The lawsuit accompanies a 23% fall in stock value after the company warned investors last week that its first quarter profits would fall below analysts' estimates. Lucent expects to report earnings of between $0.36 and $0.39 per share, well below Wall Street forecasts of $0.54 per share. Price per share plummeted on Friday from 69 to a low of 53 3/16, recovering to hover around 57 for the first half of this week.
The lawsuit charges Lucent and certain of its directors and executive officers with violations of the Securities Exchange Act of 1934 and Rule 10b-5. According to Bernstein Liebhard & Lifshitz, the complaint alleges that "the defendants issued materially false and misleading information and failed to disclose material information concerning the company's deteriorating financial condition, the lack of demand for the company's products, its inability to control costs and maintain profit margins, and the effects these adverse undisclosed conditions would ultimately have on the company's operations, liquidity, and stock price." As a result of these misrepresentations and omissions, the complaint maintains, the price of Lucent's common stock was artificially inflated throughout the class period.
However, Lucent chairman and chief executive officer Rich McGinn cited unprecedented demand for optical equipment as a major reason for the company's shortfall. "We saw faster-than-expected shifts in customer purchases to our newest 80-channel optical product line and greater-than-expected demand for the OC-192 interfaces on that system," says McGinn. "This resulted in near-term capacity and deployment constraints; we could not meet demand as that shift took place. We also had manufacturing capacity constraints on our fiber-optic business and our optical components business because demand was so high."
The company accepted responsibility for current losses, but is confident that the problem is only short-term. "We did not execute the way we wanted to," acknowledges McGinn. "Therefore, in this quarter we will be making significant investments to ramp up our manufacturing capacity and technical resources," which will impact Lucent's bottom line in the second quarter. The company does expect to see recovery and significant growth in the second half of the year when the optical products are fully ramped and in production.
Steven Levy, analyst for Lehman Bros., gives Lucent management the benefit of the doubt. "I don't think that anybody purposely misled me," he asserts. "I think that what's happened is systemic of a situation when you're trying to grow a little bit faster than the company's natural growth rate; you lose a little control, you lose some visibility, and you become vulnerable to small bumps in the road. I think all of that conspired to lead to the problem."
Levy says that analysts will be watching Lucent's next steps closely, and notes that the optical equipment rollouts cited by McGinn will be important to the company's future. "We will be monitoring Lucent's ability to get through this manufacturing/production/product rollout of some of the new optical stuff, because that is a very, very exciting marketplace," says Levy. "If the company isn't able to turn it around quickly, there could be some lingering market share loss."
Shareholders who purchased or acquired Lucent securities during the class period and lost money or still hold the stock may join in the suit by filing appropriate papers no later than March 7, 2000.
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