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Technology Stocks : Lucent Technologies (LU) -- Ignore unavailable to you. Want to Upgrade?

To: Chuzzlewit who wrote (11966)	12/30/1999 2:49:00 PM
From: GVTucker	Read Replies (1) \| Respond to of 21876

I PM'd this to Chuzzlewit first, and he thought that it might benefit the board, so here goes: I have rarely seen a company as respected as Lucent put out a 10-K that is this unclear and difficult to follow. I just got around to reading the 10-K last night. The whole thing with the A/R and the QSPE is still unclear to me. I've reread note 13 to the financial statements a few dozen times, and I'm still not sure. The following part of the note seems self contradictory to me (forgive me for copying the note, as I'm sure you have read it a dozen times also): In September 1999, a subsidiary of Lucent sold approximately $625 of accounts receivable to a non-consolidated qualified special purpose entity ("QSPE") which, in turn, sold an undivided ownership interest in these receivables to entities managed by an unaffiliated financial institution. Additionally, Lucent transferred a designated pool of qualified accounts receivable of approximately $700 to the QSPE as collateral for the initial sale. Lucent's retained interest in the QSPE's designated pool of qualified accounts receivable has been included in Receivables. Lucent will continue to service.....the receivables on behalf of the purchaser. The impact of the above transaction reduced Receivables and increased cash flows from operating activities in the Consolidated Statements of Cash Flows by $600. It strikes me that what actually happened is that LU sold $625mm of receivables for $600mm cash that on paper was a non-recourse transaction. But it also strikes me that LU could lose some of their collateral if some of the $625mm isn't paid, which really makes the A/R that was 'sold' recourse. So although that A/R was sold for balance sheet purposes, there is still a risk to LU. Note that this isn't the end of LU's exposure to Saudi Arabia. Look at page 18 of the text, under Backlog. $1.63 billion of the $6.9 billion backlog is under a long term contract with Saudi Arabia, of which $840mm is scheduled to be delivered in the coming fiscal year. Odds are that if the Saudis fail to pay promptly here, either, they'll have to do the same thing, creating even more exposure here. Note also on page 22 of the text that Lucent has guaranteed customers' debt of $310mm and has committed to guarantee another $110mm of customer debt. I think that a lot of this may be associated with WCII. Another off balance sheet exposure to pay attention to; if WCII starts to have any problems, LU has exposure there. Also, in that same item, certain customers could potentially get delivery of $7.1 billion of equipment with rather uncertain credit terms, $1.6 of which has actually been delivered. I would think that this $1.6 b is in A/R, but I imagine that the terms aren't exactly net 30. My final note on A/R is that even though A/R increased by 41% (vs a 20% rise in revenues), LU actually DECREASED the allowance for doubtful accounts from $416mm to $362mm. If the allowance proportion increased at the same % of A/R (and I would argue that given the increased DSO, it should go up MORE than the same proportion), the allowance would be $586mm instead, a direct hit of $224mm to pretax income (4% of the pretax income).