11/20 16:23
Lucent Executives Said Some Sales Hurt Future Results (Update1)
By Justin Baer
Murray Hill, New Jersey, Nov. 20 (Bloomberg) -- Lucent Technologies Inc. inflated sales at the expense of future revenue for at least two years, the company's top executives said in sworn statements.
The company recorded sales to customers such as BellSouth Corp. before orders were placed and billed others for unshipped goods in fiscal 1999 and 2000, the executives said in depositions.
The statements by Chairman Henry Schacht, former finance chief Deborah Hopkins and 12 others suggest how Lucent spurred its growth during the telecommunications boom of the late 1990s to satisfy investors. This helped the biggest U.S. maker of telephone equipment increase sales 26 percent in 1999, propelling its market value to more than $230 billion and fueling an acquisition spree.
``Lucent became intoxicated with Wall Street's expectations,'' Schacht said in a deposition taken in November 2001 for a lawsuit by Nina Aversano, Lucent's former head of North American sales. Aversano claims she was fired by Lucent for saying its financial forecasts were flawed and sued under New Jersey's whistleblower law. A trial is slated for January in Middlesex County Superior Court.
In an interview, Schacht said his statements were taken out of context by Aversano's attorneys.
``We will have our day in court,'' Schacht said. ``The transactions that I described at the time are appropriate business practices as long as they are properly accounted for.''
No More Borrowing
Schacht said in his speech and deposition that he was told of the extent of the company's ``gap filling'' only in the two weeks after he returned in October 2000.
Once he put an end to the practices, Lucent had no way of making up the sales it borrowed in previous quarters or the profit lost to discounting. In January 2001, it had a 26 percent drop in fiscal-first quarter sales to $5.84 billion and a $395 million loss. The company's shares have lost about 98 percent of their value since then.
Lucent's practices were ``increasingly jeopardizing the longer-term health of the company,'' Schacht said in his deposition, which was unsealed with those of other executives in August.
Schacht said today that the company's own review of its sales transactions showed that many of the concerns Lucent executives expressed to him were unfounded.
``I was grateful to see their concerns had not become reality,'' he said. ``We determined that the instances were fortunately limited, and in only one case was there inappropriate behavior.''
Lucent, spun off from AT&T Corp. in 1996, has said it broke some accounting rules and reported the violations to the Securities and Exchange Commission. The agency, which is investigating the company's accounting, declined to comment.
Shares of Lucent rose 4 cents to $1.24 at 4:00 p.m. in New York Stock Exchange composite trading.
Recording Sales
Securities rules let companies and industries establish guidelines for recording sales, so long as they explain in regulatory filings how future results may be affected, former SEC officials and accounting professors said. For example, companies that lend customers money to buy their products must say they may never collect if those customers go bankrupt.
``The bedrock is full disclosure,'' said Ira Sorkin, former director of the SEC's New York office and now a securities lawyer at Carter Ledyard & Milburn.
Lucent didn't tell investors about practices such as ``pull- ups'' when it recorded revenue in the current quarter for orders scheduled for future periods, in fiscal 1999 and 2000 filings, Schacht said during his deposition.
``This is really a pretty clean case of violating the rules for reporting income,'' said Duke University School of Law professor James Cox, who has advised the New York Stock Exchange and the National Association of Securities Dealers.
Lucent didn't disclose the practices because they didn't alter sales significantly, sacrifice future results or violate the company's own revenue recognition policies, Schacht said today.
``Our disclosures were accurate,'' he said in the interview.
Filling the Gap
By late 2000, Lucent's dependency on what Schacht called ``gap-filling'' had increased.
``Gap-filling became a way of life,'' Schacht said in a Nov. 8, 2000, closed-door speech to Lucent officers. ``The gamble of pulling business forward betting that the new businesses would fill in the gap created didn't work.'' A transcript of the speech was made public along with the depositions.
Deborah Hopkins, chief financial officer until May 2001, said in a deposition that in the two years before September 2000 the company had been ``pulling up,'' or giving customers incentives to order products sooner than they had planned.
In one case in late fiscal 2000, Lucent agreed to sell BellSouth $75 million of software during the next 12 months. A so- called software pool would let Lucent book the entire sum immediately, and allow BellSouth to put off paying until it decided what to buy.
``My teams have done numerous software pools and we have not had trouble getting revenue recognition,'' Lucent sales executive Carole Spurrier wrote in the e-mail to former Chief Executive Officer Richard McGinn, Hopkins and Aversano released with the other documents.
Schacht said today that Lucent generated very little revenue in 1999 or 2000 through software pools or so-called bill-and-hold arrangements, in which the company booked sales of unshipped products.
BellSouth spokesman Jeff Battcher said his company has discussed its contracts with Lucent and other suppliers with the SEC, and the telephone company's accounting was proper.
Schacht, who first led Lucent during its 1996 spin off, was reappointed CEO after he and fellow directors fired McGinn in October 2000. He ceded the CEO post to Patricia Russo last January.
Under questioning by Aversano's lawyer, Schacht said the board had asked McGinn as early as January 2000 whether he was ``trying to run the business as a rate that it was not capable of achieving.''
By the time he gathered Lucent's executives in November 2000 for a two-day retreat at a hotel in Parsippany, New Jersey, Schacht offered an answer.
``What has happened to us, '' he said, ``is that our execution and processes have broken down under the white-hot heat of driving for quarterly revenue growth.''
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