2008 Annual Report on Form 20-F

2008

ANNUAL REPORT ON FORM 20-F

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

ËË

OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR

ËË

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-11130

(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)

54, rue La Boétie
75008 Paris, France

(Address of principal executive offices)

Rémi Thomas
Telephone Number 33 (1) 40 76 10 10 Facsimile Number 33 (1) 40 76 14 00
54, rue La Boétie
75008 Paris, France

(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

American Depositary Shares, each representing one ordinary share,
New York Stock Exchange nominal value €2 per share*

* 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 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(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.

2,318,041,761 ordinary shares, nominal value €2 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

^YesË

^NoË

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 13 or 15(d) of the Securities Exchange Act of 1934.

^YesË

^NoË

Note — checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

^YesË

^NoË

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Non-accelerated filer

^{Large accelerated filer}Ë

^{Accelerated filer}Ë

Ë

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 17}Ë

^{Item 18}Ë

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

^YesË

^NoË

SELECTED FINANCIAL DATA

1.1 Condensed consolidated income statement

5

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

6.1 Overview of 2008 . . . . . . . . . . . . . . . . . . . . . . . . . .54

12
6

47

and balance sheet data. . . . . . . . . . . . . . . . . . . . . . ⁶

1.2 Exchange rate information . . . . . . . . . . . . . . . . . . 7
6.2 Consolidated results of operations

for the year ended December 31, 2008 compared to the year ended

ACTIVITY OVERVIEW

9

December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . .⁵⁶
2.1 Carrier Segment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.2 Enterprise Segment. . . . . . . . . . . . . . . . . . . . . . . . .10 2.3 Services Segment . . . . . . . . . . . . . . . . . . . . . . . . . .10
6.3 Results of operations by business segment for the year ended December 31, 2008 compared to the year ended December 31, 2007. . . . . . . . .⁵⁹

6.4 Consolidated results of operations for the year ended December 31, 2007 compared to the year ended

RISK FACTORS

11

34

3.1 Risks relating to the business . . . . . . . . . . . . . . . .11 3.2 Legal risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 3.3 Risks relating to ownership of our ADSs . . . . . . .17
December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . .⁶²
6.5 Results of operations by business segment for the year ended December 31, 2007 compared to the year ended December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . .⁶⁵

INFORMATION ABOUT THE GROUP

4.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

19

6.6 Liquidity and capital resources . . . . . . . . . . . . . . .67 6.7 Contractual obligations and off-balance sheet contingent commitments. . . . . . . . . . . . . . . . . . . .⁷⁰
4.2 History and development. . . . . . . . . . . . . . . . . . . .20 4.3 Structure of the principal companies consolidated in the Group as of
6.8 Outlook for 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . .74 6.9 Qualitative and quantitative disclosures about market risk . . . . . . . . . . . . . . . . . . . . . . . . . .⁷⁵
December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . .²⁴
4.4 Real estate and equipment . . . . . . . . . . . . . . . . . .25
6.10 Legal matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76

6.11 Research and Development – expenditures . . . .80

DESCRIPTION OF THE GROUP’S

ACTIVITIES

29

5

CORPORATE GOVERNANCE

83

5.1 Business organization. . . . . . . . . . . . . . . . . . . . . . .29 5.2 Carrier Segment. . . . . . . . . . . . . . . . . . . . . . . . . . . .30 5.3 Enterprise Segment. . . . . . . . . . . . . . . . . . . . . . . . .34 5.4 Services Segment . . . . . . . . . . . . . . . . . . . . . . . . . .35 5.5 Marketing and distribution of our products . . . .36 5.6 Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 5.7 Technology, Research and Development . . . . . .37 5.8 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . .38 5.9 Sources and availability of materials . . . . . . . . . .39 5.10 Seasonality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 5.11 Our activities in certain countries . . . . . . . . . . . . .39 5.12 Environmental matters. . . . . . . . . . . . . . . . . . . . . .39 5.13 Human Resources . . . . . . . . . . . . . . . . . . . . . . . . . .40

7

7.1 Governance code. . . . . . . . . . . . . . . . . . . . . . . . . . .83 7.2 Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .86 7.3 Powers of the Board of Directors . . . . . . . . . . . . .93 7.4 Committees of the Board . . . . . . . . . . . . . . . . . . . .95 7.5 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98 7.6 Statement of business principles and Code of ethics . . . . . . . . . . . . . . . . . . . . . . . . . ¹⁰⁹

7.7 Regulated agreements, commitments and related party transactions . . . . . . . . . . . . . . ¹⁰⁹

7.8 Major Differences between our Corporate
Governance Practices and NYSE Requirements ¹¹¹

7.9 Operating Rules of the Board of Directors. . . . . 111

2008 ANNUAL REPORT ON FORM 20-F

2

INFORMATION CONCERNING OUR CAPITAL
CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2008 151

8

12

115

8.1 Share capital and voting rights . . . . . . . . . . . . . . 115 8.2 Diluted capital at December 31, 2008 . . . . . . . . 115 8.3 Delegations of authority and authorizations . . 116 8.4 Use of authorizations . . . . . . . . . . . . . . . . . . . . . . 117 8.5 Changes in our capital over the last five years 118
Report of independent registered public accounting firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¹⁵²

Consolidated income statements . . . . . . . . . . . . . . . . . 153 Consolidated balance Sheets. . . . . . . . . . . . . . . . . . . . . 154 Consolidated statements of cash flows. . . . . . . . . . . . 155 Consolidated statements of recognized income and expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¹⁵⁶
8.6 Purchase of Alcatel-Lucent shares by the company. . . . . . . . . . . . . . . . . . . . . . . . . . . ¹¹⁹
Consolidated statements of changes in shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . ¹⁵⁷
8.7 Outstanding Instruments giving right to shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¹²⁰
Notes to Consolidated Financial Statements. . . . . . . . 158

STOCK EXCHANGE AND SHAREHOLDING

9

123

9.1 Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 9.2 Trading over the last five years. . . . . . . . . . . . . . 124 9.3 Shareholder profile . . . . . . . . . . . . . . . . . . . . . . . . 126 9.4 Breakdown of capital and voting rights . . . . . . 126 9.5 Changes of shareholdings . . . . . . . . . . . . . . . . . . 129 9.6 Shareholders’ General Meeting. . . . . . . . . . . . . . 130 9.7 Trend of dividend per share over 5 years . . . . . 131

ADDITIONAL INFORMATION

10.1 Legal information . . . . . . . . . . . . . . . . . . . . . . . . . 133

133

10 11

10.2 Specific provisions of the by-laws and of law. . 133 10.3 American Depositary Shares, taxation and certain other matters . . . . . . . . . . . . . . . . . . ¹³⁸

10.4 Documents on display . . . . . . . . . . . . . . . . . . . . . 142

CONTROLS AND PROCEDURES, STATUTORY AUDITORS’ FEES

AND OTHER MATTERS

143

11.1 Controls and procedures . . . . . . . . . . . . . . . . . . . 143 11.2 Report of independent registered public accounting firms . . . . . . . . . . . . . . . . . . . . . . . . . . ¹⁴⁴

11.3 Statutory auditors . . . . . . . . . . . . . . . . . . . . . . . . . 145 11.4 Statutory auditors’ fees . . . . . . . . . . . . . . . . . . . . 145 11.5 Audit Committee financial expert. . . . . . . . . . . . 146 11.6 Code of Ethics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 11.7 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 147 11.8 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 11.9 Cross-reference table between Form 20-F and this document. . . . . . . . . . . . . . . . . . . . . . . . . ¹⁴⁸

3

4

CONTENTS
1

2

SELECTED FINANCIAL DATA

1

345

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. telecommunications services. In January 2007, the transportation and security activities were contributed to Thales, and in April 2007, we completed the sale of our ownership interests in the two joint ventures in the space sector.

6

As a result of the Lucent transaction, our 2006 consolidated financial results include (i) 11 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 2004, 2005 and 2006 financial results pertaining to the businesses transferred to Thales are treated as discontinued operations. Further, our 2005 and 2006 financial results take into account the effect of the change in accounting policies on employee benefits with retroactive effect from January 1, 2005 and our 2006 and 2007 financial results take into account the effect of the application of the interpretation IFRIC 14 with retroactive effect from January 1, 2006, as described in the section “Changes in accounting standards as of January 1, 2008” and in Note 4 of our consolidated financial statements included elsewhere in this document.

789
10 11 12

On November 30, 2006, historical Alcatel and Lucent Technologies Inc., since renamed Alcatel-Lucent USA Inc. (“Lucent”), completed a business combination pursuant to which Lucent became a wholly owned subsidiary of Alcatel. On December 1, 2006, 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 mission-critical systems not dedicated to operators or suppliers of
As a result of the purchase accounting treatment of the Lucent business combination required by IFRS, our results for 2008, 2007 and 2006 included several negative, non-cash impacts of purchase accounting entries.

5

SELECTED FINANCIAL DATA

CONDENSED CONSOLIDATED INCOME STATEMENT AND BALANCE SHEET DATA

1

CONTENTS
1

23

1.1 CONDENSED CONSOLIDATED INCOME STATEMENT
AND BALANCE SHEET DATA

4

For the year ended December 31,

5

(in millions, except per share data)

Income Statement Data

Revenues

2008⁽¹⁾

2008

2007

2006

2005

2004

€ 10,263

6

23,640

€ 16,984

€ 17,792

€ 12,282

€ 11,219

Income (loss) from operating activities before restructuring costs, impairment of assets, gain/ (loss) on disposal of consolidated entities and postretirement plan amendments

7

(77)
(782)
(56)
(562)
(707) (856)
687
(707) (146) (219)
(61)
1,016
(79)
1,003 (313)
602

8

Restructuring costs Income (loss) from operating activities Income (loss) from continuing operations Net income (loss)
(7,381) (7,246) (7,200)
(5,303) (5,206) (5,173)
(4,249) (4,087) (3,477)
1,066

855

431

9

963

645

Net income (loss) attributable to equity holders of the parent

10 11 12

(7,259)

(5,215)

(3,518)

(106)

922

576

Earnings per Ordinary Share

Net income (loss) (before discontinued operations) attributable to the equity holders of the parent per share ••basic⁽²⁾diluted⁽³⁾

$(3.23)

(2.32)

(1.83)

(0.18)

(0.18)
0.16
0.59 0.59 0.16 0.16
0.27

$(3.23)

(2.32)

(1.83)

0.26

Dividend per ordinary share⁽⁴⁾Dividend per ADS⁽⁴⁾
--
--
--
-

-

0.16

At December 31,
2007

(in millions)

2008⁽¹⁾

2008

2006

2005

2004

Balance Sheet Data

Total assets

U.S. $ 38,015

6,393
€ 27,311
4,593
€ 33,830
5,271 4,565
483
€ 41,890
5,994
€ 21,346
5,150
€ 20,629

5,163

Marketable securities and cash and cash equivalents

Bonds, notes issued and other debt – Long-term part Current portion of long-term debt Capital stock

5,565

3,998

5,048

2,752

3,491

1,527

1,097

1,161

1,046

1,115

6,453

4,636

4,635

4,619

2,857

2,852

Shareholders’ equity attributable to the equity

holders of the parent after appropriation⁽⁵⁾

6,448

823
4,633
591
11,187
515
15,467
495
5,911
475
4,913

373

Minority interests

(1) Translated solely for convenience into dollars at the noon buying rate of € 1.00 = U.S. $ 1.3919 on December 31, 2008. (2) 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 31, without adjustment for any share equivalent: – ordinary shares: 2,259,174,970 in 2008; 2,255,890,753 in 2007; 1,449,000,656 in 2006; 1,367,994,653 in 2005 and 1,349,528,158 in 2004 (including 120,780,519 shares related to bonds mandatorily redeemable for ordinary shares).
(3) 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 after-tax 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: 2,259,174,970 in 2008; 2,255,890,753 in 2007; 1,449,000,656 in 2006; 1,376,576,909 in 2005 and 1,362,377,441 in 2004.
(4) 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 2008 at our Annual Shareholders’ Meeting to be held on May 29, 2009.
(5) Amounts presented are net of dividends distributed. Shareholders’ equity attributable to holders of the parent before appropriation are € 4,633 million, € 11,187 million, € 15,828 million,
€ 6,130 million and € 4,913 million as of December 31, 2008, 2007, 2006, 2005 and 2004 respectively and dividends proposed or distributed amounted to € 0 million, € 0 million, € 370 million, € 219 million and € 0 million as of December 31, 2008, 2007, 2006, 2005 and 2004 respectively.