELECTED FINANCIAL DATA EXCHANGE RATE INFORMATION. EXCHANGE RATE INFORMATION The table below shows the average noon buying rate of euro from 00 to 00. As used in this document, the term noon buying rate refers to the rate of exchange for the euro, expressed in U.S. dollars per euro, as certified by the Federal Reserve Bank of New York for customs purposes. Average rate () $. $. $. $.00 $. Year () The average of the noon buying rate for euro on the last business day of each month during the year. The table below shows the high and low noon buying rates expressed in U.S. dollars per euro for the previous six months. Period March 00 (through March ) February 00 January 00 December 00 November 00 October 00 September 00 High $.0 $.0 $. $. $.0 $.0 $. Low $. $. $.0 $. $. $. $. 0 On March, 00, the noon buying rate was.00 = $ ANNUAL REPORT ON FORM 0F

10 0 00 ANNUAL REPORT ON FORM 0F

11 ACTIVITY OVERVIEW The charts below set forth the three business segments that comprised our organization in 00: Carrier, Enterprise and Services. In 00, our Carrier segment was organized into seven business divisions: IP, Fixed Access, Optics, Mobile Access, CDMA Networks, Multicore and Applications. Effective January, 00, we reorganized our business into four groups: Carrier Product Group, Enterprise Product Group, Services Group, and Applications Software Group. The Carrier Product Group is now organized in four divisions: IP, Optics, Wireless and Wireline.. CARRIER SEGMENT IP, FIXED ACCESS AND OPTICS Position A world leader and privileged partner of telecom operators, enterprises and governments in transforming wireline networks toward an allip (internet Protocol) architecture using broadband access, traffic aggregation to the optical transport network with central focus on the IP intelligent router market. Our technology allows service providers to enrich the enduser experience which creates sustainable value. 0 Activities Market positions Activities focus on the three main wireline market segments: access, optics and IP (internet Protocol). The portfolio of products we offer may be deployed anywhere in legacy and nextgeneration networks from the core to the access, facilitating the delivery of voice, data and video services (Triple Play) over broadband. # in Broadband Access with 0.% of DSL market share in 00 (in revenues) () # in optics (Terrestrial and Submarine) with.% of market share in 00 (in revenues) () # in IP/MPLS Service Provider edge routers with % of market share in 00 (in revenues) () () Dell Oro. () Ovum. () Ovum. MOBILE ACCESS AND CDMA NETWORKS Position Activities One of the world s 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 G (GSM/GPRS/EDGE, CDMA), G (UMTS/HSPA/EVDO) and G networks (WiMAX, LTE) from access to core switching. Market positions # in GSM/GPRS/EDGE Radio Access Networks with 0.% of market share in 00 (in revenues) () # in WCDMA Radio Access Networks with.% of market share in 00 (in revenues) () # in CDMA with.% of market share in 00 (in revenues) () # in WiMAX 0.e with 0.% of market share in 00 (in base stations revenues) () () Dell Oro. () Dell Oro. () Dell Oro. () Infonetic Research. 00 ANNUAL REPORT ON FORM 0F

12 ACTIVITY OVERVIEW SERVICES SEGMENT MULTICORE AND APPLICATIONS Position Activities 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 world s 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 enduser services (charging and billing with converged payment, subscriber data management). Market positions We have deployed IP/NGN products in more than fixed and mobile networks, and we are involved in (various stages of deployment, trials and commercial roll out) more than 0 full IMS network transformation projects. In addition, there are more than 0 customers using our IMS application servers and services, and more than 0 networks using our subscriber data management applications.. ENTERPRISE SEGMENT Position A world leader in the delivery of secure, dynamic communication product offerings for enterprises and government agencies, with emphasis on the education, finance, healthcare and hospitality industries and the public sector. Activities Supply end to end IP communication product offerings that interconnect networks, people, business processes and knowledge with real time communications (secure networking, telephony, unified communications, Genesys contact center and mobile applications) for small, medium, large and extralarge companies and public agencies. Market positions 0 # in Western Europe Enterprise Telephony with % of market share (in revenues) () # in Contact Center agent revenue, Western Europe 00 (Alcatel & Genesys combined) () () Gartner Dataquest, Market Share Enterprise Telephony Western Europe July 00. () Gartner Market Share: Contact Centers, Western Europe, 00, June 00.. SERVICES SEGMENT Position A world leader in supplying services for telecom service providers and companies in selected verticals, with particular expertise in integrating complete telecommunication endtoend product offerings. Activities Activities focus on supplying complete offerings for networks entire life cycle consultation and conception, integration and deployment, exploitation and maintenance, as well as various partnership models to facilitate a total or partial outsourcing of operations. (0) Infonetics Research ANNUAL REPORT ON FORM 0F Market positions # in worldwide Service Delivery Platform integration services (0) Since many of our competitors define the overall services market differently, we are unable to provide overall services market positions.

13 RISK FACTORS Our business, financial condition or results of operations could suffer material adverse effects due to any of the following risks. We have described the specific risks that we consider material to our business but the risks described below are not the only ones we face. We do not discuss risks that would generally be equally applicable to companies in other industries, due to the general state of the economy or the markets, or other factors. Additional risks not known to us or that we now consider immaterial may also impair our business operations.. RISKS RELATING TO THE BUSINESS We have adopted a new strategic focus and we are shifting our resources to support that new focus. If our new strategic plan is not aligned with the direction our customers take as they invest in the evolution of their networks, customers may not buy our products or use our services. We have adopted a new strategic plan as of January, 00, and we are undergoing a strategic transformation and realignment of our operations in support of that new plan. The transformation we are undergoing includes reduced spending on research and development as we accelerate the shift in our investments from mature technologies that previously generated significant revenue for us toward certain nextgeneration technologies. Our choices of specific technologies to pursue and those to deemphasize may prove to be inconsistent with our customers investment spending. The telecommunications industry fluctuates and is affected by many factors, including the economic environment, decisions by service providers regarding their deployment of technology and their timing of purchases, as well as demand and spending for communications services by businesses and consumers. Spending trends in the global telecommunications industry were negatively impacted by the deteriorating global macroeconomic environment in 00, and we expect the global economy to deteriorate further in 00. We expect the global telecommunications equipment and related services market to decline between % and % at constant currency in 00, but in the context of the global economic environment, the degree of volatility and subsequent lack of visibility is at a historically high level and actual market conditions could be very different from what we expect and are planning for. Moreover, market conditions could vary geographically and across different technologies, and are subject to substantial fluctuations. Conditions in the specific industry segments in which we participate may be weaker than in other segments. In that case, the results of our operations may be adversely affected. If capital investment by service providers is weaker than the % to % decline at constant currency rates that we anticipate, our revenues and profitability may be adversely affected. The level of demand by service providers can change quickly and can vary over short periods of time, including from month to month. As a result of the uncertainty and variations in the telecommunications industry, accurately forecasting revenues, results and cash flow remains difficult. 0 In addition, our sales volume and product mix will affect our gross margin. Therefore, if reduced demand for our products results in lower than expected sales volume, or if we have an unfavorable product mix, we may not achieve the expected gross margin rate, resulting in lower than expected profitability. These factors may fluctuate from quarter to quarter. Our business requires a significant amount of cash, and we may require additional sources of funds if our sources of liquidity are unavailable or insufficient to fund our operations. Our working capital requirements and cash flows have historically been, and they are expected to continue to be, subject to quarterly and yearly fluctuations, depending on a number of factors. If we are unable to manage fluctuations in cash flow, our business, operating results and financial condition may be materially adversely affected. Factors which could lead us to suffer cash flow fluctuations include: the level of sales; the collection of receivables; the timing and size of capital expenditures; costs associated with potential restructuring actions; and customer financing obligations. 00 ANNUAL REPORT ON FORM 0F

14 RISK FACTORS RISKS RELATING TO THE BUSINESS We derive our capital resources from a variety of sources, including the generation of positive cash flow from ongoing operations, the issuance of debt and equity in various forms, and banking facilities, including our revolving credit facility of. billion maturing in April 0 (with an extension until April, 0 for an amount of million) and on which we have not drawn. 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. Given current conditions, access to the debt and equity markets may not be relied upon at this time. Based on our current view of our business and capital resources and the overall market environment, we believe we have sufficient resources to fund our operations. If, however, the business environment were to materially worsen, the credit markets were to limit our access to bid and performance bonds, or our customers were to dramatically pull back on their spending plans, our liquidity situation could deteriorate. 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. We cannot provide any assurance that such funding will be available on terms satisfactory to us. If we were to incur high levels of debt, this would require a larger portion of our operating cash flow to be used to pay principal and interest on our indebtedness. The increased use of cash to pay indebtedness could leave us with insufficient funds to finance our operating activities, such as Research and Development expenses and capital expenditures, which could have a material adverse effect on our business. Our ability to have access to the capital markets and our financing costs will be, in part, dependent on Standard & Poor s, Moody s or similar agencies ratings with respect to our debt and corporate credit and their outlook with respect to our business. Our current shortterm and longterm credit ratings, as well as any possible future lowering of our ratings, may result in higher financing costs and reduced access to the capital markets. We cannot provide any assurance that our credit ratings will be sufficient to give us access to the capital markets on acceptable terms, or that once obtained, such credit ratings will not be reduced by Standard & Poor s, Moody s or similar rating agencies. Credit and commercial risks and exposures could increase if the financial condition of our customers declines. A substantial portion of our sales are to customers in the telecommunications industry. These customers may require their suppliers to provide extended payment terms, direct loans or other forms of financial support as a condition to obtaining commercial contracts. We expect that we may provide or commit to financing where appropriate for our business. Our ability to arrange or provide financing for our customers will depend on a number of factors, including our credit rating, our level of available credit, and our ability to sell off commitments on acceptable terms. More generally, we expect to routinely enter into longterm contracts involving significant amounts to be paid by our customers over time. Pursuant to these contracts, we may deliver products and services representing an important portion of the contract price before receiving any significant payment from the customer. As a result of the financing that may be provided to customers 00 ANNUAL REPORT ON FORM 0F and our commercial risk exposure under longterm contracts, our business could be adversely affected if the financial condition of our customers erodes. Over the past few years, certain of our customers have filed with the courts seeking protection under the bankruptcy or reorganization laws of the applicable jurisdiction, or have experienced financial difficulties. As a result of the more challenging economic environment, we saw some increase in the number of our customers experiencing such difficulties in 00, and we expect that trend to intensify as the global economy deteriorates further in 00. That trend may be exacerbated in many emerging markets, where our customers are being affected not only by recession, but by deteriorating local currencies and a lack of credit. Upon the financial failure of a customer, we may experience losses on credit extended and loans made to such customer, losses relating to our commercial risk exposure, and the loss of the customer s ongoing business. If customers fail to meet their obligations to us, we may experience reduced cash flows and losses in excess of reserves, which could materially adversely impact our results of operations and financial position. The Group s U. S. pension and postretirement benefit plans are large and have funding requirements that fluctuate based on how their assets are invested, the performance of the financial markets worldwide, the level of interest rates, and changes in legal requirements. These plans are also costly, and our efforts to fund or control those costs may be ineffective. In particular, many former and current employees and retirees of the Group in the U.S. participate in one or more of the following benefit plans: management pension plan; occupational pension plans; postretirement health care benefit plan for former management employees; and postretirement health care benefit plan for formerly represented employees. The performance of the financial markets and the level of interest rates impact the funding obligations for the Group s U.S. pension plans. Both of those factors contributed to a deterioration in the funded status of our pension plans in 00. Specifically, the deterioration in equity markets contributed to a large decline in pension plan assets late in the year, while lower interest rates were reflected in lower discount rates that contributed to an increase in our pension obligations. A continuation of those trends could have a negative impact on the funded status and funding obligations of our pension plans. As of January, 00, we estimate that all of our U.S. pension plans meet the current funding requirements of the Internal Revenue Code of (the Code ), as amended, and the Employee Retirement Income Security Act of, as amended, each as further amended by the Pension Protection Act of 00 (the PPA ) and the Worker, Retiree, and Employer Recovery Act of 00 (the WRERA ), and we believe it is unlikely that the Group will make any material contributions to these plans through 00. We are unable to provide an estimate of future funding requirements beyond fiscal year 00 for the Group s U.S. pension plans. 0

15 RISK FACTORS RISKS RELATING TO THE BUSINESS Although we estimate that all of our material U.S. pension plans are overfunded under the requirements of ERISA and the Code (each as amended by PPA and WRERA), based on IFRS accounting standards to which the Group is subject, the management pension plan was underfunded by million as of December, 00. For more details regarding this underfunding, see Note g to our consolidated financial statements included elsewhere in this annual report. Section 0 of the Code, as amended by PPA and the U.S. Troop Readiness, Veterans Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 00, provides for the qualified transfer of pension plan assetseither for a single year or for two or more yearswhereby pension plan assets in excess of % (for a singleyear transfer) or 0% (for a multiyear transfer) of a pension plan s funding obligations would be available to fund retiree health care costs. As of the January, 00 valuation date, the occupational pension plan had approximately. billion of pension plan assets that would be eligible for transfer to fund retiree health care costs for a single year for Lucent s formerly represented retirees. As of the same valuation date,. billion would be available to fund such retiree health care costs for multiple years. In December 00 we made a multiyear collectively bargained Section 0 transfer of excess pension assets from the occupational pension plan for former Lucent employees in the amount of $ million to fund healthcare benefits for Lucent s formerly represented retirees for the period beginning January, 00 through about September 0, 00. We expect to make another multiyear collectively bargained transfer during 00 to cover Lucent s formerly represented retiree health care costs for the remainder of 00 through the first nine months of 00. Based on current actuarial assumptions we believe it is likely that all of the healthcare funding required for Lucent s formerly represented retirees (assuming the present level and structure of benefits) could be addressed through Section 0 transfers. However, a deterioration in the funded status of our occupational pension plan could negatively impact our ability to make future Section 0 transfers. The Group has also taken some steps, and we may take additional actions over time, to reduce the overall cost of our U.S. retiree health care benefit plans and the share of these costs borne by us, consistent with legal requirements and any collective bargaining obligations. However, the cost increases may exceed our ability to reduce these costs. In addition, the reduction or elimination of U.S. retiree health care benefits by the Group has led to lawsuits against us. Any other initiatives that we undertake to control or reduce costs may lead to additional claims against us. Our financial condition and results of operations may be harmed if we do not successfully reduce market risks through the use of derivative financial instruments. Since we conduct operations throughout the world, a substantial portion of our assets, liabilities, revenues and expenses are denominated in various currencies other than the euro and the U.S. dollar. Because our financial statements are denominated in euros, fluctuations in currency exchange rates, especially the U.S. dollar against the euro, could have a material impact on our reported results. We also experience other market risks, including changes in interest rates and in prices of marketable equity securities that we own. We may use derivative financial instruments to reduce certain of these risks. If our strategies to reduce market risks are not successful, our financial condition and operating results may be harmed. An impairment of other intangible assets or goodwill would adversely affect our financial condition or results of operations. We have a significant amount of goodwill and intangible assets, including acquired intangibles, development costs for software to be sold, leased or otherwise marketed and internal use software development costs as of December, 00. In connection with the combination between Alcatel and Lucent, a significant amount of additional goodwill and acquired intangible assets were recorded as a result of the purchase price allocation. 0 Goodwill and intangible assets with indefinite useful lives are not amortized but are tested for impairment annually, or more often, if an event or circumstance indicates that an impairment loss may have been incurred. Other intangible assets are amortized on a straightline basis over their estimated useful lives and reviewed for impairment whenever events such as product discontinuances, plant closures, product dispositions or other changes in circumstances indicate that the carrying amount may not be wholly recoverable. Historically, we have recognized significant impairment charges due to various reasons, including some of those noted above as well as potential restructuring actions or adverse market conditions that are either specific to us or the broader telecommunications industry or more general in nature. For instance, we accounted for an impairment loss of. billion in 00 related to a reassessment of our nearterm outlook, our decision to streamline our portfolio and our weaker than expected CDMA business. Additional impairment charges may be incurred in the future that could be significant and that could have an adverse effect on our results of operations or financial condition. 00 ANNUAL REPORT ON FORM 0F

16 RISK FACTORS RISKS RELATING TO THE BUSINESS We operate in a highly competitive industry with many participants. Our failure to compete effectively would harm our business. We operate in a highly competitive environment in each of our businesses, competing on the basis of product offerings, technical capabilities, quality, service and pricing. Competition for new service provider and enterprise customers as well as for new infrastructure deployments is particularly intense and increasingly focused on price. We offer customers and prospective customers many benefits in addition to competitive pricing, including strong support and integrated services for quality, technologicallyadvanced products; however, in some situations, we may not be able to compete effectively if purchasing decisions are based solely on the lowest price. We have a number of competitors, many of which currently compete with us and some of which are very large, with substantial technological and financial resources and established relationships with global service providers. Some of these competitors have very low cost structures. In addition, new competitors may enter the industry as a result of acquisitions or shifts in technology. These new competitors, as well as existing competitors, may include entrants from the telecommunications, computer software, computer services and data networking industries. We cannot assure you that we will be able to compete successfully with these companies. Competitors may be able to offer lower prices, additional products or services or a more attractive mix of products or services, or services or other incentives that we cannot or will not match or offer. These competitors may be in a stronger position to respond quickly to new or emerging technologies and may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to customers, prospective customers, employees and strategic partners. Technology drives our products and services. If we fail to keep pace with technological advances in the industry, or if we pursue technologies that do not become commercially accepted, customers may not buy our products or use our services. The telecommunications industry uses numerous and varied technologies and large service providers often invest in several and, sometimes, incompatible technologies. The industry also demands frequent and, at times, significant technology upgrades. Furthermore, enhancing our services revenues requires that we develop and maintain leading tools. We will not have the resources to invest in all of these existing and potential technologies. As a result, we concentrate our resources on those technologies that we believe have or will achieve substantial customer acceptance and in which we will have appropriate technical expertise. However, existing products often have short product life cycles characterized by declining prices over their lives. In addition, our choices for developing technologies may prove incorrect if customers do not adopt the products that we develop or if those 00 ANNUAL REPORT ON FORM 0F technologies ultimately prove to be unviable. Our revenues and operating results will depend to a significant extent on our ability to maintain a product portfolio and service capability that is attractive to our customers, to enhance our existing products, to continue to introduce new products successfully and on a timely basis and to develop new or enhance existing tools for our services offerings. The development of new technologies remains a significant risk to us, due to the efforts that we still need to make to achieve technological feasibility; due as mentioned above to rapidly changing customer markets; and due to significant competitive threats. Our failure to bring these products to market in a timely manner could result in a loss of market share or a lost opportunity to capitalize on emerging markets, and could have a material adverse impact on our business and operating results. Many of our current and planned products are highly complex and may contain defects or errors that are detected only after deployment in telecommunications networks. If that occurs, our reputation may be harmed. Our products are highly complex, and there is no assurance that our extensive product development, manufacturing and integration testing is, or will be, adequate to detect all defects, errors, failures and quality issues that could affect customer satisfaction or result in claims against us. As a result, we might have to replace certain components and/or provide remediation in response to the discovery of defects in products that have been shipped. The occurrence of any defects, errors, failures or quality issues could result in cancellation of orders, product returns, diversion of our resources, legal actions by customers or customers end users and other losses to us or to our customers or end users. These occurrences could also result in the loss of or delay in market acceptance of our products and loss of sales, which would harm our business and adversely affect our revenues and profitability. Rapid changes to existing regulations or technical standards or the implementation of new ones for products and services not previously regulated could be disruptive, timeconsuming and costly to us. We develop many of our products and services based on existing regulations and technical standards, our interpretation of unfinished technical standards or the lack of such regulations and standards. Changes to existing regulations and technical standards, or the implementation of new regulations and technical standards relating to products and services not previously regulated, could adversely affect our development efforts by increasing compliance costs and causing delay. Demand for those products and services could also decline. 0

17 RISK FACTORS RISKS RELATING TO THE BUSINESS Our ten largest customers accounted for 0% of our revenues in 00, and most of our revenues come from telecommunications service providers. The loss of one or more key customers or reduced spending of these service providers could significantly reduce our revenues, profitability and cash flow. Our ten largest customers accounted for 0% of our revenues in 00. As service providers increase in size, it is possible that an even greater portion of our revenues will be attributable to a smaller number of large service providers going forward. Our existing customers are typically not obligated to purchase a certain amount of products or services over any period of time from us and may have the right to reduce, delay or even cancel previous orders. We, therefore, have difficulty projecting future revenues from existing customers with certainty. Although historically our customers have not made sudden supplier changes, our customers could vary their purchases from period to period, even significantly. Combined with our reliance on a small number of large customers, this could have an adverse effect on our revenues, profitability and cash flow. In addition, our concentration of business in the telecommunications service provider industry makes us extremely vulnerable to a downturn in spending in that industry, like the one that is developing in today s increasingly challenging economic environment. Service providers are planning cuts in their 00 capital expenditure budgets, and their reduced spending will have adverse effects on our results of operations. We have longterm sales agreements with a number of our customers. Some of these agreements may prove unprofitable as our costs and product mix shift over the lives of the agreements. We have entered into longterm sales agreements with a number of our large customers, and we expect that we will continue to enter into longterm sales agreements in the future. Some of these existing sales agreements require us to sell products and services at fixed prices over the lives of the agreements, and some require, or may in the future require, us to sell products and services that we would otherwise discontinue, thereby diverting our resources from developing more profitable or strategically important products. Since our new strategic plan entails a streamlined set of product offerings, it may increase the likelihood that we may have to sell products that we would otherwise discontinue. The costs incurred in fulfilling some of these sales agreements may vary substantially from our initial cost estimates. Any cost overruns that cannot be passed on to customers could adversely affect our results of operations. We have significant international operations and a significant amount of our revenues are made in emerging markets and regions. In addition to the currency risks described elsewhere in this section, our international operations are subject to a variety of risks arising out of the economy, the political outlook and the language and cultural barriers in countries where we have operations or do business. We expect to continue to focus on expanding business in emerging markets in Asia, Africa and Latin America. In many of these emerging markets, we may be faced with several risks that are more significant than in other countries. These risks include economies that may be dependent on only a few products and are therefore subject to significant fluctuations, weak legal systems which may affect our ability to enforce contractual rights, possible exchange controls, unstable governments, privatization actions or other government actions affecting the flow of goods and currency. We are required to move products from one country to another and provide services in one country from a base in another. Accordingly, we are vulnerable to abrupt changes in customs and tax regimes that may have significant negative impacts on our financial condition and operating results. 00 ANNUAL REPORT ON FORM 0F 0

18 RISK FACTORS LEGAL RISKS. LEGAL RISKS We are involved in lawsuits and investigations which, if determined against us, could require us to pay substantial damages, fines and/ or penalties. We are defendants in various lawsuits. These lawsuits against us include such matters as commercial disputes, claims regarding intellectual property, customer financing, product discontinuance, asbestos claims, labor, employment and benefit claims and others. We are also involved in certain investigations by government authorities. For a discussion of some of these legal proceedings and investigations, you should read Legal Matters in Section.0 of this annual report and Note to our consolidated financial statements included elsewhere in this document. We cannot predict the extent to which any of the pending or future actions will be resolved in our favor, or whether significant monetary judgments will be rendered against us. Any material losses resulting from these claims and investigations could adversely affect our profitability and cash flow. If we fail to protect our intellectual property rights, our business and prospects may be harmed. We also may receive such notices or claims when we attempt to license our intellectual property to others. Intellectual property litigation can be costly and timeconsuming and can divert the attention of management and key personnel from other business issues. A successful claim by a third party of patent or other intellectual property infringement by us could compel us to enter into costly royalty or license agreements or force us to pay significant damages and could even require us to stop selling certain products. Further, if one of our important patents or other intellectual property rights is invalidated, we may suffer losses of licensing revenues and be prevented from attempting to block others, including competitors, from using the related technology. Our largest joint venture, AlcatelLucent Shanghai Bell, has this type of requirement. However, we cannot predict whether any patents, issued or pending, will provide us with any competitive advantage or whether such patents will be challenged by third parties. We own 0% plus one share of AlcatelLucent Shanghai Bell, the remainder being owned by the Chinese government. If we do not receive the patents that we seek or if other problems arise with our intellectual property, our competitiveness could be significantly impaired, which would limit our future revenues and harm our prospects. We are subject to intellectual property litigation and infringement claims, which could cause us to incur significant expenses or prevent us from selling certain products. From time to time, we receive notices or claims from third parties of potential infringement in connection with products or services. 00 ANNUAL REPORT ON FORM 0F 0 We are involved in significant joint ventures and are exposed to problems inherent to companies under joint management. We have numerous French, U.S. and foreign patents and numerous pending patents. In addition, patent applications currently pending may not be granted. Intellectual property rights, such as patents, are vital to our business and developing new products and technologies that are unique is critical to our success. Our competitors also may attempt to design around our patents or copy or otherwise obtain and use our proprietary technology. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. We are involved in significant joint venture companies. The related joint venture agreements may require unanimous consent or the affirmative vote of a qualified majority of the shareholders to take certain actions, thereby possibly slowing down the decisionmaking process. Moreover, our competitors may already have applied for patents that, once issued, could prevail over our patent rights or otherwise limit our ability to sell our products. We are subject to environmental, health and safety laws that restrict our operations. Our operations are subject to a wide range of environmental, health and safety laws, including laws relating to the use, disposal and clean up of, and human exposure to, hazardous substances. In the United States, these laws often require parties to fund remedial action regardless of fault. Although we believe our aggregate reserves are adequate to cover our environmental liabilities, factors such as the discovery of additional contaminants, the extent of required remediation and the imposition of additional cleanup obligations could cause our capital expenditures and other expenses relating to remediation activities to exceed the amount reflected in our environmental reserves and adversely affect our results of operations and cash flows. Compliance with existing or future environmental, health and safety laws could subject us to future liabilities, cause the suspension of production, restrict our ability to utilize facilities or require us to acquire costly pollution control equipment or incur other significant expenses.

19 RISK FACTORS RISKS RELATING TO OWNERSHIP OF OUR ADSS. RISKS RELATING TO OWNERSHIP OF OUR ADSs The trading price of our ADSs may be affected by fluctuations in the exchange rate for converting euro into U.S. dollars. Fluctuations in the exchange rate for converting euro into U.S. dollars may affect the market price of our ADSs. If a holder of our ADSs fails to comply with the legal notification requirements upon reaching certain ownership thresholds under French law or our governing documents, the holder could be deprived of some or all of the holder s voting rights and be subject to a fine. French law and our governing documents require any person who owns our outstanding shares or voting rights in excess of certain amounts specified in the law or our governing documents to file a report with us upon crossing this threshold percentage and, in certain circumstances, with the French stock exchange regulator (Autorité des Marchés Financiers). If any shareholder fails to comply with the notification requirements: the shares or voting rights in excess of the relevant notification threshold may be deprived of voting power on the demand of any shareholder; all or part of the shareholder s voting rights may be suspended for up to five years by the relevant French commercial court; and the shareholder may be subject to a fine. Holders of our ADSs will have limited recourse if we or the depositary fail to meet obligations under the deposit agreement between us and the depositary. The deposit agreement expressly limits our obligations and liability and the obligations and liability of the depositary. Neither we nor the depositary will be liable despite the fact that an ADS holder may have incurred losses if the depositary: is prevented or hindered in performing any obligation by circumstances beyond our control; exercises or fails to exercise discretion under the deposit agreement; performs its obligations without negligence or bad faith; takes any action based upon advice from legal counsel, accountants, any person presenting our ordinary shares for deposit, any holder or any other qualified person; or relies on any documents it believes in good faith to be genuine and properly executed. This means that there could be instances where you would not be able to recover losses that you may have suffered by reason of our actions or inactions or the actions or inactions of the depositary pursuant to the deposit agreement. In addition, the depositary has no obligation to participate in any action, suit or other proceeding in respect of our ADSs unless we provide the depositary with indemnification that it determines to be satisfactory. We are subject to different corporate disclosure standards that may limit the information available to holders of our ADSs. As a foreign private issuer, we are not required to comply with the notice and disclosure requirements under the Securities Exchange Act of, as amended, relating to the solicitation of proxies for shareholder meetings. Although we are subject to the periodic reporting requirements of the Exchange Act, the periodic disclosure required of nonu.s. issuers under the Exchange Act is more limited than the periodic disclosure required of U.S. issuers. Therefore, there may be less publicly available information about us than is regularly published by or about most other public companies in the United States. Judgments of U.S. courts, including those predicated on the civil liability provisions of the federal securities laws of the United States in French courts, may not be enforceable against us. 0 An investor located in the United States may find it difficult to: effect service of process within the United States against us and our nonu.s. resident directors and officers; enforce U.S. court judgments based upon the civil liability provisions of the U.S. federal securities laws against us and our nonu.s. resident directors and officers in both the United States and France; and bring an original action in a French court to enforce liabilities based upon the U.S. federal securities laws against us and our nonu.s. resident directors and officers. Preemptive rights may not be available for U.S. persons. Under French law, shareholders have preemptive rights to subscribe for cash issuances of new shares or other securities giving rights to acquire additional shares on a pro rata basis. U.S. holders of our ADSs or ordinary shares may not be able to exercise preemptive rights for their shares unless a registration statement under the Securities Act of is effective with respect to such rights or an exemption from the registration requirements imposed by the Securities Act is available. We may, from time to time, issue new shares or other securities giving rights to acquire additional shares at a time when no registration statement is in effect and no Securities Act exemption is available. If so, U.S. holders of our ADSs or ordinary shares will be unable to exercise their preemptive rights. 00 ANNUAL REPORT ON FORM 0F

20 0 00 ANNUAL REPORT ON FORM 0F