Calculate and Decompose ROE into profit margin, asset turnover, return-on-assets, and financial leverage by quarter. Calculate the same-quarter to same-quarter change in Sales, Accounts Receivable, Inventory and Gross Margin. Evaluated management's explanation in the 8-k BEST Answer with CLEAR explanation and formatting gets the Credit

EXHIBIT 3 LUCENT TECHNOLOGIES Consolidated Balance Sheets For the Quarters Ended: Dec-99 Sep-99 Jun-99 Mar-99 Dec-98 Sep-98 Jun-98 Mar-98 Dec-97 Sep-97 Assets Cash $ 2,219 $ 1,816 $ 1,495 $ 792 $ 940 $ 685 $ 1,099 $ 969 $ 1,225 $ 1,350 Receivables 10, 143 10,438 9,486 8,752 9, 185 6,939 5,792 5,576 6,295 5,373 Less Allowance 381 362 393 349 346 390 374 369 344 352 Inventory 5,380 5,048 5, 179 4,332 3,778 3,081 2,973 2,874 2,604 2,926 Contracts in Process, net 1, 164 1, 103 1,338 1, 106 1,060 1,259 1,405 1,332 1,214 1,046 Deferred Taxes, net 1,504 1,583 1,784 1,632 1,620 1,623 1,554 1,477 1,469 1,333 Other Current Assets 1, 168 1,943 1,528 1, 160 768 491 482 481 449 473 Total Current Assets $ 21,578 $ 21,931 $ 20,810 $ 17,774 $ 17,351 $ 14,078 $ 13,305 $ 12,709 $ 13,256 $ 12,501 Property & Equipment (net) 6,986 6,847 6,257 5,751 5,645 5,403 4,957 4,805 4,729 5, 147 Accumulated Depreciation 7,693 7.445 7.274 6.935 6.886 6,382 6,253 6,132 6,121 6,407 Pre-paid Pension Costs 6,078 6,485 6337 6,210 6,068 3,754 3,597 3,462 3,322 3,172 Deferred Taxes, net 750 832 1,002 1,120 1,262 Capitalized Software Development Costs 506 470 412 346 306 298 289 279 246 293 Other Assets 3,486 3,002 3,340 2,759 2,271 2,437 2,299 2,407 2,079 1,436 Total Assets $ 38,634 $ 38,735 $ 37, 156 $ 32,840 $ 31,641 $ 26,720 $ 25,279 $ 24,664 $ 24,752 $ 23,811 Liabilities and Shareholders' Equity Accounts Payable $ 2, 162 $ 2,878 $ 2,705 $ 2,410 $ 2,468 $ 2,040 $ 1,727 $ 1,659 1,496 $ 1,931 Payroll and Benefit Liabilities 1,321 2,300 2,001 1,724 1,857 2,511 2,354 2,048 2, 178 2, 178 Post-retirement and Post-employment Benefit Liabilities 103 137 169 184 186 187 194 195 221 239 Debt Maturing within One Year 2,672 2,864 3,080 3, 185 3,763 2,231 2,423 1,898 1,757 2,538 Other Current Liabilities 3.659 3.599 4,001 4.059 4,167 3.459 3.498 3,618 4,310 3,852 Total Current Liabilities $ 9,917 $ 11,778 $ 11,956 $ 11,562 $ 12,441 $ 10,428 $ 10, 196 $ 9,418 $ 9,962 $ 10,738 Post-retirement and Post-employment Benefit Liabilities 6,013 6,615 6,533 6,471 6,413 6,380 6,286 6,249 6, 136 6,073 Long Term Debt 3,832 3,812 3,712 3,716 2,404 2,409 1,899 1,918 1,945 1,665 Other Liabilities 2,793 2,908 2,552 2,040 1,946 1,969 1,976 2,043 2,038 1,948 Total Liabilities 22,555 $ 25, 113 $ 24,753 $ 23,789 $ 23,204 $ 21, 186 $ 20,357 $ 19,628 $ 20,081 $ 20,424 Common Stock 32 31 $ 30 $ 27 13 13 13 $ 13 $ 6 $ 6 Additional Paid-in Capital 9,032 7,763 7,339 4,996 4,706 4,468 4,251 4,076 3,717 3,047 Guaranteed ESOP Obligations (30) (33) (34) (34) (49) (49) (63) (63) (77) (77) Retained Earnings 7,296 6, 105 5,240 4,384 3,565 1,364 1,028 1,314 1,298 602 Accumulated Other Comprehensive Income or Loss (251) (244) (172) (322) (198) (262) (307) (304) (273) (191) Total Shareholders Equity 16,079 $ 13,622 $ 12,403 9,051 $ 8,437 $ 5,534 $ 4,922 $ 5,036 $ 4,671 $ 3,387 CA CA Total Liabilities and Shareholders' Equity 38,634 $ 38,735 37, 156 32,840 $ 31,641 $ 26,720 25,279 $ 24,664 24,752 23,811EXHIBIT 4 LUCENT TECHNOLOGIES Consolidated Statements of Income* For the Quarters Ended: Dec-99 Sep-99 Jun-99 Mar-99 Dec-98 Sep-98 Jun-98 Mar-98 Dec-97 Sep-97 Total Revenues $ 9,905 9 10,575 $ 9,315 $ 8,220 $ 9,842 $ 8,574 $ 7,642 $ 6, 184 $ 8,724 $ 6,933 Cost of Sales 5,259 5,706 4,834 4,327 4,630 4,443 4,087 3,436 4,519 3,873 Gross Margin 4,646 4,869 4,481 3,893 5,212 4, 131 3,555 2,748 4,205 3,060 Selling, General and Administrative Expenses 1,908 2,251 1,984 1,902 1,937 1,972 1,673 1,501 1,555 1,608 Research and Development 978 1, 131 1, 141 1, 139 1,013 1,050 1,002 932 829 835 Total Operating Expenses 2,886 3,382 3, 125 3,041 2,950 3,022 2,675 2,433 2,384 2,443 Operating Income 1,760 1,487 1,356 852 2,262 1, 109 880 315 1,821 617 Other Income (Expense), net 66 92 19 (65) 116 (43) (17) 31 14 51 Interest Expense 98 114 119 95 78 71 63 58 79 72 Income Before Taxes 1,728 1,465 1,256 692 2,300 995 800 288 1,756 596 Income Tax Expense 553 493 427 235 777 348 282 102 632 227 Net Income $ 1,175 $ 972 $ 829 457 $ 1,523 $ 647 $ 518 $ 186 $ 1,124 $ 369 * Excludes one-time events and the cumulative effect of accounting changes EXHIBIT 5 Notes to Consolidated Financial Statements Supplementary Balance Sheet Information Dec-99 Sep-99 Jun-99 Mar-99 Dec-98 Sep-98 Jun-98 Mar-98 Dec-97 Sep-97 Inventories Finished Goods 3062.00 2946.00 2917.00 2281.00 1777.00 1578.00 1594.00 1463.00 1291.00 1611.00 Work in Process 2318.00 2102.00 2262.00 2051.00 2001.00 1503.00 1379.00 1411.00 1313.00 1315.00 Total Inventories 5380.00 5048.00 5179.00 4332.00 3778.00 3081.00 2973.00 2874.00 2604.00 2926.00uuuumu 1. Conduct a DuPont decomposition of Lucent's ROE by quarter. What factors contributed to the differences in Lucent's performance between those quarters? 2. Evaluate the seasonally adjusted change (i.e., quarter i in year t to quarter 1' in year H) in Lucent's: Sales, Accounts Receivable, Inventory and Gross Margin for the ve quarterly periods: December 1998 through December 1999. Be sure to include an evaluation of the Footnote disclosures regarding Lucent's inventories in your examination. Does the explanation for the earnings shortfall provided by Lucent's managers make sense in light of your analysis? 3. Based on your analysis: a) When might you have determined that Lucent would be unable to maintain its streak of record earnings? b) Do you think the classaction lawsuits have merit? c) Would you expect Lucent's earnings to 'recover' by the second quarter of 2000? What obstacles to Lucent's earnings recovery present themselves? AT&T spun off its research and development division (the former Bell Laboratories) in April of 1996, and the newly independent company - renamed Lucent Technologies - was an instant hit with investors. The company's stock became the most widely held in the United States, and over the following 3 years and 9 months its price increased 892%.1 This remarkable price appreciation tracked a series of steadily increasing earnings that exceeded analyst expectations. Lucent, in fact, had beaten those expectations in each of its 15 quarters of operations (Zacks, 2000). Lucent Technologies manufactures, sells and services voice and data communications systems and software. By the end of its scal-year 1999, Lucent generated over thirty-eight billion dollars in annual revenues, employed over 150,000 people, and had ofces in more than ninety countries worldwide. On October 26, 1999, Lucent issued a press release describing record earnings for both the quarter and the scal year ended September 30, 1999 (Lucent, 1999a). Lucent's revenues were up 23 percent, and earnings were up 50 percent from the fourth quarter of the previous year. For the scal year, Lucent's revenues and earnings were up 20 and 46 percent respectively. Lucent's chairman and CEO, Richard McGinn, described the results saying: "Lucent enters the new millennium with momentum. This was the strongest quarter and the strongest year in Lucent's history." The report of these record results was accompanied by another press release. This second announcement outlined a realignment of Lucent into "four core businesses." This realignment was, in the words of McGinn, ...intended to mirror the way we are approaching customers today - with converged network solutions. We are sharpening our focus on high-growth areas - such as data networking, optical networking, wireless semiconductors, e-business and professional services - while speeding our growth in international markets. And, we will also be aligning our management structure to increase productivity and accelerate our response to customer needs" (Lucent, 1999b). Over the ensuing days and weeks, Lucent's share price soared. Climbing steadily from $59 7/8 on October 25, 1999, it traded at prices over $82 during December 1999, and closed at $72 3/8 on January 5, 2000. On January 6, however, Lucent led a Form 8-K with the U.S. Securities and Exchange Commission. Form 8-Ks are used to report "material events," and Lucent's "event" was that rst quarter earnings for the quarter ended December 31, 1999 would be signicantly below expectations. Lucent reported that its revenue from Service Provider Networks was down 2%. A result, company executives said, that was caused by the domino effect of unanticipated customer shifts to new optical systems and the manufacturing deployment and capacity problems that ensued. Indeed, analysts estimated that Lucent lost up to $1 billion in sales because of production delays, delivery problems and cancelled orders during the quarter (Dow Jones, 1/20/00). EXHIBIT 1 LUCENT TECHNOLOGIES Selected Earnings Per Share Data For the Quarters Ended: Dec-99 Sep-99 Jun-99 Mar-99 Dec-98 Earnings Per Share 0.36 0.31 0.26 0.17 0.52 Analyst Expected Earnings Per Share 0.43 0.29 0.23 0.15 0.50 Difference (0.07) 0.02 0.03 0.02 0.02 % Surprise -16.28% 6.90% 13.04% 13.33% 5.00% Although Richard McGinn, said the company expected its problems to be resolved by the end of the second quarter, and Lucent's Chief Financial Officer, Don Peterson described the shortfall as a "bump in the road," (Burns, 1/27/00) the response of investors was harsh. The company's stock price fell from $72 3/8 to $52. Erasing in that single day, more than $80 billion in market capitalization and a year's worth of gains. Furthermore, a number of class action lawsuits were filed on behalf of investors who had purchased Lucent's stock between October 27, 1999 and January 6, 2000 (PRNewswire, 1/20/00). The suits claimed that Lucent violated Sections 10(b) and 20(a) of the Securities Act of 1934 by issuing a series of materially false and misleading statements that failed to disclose the weaker-than-expected performance in a timely fashion