This page is from the June 30, 2002 Lucent conference call
18. Special Purpose Entities (SPE’s)
SPE’s are what caused the demise of Enron. SPE’s give companies the ability to legally avoid showing certain debts and obligations on a companies consolidated financial statements. Lucent has SPE’s in existence for the ” sales and securitizations of receivables and in real estate financing arrangements”. Lucent goes on to mention that The Financial Accounting Standards Board (FASB) is currently reviewing these rules, and are considering the requirement to consolidate these SPE’s. Lucent identifies its exposure in the 10Q as the following :
A. adding $350M of long term notes receivable and debt obligations to the balance sheet. Lucent did not indicate whether the debt obligations would be short or long term in duration. One could assume the wording to mean long term , but if this is a concern to the reader, it should be independently verified.
B. there is what is called a synthetic lease that if consolidated would result in adding approximately $100 million of Land and Buildings and debt obligations to their balance sheet.
19. What is Lucent’s banking definition of Net Worth ? Lucent mentions in the 10Q that there are minimum net worth requirements that are defined under the credit facility. We discussed the covenants with Lucent. According to Lucent they are in compliance with the Credit Facility covenants in 3Q02. Here was their reply to our question.
In accordance with the February 22, 2001 8K:
The Credit Facilities contain financial covenants that require Lucent to have a minimum net worth and minimum earnings before interest, taxes, depreciation and amortization (EBITDA). The minimum net worth required is $23 billion. The calculation of the net worth covenant will exclude certain items, such as the financial statement accounting effects of the expected Agere IPO and expected Distribution referred to below, certain business restructuring charges, other nonrecurring expenses and gains, and accounting changes.
However, on June 13, 2002 Lucent filed an 8K which amends the definition of net worth:
Amendment to Section 1.01 of the Credit Agreement. (a) The definition of “Consolidated Net Worth” in Section 1.01 of the Credit Agreement is hereby amended by (i) deleting the word “or” at the end of clause (f) and substituting in lieu thereof a comma, (ii) deleting the period at the end of such definition and substituting in lieu thereof a comma and (iii) adding the following new clauses (h) and (i):
(h) any non-cash charges for establishing valuation allowances on deferred tax assets taken in accordance with Statement of Financial Accounting Standards Number 109 or (i) any non-cash charges for impairment of goodwill and other acquired intangible assets taken in accordance with Statement of Financial Accounting Standards Number 121 or 142.