AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 11, 2002
REGISTRATION NO. 333-81632
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
AGERE SYSTEMS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 3674 22-3746606
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
555 UNION BOULEVARD
ALLENTOWN, PENNSYLVANIA 18109
(610) 712-4323
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JEAN F. RANKIN, ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
AGERE SYSTEMS INC.
555 UNION BOULEVARD
ALLENTOWN, PENNSYLVANIA 18109
(610) 712-4323
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
WILLIAM J. WHELAN, III, ESQ. JEREMIAH L. THOMAS, III, ESQ. RAYMOND B. CHECK, ESQ.
CRAVATH, SWAINE & MOORE SIMPSON THACHER & BARTLETT CLEARY, GOTTLIEB, STEEN & HAMILTON
WORLDWIDE PLAZA 425 LEXINGTON AVENUE ONE LIBERTY PLAZA
825 EIGHTH AVENUE NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10006-1470
NEW YORK, NEW YORK 10019 (212) 455-2000 (212) 225-2000
(212) 474-1000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
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% Senior Subordinated Notes due 2007...
Put Rights..................................
Total....................................... $200,000,000 $18,400(2)
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) of the Securities Act.
(2)Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MARCH 11, 2002
PROSPECTUS
[AGERE LOGO]
$200,000,000 % SENIOR SUBORDINATED NOTES DUE 2007
AND
PUT RIGHTS
------------------------
The notes will bear interest at the rate of % per year. Interest on
the notes is payable on January 15 and July 15 of each year, beginning on July
15, 2002. The notes will mature on July 15, 2007. We may redeem the notes in
whole but not in part at any time pursuant to a make-whole provision described
under "Description of Notes -- Optional Redemption."
The notes and the put rights will be unsecured senior subordinated
obligations and will be subordinated in right of payment to all our existing and
future senior debt, including our bank debt.
On July 15, 2007, or on an earlier date if accelerated, Agere Systems Inc.
will pay the holder of a put right the amount, if any, by which $ , as
adjusted for any dilutive events, exceeds the average closing or sale price of a
share of Agere Class A common stock during the 20-trading day period preceding
such date.
------------------------
INVESTING IN THE NOTES AND THE PUT RIGHTS INVOLVES RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PER NOTE AND
PUT RIGHTS TOTAL
------------ --------
Public Offering Price....................................... $ $
Purchaser Discount.......................................... $ -- $ --
-------- --------
Proceeds to Agere Systems Inc. ............................. $ $
Interest on the notes will accrue from , 2002.
------------------------
We expect to deliver the securities to the purchaser on or about
, 2002.
------------------------
, 2002
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS.
---------------------
TABLE OF CONTENTS
PAGE
----
Industry Data............................................... i
Forward-Looking Statements.................................. ii
Summary..................................................... 1
Risk Factors................................................ 8
Use of Proceeds............................................. 22
Capitalization.............................................. 23
Selected Financial Information.............................. 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 26
Business.................................................... 49
Management.................................................. 67
Arrangements Between Lucent and Our Company................. 86
Principal Stockholders...................................... 100
Certain Indebtedness........................................ 101
Description of Notes........................................ 103
Description of Put Rights................................... 150
Description of Common Stock................................. 156
Material Federal Income Tax Consequences.................... 165
Plan of Distribution........................................ 169
Legal Matters............................................... 169
Experts..................................................... 169
Where You Can Find More Information......................... 169
Index to Financial Statements............................... F-1
---------------------
This prospectus contains trademarks, service marks and registered marks of Agere
Systems Inc.
"SHARCS" is a service mark of Salomon Smith Barney Inc.
---------------------
INDUSTRY DATA
In this document, we rely on and refer to information regarding the
semiconductor market and its segments and competitors from (1) Gartner Dataquest
Alert: Communications Semiconductor and Optical Component Market Share in 2000,
issued on June 11, 2001, (2) Gartner, Wireless Communications Semiconductor
Competitive Market Shares for 2000, issued on August 29, 2001, (3) Gartner,
Wired Communications Semiconductor and Optical Component Market Share, 2000,
issued on July 13, 2001, (4) analyst reports and (5) other publicly available
sources. Gartner Dataquest is not aware of, and has not consented to, being
named in this document. Although we believe that this information is reliable,
we have not independently verified the accuracy and completeness of this
information.
i
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on
current expectations, estimates, forecasts and projections about the industry in
which we operate, management's beliefs and assumptions made by management. Such
statements include, in particular, statements about our plans, strategies and
prospects under the headings "Summary," "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve risks, uncertainties and assumptions which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. We do not have any intention or obligation to update publicly any
forward-looking statements after we distribute this prospectus, whether as a
result of new information, future events or otherwise.
The assumptions underlying the information on our market segments and
product areas have been derived from information currently available to us. If
any one or more of these assumptions are incorrect, actual market results may
differ from those we expect. While we do not know what impact any such
differences may have on our businesses, our future results of operations and
financial condition may be materially adversely affected. In addition, we
generally cannot assure you that the forward-looking information regarding our
market segments and product areas will be achieved, whether or not the
assumptions are correct. Conditions in our industry change rapidly and such
information must be continually evaluated in light of then current conditions.
For a description of recent changes in conditions in our industry, please see
"Risk Factors -- Risks Related to Our Business -- The demand for products in our
industry has recently declined, and we cannot predict the duration or extent of
this trend."
ii
SUMMARY
The following is a summary of some of the information contained in this
prospectus. In addition to this summary, we urge you to read the entire
prospectus carefully, especially the risks of investing in our notes discussed
under "Risk Factors" and our combined and consolidated financial statements and
notes to our combined and consolidated financial statements included elsewhere
in this prospectus.
We describe in this prospectus the businesses contributed to us by Lucent
Technologies Inc. as part of our separation from Lucent as if they were our
businesses for all historical periods prior to Lucent's contribution to us of
the assets and liabilities related to those businesses, which began on February
1, 2001. Please see "Arrangements Between Lucent and Our Company" for a
description of this separation. Our historical financial results as part of
Lucent contained in this prospectus may not reflect our financial results in the
future as a stand-alone company or what our financial results would have been
had we been a stand-alone company during the periods presented. Our fiscal year
ends on September 30.
AGERE SYSTEMS
OUR COMPANY
Agere Systems designs, develops and manufactures integrated circuits for
use in a broad range of communications and computer systems and optoelectronic
components for communications networks. We are the world leader in sales of
communications components, which include both integrated circuits and
optoelectronic components. Communications components are basic building blocks
of electronic and photonic products and systems for terrestrial and submarine,
or undersea, communications networks and for communications equipment.
As of December 31, 2001, we employed approximately 12,600 people worldwide.
We have major research and development and manufacturing sites in the United
States, Mexico, Singapore and Thailand. We had revenue of $537 million, a net
loss of $375 million, net cash used in operating activities of $344 million and
EBITDA, on an adjusted basis, of $(182) million for the three months ended
December 31, 2001. We had revenue of $4,080 million, a net loss of $4,616
million, net cash provided by operating activities of $269 million and EBITDA,
on an adjusted basis, of $(96) million in fiscal 2001. EBITDA equals operating
income (loss) plus depreciation and amortization expense. Adjusted EBITDA equals
EBITDA plus purchased in-process research and development, restructuring and
separation charges and impairment of goodwill and other acquired intangibles.
EBITDA is not intended to represent cash flow or any other measure of
performance or liquidity in accordance with generally accepted accounting
principles. EBITDA is included here because we believe that you may find it to
be a useful analytical tool. Other companies may calculate EBITDA differently,
and we cannot assure you that our figures are comparable with similarly-titled
figures for other companies.
Effective October 1, 2001, we realigned our business operations into two
market-focused groups, Infrastructure Systems and Client Systems, that target
the network equipment and consumer communications markets, respectively. Each of
these two groups is a reportable operating segment.
The Infrastructure Systems segment is comprised of our former
optoelectronics segment and portions of our former integrated circuits segment
and facilitates the convergence of products from these businesses as we address
markets in high-speed communications systems. We have consolidated research and
development, as well as marketing, for optoelectronic and integrated circuit
devices aimed at communications systems. This more effectively allows us to
design, develop and deliver complete, interoperable solutions to equipment
manufacturers for advanced enterprise, access, metropolitan, long-haul and
undersea applications. Our Infrastructure Systems segment generated revenue of
$263 million and $2,674 million for the three months ended December 31, 2001 and
the year ended September 30, 2001, respectively.
1
The Client Systems segment consists of the remainder of our former
integrated circuits segment and includes our wireless data, computer
communications, storage and wireless terminal solutions products. This segment
delivers semiconductor solutions for a variety of end-user applications such as
modems, Internet-enabled cellular terminals and hard-disk drives for computers
as well as software, systems and wireless local area network solutions through
the ORiNOCO(TM) product family. Our Client Systems segment generated revenue of
$274 million and $1,406 million for the three months ended December 31, 2001 and
the year ended September 30, 2001, respectively.
We sell integrated circuits for use in a broad range of communications
networks and computer equipment. Integrated circuits, or chips, are made using
semiconductor wafers imprinted with a network of electronic components. They are
designed to perform various functions such as processing electronic signals,
controlling electronic system functions and processing and storing data.
We also sell active optoelectronic components to manufacturers of
communications equipment. Optoelectronic components transmit, process, change,
amplify and receive light that carries data and voice traffic over optical
networks. Optical networks transmit information as pulses of light, or optical
signals, through optical fibers, which are hair-thin glass strands. An optical
network utilizes a number of interdependent active optoelectronic and passive
optical components. An active component is a device that has both optical and
electronic properties. A passive component is a device that functions only in
the optical domain. In addition to our broad portfolio of active optoelectronic
components, we have started to sell some passive components.
OUR RELATIONSHIP WITH LUCENT
Agere was formed as part of Lucent Technologies' plan to spin-off to its
stockholders its microelectronics business, including its integrated circuits
and optoelectronics divisions. Our Class A common stock began trading on the New
York Stock Exchange following our initial public offering in April 2001. The
separation of our business from Lucent's other businesses was substantially
completed, including the transfer of all assets and liabilities related to these
divisions (other than pension and postretirement plan assets and liabilities,
which have yet to be transferred) when we completed our initial public offering.
As of December 1, 2001, Lucent owned 100% of our outstanding Class B common
stock and 37 million shares of our Class A common stock, which together
represented approximately 84.2% of the combined voting power of both classes of
our voting stock with respect to the election and removal of directors and
approximately 57.8% of the voting power of our outstanding common stock with
respect to all other matters. Lucent has announced that it remains committed to
completing the process of separating Agere from Lucent, and it intends to move
forward with its distribution of its shares of our common stock in a tax-free
spin-off to its stockholders. However, Lucent's credit agreement includes
conditions that must be satisfied before Lucent can distribute its Agere stock
to its stockholders, and, even if the conditions were met, we cannot assure you
that Lucent will complete the spin-off by a particular date or at all. One of
the requirements that Lucent must meet in order to complete the spin-off is that
Lucent have generated positive EBITDA, as defined in Lucent's credit agreement,
for the fiscal quarter immediately preceding the distribution. Lucent announced
on February 14, 2002 that it intends to use its results from its quarter ending
March 31, 2002, to meet this requirement, but that the current market introduces
a degree of uncertainty about the timing of the spin-off. The issuance of the
notes and the put rights will not affect Lucent's ability to effect the
spin-off. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview -- Separation from Lucent" and "Arrangements
Between Lucent and Our Company" for further information about our spin-off as a
fully independent company.
2
THE OFFERING
We are offering $200 million aggregate principal amount of notes and
put rights at an aggregate price of $ per combination of note
and put rights.
Issuer........................ Agere Systems Inc.
Purchaser..................... SHARCS Trust I, a newly created Delaware
business trust, will purchase all the notes and
put rights from us. The trust has advised us
that:
- it will also purchase shares of our Class A
common stock in private transactions or in
the open market;
- it will issue SHARCS (Shared Appreciation
Redeemable Convertible Securities) which are
securities that represent all of the
beneficial interest in the trust; and
- holders of SHARCS will have the right upon
the occurrence of certain events to exchange
their SHARCS prior to the 25(th) business day
prior to the maturity of the notes for the
underlying notes and shares of common stock.
This prospectus is not an offer to sell the
SHARCS. The trust has filed a registration
statement with the Securities and Exchange
Commission relating to the SHARCS.
Use of Proceeds............... We estimate that the proceeds from this
offering, net of discounts and expenses of this
offering, will be approximately $
million. We intend to use approximately 50% of
the net proceeds to repay short-term debt under
our credit facility and the balance for general
corporate purposes.
NOTES:
Notes offered................. $200 million aggregate principal amount of
% Senior Subordinated Notes due 2007.
Maturity...................... July 15, 2007.
Interest payment dates........ January 15 and July 15 of each year, commencing
July 15, 2002.
Optional Redemption........... The notes will be redeemable in cash, at our
option, at any time in whole, but not in part,
at a price equal to the greater of:
- 100% of their principal amount plus accrued
interest to the date of redemption; and
- the sum of the present values of the
remaining scheduled payments of principal and
interest thereon discounted, on a semi-annual
basis, at the treasury rate plus basis
points, plus accrued interest to the date of
redemption.
Ranking....................... The notes will be our unsecured senior
subordinated obligations. The notes will rank:
- subordinate in right of payment to all
existing and future senior indebtedness,
including our credit facility;
- equal with any future senior subordinated
indebtedness; and
- senior to any future junior subordinated
indebtedness.
3
Assuming we had completed this offering as of
, 2002 and applied the net proceeds
as described in "Use of Proceeds," the notes
would have been subordinated to approximately
$ million of senior indebtedness.
The notes will also be effectively subordinated
to all indebtedness and other liabilities of
our subsidiaries. The total liabilities of our
subsidiaries were approximately $440 million on
December 31, 2001.
Change of Control............. If a change of control occurs, we will be
required to offer to repurchase the notes at a
repurchase price equal to 101% of the principal
amount of the notes, plus accrued and unpaid
interest, if any, to the date of repurchase.
The repurchase date will be no earlier than 30
days nor later than 60 days from the date we
mail a notice of the change of control offer to
holders of the notes. Upon the trust's receipt
of our notice, it will promptly mail a notice
to each holder of SHARCS. A holder of SHARCS
will thus have approximately no fewer than 20
days and no more than 50 days to determine
whether to accept our repurchase offer. If a
holder of SHARCS wishes to accept our
repurchase offer, however, it must first
exchange its SHARCS early for notes and Agere
common stock. At the time the notes and common
stock are distributed to such holder, such
holder will surrender all put rights
corresponding to such exchanged SHARCS, unless
the put rights were previously accelerated. See
"Description of Notes -- Change of Control."
Material covenants............ We will issue the notes under an indenture
containing covenants for the benefit of the
holder or holders. These covenants will, among
other things, limit our ability and the ability
of our restricted subsidiaries to:
- incur additional debt;
- pay dividends on stock, repurchase stock or
redeem subordinated debt;
- make investments;
- create liens on the collateral;
- sell assets;
- sell capital stock of subsidiaries;
- guarantee other indebtedness;
- enter into agreements that restrict dividends
or distributions from subsidiaries;
- merge or consolidate or sell all or
substantially all of our assets; and
- enter into transactions with affiliates.
These covenants are subject to a number of
important exceptions and qualifications,
including suspension under certain
circumstances. See "Description of
Notes -- Certain Covenants."
4
U.S. federal income tax
considerations................ The notes will be issued with original issue
discount for U.S. federal income tax purposes.
See "Material Federal Income Tax Consequences."
Absence of an established
market for the notes.......... The notes are new securities and there is no
established market for them. Initially, they
will be owned by the trust. We do not intend to
apply for a listing of the notes on any
securities exchange or any automated dealer
quotation system. Accordingly, we cannot assure
you that a liquid market will develop for the
notes held by holders who exchange their SHARCS
early for notes and Class A common stock.
Trustee for the notes......... The Bank of New York.
Accounting treatment.......... The notes will be valued at the estimated
proceeds from this offering less the amount
allocated to the put rights. The difference
between the carrying value and the face value
of the notes will be accreted over the term of
the notes.
PUT RIGHTS:
Put rights.................... On July 15, 2007, we will pay to the trust for
each put right it then holds the amount, if
any, by which $ , as adjusted for any
dilutive events, exceeds the average closing or
sale price of a share of our common stock
during the 20-trading day period preceding such
date.
The trust may not transfer the put rights to
any other person. In the event that any SHARCS
are exchanged early, the number of put rights
covered by the put option agreement between us
and the trust will be reduced by the number of
shares delivered upon such exchange (without
payment to the SHARCS holder exchanging early).
Upon the occurrence of certain events, the put
rights will be accelerated. See "Description of
Put Rights."
Accounting treatment.......... We will record the fair value of the put rights
as a liability, and any changes in the fair
value of the put rights liability will be
reflected in our results of operations. The
fair value of the put rights will be determined
using an option pricing model which takes into
account our credit risk, the volatility of our
stock price and the time to maturity.
RISK FACTORS
See "Risk Factors," which begins on page 8, for a discussion of certain
factors that you should consider in evaluating an investment in the notes and
put rights.
---------------------
Our principal executive offices are located at 555 Union Boulevard,
Allentown, Pennsylvania 18109. Our telephone number is (610) 712-4323. Our World
Wide Web site address is www.agere.com. Information contained in our website is
not incorporated by reference in this prospectus and, therefore, is not part of
this prospectus.
5
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following table sets forth our summary historical financial information
derived from our unaudited financial statements for the three month periods
ended December 31, 2001 and 2000, and our audited financial statements for the
fiscal years ended September 30, 2001, 2000 and 1999 included elsewhere in this
prospectus. This summary financial information may not be indicative of our
future performance as a stand-alone company. You should read the summary
financial information in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our financial statements and
the notes thereto included elsewhere in this prospectus.
THREE MONTHS
ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
--------------- -------------------------
2001 2000 2001 2000 1999
------ ------ ------- ------ ------
(DOLLARS IN MILLIONS)
STATEMENT OF OPERATIONS INFORMATION:
Revenue:
Infrastructure Systems......................... $ 263 $ 929 $ 2,674 $3,059 $2,290
Client Systems................................. 274 433 1,406 1,649 1,424
Total revenue.................................. 537 1,362 4,080 4,708 3,714
Costs............................................ 521 782 3,084 2,555 1,949
Gross profit..................................... 16 580 996 2,153 1,765
Operating expenses:
Selling, general and administrative............ 109 157 597 535 573
Research and development....................... 194 276 951 827 683
Purchased in-process research and development.... -- -- -- 446 17
Amortization of goodwill and other acquired
intangibles.................................... 21 111 415 189 13
Restructuring and separation..................... 72 11 662 -- --
Impairment of goodwill and other acquired
intangibles.................................... -- -- 2,762 -- --
Total operating expenses......................... 396 555 5,387 1,997 1,286
Operating income (loss).......................... (380) 25 (4,391) 156 479
Cumulative effect of accounting change (net of
provision (benefit) for income taxes).......... -- (4) (4) -- 32
Net income (loss)................................ (375) (4) (4,616) (76) 351
OTHER FINANCIAL DATA:
Net cash (used in) provided by operating
activities..................................... $ (344) $ 102 $ 269 $ 762 $ 690
Ratio of earnings to fixed charges(1)............ n/a 1.1 n/a 2.4 8.7
Deficiency(1).................................... $ 378 n/a $ 4,553 n/a n/a
SUPPLEMENTAL FINANCIAL DATA:
EBITDA(2)........................................ $ (254) $ 241 $(3,520) $ 822 $ 877
Adjusted EBITDA(3)............................... (182) 252 (96) 1,268 894
6
The "as adjusted" information below is derived from data contained in our
historical financial statements which has been adjusted to give pro forma effect
to (1) repayments of $378 million under the credit facility subsequent to
December 31, 2001 as described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and (2) the issuance and sale of the notes and put rights and the
application of the net proceeds therefrom as described under "Use of Proceeds"
as if such transactions had occurred as of December 31, 2001.
DECEMBER 31, 2001 SEPTEMBER 30, 2001
------------------------ ------------------
HISTORICAL AS ADJUSTED HISTORICAL
---------- ----------- ----------
(DOLLARS IN MILLIONS)
BALANCE SHEET INFORMATION:
Cash.................................................. $1,781 $ $3,152
Working capital....................................... 21 156
Total assets.......................................... 4,847 6,562
Short-term debt....................................... 1,393 2,516
Long-term debt........................................ 33 33
Total stockholders' equity............................ 2,107 2,461
---------------
(1) For purposes of determining the ratio of earnings to fixed charges,
"earnings" are defined as income (loss) from continuing operations before
income taxes less undistributed earnings of equity investments plus fixed
charges less interest capitalized during the period. "Fixed charges" consist
of interest expense on all indebtedness and that portion of operating lease
rental expense that is representative of the interest factor. "Deficiency"
is the amount by which fixed charges exceeded earnings in fiscal 2001.
(2) EBITDA equals operating income (loss) plus depreciation and amortization
expense. EBITDA is not intended to represent cash flow or any other measure
of performance or liquidity in accordance with generally accepted accounting
principles. EBITDA is included here because we believe that you may find it
to be a useful analytical tool. Other companies may calculate EBITDA
differently, and we cannot assure you that our figures are comparable with
similarly-titled figures for other companies.
(3) The calculation of adjusted EBITDA is shown below:
THREE MONTHS
ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
------------ --------------------------
2001 2000 2001 2000 1999
----- ---- -------- ------- -----
(DOLLARS IN MILLIONS)
EBITDA.................................. $(254) $241 $(3,520) $ 822 $877
Purchased in-process research and
development........................... -- -- -- 446 17
Restructuring and separation............ 72 11 662 -- --
Impairment of goodwill and other
acquired intangibles.................. -- -- 2,762 -- --
----- ---- ------- ------ ----
Adjusted EBITDA......................... $(182) $252 $ (96) $1,268 $894
===== ==== ======= ====== ====
7
RISK FACTORS
An investment in the notes and put rights is subject to a number of risks.
You should carefully consider the following risk factors and all the other
information contained in this prospectus before investing in our notes and put
rights.
RISKS RELATED TO OUR SEPARATION FROM LUCENT
WE WILL BE CONTROLLED BY LUCENT AS LONG AS IT OWNS A MAJORITY OF OUR COMMON
STOCK, AND OUR OTHER STOCKHOLDERS WILL BE UNABLE TO AFFECT THE OUTCOME OF
STOCKHOLDER VOTING DURING THAT TIME.
Lucent is our controlling stockholder because it owns a majority of our
common stock. Because Lucent's interests may differ from ours, actions Lucent
takes with respect to us, as our controlling stockholder, may not be favorable
to us.
Lucent's interests may not be the same as, or may conflict with, the
interests of our other stockholders. Our other stockholders will not be able to
affect the outcome of any stockholder vote so long as Lucent owns a majority of
our common stock.
Lucent is generally not prohibited from selling a controlling interest in
us to a third party. Because we have elected not to be subject to Section 203 of
the General Corporation Law of the State of Delaware, Lucent, as a controlling
stockholder, may find it easier to sell its controlling interest to a third
party than if we were subject to Section 203.
THE TIMING AND MANNER OF OUR SEPARATION FROM LUCENT ARE UNCLEAR, AND OUR
SEPARATION MAY NOT OCCUR AT ALL.
Lucent originally announced its intention to distribute all shares of Agere
stock it then owned to its stockholders in a tax-free distribution by September
30, 2001. On August 16, 2001, Lucent amended its credit facilities. The amended
credit facilities modified the conditions that must be met before Lucent could
distribute its Agere stock to its stockholders. At the time, Lucent announced
that it expected that these conditions would result in a delay in the spin-off
of up to six months.
Lucent has stated that the conditions contained in its remaining credit
agreement that must be met before Lucent can distribute its Agere stock to its
stockholders include:
- no event of default exists under the credit agreement;
- Lucent has generated positive EBITDA, as defined in its credit agreement,
for the fiscal quarter immediately preceding the distribution;
- Lucent must meet a minimum current asset ratio;
- Lucent must have received $5 billion in cash from certain non-operating
sources; and
- the total lending commitments under the credit agreement must be reduced
to $1.75 billion or less.
Lucent has advised us that it has satisfied the $5 billion requirement
noted above and reduced the total lending commitments below $1.75 billion.
Lucent also announced on February 14, 2002 that it intends to use its results
from the quarter ending March 31, 2002, to meet the EBITDA condition, and has
indicated that it cannot provide assurances that the conditions to its
obligation to complete the distribution will be satisfied by a particular date
or that the terms and conditions of its indebtedness will permit the
distribution by a particular date or at all due to uncertain market conditions.
Lucent has received a private letter ruling from the Internal Revenue
Service holding that the distribution of its shares of Agere stock to its
stockholders in the spin-off and to holders of its debt in the debt-for-equity
exchange effected in connection with our initial public offering will be tax
free to Lucent and its stockholders. The effectiveness of the original ruling
was conditioned on completion of the spin-off
8
by September 30, 2001. However, Lucent has received a supplemental ruling from
the Internal Revenue Service that maintains the effectiveness of the original
ruling so long as the spin-off is completed on or before June 30, 2002.
Under the separation and distribution agreement between Lucent and us,
Lucent has the right to terminate its obligation to complete the distribution
if, at any time, after consultation with our senior management, Lucent's board
of directors determines, in its sole discretion, that the distribution is not in
the best interests of Lucent or its stockholders or if, as of September 30,
2001, the consummation of the distribution was not permitted under the terms of
Lucent's then existing indebtedness or would result in the acceleration of any
payment under such indebtedness. Lucent may also terminate its obligations to
complete the distribution if the distribution has not occurred by September 30,
2002.
Because we do not know whether:
- Lucent will meet the EBITDA condition to our spin-off using its results
for the quarter ending March 31, 2002,
- Lucent will be able to obtain an extension of the tax ruling if Lucent
does not meet the EBITDA condition to our spin-off using its results for
the quarter ending March 31, 2002, and
- Lucent will make one of the determinations under the separation and
distribution agreement that permit it not to complete the distribution,
we cannot assure you that Lucent will complete the spin-off by a particular date
or at all. If Lucent does not complete the spin-off, we do not know whether or
how Lucent would complete our separation.
IF OUR SEPARATION FROM LUCENT IS DELAYED OR DOES NOT OCCUR, WE MAY NOT ACHIEVE
MANY OF THE EXPECTED BENEFITS OF OUR SEPARATION, SO OUR BUSINESS MAY SUFFER AND
WE MAY LOSE MANY OF OUR EMPLOYEES.
We believe that the announcement of our separation from Lucent led to an
increased interest in doing business with us from some of our existing and
potential customers who are competitors of Lucent. We believe that the
announcement of our separation from Lucent has reduced the concerns of these
existing and potential customers that doing business with us might benefit
Lucent. If our separation from Lucent does not occur, these customers may not
increase or commence purchases of our products.
Many of our employees are anticipating our separation from Lucent. If the
separation does not occur or is delayed, employees may feel their job security
or their ability to benefit from the appreciation of stock-based compensation
may be diminished and they may therefore be more susceptible to competitive job
offers.
WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH LUCENT WITH RESPECT
TO OUR PAST AND ONGOING RELATIONSHIPS AND, BECAUSE OF LUCENT'S CONTROLLING
OWNERSHIP, THE RESOLUTION OF THESE CONFLICTS MAY NOT BE ON THE MOST FAVORABLE
TERMS TO US.
Prior to the distribution, a resolution of any potential conflicts of
interest between Lucent and us may be less favorable to us than if we were
dealing with an unaffiliated party. Conflicts of interest may arise between
Lucent and us in a number of areas relating to our past and ongoing
relationships, including:
- the nature, quantity, quality, time of delivery and pricing of products
we supply to each other under, and other issues arising under, our
product purchase agreements with Lucent;
- labor, tax, employee benefit, indemnification and other matters arising
from our separation from Lucent;
- intellectual property matters;
- employee recruiting and retention;
9
- sales or distributions by Lucent of all or any portion of its ownership
interest in us, which could be to one of our competitors; and
- business opportunities that may be attractive to both Lucent and us.
We and Lucent have entered into several agreements in connection with our
separation, as described in "Arrangements Between Lucent and Our Company." While
we are controlled by Lucent, it is possible for Lucent to cause us to amend
these agreements on terms that may be less favorable to us than the current
terms of the agreements.
OUR HISTORICAL FINANCIAL INFORMATION PRIOR TO THE FEBRUARY 1, 2001 CONTRIBUTION
TO US OF OUR BUSINESS FROM LUCENT MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS A
STAND-ALONE COMPANY AND, THEREFORE, MAY NOT BE RELIABLE AS AN INDICATOR OF OUR
HISTORICAL OR FUTURE RESULTS.
Our historical consolidated and combined financial statements may not be
indicative of our future performance as a stand-alone company. This is primarily
a result of the three factors described below.
- First, our historical consolidated and combined financial statements
reflect allocations, primarily with respect to general corporate
expenses, research expense and interest expense, which may be less than
the expenses we will incur in the future as a stand-alone company.
- Second, the information does not reflect significant changes that we
expect to occur in the future as a result of our separation from Lucent,
including changes in how we fund our operations, conduct research and
handle tax and employee matters.
- Third, our historical consolidated and combined financial statements
include substantial revenue from sales to Lucent. This revenue may not
reflect the pricing, volume or percentage of our sales we would have
derived from Lucent if we were a stand-alone company.
BECAUSE LUCENT'S BELL LABORATORIES' CENTRAL RESEARCH ORGANIZATION HISTORICALLY
PERFORMED IMPORTANT RESEARCH FOR US, WE MUST CONTINUE TO DEVELOP OUR OWN CORE
RESEARCH CAPABILITY. WE MAY NOT BE SUCCESSFUL, WHICH COULD MATERIALLY HARM OUR
PROSPECTS AND ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
If our separate research efforts are not as successful as when we were part
of Lucent, we may not be able to keep pace with the rapid technological change
in our industry and our prospects may be harmed. Many of our products use
technology and manufacturing processes derived from innovations developed by
Lucent's Bell Laboratories central research organization. After the contribution
to us of our business in February 2001, Lucent has no obligation to provide
research and development for us except as agreed to in the development project
agreement and joint design center operating agreement described under
"Arrangements Between Lucent and Our Company." We cannot assure you that our
independent research efforts will be as successful as the efforts of Bell
Laboratories have been historically or that our efforts will not require us to
increase our expenditures for the same services over the amounts in our
historical combined and consolidated financial statements. A significant
increase in our expenditures for the same services may adversely affect our
results of operations. We may not be able to recruit engineers and other
research and development employees as effectively as Bell Laboratories was able
to because of its history, name recognition and size.
MANY OF OUR EXECUTIVE OFFICERS AND SOME OF OUR DIRECTORS MAY HAVE CONFLICTS OF
INTEREST BECAUSE OF THEIR OWNERSHIP OF LUCENT COMMON STOCK AND OTHER TIES TO
LUCENT.
Many of our executive officers and some of our directors, including the
Lucent-representative directors who we expect will resign at the time of the
distribution, have a substantial amount of their personal financial portfolios
in Lucent common stock and options to purchase Lucent common stock. Ownership of
Lucent common stock or options to purchase Lucent common stock by our directors
and officers could create, or appear to create, potential conflicts of interest
when directors and officers are faced with decisions that could have different
implications for Lucent and us.
10
WE COULD INCUR SIGNIFICANT TAX LIABILITY IF LUCENT FAILS TO PAY THE TAX
LIABILITIES ATTRIBUTABLE TO LUCENT UNDER OUR TAX SHARING AGREEMENT, WHICH COULD
REQUIRE US TO PAY A SUBSTANTIAL AMOUNT OF MONEY.
We and Lucent have entered into a tax sharing agreement that allocates
responsibility for tax liabilities between us and them. For a discussion of this
agreement, please see "Arrangements Between Lucent and Our Company -- Tax
Sharing Agreement." Under U.S. federal income tax laws, we and Lucent are
jointly and severally liable for Lucent's federal income taxes attributable to
periods prior to and including the most recent taxable year of Lucent, which
ended on September 30, 2001. This means that if Lucent fails to pay the taxes
attributable to it under the tax sharing agreement for those periods, we may be
liable for any part of, including the whole amount of, these liabilities.
BECAUSE THE DIVISION OF ENFORCEMENT OF THE SECURITIES AND EXCHANGE COMMISSION
IS INVESTIGATING MATTERS BROUGHT TO ITS ATTENTION BY LUCENT, OUR BUSINESS MAY
BE AFFECTED IN A MANNER WE CANNOT FORESEE AT THIS TIME.
On November 21, 2000, and again on December 21, 2000, Lucent brought to the
attention of the staff of the Securities and Exchange Commission matters
relating to its recognition of revenue. Lucent also publicly disclosed these
matters in press releases on those dates. Although Lucent has informed us that
it has no reason to believe that this investigation by the Division of
Enforcement of the Securities and Exchange Commission into these matters
concerns our business and we are not aware of any reason why the investigation
would affect us, it is possible that the results of the investigation may have
an impact on us. Although the investigation could result in no action being
taken by the Securities and Exchange Commission, if an action is taken and the
investigation is found to concern our business, the action could result in
monetary fines or changes in some of our financial and other practices and
procedures that we are unable to foresee at this time.
RISKS RELATED TO OUR BUSINESS
THE DEMAND FOR PRODUCTS IN OUR INDUSTRY HAS RECENTLY DECLINED, AND WE CANNOT
PREDICT THE DURATION OR EXTENT OF THIS TREND. SALES OF OUR INTEGRATED CIRCUITS
AND OPTOELECTRONIC COMPONENTS ARE DEPENDENT ON THE GROWTH OF COMMUNICATIONS
NETWORKS.
We derive, and expect to continue to derive, a significant amount of
revenue from the sale of integrated circuits and optoelectronic components used
in optical, wired and wireless communications networks. The current economic
downturn has resulted in reduced purchasing in many of the markets we serve
worldwide. In particular, the communications equipment industry is currently in
a cycle characterized by diminished product demand, excess manufacturing
capacity and the erosion of average selling prices. If the long-term growth in
demand for communications networks does not occur as we expect, the demand for
many of our integrated circuits and optoelectronic components may decline or
grow more slowly than we expect. As a result, we may not be able to grow our
business and our revenue may decline from current levels.
BECAUSE WE EXPECT TO CONTINUE TO DERIVE A MAJORITY OF OUR REVENUE FROM
INTEGRATED CIRCUITS AND THE INTEGRATED CIRCUITS INDUSTRY IS HIGHLY CYCLICAL,
OUR REVENUE MAY FLUCTUATE.
We expect to continue to derive a majority of our revenue from integrated
circuits products. Because the integrated circuits market segment is highly
cyclical, we may have declines in our revenue that are primarily related to
industry conditions and not our products. This market segment has experienced
significant downturns, often in connection with, or in anticipation of, excess
manufacturing capacity worldwide, maturing product cycles and declines in
general economic conditions, and we are currently experiencing such a downturn.
11
IF WE DO NOT COMPLETE OUR ANNOUNCED WORKFORCE REDUCTIONS AND OTHER
RESTRUCTURING AND FACILITY CONSOLIDATION ACTIVITIES AS EXPECTED OR EVEN IF WE
DO SO, WE MAY NOT ACHIEVE ALL OF THE EXPENSE REDUCTIONS WE ANTICIPATE.
Our business has been experiencing lower revenues due to decreased and
canceled customer orders. Revenue has declined over the past five quarters.
During fiscal 2001 and the first quarter of fiscal 2002, we announced a series
of restructuring initiatives to align Agere with current market conditions.
These initiatives are focused on improving gross profit, reducing expenses and
streamlining operations. These restructuring initiatives include a worldwide
workforce reduction, rationalization of manufacturing capacity and other
restructuring initiatives. In addition, we recently announced our intention to
consolidate our operations at a number of facilities. If we do not complete
these workforce reductions and other restructuring and consolidation activities
as expected or even if we do so, we may not achieve all of the expense
reductions we anticipate.
OUR QUARTERLY REVENUE AND OPERATING RESULTS MAY VARY SIGNIFICANTLY IN FUTURE
PERIODS DUE TO THE NATURE OF OUR BUSINESS.
Our quarterly revenue and income (loss) from operations may vary
significantly from quarter to quarter because of the nature of our revenue and
planned product introductions. For example, because of our lengthy sales and
design processes, the effects of failing to be selected by a customer to provide
a product may result in significantly lower revenue later, as compared to prior
periods with more revenue from earlier design wins. In addition, sales of our
products for specific customer projects often begin and end abruptly, so revenue
may increase rapidly and later decrease just as quickly. The relative timing of
the beginning and end of our sales and design processes can make our revenues
less predictable.
IF WE FAIL TO KEEP PACE WITH TECHNOLOGICAL ADVANCES IN OUR INDUSTRY OR IF WE
PURSUE TECHNOLOGIES THAT DO NOT BECOME COMMERCIALLY ACCEPTED, CUSTOMERS MAY NOT
BUY OUR PRODUCTS AND OUR REVENUE MAY DECLINE.
The demand for our products can change quickly and in ways we may not
anticipate because our industry is generally characterized by:
- rapid, and sometimes disruptive, technological developments;
- evolving industry standards;
- changes in customer requirements;
- limited ability to accurately forecast future customer orders;
- frequent new product introductions and enhancements; and
- short product life cycles with declining prices over the life cycle of
the product.
If we fail to make sufficient investments in research and development
programs in order to develop new and enhanced products and solutions, or if we
focus on technologies that do not become widely adopted, new technologies could
render our current and planned products obsolete, resulting in the need to
change the focus of our research and development and product strategies and
disrupting our business significantly.
BECAUSE MANY OF OUR CURRENT AND PLANNED PRODUCTS ARE HIGHLY COMPLEX, THEY MAY
CONTAIN DEFECTS OR ERRORS THAT ARE DETECTED ONLY AFTER DEPLOYMENT IN COMMERCIAL
COMMUNICATIONS NETWORKS AND IF THIS OCCURS, IT COULD HARM OUR REPUTATION AND
RESULT IN INCREASED EXPENSE.
Our products are highly complex and may contain undetected defects, errors
or failures. These products can only be fully tested when deployed in commercial
communications networks and other
12
equipment. Consequently, our customers may discover errors after the products
have been deployed. The occurrence of any defects, errors or failures could
result in:
- cancelation of orders;
- product returns, repairs or replacements;
- diversion of our resources;
- legal actions by our customers or our customers' end-users;
- increased insurance costs; and
- other losses to us or to our customers or end users.
Any of these occurrences could also result in the loss of or delay in market
acceptance of our products and loss of sales, which would harm our business and
adversely affect our revenue and results of operations. We have from time to
time experienced defects and expect to experience defects in the future. Because
the trend in our industry is moving toward even more complex products in the
future, this risk will intensify over time.
OUR PRODUCTS AND TECHNOLOGIES TYPICALLY HAVE LENGTHY DESIGN AND DEVELOPMENT
CYCLES. A CUSTOMER MAY DECIDE TO CANCEL OR CHANGE ITS PRODUCT PLANS, WHICH
COULD CAUSE US TO GENERATE NO REVENUE FROM A PRODUCT AND ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.
We may never generate any revenue from our products after incurring
significant design and development expenditures. A delay or cancelation of a
customer's plans could significantly adversely affect our financial results.
Unlike some of our competitors, we primarily focus on winning competitive
selection processes to develop products for use in our customers' equipment.
These selection processes can be lengthy. After winning and beginning a product
design for a customer, that customer may not begin volume production of their
equipment for a period of up to two years, if at all. Due to this lengthy design
and development cycle, we may experience delays from the time we begin incurring
expenses until the time we generate revenue from our products. We have no
assurances that our customers will ultimately market and sell their equipment or
that such efforts by our customers will be successful.
BECAUSE OUR SALES ARE CONCENTRATED ON LUCENT AND A FEW OTHER CUSTOMERS, OUR
REVENUE MAY MATERIALLY DECLINE IF ONE OR MORE OF OUR KEY CUSTOMERS DO NOT
CONTINUE TO PURCHASE OUR EXISTING AND NEW PRODUCTS IN SIGNIFICANT QUANTITIES.
Our customer base is highly concentrated. Our top ten end customers
accounted for approximately 53% of our revenue in fiscal 2001. If any one of our
key customers decides to purchase significantly less from us or to terminate its
relationship with us, our revenue may materially decline. Because our strategy
has generally been to develop long-term relationships with a few key customers
in the product areas in which we focus and we have a long product design and
development cycle for most of our products, we may be unable to replace these
customers quickly or at all. We could lose our key customers or significant
sales to our key customers because of factors beyond our control, such as a
significant disruption in our customers' businesses generally or in a specific
product line.
In particular, we depend on Lucent as a key customer. We derived 14.9% of
our revenue from sales to Lucent in fiscal 2001. We expect to continue to be
dependent on Lucent for a significant percentage of our revenue.
IF WE FAIL TO ATTRACT, HIRE AND RETAIN QUALIFIED PERSONNEL, WE MAY NOT BE ABLE
TO DEVELOP, MARKET OR SELL OUR PRODUCTS OR SUCCESSFULLY MANAGE OUR BUSINESS.
In some fields, there are only a limited number of people in the job market
with the requisite skills, particularly people with optoelectronic technology
expertise. We have in the past experienced difficulty in identifying and hiring
qualified engineers in many areas of our business as well as in retaining our
current
13
employees. The loss of the services of any key personnel or our inability to
hire new personnel with the requisite skills could restrict our ability to
develop new products or enhance existing products in a timely manner, sell
products to our customers or manage our business effectively.
BECAUSE WE ARE SUBJECT TO ORDER AND SHIPMENT UNCERTAINTIES, ANY SIGNIFICANT
CANCELLATIONS OR DEFERRALS COULD CAUSE OUR REVENUE TO DECLINE OR FLUCTUATE.
We generally sell products pursuant to purchase orders that customers may
cancel or defer on short notice without incurring a significant penalty.
Cancellations or deferrals could cause us to hold excess inventory, which could
adversely affect our results of operations and restrict our ability to fund our
operations. If a customer cancels or defers product shipments, we may incur
unanticipated reductions or delays in our revenue. If a customer refuses to
accept shipped products or does not timely pay for these products, we could
incur significant charges against our income, which could materially and
adversely affect our operating results.
IF WE DO NOT ACHIEVE ADEQUATE MANUFACTURING UTILIZATION, YIELDS, VOLUMES OR
SUFFICIENT PRODUCT RELIABILITY, OUR GROSS MARGINS WILL BE REDUCED.
Because the majority of our manufacturing costs are relatively fixed,
efficient utilization of manufacturing facilities and manufacturing yields are
critical to our results of operations. Some of our manufacturing facilities have
been underutilized, which has reduced our gross margins. Lower than expected
manufacturing yields could impair our gross margins and delay product shipments.
In the event of an increase in demand, failure to increase our
manufacturing volumes to meet our customers' increasing needs and satisfy
customer demand will have a significant effect on our gross margins. In some
cases, existing manufacturing capacity may be insufficient to achieve the volume
or cost targets of our customers.
The manufacture of our products involves highly complex and precise
processes, requiring production in highly controlled and clean environments.
Changes in our manufacturing processes or those of our suppliers or contractors,
or their inadvertent use of defective or contaminated materials, could
significantly reduce our manufacturing yields and product reliability.
WE HAVE RELATIVELY HIGH GROSS MARGIN ON THE REVENUE WE DERIVE FROM THE
LICENSING OF OUR INTELLECTUAL PROPERTY, AND A DECLINE IN THIS REVENUE WOULD
HAVE A GREATER IMPACT ON OUR NET INCOME THAN A DECLINE IN REVENUE FROM OUR
INTEGRATED CIRCUITS AND OPTOELECTRONIC PRODUCTS.
The revenue we generate from the licensing of our intellectual property has
a high gross margin compared to the revenue we generate from our integrated
circuits and optoelectronic products. Although we have derived less than 6% of
our total revenue in recent years from the licensing of intellectual property, a
decline in this licensing revenue would have a greater impact on our
profitability than a similar decline in revenues from our integrated circuits
and optoelectronic products.
WE DEPEND ON JOINT VENTURES OR OTHER THIRD-PARTY STRATEGIC RELATIONSHIPS FOR
THE MANUFACTURE OF SOME OF OUR PRODUCTS, ESPECIALLY INTEGRATED CIRCUITS. IF
THESE MANUFACTURERS ARE UNABLE TO FILL OUR ORDERS ON A TIMELY AND RELIABLE
BASIS, OUR REVENUE MAY DECLINE.
We currently manufacture our integrated circuits and optoelectronic
components through a combination of internal capability, joint ventures and
external sourcing with contract manufacturers. Over the past two quarters,
approximately 30 to 35% of our revenue was derived principally from integrated
circuits manufactured at joint ventures or through other external sourcing
arrangements. To the extent we rely on joint ventures and third-party
manufacturing relationships, especially with respect to integrated circuits, we
face the following risks:
- their inability to develop manufacturing methods appropriate for our
products;
- that the manufacturing costs will be higher than planned;
14
- that the reliability of our products will decline;
- their unwillingness to devote adequate capacity to produce our products;
- their inability to maintain continuing relationships with our suppliers;
and
- the reduction of our control over delivery schedules and costs of our
products.
If any of these risks is realized, we could experience an interruption in
supply or an increase in costs, which could delay or decrease our revenue or
adversely affect our results of operations.
IF OUR CUSTOMERS DO NOT QUALIFY OUR MANUFACTURING LINES FOR VOLUME SHIPMENTS,
OUR REVENUE MAY BE DELAYED OR REDUCED.
Customers will not purchase any of our products, other than limited numbers
of evaluation units, prior to qualification of the manufacturing line for the
product. We may not always be able to satisfy the qualifications. Delays in
qualification can cause a customer to discontinue use of the product and result
in a significant loss of revenue.
BECAUSE OUR INTEGRATED CIRCUIT AND OPTOELECTRONIC COMPONENT AVERAGE SELLING
PRICES IN PARTICULAR PRODUCT AREAS ARE DECLINING AND SOME OF OUR OLDER
PRODUCTS ARE MOVING TOWARD THE END OF THEIR PRODUCT LIFE CYCLES, OUR RESULTS
OF OPERATIONS MAY BE ADVERSELY AFFECTED.
We have in the past, and will in the future, experience declines in the
average selling prices for some of our integrated circuits and optoelectronic
components. For our products, the declines are due to, among other things,
downturns in the semiconductor and communications industries, increased
competition, lower costs of producing products and greater unit volumes. In
addition, because our industry is characterized by rapid technological change
and short product life cycles, in any given year we may have a substantial
amount of revenue from products that are nearing the end of their product lives.
The average age of our products is approximately two years, and approximately
one third of our revenues are from products older than two years. If we do not
offset sales decreases in older products by increases in sales of other
products, including new products, our revenue will decline. If we are not able
to replace products in a timely manner, our results of operations may be
adversely affected.
WE CONDUCT A SIGNIFICANT AMOUNT OF OUR SALES ACTIVITY AND MANUFACTURING
EFFORTS OUTSIDE THE UNITED STATES, WHICH SUBJECTS US TO ADDITIONAL BUSINESS
RISKS AND MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS DUE TO INCREASED
COSTS.
In fiscal 2001, we derived 55% of our revenue from sales of our products
shipped to locations outside the United States. We also manufacture a
significant portion of our products outside the United States and are dependent
on international suppliers for many of our parts. We intend to continue to
pursue growth opportunities in both sales and manufacturing internationally.
International operations are subject to a number of risks and potential costs,
which could adversely affect our revenue and results of operations, including:
- our new brand will not be locally recognized, which will cause us to
spend significant amounts of time and money to build a brand identity;
- unexpected changes in regulatory requirements;
- inadequate protection of intellectual property in some countries outside
of the United States;
- currency exchange rate fluctuations; and
- political and economic instability.
15
WE ARE SUBJECT TO ENVIRONMENTAL, HEALTH AND SAFETY LAWS, WHICH COULD INCREASE
OUR COSTS AND RESTRICT OUR OPERATIONS IN THE FUTURE.
We are subject to a variety of laws relating to the use, disposal, clean-up
of, and human exposure to, hazardous chemicals. Any failure by us to comply with
present and future environmental, health and safety requirements could subject
us to future liabilities or the suspension of production. In addition,
compliance with these or future laws could restrict our ability to expand our
facilities or require us to acquire costly pollution control equipment, incur
other significant expenses or modify our manufacturing processes. In the event
of the discovery of additional contaminants or the imposition of additional
cleanup obligations at these or other sites, we could be adversely affected.
THE COMMUNICATIONS COMPONENT INDUSTRY IS INTENSELY COMPETITIVE, AND OUR
FAILURE TO COMPETE EFFECTIVELY COULD HURT OUR REVENUE.
The market segments for optoelectronic components and integrated circuits
are intensely competitive and subject to rapid and disruptive technological
change. We expect the intensity of competition to continue to increase in the
future as existing competitors enhance and expand their product offerings and as
new participants enter the market. Increased competition may result in price
reductions, reduced gross margins and loss of market share. We cannot assure you
that we will be able to compete successfully against existing or future
competitors, which may hurt our revenue.
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY LITIGATION AND INFRINGEMENT CLAIMS,
WHICH COULD CAUSE US TO INCUR SIGNIFICANT EXPENSES OR PREVENT US FROM SELLING
OUR PRODUCTS. IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS,
OUR BUSINESSES AND PROSPECTS MAY BE HARMED.
Like other companies in the semiconductor industry, we experience frequent
litigation regarding patent and other intellectual property rights. From time to
time, we receive notices from third parties of potential infringement and
receive claims of potential infringement when we attempt to license our
intellectual property to others. Defending these claims could be costly and time
consuming and would divert the attention of management and key personnel from
other business issues. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. Claims of
intellectual property infringement also might require us to enter into costly
royalty or license agreements. However, we may be unable to obtain royalty or
license agreements on terms acceptable to us or at all. In addition, third
parties may attempt to appropriate the confidential information and proprietary
technologies and processes used in our business, which we may be unable to
prevent and would harm our businesses and prospects.
IF WE CANNOT MAINTAIN OUR STRATEGIC RELATIONSHIPS OR IF OUR STRATEGIC
RELATIONSHIPS FAIL TO MEET THEIR GOALS OF DEVELOPING TECHNOLOGIES OR
PROCESSES, WE WILL LOSE OUR INVESTMENT AND MAY FAIL TO KEEP PACE WITH THE
RAPID TECHNOLOGICAL DEVELOPMENTS IN OUR INDUSTRY.
In the past, we have entered into strategic relationships to develop
technologies and manufacturing processes. If any of our strategic relationships
do not accomplish our intended goals or do not develop the technology or
processes sought, we will not realize a return on our investment. Currently our
only material strategic investment is Silicon Manufacturing Partners Pte Ltd., a
joint venture entered into with Chartered Semiconductor. See "Management's
Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources -- Contractual Obligations and
Commitments."
WE MAY NOT HAVE FINANCING FOR FUTURE STRATEGIC INITIATIVES, WHICH MAY PREVENT
US FROM ADDRESSING GAPS IN OUR PRODUCT OFFERINGS THAT MAY ARISE IN THE FUTURE,
IMPROVING OUR TECHNOLOGY OR INCREASING OUR MANUFACTURING CAPACITY.
If we are unable to incur additional debt or issue equity for future
strategic initiatives, we may fail to address gaps in our product offerings,
improve our technology or increase our manufacturing capacity. We cannot assure
you that such financing will be available to us on acceptable terms or at all.
Our credit
16
agreement restricts our ability to incur debt and requires us to use a portion
of the proceeds from any debt or equity issuance to repay the credit facility,
as described in "Certain Indebtedness," and the indenture for the notes will
also restrict our ability to incur debt, as described in "Description of
Notes -- Certain Covenants -- Limitation on Indebtedness." Also, in connection
with our spin-off from Lucent, we are significantly restricted in our ability to
issue stock in order to raise capital. See "Arrangements Between Lucent and Our
Company -- Tax Limitations on Additional Issuance of Our Stock."
IF WE ARE UNABLE TO EXTEND OR REFINANCE OUR CREDIT FACILITY WHEN IT MATURES ON
SEPTEMBER 30, 2002, WE MAY NOT HAVE SUFFICIENT CASH AVAILABLE TO REPAY THAT
FACILITY OR TO FUND OUR OPERATIONS.
We cannot assure you that we will be able to extend or refinance our credit
facility before it matures on September 30, 2002. While we currently have
sufficient cash on hand to repay amounts outstanding under the credit facility
when it matures, we cannot assure you that we will have sufficient cash to repay
those amounts when due. In recent periods, we have incurred substantial losses
and used cash on hand to fund our operations and other cash needs, and we expect
these conditions to continue in the near future. If we are required to repay our
credit facility, and we are unable to obtain alternate sources of financing, we
may not be able to fund our operations, make capital expenditures or service our
debt. Under these circumstances, we would consider actions such as eliminating
employee bonuses, accelerating already planned expense reductions, limiting
capital spending and selling assets to enable us to meet our cash requirements.
However, we cannot assure you that these actions will be feasible at the time or
prove adequate. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
RISKS RELATED TO THE OFFERING
WE HAVE A SIGNIFICANT AMOUNT OF DEBT, WHICH SUBJECTS US TO VARIOUS
RESTRICTIONS AND INTEREST COSTS.
Because Lucent historically provided financing to us and incurred debt at
the parent level, our historical combined balance sheets prior to completion of
our initial public offering do not include debt. On April 2, 2001, upon
completion of our initial public offering, we assumed $2,500 million of
short-term debt that Lucent had borrowed under a credit facility. We did not
receive any of the proceeds from the credit facility. Lucent was relieved of all
obligations related to this short-term debt. As of February 4, 2002, $999
million was outstanding under our credit facility. See "Certain Indebtedness"
for a description of the credit facility. We will use approximately 50% of the
net proceeds from the notes and put rights to further repay this short-term
debt. After giving pro forma effect to the issuance and sale of the notes and
put rights and the application of the net proceeds therefrom as described under
"Use of Proceeds," as of , 2002, our total outstanding debt would have
been $ million. Please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" for additional details about our credit facility, including certain
repayments of the facility.
The credit facility is secured by our principal domestic assets other than
the proceeds of our initial public offering and, while Lucent remains a majority
stockholder, real estate. The maturity date of the facility has been extended
from February 22, 2002 to September 30, 2002. In addition, if we raise at least
$500 million in equity or debt capital markets transactions before September 30,
2002, or $ million after giving effect to this offering, the maturity
date of the facility will be extended to September 30, 2004, with the facility
required to be reduced to $750 million on September 30, 2002 and $500 million on
September 30, 2003. The credit facility imposes, and future indebtedness may
impose, various restrictions and covenants on us which could limit our ability
to respond to market conditions, to provide for unanticipated capital
investments or to take advantage of business opportunities. Our interest expense
may be materially different as a stand-alone company than the interest expense
reflected in our historical combined statement of operations for periods prior
to completion of our initial public offering. Please see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" for details about our historical interest expense and
interest expense under, and the other terms of, the debt we assumed from Lucent.
17
IT IS POSSIBLE THAT OUR CREDIT RATINGS COULD BE AFFECTED BY A CHANGE IN
LUCENT'S RATINGS, AND IF OUR CREDIT RATINGS WERE TO CHANGE FOR THAT REASON OR
ANY OTHER REASON, THE VALUE OF YOUR NOTES COULD DECLINE.
It is possible that, while we are a majority-owned subsidiary of Lucent,
the rating agencies might change our credit ratings as a result of changes in
Lucent's credit ratings. If our credit ratings were to decline for this or any
other reason, our cost of borrowing under our credit agreement and in connection
with our receivables securitization would increase. Further, if our ratings were
to decline, the value of the notes could decline.
WE AND OUR SUBSIDIARIES MAY BE ABLE TO INCUR SUBSTANTIALLY MORE DEBT.
Subject to the restrictions in our credit facility and the indenture
governing the notes, we may incur significant additional debt. Although the
terms of our credit facility and the indenture governing the notes contain
restrictions on the incurrence of additional debt, these restrictions are
subject to a number of qualifications and exceptions, and debt incurred in
compliance with these restrictions could be substantial. New debt may be senior
debt. If new debt is added to our and our subsidiaries' current debt levels, the
related risks that we and they now face could intensify.
RESTRICTIONS IN THE NOTES INDENTURE AND OUR CREDIT FACILITY MAY LIMIT OUR
ACTIVITIES.
The notes indenture and our credit facility contain restrictions on our
activities, including covenants limiting our ability to:
- incur indebtedness at the subsidiary or parent level;
- incur or permit to exist liens or security interests on our assets;
- merge or consolidate with another entity or sell all or substantially all
of our assets;
- make investments in non-affiliates and certain of our subsidiaries;
- make or declare dividends on our capital stock;
- consummate certain transactions with our affiliates; and
- consummate certain sale and leaseback or collateralized mortgage
obligation transactions.
We also are required to satisfy specified financial covenants under the
terms of our credit facility. These restrictions may make it difficult for us to
successfully execute our business strategy or to compete in the worldwide
integrated circuits and optoelectronic components industries with companies not
similarly restricted.
IN THE EVENT OF OUR BANKRUPTCY OR LIQUIDATION, OUR ASSETS WILL NOT BE
AVAILABLE TO MAKE ANY PAYMENTS TO THE HOLDERS OF THE NOTES UNTIL WE HAVE MADE
ALL PAYMENTS TO HOLDERS OF SENIOR INDEBTEDNESS.
The notes will be general unsecured obligations, subordinate in right of
payment to all of our existing and future senior indebtedness, including all
indebtedness under our credit facility. In the event of insolvency, liquidation,
reorganization or a similar proceeding, our senior indebtedness must be paid in
full before the principal of, and premium, if any, and interest on the notes may
be paid. In the event of a bankruptcy, liquidation or reorganization, holders of
the notes will participate ratably (based upon respective amounts owed to each
holder or creditor) with all holders of subordinated indebtedness that is deemed
to be of the same class as the notes in the remaining assets. If any of these
events occur, we cannot assure you that there would be sufficient assets to pay
amounts due on the notes. After giving pro forma effect to the issuance and sale
of the notes and put rights and the application of the net proceeds therefrom as
described under "Use of Proceeds," as of December 31, 2001, we would have had
approximately $ million of senior indebtedness outstanding.
In addition, the indenture provides that, except under certain
circumstances, no payment with respect to the notes may be made during the
occurrence of a payment default with respect to senior indebtedness.
18
Moreover, the indenture provides that, under certain circumstances, no payment
with respect to the notes may be made if certain non-payment defaults occur with
respect to certain designated senior indebtedness, including indebtedness under
our credit facility.
YOUR RIGHT TO RECEIVE PAYMENTS ON THE NOTES IS UNSECURED AND WILL BE
EFFECTIVELY SUBORDINATED TO OUR AND OUR SUBSIDIARIES' EXISTING AND FUTURE
SECURED INDEBTEDNESS.
The notes will be general unsecured senior subordinated obligations,
effectively junior to any secured debt that we and our subsidiaries have and may
have in the future to the extent of the value of the assets securing that debt.
Our borrowings under our credit facility are secured. After giving pro forma
effect to the issuance and sale of the notes and put rights and the application
of the net proceeds therefrom as described under "Use of Proceeds," as of
, 2002, we would have had $ million of secured indebtedness
outstanding.
In the event of liquidation, dissolution, reorganization, bankruptcy or any
similar proceeding, whether voluntarily or involuntarily instituted, the holders
of our secured debt will be entitled to be paid from our or our subsidiaries'
assets, as applicable, before any payment may be made with respect to the notes.
If any of the foregoing events occurs, we cannot assure you that we will have
sufficient assets to pay amounts due on our secured debt and the notes. As a
result, the holders of the notes may receive less, ratably, than the holders of
secured debt in the event of our liquidation, dissolution, reorganization,
bankruptcy or other similar occurrence.
SOME SIGNIFICANT RESTRUCTURING TRANSACTIONS MAY NOT CONSTITUTE A CHANGE OF
CONTROL, IN WHICH CASE WE WOULD NOT BE OBLIGATED TO OFFER TO REPURCHASE THE
NOTES.
Upon the occurrence of certain specific kinds of change of control events,
we will be required to offer to repurchase all outstanding notes. The change of
control repurchase feature is a result of negotiations between us and the
underwriters for the SHARCS. The reason for giving holders of the notes this
right to require us to repurchase the notes in the event of a change of control
is that note holders will have purchased our notes based in part on their
comfort with our management. However, the change of control provisions will not
afford protection to holders of notes in the event of certain transactions. For
example, certain transactions, such as leveraged recapitalizations,
refinancings, restructurings or acquisitions initiated by us, would not
constitute a change of control. Certain other transactions may not constitute a
change of control because they do not involve a change in voting power or
beneficial ownership of the magnitude required under the definition of change of
control. In the event of any such transaction, note holders would not have the
right to require us to repurchase the notes, even though each of these
transactions could increase the amount of our indebtedness, or otherwise
adversely affect our capital structure or credit ratings, thus adversely
affecting the holders of notes.
In addition, the definition of change of control includes a phrase relating
to the sale of all or substantially all of our assets, determined on a
consolidated basis. Although there is a limited body of case law interpreting
the phrase "substantially all," there is no precise established definition of
the phrase under New York law (which governs the indenture and the notes).
Accordingly, the ability of a holder of notes to require us to repurchase the
notes as a result of a sale of less than all of our assets, determined on a
consolidated basis, may be uncertain. See "Description of Notes -- Change of
Control" and "Description of Notes -- Certain Definitions -- Change of Control."
EVEN IF A TRANSACTION DOES TRIGGER OUR OBLIGATION TO REPURCHASE THE NOTES UPON
A CHANGE OF CONTROL, WE MAY NOT BE ABLE TO REPURCHASE THE NOTES.
The source of funds for any repurchase required as a result of any change
of control will be our available cash, cash generated from our operations or
other sources, including borrowings, sales of assets or funds provided by a new
controlling entity. We cannot assure you, however, that sufficient funds will be
available at the time of the change of control to make the required repurchase
of notes. Under our credit agreement, a change in control (which is defined
differently in the credit agreement than in the indenture)
19
constitutes an event of default allowing the lenders to require repayment of the
facility. Even if the credit agreement were to remain outstanding, restrictions
in the credit facility will not allow such repurchases. Consequently, if we are
unable to prepay our indebtedness under our credit facility or obtain the
requisite consent under our credit facility, we will be unable to fulfill our
repurchase obligations if holders of notes exercise their repurchase rights
following a change of control, resulting in a default under the indenture.
Furthermore, such default under the indenture will result in a cross-default
under our credit facility and may constitute an event of default under other,
future senior debt. Under these circumstances, the subordination provisions in
the indenture would restrict payments to you before these obligations are
satisfied. Additionally, the change of control purchase feature of the notes may
in certain circumstances make it more difficult or discourage a sale or takeover
of us and thus, the removal of incumbent management. See "Description of
Notes -- Change of Control."
HOLDERS OF NOTES WILL BE TAXED ON ORIGINAL ISSUE DISCOUNT.
The notes will be deemed to be issued at a discount from their principal
amount. Consequently, holders of the notes generally will be required to include
amounts in gross income for U.S. federal income tax purposes in advance of
receipt of the cash payments to which this income is attributable. For a more
detailed discussion of the U.S. federal income tax consequences from the
purchase, ownership and disposition of the notes, see "Material Federal Income
Tax Consequences."
THERE IS NO ESTABLISHED TRADING MARKET FOR THE NOTES, AND ANY MARKET FOR THE
NOTES MAY BE ILLIQUID.
We do not intend to apply for a listing of the notes on a securities
exchange. There is currently no established market for the notes, and we cannot
assure you of any of the following:
- the liquidity of any market that may develop for the notes;
- your ability to sell the notes; or
- the price at which you will be able to sell the notes.
Although the underwriters of the SHARCS have advised us that they currently
intend to make a market for the notes, the underwriters are not obligated to do
so and any such market making would not commence until the notes have been
distributed by the trust. Any underwriters that make a market in the notes may
discontinue their market making at any time at their discretion without notice
to the holders of the notes. In addition, market-making activity by the
underwriters will be subject to the limits imposed by the Securities Act of 1933
and the Securities Exchange Act of 1934. As a result, we cannot assure you that
any market in the notes will develop or, if one does develop, that it will be
maintained. If a market for the notes does develop, prevailing interest rates,
the markets for similar securities and other factors could cause the notes to
trade at prices lower than their purchase price or reduce the liquidity of the
notes.
WE MIGHT NOT HAVE SUFFICIENT FUNDS TO SATISFY OUR OBLIGATIONS UNDER THE PUT
RIGHTS.
If the average closing price or average sale price, as applicable, of a
share of our Class A common stock for the 20 trading days prior to maturity is
less than the strike price of the put rights, we will be obligated under the put
rights to pay to the trust an amount of cash equal to the product of (x) the
number of shares subject to outstanding put rights and (y) the difference
between the strike price of the put rights and such average closing price or
sale price, as applicable. For example, assuming all the put rights are
outstanding at maturity, a 10% decline in the price of our Class A common stock
would result in an obligation to pay $ million. The contingent liability
created by the put rights is directly correlated to the price of our Class A
common stock, which in turn is dependent on, among other things, the strength of
our business. Our maximum potential obligation under the put rights is $200
million. We cannot assure you that we will have sufficient funds to satisfy this
obligation.
20
OUR STOCK PRICE MAY DECLINE IF OUR QUARTERLY REVENUE AND OPERATING RESULTS
FALL BELOW ANALYSTS' OR INVESTORS' EXPECTATIONS.
Our quarterly revenue and income from operations have varied and are likely
to continue to fluctuate significantly from quarter to quarter because of the
nature of our business and planned product introductions. If our quarterly
revenue or operating results fall below the expectations of securities analysts
or investors, the price of our common stock may fall substantially. For example,
because of our lengthy sales and design processes described above, the effects
of failing to be selected by a customer to provide a product may result in
significantly lower revenue later, as compared to prior periods with more
revenue from earlier design wins. We have experienced fluctuations in quarterly
revenue for this reason in the past. In addition, sales of our products for
specific customer projects often begin and end abruptly, so revenue may increase
rapidly and later decrease just as quickly. The relative timing of the beginning
and end of such sales can make our revenue less predictable.
BECAUSE OF DIFFERENCES IN VOTING POWER AND LIQUIDITY BETWEEN THE CLASS A COMMON
STOCK AND THE CLASS B COMMON STOCK, THE MARKET PRICE OF THE CLASS A COMMON
STOCK MAY BE LESS THAN THE MARKET PRICE OF THE CLASS B COMMON STOCK FOLLOWING
LUCENT'S DISTRIBUTION OF THE CLASS B COMMON STOCK.
After the distribution by Lucent of its shares of Class B common stock to
its stockholders, the Class B common stock will be publicly traded. Upon the
distribution by Lucent, there will be more shares of Class B common stock than
Class A common stock then outstanding. Consequently, the Class B common stock
may be more liquid than the Class A common stock. In addition, because the Class
B common stock has greater voting power per share for the election and removal
of directors than the Class A common stock, some investors may prefer the Class
B common stock as a means of investing in our company. Accordingly, the greater
potential voting power and liquidity of the Class B common stock may cause the
Class B common stock to trade at a higher market price than the Class A common
stock.
IN A BANKRUPTCY OR SIMILAR PROCEEDING INVOLVING US, YOUR RIGHT TO RECEIVE
PAYMENT UNDER THE PUT RIGHT WOULD LIKELY BE TREATED AS AN EQUITY CLAIM
SUBORDINATED TO ALL OF OUR EXISTING AND FUTURE DEBT OBLIGATIONS AND COULD BE
FOUND TO BE UNENFORCEABLE.
The put rights will by their terms be general unsecured senior subordinated
obligations, subordinate in right of payment to all of our existing and future
senior indebtedness, including all indebtedness under our credit facility. If we
become the subject of a liquidation, dissolution, reorganization, bankruptcy or
similar proceeding, whether voluntarily or involuntarily instituted, our
obligations under the put rights will likely be treated as an equity claim. As a
result, a claim under the put right would be subordinated to all of our existing
and future debt obligations. If any of the foregoing events occur, we cannot
assure you that the amounts that you receive with respect to your claim, if any,
will have a value equal to the amounts due on the put rights. Moreover, in such
a proceeding, a court may treat the put option agreement as an agreement to
acquire our own securities that is impermissible under Delaware law and may
disallow the put rights in their entirety. In that case, you will not receive
anything under your put rights.
21
USE OF PROCEEDS
We estimate that the net proceeds of the offering will be approximately $
million after deduction of expenses and commissions. We intend to use
approximately 50% of the net proceeds to repay short-term debt under our credit
facility and the balance for general corporate purposes.
The $2,500 million credit facility that we assumed from Lucent at the time
of our initial public offering was a 364-day facility that was to mature on
February 21, 2002. On October 4, 2001, this credit facility was amended. The
maturity date of the facility was extended from February 22, 2002 to September
30, 2002. In addition, if we raise at least $500 million in equity or debt
capital markets transactions before September 30, 2002, or approximately $
million after giving effect to this offering, the maturity date of the facility
will be extended to September 30, 2004, with the facility required to be reduced
to $750 million on September 30, 2002 and $500 million on September 30, 2003.
The interest rates applicable to borrowings under the facility are based on a
scale indexed to our credit rating. Based upon our current credit ratings of BB-
from Standard & Poor's and Ba3 from Moody's, the interest rate under the
facility is the applicable LIBOR rate plus 400 basis points. The only periodic
debt service obligation under the amended credit facility is to make quarterly
interest payments.
22
CAPITALIZATION
The following table sets forth our consolidated capitalization as of
December 31, 2001, on an actual basis and on an as adjusted basis to give effect
to payments of $378 million on the credit facility which reduced the balance of
the facility to $999 million on February 4, 2002 as described in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," this offering and the use of
approximately 50% of the net proceeds therefrom to repay additional short-term
debt outstanding under the credit facility.
The table below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," our financial
statements and the notes thereto included elsewhere in this prospectus.
DECEMBER 31, 2001
------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(UNAUDITED)
(DOLLARS IN MILLIONS)
Cash and cash equivalents................................... $ 1,781 $
======= ======
Put rights liability(a)..................................... $ -- $
======= ======
Debt
Credit facility........................................... $ 1,377 $
Securitization obligation................................. --
% Senior Subordinated Notes due 2007(b)................. --
Capitalized lease obligation.............................. 49
------- ------
Total debt............................................. $ 1,426 $
======= ======
Stockholders' equity(c):
Class A common stock, par value $0.01 per share,
5,000,000,000 shares authorized and 727,429,667 shares
issued and outstanding................................. 7
Class B common stock, par value $0.01 per share,
5,000,000,000 shares authorized and 908,100,000 shares
issued and outstanding................................. 9
Additional paid in capital................................ $ 7,012 $
Accumulated deficit....................................... (4,917)
Accumulated other comprehensive loss...................... (4)
------- ------
Total stockholders' equity............................. 2,107
------- ------
Total capitalization................................... $ 3,533 $
======= ======
---------------
(a)Represents the estimated fair value of the put rights on the date of
issuance. In accordance with Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative and Hedging Instruments," we will
record the fair value of the put rights as a liability, and any changes
in the fair value of the put rights liability will be reflected in our
results of operations. The fair value of the put rights will be
determined using an option pricing model which takes into account our
credit risk, the volatility of our stock price and the time to maturity.
(b)Represents the estimated proceeds from this offering ($ ) less the
amount allocated to the put rights ($ ).
(c) Our ability to issue additional equity is constrained because our
issuance of additional common stock may cause the distribution of our
shares by Lucent to its stockholders to be taxable to Lucent under
Section 355(e) or be taxable to both Lucent and its stockholders
because of a failure of Lucent to distribute "control" of us as defined
in Section 368(c) of the Internal Revenue Code, and under the tax
sharing agreement we would be required to indemnify Lucent against that
tax. In particular, due to Section 355(e), we are significantly limited
in our ability to issue shares of our common stock. For a discussion of
Section 355(e) and Section 368(c), please see "Arrangements Between
Lucent and Our Company -- Tax Limitations on Additional Issuance of Our
Stock."
23
SELECTED FINANCIAL INFORMATION
(DOLLARS IN MILLIONS)
The following table sets forth our selected financial information. The
financial information for the three month periods ended December 31, 2001 and
2000 and as of December 31, 2001 has been derived from our unaudited financial
statements included elsewhere in this prospectus. The financial information for
the years ended September 30, 2001, 2000 and 1999 and as of September 30, 2001
and 2000 has been derived from our audited financial statements included
elsewhere in this prospectus. The financial information for the year ended
September 30, 1998 and as of September 30, 1999 has been derived from our
audited combined financial statements not included in this prospectus. The
financial information for the year ended September 30, 1997 and as of September
30, 1998 and 1997 has been derived from the company's unaudited combined
financial statements not included in this prospectus. The historical selected
financial information may not be indicative of our future performance as a
stand-alone company and should be read in conjunction with the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements and the related notes
included elsewhere in this prospectus.
THREE MONTHS
ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
--------------- --------------------------------------------
2001 2000 2001(1) 2000(2) 1999 1998 1997
------ ------ ------- ------- ------ ------ ------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS INFORMATION:
Revenue............................... $ 537 $1,362 $ 4,080 $4,708 $3,714 $3,101 $2,769
Gross profit.......................... 16 580 996 2,153 1,765 1,509 1,321
Purchased in-process research and
development......................... -- -- -- 446 17 48 --
Amortization of goodwill and other
acquired intangibles................ 21 111 415 189 13 3 1
Restructuring and separation.......... 72 11 662 -- -- -- --
Impairment of goodwill and other
acquired intangibles................ -- -- 2,762 -- -- -- --
Income (loss) before cumulative effect
of accounting change................ (375) -- (4,612) (76) 319 303 275
Cumulative effect of accounting change
(net of provision (benefit) for
income taxes of $(2) for the three
months ended December 31, 2001, $(2)
in fiscal 2001, and $21 in fiscal
1999)(3)............................ -- (4) (4) -- 32 -- --
Net income (loss)..................... $ (375) $ (4) $(4,616) $ (76) $ 351 $ 303 $ 275
BASIC AND DILUTED EARNINGS (LOSS) PER
SHARE:(4)
Income (loss) before cumulative effect
of accounting change................ $ (.23) -- $ (3.46) $ (.07) $ .31 $ .29 $ .27
Cumulative effect of accounting
change(3)........................... -- -- -- -- .03 -- --
Net income (loss)..................... $ (.23) -- $ (3.46) $ (.07) $ .34 $ .29 $ .27
Weighted average shares outstanding --
basic and diluted (in millions)..... 1,635 1,035 1,334 1,035 1,035 1,035 1,035
STATEMENT OF CASH FLOWS INFORMATION:
Net cash (used in) provided by
operating activities................ $ (344) $ 102 $ 269 $ 762 $ 690 $ 524 n/a
Net cash provided by (used in)
investing activities................ 117 (197) (723) (829) (753) (541) n/a
Net cash (used in) provided by
financing activities................ (1,144) 95 3,607 67 63 17 n/a
OTHER FINANCIAL DATA:
Ratio of earnings to fixed
charges(5).......................... n/a 1.1 n/a 2.4 8.7 12.5 14.7
Deficiency(5)......................... $ 378 n/a $ 4,553 n/a n/a n/a n/a
SUPPLEMENTAL FINANCIAL DATA:
EBITDA(6)............................. $ (254) $ 241 $(3,520) $ 822 $ 877 n/a n/a
Adjusted EBITDA(7).................... (182) 252 (96) 1,268 894 n/a n/a
24
AT SEPTEMBER 30,
AT DECEMBER 31, --------------------------------------------
2001(8) 2001(1) 2000(2) 1999 1998 1997
--------------- ------- ------- ------ ------ ------
(DOLLARS IN MILLIONS)
BALANCE SHEET INFORMATION:
Working capital......................... $ 21 $ 156 $ 428 $ 219 $ 409 $ 331
Total assets............................ 4,847 6,562 7,067 3,020 2,481 2,197
Short-term debt......................... 1,393 2,516 14 14 -- --
Long-term debt.......................... 33 33 46 64 -- --
Stockholders' equity/invested equity.... 2,107 2,461 5,781 1,962 -- --
---------------
(1) During fiscal 2001 we received approximately $3,400 million of net proceeds
from our initial public offering and recorded a $2,762 million impairment of
goodwill and other acquired intangibles related to our acquisitions of Ortel
Corporation, Herrmann Technology, Inc., Agere, Inc. and Enable
Semiconductor, Inc. We also assumed $2,500 million of debt from Lucent
Technologies Inc., consisting of short-term borrowings under a credit
facility provided by financial institutions. We did not receive any of the
proceeds of this short-term debt.
(2) During fiscal 2000 goodwill and other acquired intangibles increased by
$3,400 million due to the acquisitions of Ortel Corporation, Herrmann
Technology, Inc., Agere, Inc. and substantially all the assets of VTC Inc.,
whose results of operations are included from their respective dates of
acquisition.
(3) Effective October 1, 2000, we adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended.
Effective October 1, 1998, we changed our method for calculating the
market-related value of plan assets used in determining the expected
return-on-asset component of annual net pension and postretirement benefit
costs.
(4) Basic and diluted earnings (loss) per common share are calculated by
dividing income (loss) by the weighted average number of common shares
outstanding during the period. The weighted average number of common shares
outstanding on a historical basis includes the retroactive recognition to
October 1, 1996 of the 1,035,000,000 shares owned by Lucent prior to our
initial public offering.
(5) For purposes of determining the ratio of earnings to fixed charges,
"earnings" are defined as income (loss) from continuing operations before
income taxes less undistributed earnings of equity investments plus fixed
charges less interest capitalized during the period. "Fixed charges" consist
of interest expense on all indebtedness and that portion of operating lease
rental expense that is representative of the interest factor. "Deficiency"
is the amount by which fixed charges exceeded earnings in fiscal 2001.
(6) EBITDA equals operating income (loss) plus depreciation and amortization
expense. EBITDA is not intended to represent cash flow or any other measure
of performance or liquidity in accordance with generally accepted accounting
principles. EBITDA is included here because we believe that you may find it
to be a useful analytical tool. Other companies may calculate EBITDA
differently, and we cannot assure you that our figures are comparable with
similarly-titled figures for other companies.
(7)The calculation of adjusted EBITDA is shown below:
THREE MONTHS
ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
------------ --------------------------
2001 2000 2001 2000 1999
----- ---- -------- ------- -----
(DOLLARS IN MILLIONS)
EBITDA........................................... $(254) $241 $(3,520) $ 822 $877
Purchased in-process research and development.... -- -- -- 446 17
Restructuring and separation..................... 72 11 662 -- --
Impairment of goodwill and other acquired
intangibles.................................... -- -- 2,762 -- --
----- ---- ------- ------ ----
Adjusted EBITDA.................................. $(182) $252 $ (96) $1,268 $894
===== ==== ======= ====== ====
(8)On October 4, 2001, we repaid $1,000 million of the $2,500 million of
short-term debt then outstanding under our credit facility. This repayment
was made in connection with an amendment to the terms of the credit facility.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our unaudited financial statements
for the quarterly periods ended December 31, 2001 and 2000 and our audited
financial statements for the years ended September 30, 2001, 2000 and 1999, and
the notes thereto. This discussion contains forward-looking statements. Please
see "Forward-Looking Statements" and "Risk Factors" for a discussion of the
uncertainties, risks and assumptions associated with these statements.
OVERVIEW
We are the world's leading provider of components for communications
applications, delivering integrated solutions that form the building blocks for
advanced wired, wireless and optical communications networks. We also design and
manufacture a wide range of semiconductor solutions for computer- and
communications-related devices used by consumers, such as cellular phones,
modems and hard disk drives for personal computers and workstations. In
addition, we supply complete wireless computer networking solutions through the
ORiNOCO(TM) product family.
Effective October 1, 2001, we realigned our business operations into two
market-focused groups, Infrastructure Systems and Client Systems, that target
the network equipment and consumer communications markets respectively. Each of
these two groups is a reportable operating segment. The segments each include
revenue from the licensing of intellectual property related to that segment.
The Infrastructure Systems segment is comprised of our former
Optoelectronics segment and portions of our former Integrated Circuits segment
and facilitates the convergence of products from both businesses. This segment
delivers solutions to the high-speed communications systems market. We have
consolidated research and development, as well as marketing, for both
optoelectronic and integrated circuit devices aimed at communications systems.
This allows us to more efficiently design, develop and deliver complete,
interoperable solutions to equipment manufacturers for advanced enterprise,
access, metropolitan, long-haul and undersea applications.
The Client Systems segment consists of the remainder of our former
Integrated Circuits segment and includes our wireless data, computer
communications, storage and wireless terminal solutions products. This segment
delivers semiconductor solutions for a variety of end-user applications such as
modems, Internet-enabled cellular terminals and hard-disk drives for computers
as well as software, systems and wireless local area network solutions through
the ORiNOCO(TM) product family.
SEPARATION FROM LUCENT
We were incorporated under the laws of the State of Delaware on August 1,
2000, as a wholly owned subsidiary of Lucent. We had no material assets or
activities as a separate corporate entity until the contribution to us by Lucent
of its integrated circuits and optoelectronic components businesses. Lucent had
previously conducted these businesses through various divisions and
subsidiaries. On February 1, 2001, Lucent began the separation of our company by
transferring to us the assets and liabilities related to these businesses. The
separation was substantially completed, including the transfer of all assets and
liabilities other than pension and postretirement plan assets and liabilities,
which have yet to be transferred, when we completed our initial public offering
in April 2001. As of December 31, 2001, Lucent owned 100% of our outstanding
Class B common stock and 37 million shares of our outstanding Class A common
stock, which represented approximately 57.8% of the total outstanding common
stock and approximately 84.2% of the combined voting power of both classes of
our common stock with respect to the election and removal of directors.
Lucent originally announced its intention to distribute all shares of our
common stock it then owned to its stockholders in a tax-free distribution by
September 30, 2001. On August 16, 2001, Lucent amended its credit facilities.
The amended credit facilities modified the conditions that must be met before
Lucent can distribute its Agere stock to its stockholders.
26
Lucent has stated that the conditions contained in its remaining credit
agreement that must be met before Lucent can distribute its Agere stock to its
stockholders include:
- no event of default exists under the credit agreement;
- Lucent has generated positive EBITDA, as defined in its credit agreement,
for the fiscal quarter immediately preceding the distribution;
- Lucent must meet a minimum current asset ratio;
- Lucent must have received $5 billion in cash from certain non-operating
sources; and
- the total lending commitments under the credit agreement must be reduced
to $1.75 billion or less.
Lucent has advised us that it has satisfied the $5 billion requirement
noted above and reduced the total lending commitments below $1.75 billion.
Lucent also announced on February 14, 2002 that it intends to use its results
from the quarter ending March 31, 2002, to meet the EBITDA condition, and has
indicated that it cannot provide assurances that the conditions to its
obligation to complete the distribution will be satisfied by a particular date
or that the terms and conditions of its indebtedness will permit the
distribution by a particular date or at all due to uncertain market conditions.
In connection with our separation from Lucent, we entered into several
agreements with Lucent regarding, among other things, interim services,
intellectual property and product supply. The interim services agreement sets
forth charges generally intended to allow the providing company to fully recover
the allocated direct costs of providing the services, plus all out-of-pocket
costs and expenses. For more information, see note 19 to our annual financial
statements and note 11 to our quarterly financial statements included elsewhere
in this prospectus.
Lucent is our largest customer with purchases for the three months ended
December 31, 2001 and 2000 representing 14.5% and 17.0%, respectively, and in
fiscal 2001, 2000 and 1999 representing 14.9%, 21.3% and 25.7%, respectively, of
our revenue. We expect Lucent will continue to represent a significant
percentage of our revenue in the foreseeable future.
Our financial statements include amounts prior to February 1, 2001 that
have been derived from the financial statements and accounting records of Lucent
using the historical results of operations and historical basis of the assets
and liabilities of our businesses. We believe the assumptions underlying our
financial statements are reasonable. However, our financial statements for
periods prior to February 1, 2001 may not necessarily reflect our results of
operations, financial position and cash flows in the future or what our results
of operations, financial position and cash flows would have been had we been a
stand-alone company during the periods presented. Because a direct ownership
relationship did not exist among all the various units comprising Agere,
Lucent's net investment in us is shown in lieu of stockholders' equity in our
financial statements for periods prior to February 1, 2001. For periods prior to
February 1, 2001, our financial statements include allocations of Lucent's
expenses, assets and liabilities, including allocations for general corporate
expenses, basic research, interest expense, pension and postretirement costs,
income taxes and cash and receivables, which are discussed in note 1 to our
annual financial statements included elsewhere in this prospectus.
ACQUISITIONS
During fiscal 1999 and 2000 we completed the acquisitions described below
as part of our efforts to broaden our portfolio of product offerings. We did not
have any significant acquisitions during fiscal 2001.
In June 2000, we acquired Herrmann, a developer and manufacturer of passive
optical filters that can be used in conjunction with active optoelectronic
components in products such as amplifiers. The purchase price was $432 million
in Lucent common stock and options. In connection with this acquisition, certain
former stockholders of Herrmann are entitled to receive up to a total of 677,019
additional shares of Lucent common stock based on retention and the achievement
of specified milestones, which require the production of two products at
improved manufacturing yields within the three-year period following the
acquisition. As of September 30, 2001, 200,000 shares of Lucent common stock had
been released based on the achievement of milestones, resulting in additional
goodwill related to the acquisition. The achievement of additional milestones
may also result in additional goodwill.
27
In April 2000, we acquired Ortel, a developer and manufacturer of
semiconductor optoelectronic components used in fiber optic systems for cable
television and data communications networks. The purchase price was $2,998
million in Lucent common stock and options.
In April 2000, we acquired Agere, Inc., a developer and supplier of network
processor integrated circuits. Network processors control how data is sent over
a network. The purchase price was $377 million in Lucent common stock and
options.
In March 2000, we acquired substantially all the assets of VTC, a supplier
of integrated circuits to computer hard disk drive manufacturers. The purchase
price was $104 million in cash. In connection with this acquisition,
stockholders of VTC are entitled to receive additional cash consideration of up
to $50 million contingent on the delivery of product at specified manufacturing
yields and the transfer and qualification of process technology to our
manufacturing facilities. As of September 30, 2001, $30 million of the
additional cash consideration had been paid, resulting in additional goodwill
related to the acquisition. Any future contingent cash consideration paid will
also be recorded as additional goodwill.
In March 1999, we acquired Enable, a developer of integrated circuits for
local area network equipment. The purchase price was $51 million in cash.
In February 1999, we acquired Sybarus Technologies ULC, a developer of
integrated circuits for communications networks. The purchase price was $41
million in cash.
During fiscal 2001, we performed impairment evaluations of the goodwill and
other acquired intangibles from recent acquisitions. The assessments were
performed in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," as a result of weakening economic conditions and
decreased current and expected future demand for products in the markets in
which we operate. We determined the fair value of the acquired entities using a
discounted cash flow model based on growth rates and margins reflective of the
current decrease in demand for our products, as well as anticipated future
demand. Discount rates used were based upon our weighted average cost of capital
adjusted for business risks. These assumptions were based on management's best
estimate of future results. As a result of the assessments, we determined that
an other than temporary impairment of goodwill and other acquired intangibles
existed. We recorded a charge to reduce goodwill and other acquired intangibles
of $2,762 million during fiscal 2001, consisting of $2,220 million, $275
million, $240 million and $27 million related to Ortel, Herrmann, Agere, Inc.
and Enable, respectively.
OPERATING TRENDS
Order levels and revenues have declined significantly during fiscal 2001
and are expected to remain at lower levels in the near-term. We believe the
decreases are due to weakness in our customers' markets and excess inventory
held by our customers. We have experienced a higher than normal level of order
cancellations and reschedules during fiscal 2001. Although the level of customer
order changes has decreased in recent months, our order backlog is lower than we
have experienced in the past. Because of this reduced backlog and the potential
for additional order changes by customers, our ability to forecast future
results is limited.
During the first quarter of fiscal 2002, we observed that the personal
computer market is beginning to show signs of stabilization. Our storage-related
integrated circuits benefited from this strengthening in the personal computer
market and experienced sequential growth, as we provided new read-channel
products and preamplifier solutions to our hard-disk drive customers. However,
the optical networking market continues to experience deterioration, as we saw a
sequential decline in product revenues from this market.
Our costs consist primarily of manufacturing overhead, materials and labor.
Similar to many semiconductor manufacturers, we have relatively high fixed costs
associated with our wafer manufacturing. As a result, our ability to reduce
costs quickly in times of decreased demand is limited, which has an adverse
effect on margins. Because we anticipated higher revenues as we entered fiscal
2001, our cost structure reflected manufacturing capacity and resources greater
than those actually required. In light of the lower revenues we have experienced
in recent quarters, we have taken a number of steps to reduce our cost
structure, including restructuring activities and reductions in capital
spending.
28
RESTRUCTURING AND SEPARATION EXPENSES AND INVENTORY PROVISION
RESTRUCTURING EXPENSES
In fiscal 2001 and the first quarter of fiscal 2002, we announced a series
of restructuring initiatives to reduce our cost structure in light of declining
revenues. We recorded restructuring charges of $70 million and $563 million for
the three months ended December 31, 2001 and fiscal 2001, respectively,
classified within restructuring and separation expenses. These restructuring
initiatives were focused on improving gross profit, reducing expenses and
streamlining operations, and include a worldwide workforce reduction,
rationalization of manufacturing capacity and other activities.
Fiscal Year Ended September 30, 2001
The restructuring initiatives announced in fiscal 2001 will result in a
workforce reduction of approximately 6,000 employees across various business
functions, operating units and geographic regions, and includes both management
and occupational employees. We recorded a restructuring charge of $177 million
in fiscal 2001 related to approximately 5,500 employees, of which approximately
4,300 employees had been taken off-roll as of September 30, 2001. Of this $177
million charge, $28 million represents termination benefits to U.S. management
employees that will be funded through Lucent's pension assets. This amount was
recognized in accordance with Statement of Financial Accounting Standards No.
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits." Severance costs and other exit
costs noted above were determined in accordance with Emerging Issues Task Force
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity."
We recorded a restructuring charge of $386 million in fiscal 2001 relating
to the rationalization of under-utilized manufacturing facilities and other
restructuring-related activities. We have discontinued manufacturing operations
at our chip fabrication plant in Madrid, Spain and have subsequently sold this
facility. We are also rationalizing under-utilized manufacturing capacity at our
facilities in Orlando, Florida, and in Allentown, Breinigsville and Reading,
Pennsylvania. In addition, we are consolidating several satellite-manufacturing
sites, as well as leased corporate offices. The restructuring charge for fiscal
2001 includes $37 million related to facility closings, primarily for lease
terminations, non-cancelable leases and related costs. It also includes an asset
impairment charge of $287 million. All affected assets were classified as held
for disposal, in accordance with the guidance on impairment of assets in
Statement 121, and depreciation was suspended. The $287 million impairment
charge represents the write-down to fair value, less costs to sell, of property,
plant and equipment that was disposed of or removed from operations. The
remaining restructuring charge of $62 million relates primarily to contract
terminations.
A summary of restructuring charges is outlined as follows:
YEAR ENDED AT SEPTEMBER 30,
SEPTEMBER 30, 2001 2001
----------------------------- ----------------
TOTAL NON CASH CASH RESTRUCTURING
CHARGES CHARGES PAYMENTS RESERVE
------- -------- -------- ----------------
(DOLLARS IN MILLIONS)
Workforce reduction....................... $177 $ (28) $(57) $ 92
Rationalization of manufacturing capacity
and other charges....................... 386 (293) (14) 79
---- ----- ---- ----
Total................................ $563 $(321) $(71) $171
==== ===== ==== ====
Three Months Ended December 31, 2001
During the first quarter of fiscal 2002, workforce reductions resulted in a
restructuring charge of $40 million. This charge includes $23 million for
approximately 500 remaining employees associated with the workforce reduction of
6,000 positions announced in fiscal 2001. It also includes $17 million for
approximately 500 employees impacted by the December 5, 2001 announcement of an
additional workforce reduction of 950 positions. This new initiative affects
primarily management positions within our product groups, sales organizations
and corporate support functions located in New Jersey and
29
Pennsylvania. Of the total charge, $13 million represents a non-cash charge for
termination benefits to certain U.S. management employees that will be funded
through Lucent's pension assets recognized in accordance with Statement 88.
We also recorded a $20 million reversal of the restructuring reserve
associated with the worldwide workforce reductions due to the revision of an
estimate reflecting lower severance and benefit costs. Severance costs and other
exit costs were determined in accordance with Emerging Issues Task Force No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity."
We substantially completed the workforce reductions announced in fiscal
2001 with approximately 5,600 employees taken off-roll as of December 31, 2001.
The remaining 400 employees associated with this action are expected to be
off-roll by the end of the second quarter of fiscal 2002. We expect to complete
the workforce reduction announced on December 5, 2001 by September 30, 2002.
During the first quarter of fiscal 2002, we recognized a restructuring
charge of $81 million for rationalization of manufacturing capacity and other
charges. This charge includes $40 million relating to facility closings, $33
million for asset impairments and $8 million primarily for contract
terminations.
The facility closing charge consists principally of a non-cash charge of
$35 million for the realization of the cumulative translation adjustment
resulting from management's decision to substantially liquidate our investment
in the legal entity associated with the Madrid, Spain manufacturing operations.
This charge was recognized in accordance with Emerging Issues Task Force No.
01-5, Issue Summary No. 1, "Application of SFAS No. 52, and Foreign Currency
Translation, to an Investment Being Evaluated for Impairment That Will Be
Disposed Of." The $5 million balance of the charge related to the facility
closing is primarily for lease terminations and non-cancelable leases and
related costs.
The $33 million of asset impairment charges was recognized for property,
plant, and equipment associated with the consolidation of manufacturing and
other corporate facilities. All affected assets were classified as held for
disposal, in accordance with the guidance on impairment of assets in Statement
121, and depreciation was suspended. The $33 million impairment charge
represents the write-down to fair value, less cost to sell, of property, plant
and equipment that was disposed of or removed from operations.
We also recorded a restructuring charge reversal of $31 million during the
first quarter of fiscal 2002 associated with the rationalization of
manufacturing capacity and other charges. The majority of this reversal occurred
because we received $25 million more from the sale of the assets associated with
our Madrid, Spain manufacturing operations than originally estimated. It also
includes a $6 million reversal of a restructuring reserve deemed no longer
necessary.
The following table sets forth our restructuring reserve as of September
30, 2001 and reflects the activity regarding the worldwide workforce reductions
and the rationalization of manufacturing capacity and other charges affecting
the reserve for the three months ended December 31, 2001:
SEPTEMBER 30, THREE MONTHS ENDED DECEMBER 31,
2001 DECEMBER 31, 2001 2001
------------- --------------------------------------------------- -------------
RESTRUCTURING RESTRUCTURING RESTRUCTURING NON-CASH CASH RESTRUCTURING
RESERVE CHARGE REVERSAL ITEMS PAYMENTS RESERVE
------------- ------------- ------------- -------- -------- -------------
(DOLLARS IN MILLIONS)
Workforce reduction.......... $ 92 $ 40 $(20) $(13) $(61) $ 38
Rationalization of
manufacturing capacity and
other charges.............. 79 81 (31) (43) (19) 67
---- ---- ---- ---- ---- ----
Total.................... $171 $121 $(51) $(56) $(80) $105
==== ==== ==== ==== ==== ====
We anticipate that substantially all of the $38 million restructuring
reserve balance as of December 31, 2001 relating to workforce reductions will be
paid by the end of fiscal year 2002. The restructuring reserve balance of $67
million as of December 31, 2001 relating to the rationalization of manufacturing
capacity and other charges will be paid as follows: the majority of the contract
terminations of $42 million will be paid by the end of the third quarter of
fiscal 2002; non-cancelable lease obligations
30
of $14 million, due to the consolidation of facilities, will be paid over the
respective lease terms through fiscal 2005; and other related costs of $11
million will be paid by the end of fiscal 2002. These cash outlays will be
funded through cash and cash equivalents on hand.
We currently estimate future annualized pre-tax savings from the actions
announced in fiscal 2001 and the first quarter of fiscal 2002 described above to
be approximately $600 million, of which $120 million is associated with reduced
depreciation and $480 million in cash savings resulting from lower employee
costs and reduced costs associated with contract and facility lease obligations.
The full benefit of these savings is expected to be achieved during the third
quarter of fiscal 2002. We expect that approximately 75% of these savings will
affect cost of goods sold and 25% will affect operating expenses. Our savings in
the current quarter were approximately $110 million resulting from reduced
depreciation and lower employee costs and reduced costs associated with contract
and facility lease obligations. Of that amount, we estimate that approximately
75% will affect cost of goods sold and 25% will affect operating expenses.
Facilities Consolidation
On January 23, 2002, we announced plans to further improve our operating
efficiency. We plan to seek a buyer for our wafer fabrication operation in
Orlando, Florida. This site has approximately 1,100 employees. Additionally,
over twelve to eighteen months from the announcement date, we will consolidate
nine existing manufacturing, research and development, business management and
administrative facilities in Pennsylvania and New Jersey into our Allentown,
Pennsylvania campus and two new research and development facilities in New
Jersey.
We will move the majority of our integrated circuits and optoelectronics
operations from our sites in Reading and Breinigsville, Pennsylvania into the
Allentown, Pennsylvania campus. In addition, the majority of our assembly and
test operations located in these three sites will move to our assembly and test
facilities in Bangkok, Thailand; Matamoras, Mexico; and Singapore. Subsequently,
we will discontinue operations at the Reading and Breinigsville facilities and
will seek buyers for those properties. We expect that our plan to combine
operations from these facilities into Allentown will result in a net headcount
reduction of approximately 300 positions.
We will also transfer approximately 350 corporate support and product
development positions from multiple locations in New Jersey to Allentown. The
remaining research and development positions in New Jersey will move to two new
research and development facilities in New Jersey.
We expect to incur cash expenditures associated with moving manufacturing
operations and consolidating facilities of approximately $250 million to $350
million. We do not anticipate any significant charges until the latter half of
fiscal 2002. There will also be additional non-cash impacts associated with
accelerated depreciation and asset impairments that we are still evaluating, and
such impacts could be material.
Through the consolidation of operations from nine sites to Allentown and
two New Jersey locations, we will reduce our square footage in the two states by
about two million square feet, or approximately 50%, resulting in significantly
lower costs. We expect to realize approximately $100 million annually in cash
savings from these actions, driven primarily by a reduction in rent and building
infrastructure costs.
SEPARATION EXPENSES
We incurred costs, fees and expenses relating to our separation from
Lucent. These costs, fees and expenses were primarily related to legal
separation matters; the establishment of a separate computer and information
technology infrastructure and associated information processing and network
support; marketing relating to building a company brand identity; and
implementing treasury, real estate, pension and records retention management
services. For the three months ended December 31, 2001 and 2000, we incurred
separation expenses of $2 million and $11 million, respectively. For fiscal 2001
we incurred $99 million of separation expenses classified within restructuring
and separation expenses. Additional separation costs that we may incur in future
periods are contingent on when and how we achieve our full independence from
Lucent.
31
INVENTORY PROVISION
We recorded inventory provisions, classified within cost of sales, of $55
million and $40 million for the three months ended December 31, 2001 and 2000,
respectively, and $409 million in fiscal 2001 compared to inventory provisions
of $29 million in fiscal 2000 and $11 million in fiscal 1999. The fiscal 2001
amount, which includes purchase order cancelation charges, resulting from a
significant decrease in forecasted revenue and was calculated in accordance with
our inventory valuation policy, which is based on a review of forecasted demand
compared with existing inventory levels.
ACCOUNTING POLICIES INVOLVING SIGNIFICANT ESTIMATES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and revenue and expenses
during the period reported. The following accounting policies require management
to make estimates and assumptions. These estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the period that they
are determined to be necessary. If actual results differ significantly from
management's estimates, our financial statements could be materially impacted.
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market. Our inventory valuation policy is based on a review
of forecasted demand compared with existing inventory levels. If our estimate of
forecasted demand is significantly different than our actual demand, our
inventory may be over- or under-valued.
Long-lived assets, such as goodwill and other acquired intangibles and
property, plant and equipment, are reviewed for impairment whenever events such
as a significant industry downturn, product discontinuance, plant closures,
product dispositions, technological obsolescence or other changes in
circumstances indicate that the carrying amount may not be recoverable. When
such events occur, we compare the carrying amount of the assets to undiscounted
expected future cash flows. If this comparison indicates that there is an
impairment, the amount of the impairment is typically calculated using
discounted expected future cash flows. If our estimate of an asset's future cash
flows is significantly different from the asset's actual cash flows, we may
over- or under-estimate the value of an asset's impairment. A long-lived asset's
value is also dependent upon its estimated useful life. A change in the useful
life of a long-lived asset could result in higher or lower depreciation and
amortization expenses. If the asset's actual life is different from its
estimated life, the asset could be over- or under-valued.
Restructuring reserves have been recorded in connection with the
restructuring initiatives we have announced. These reserves include estimates
pertaining to employee separation costs, the settlement of contractual
obligations and other matters. Although we do not anticipate significant
changes, the actual costs may differ from these estimates, resulting in further
charges or reversals of previously recorded charges.
We are subject to proceedings, lawsuits and other claims related to
environmental, labor, product and other matters. We are required to assess the
likelihood of adverse outcomes to these matters as well as potential ranges of
probable losses. A determination of the amount of reserves required, if any, for
these contingencies is made after careful analysis of each individual issue. The
required reserves may change in the future due to new developments in each
matter or changes in the approach, such as a change in settlement strategy.
Historically, certain of our operations have been included in Lucent's
consolidated income tax returns. Income tax expense in our consolidated and
combined statements of operations has been calculated on a separate tax return
basis prior to our initial public offering. The asset and liability approach is
used to recognize deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the carrying amounts and the
tax bases of assets and liabilities. A valuation allowance is established, as
needed, to reduce net deferred tax assets to the amount for which recovery is
probable. If
32
estimates of our future profitability are different than that actually attained,
our deferred tax assets could be under- or over-valued.
See footnote 2 to our annual financial statements for a summary of our
significant accounting policies.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 2000
The following table shows the change in revenue by operating segment:
THREE MONTHS
ENDED
DECEMBER 31, CHANGE
------------- -----------
2001 2000 $ %
---- ------ ----- ---
(DOLLARS IN MILLIONS)
OPERATING SEGMENT:
Infrastructure Systems............................... $263 $ 929 $(666) (72)%
Client Systems....................................... 274 433 (159) (37)
---- ------ -----
Total............................................. $537 $1,362 $(825) (61)%
==== ====== =====
Revenue. Revenue decreased 61%, or $825 million, for the three months
ended December 31, 2001 as compared to the same period in 2000, due primarily to
volume decreases. The decrease of $666 million within the Infrastructure Systems
segment was due to depressed market conditions and reduced expenditures by
service providers, which drove volume decreases across the entire segment. The
decrease of $159 million within the Client Systems segment was also primarily
the result of depressed market conditions, which drove volume decreases across
the entire segment.
Costs and gross margin. Costs decreased 33%, or $261 million, from $782
million for the three months ended December 31, 2000 to $521 million for the
three months ended December 31, 2001. Gross margin decreased from 42.6% in the
prior year quarter to 3.0% in the current quarter, a decrease of 39.6 percentage
points. Gross margin for the Infrastructure Systems segment decreased to a
negative 6.5% in the current quarter from 46.3% in the prior year quarter,
largely as a result of lower manufacturing capacity utilization and the impact
of inventory provisions of $53 million in the current quarter compared to
inventory provisions of $28 million in the prior year quarter. Gross margin for
the Client Systems segment declined to 12.0% in the current quarter from 34.6%
in the prior year quarter. This decline was primarily due to lower manufacturing
capacity utilization.
Selling, general and administrative. Selling, general and administrative
expenses decreased 31%, or $48 million, from $157 million in the three months
ended December 31, 2000 to $109 million in the three months ended December 31,
2001. The decrease was principally due to savings realized from the
restructuring and cost saving initiatives announced in fiscal 2001.
Research and development. Research and development expenses decreased 30%,
or $82 million, from $276 million in the prior year quarter to $194 million in
the current quarter. The decrease was primarily due to savings realized from the
restructuring and cost saving initiatives announced in fiscal 2001.
Amortization of goodwill and other acquired intangibles. Amortization
expense decreased 81%, or $90 million, from $111 million for the three months
ended December 31, 2000 to $21 million for the three months ended December 31,
2001. The decrease is due to the impairment of goodwill and other acquired
intangibles of $2,762 million that was recognized in the second half of fiscal
2001. This impairment significantly reduced our goodwill and other acquired
intangibles and therefore, our current period amortization.
Restructuring and separation expenses. Restructuring and separation
expenses increased $61 million from $11 million for the three months ended
December 31, 2000 to $72 million for the three months ended December 31, 2001.
Net restructuring expenses of $70 million were incurred in the first quarter of
fiscal 2002 as we continued to implement our announced restructuring
initiatives. No restructuring
33
expenses were recognized in the prior year quarter. Separation expenses
decreased $9 million, or 81%, from $11 million in the first quarter of fiscal
2001 to $2 million in the first quarter of fiscal 2002. Because we incurred the
majority of the necessary expenses related to our separation from Lucent in
fiscal 2001, we expect these expenses to be substantially lower in fiscal 2002.
Operating income (loss). We reported an operating loss of $380 million for
the three months ended December 31, 2001, a decline of $405 million from
operating income of $25 million reported for the three months ended December 31,
2000. This change reflects primarily a decline in gross profit, as well as an
increase in restructuring and separation expenses, partially offset by expense
reductions resulting from restructuring and cost saving initiatives announced in
fiscal 2001 and a decrease in the amortization of goodwill and other acquired
intangibles. Although performance measurement and resource allocation for the
reportable segments are based on many factors, the primary financial measure
used is operating income (loss) by segment, exclusive of amortization of
goodwill and other acquired intangibles, the impairment of goodwill and other
acquired intangibles, and restructuring and separation expenses, which is shown
in the following table.
THREE MONTHS
ENDED
DECEMBER 31, CHANGE
------------ -----------
2001 2000 $ %
----- ---- ----- ---
(DOLLARS IN MILLIONS)
OPERATING SEGMENT:
Infrastructure Systems.............................. $(201) $140 $(341) N/M
Client Systems...................................... (86) 7 (93) N/M
----- ---- -----
Total............................................ $(287) $147 $(434) N/M
===== ==== =====
---------------
N/M = Not meaningful
Other income -- net. Other income -- net increased $54 million from $21
million for the three months ended December 31, 2000 to $75 million for the same
period in 2001. The increase is primarily due to a gain of $38 million from the
sale of an available-for-sale investment, as well as an increase in interest
income of $11 million from our investment of the initial public offering
proceeds.
Interest expense. Interest expense increased $26 million to $50 million
for the three months ended December 31, 2001 from $24 million in the prior year
period. This increase is due to the interest expense associated with our credit
facility being greater than what Lucent allocated to us in the prior year
quarter.
Provision for income taxes. For the first quarter of fiscal 2002, we
recorded a provision for income taxes of $20 million on a pre-tax loss of $355
million, yielding an effective tax rate of negative 5.6%. This rate is higher
than the U.S. statutory rate primarily due to the provision for taxes in foreign
jurisdictions and the recording of a full valuation allowance of approximately
$124 against U.S. net deferred tax assets. For the first quarter of fiscal 2001,
we recorded a provision for income taxes of $22 million on pre-tax income of $22
million, yielding an effective tax rate of 100.0%. This rate is higher than the
U.S. statutory rate primarily due to non-tax deductible goodwill amortization
and separation costs.
FISCAL YEAR ENDED SEPTEMBER 30, 2001 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 2000
The following table shows the change in revenue by operating segment:
YEAR ENDED
SEPTEMBER 30, CHANGE
--------------- -----------
2001 2000 $ %
------ ------ ----- ---
(DOLLARS IN MILLIONS)
OPERATING SEGMENT:
Infrastructure Systems.............................. $2,674 $3,059 $(385) (13)%
Client Systems...................................... 1,406 1,649 (243) (15)
------ ------ -----
Total............................................ $4,080 $4,708 $(628) (13)%
====== ====== =====
34
Revenue. Revenue decreased 13%, or $628 million, to $4,080 million in
fiscal 2001 from $4,708 million in fiscal 2000, primarily due to volume
decreases in both segments. The decrease of $385 million within the
Infrastructure segment was primarily due to decreased sales of $395 million in
integrated circuits, as system providers managed their orders and inventory in
light of the reduced capital spending by service providers. This decrease in the
Infrastructure segment was partially offset by an increase of $10 million in
sales of optoelectronic components. The decrease of $243 million within the
Client segment was due to volume decreases across the segment, which were
partially offset by strength in the wireless local area networking market.
During fiscal 2001 revenues decreased sequentially each quarter due to
declining market conditions compared to sequential revenue growth each quarter
in fiscal 2000. Infrastructure revenues declined $708 million, or 70%, to $298
million in the fourth quarter of fiscal 2001 from the peak quarterly revenue
level of $1,006 million experienced in the fourth quarter of fiscal 2000. Client
revenues declined $181 million, or 37%, to $302 million in the fourth quarter of
fiscal 2001 from the peak quarterly revenue level of $483 million experienced in
the fourth quarter of fiscal 2000.
Costs and gross margin. Costs increased 21%, or $529 million, to $3,084
million in the current fiscal year from $2,555 million in the prior fiscal year.
Gross margin decreased 21.3 percentage points to 24.4% in fiscal 2001 from 45.7%
in fiscal 2000, primarily due to lower manufacturing capacity utilization and
the impact of inventory provisions of $409 million in fiscal 2001 compared to
inventory provisions of $29 million in fiscal 2000. Gross margin for the
Infrastructure segment declined to 24.8% in fiscal 2001 from 49.8% in fiscal
2000 primarily due to lower manufacturing capacity utilization, inventory
provisions of $378 million in fiscal 2001 compared to inventory provisions of
$20 million in fiscal 2000, and a change in product mix, from higher margin
components to lower margin components. Gross margin for the Client segment
decreased to 23.8% in fiscal 2001 from 38.3% in fiscal 2000 due to lower
manufacturing capacity utilization.
Selling, general and administrative. Selling, general and administrative
expenses increased 12%, or $62 million, to $597 million in fiscal 2001 from $535
million in fiscal 2000. This was primarily due to increases in general and
administrative expenses associated with being a stand-alone company, which were
partially offset by lower bonus accruals of approximately $35 million.
Research and development. Research and development expenses increased 15%,
or $124 million, to $951 million in fiscal 2001 from $827 million in fiscal
2000. The increase was due to new and ongoing product development expenses,
including a full year of expenses associated with acquisitions during fiscal
2000, partially offset by lower bonus accruals of approximately $40 million.
Purchased in-process research and development. Purchased in-process
research and development decreased to zero in fiscal 2001 from $446 million in
fiscal 2000. This is the result of no significant acquisitions being made in
fiscal 2001, while a number of acquisitions were completed in fiscal 2000.
Amortization of goodwill and other acquired intangibles. Amortization
expense increased $226 million to $415 million in fiscal 2001 from $189 million
in fiscal 2000 due to the recognition in fiscal 2001 of amortization associated
with acquisitions completed during fiscal 2000.
Restructuring and separation expenses. Restructuring and separation
expenses of $662 million were incurred in fiscal 2001. We recorded $563 million
of restructuring charges. We also incurred expenses of $99 million in connection
with our separation from Lucent.
Impairment of goodwill and other acquired intangibles. During fiscal 2001,
we determined that an other than temporary impairment of goodwill and other
acquired intangibles existed and recorded a charge of $2,762 million to reduce
goodwill and other acquired intangibles.
Operating income (loss). Operating loss was $4,391 million in fiscal 2001
compared to $156 million of operating income in fiscal 2000. This was driven
primarily by the impairment of goodwill and other acquired intangibles, a
decline in gross profit, restructuring and separation expenses and an increase
in the amortization of goodwill and other acquired intangibles, partially offset
by the absence of purchased in-process research and development costs in fiscal
2001. Although performance measurement and resource allocation for the
reportable segments are based on many factors, the primary financial measure
used is
35
operating income (loss) by segment, exclusive of purchased in-process research
and development costs, amortization of goodwill and other acquired intangibles,
restructuring and separation expenses, and impairment of goodwill and other
acquired intangibles which is shown in the following table:
YEAR ENDED
SEPTEMBER 30, CHANGE
-------------- -------------
2001 2000 $ %
------ ----- ------- ---
(DOLLARS IN MILLIONS)
OPERATING SEGMENT:
Infrastructure Systems............................. $(377) $658 $(1,035) N/M
Client Systems..................................... (175) 133 (308) N/M
----- ---- -------
Total........................................... $(552) $791 $(1,343) N/M
===== ==== =======
---------------
N/M = Not meaningful
Other income-net. Other income-net increased 6%, or $2 million, to income
of $35 million in fiscal 2001 from income of $33 million in fiscal 2000. The $35
million in fiscal 2001 was comprised primarily of interest income of $69 million
from our investment of the proceeds from our initial public offering, income of
$42 million from our equity investment in Silicon Manufacturing Partners Pte
Ltd., the impairment of $47 million for several non-consolidated investments and
foreign exchange losses of $14 million. The $33 million in fiscal 2000 was
comprised primarily of gains of $18 million on the sale of investments and
foreign exchange gains of $6 million.
Interest expense. Interest expense increased $93 million to $151 million
in fiscal 2001 from $58 million in fiscal 2000. This increase is due to interest
on the $2,500 million of short-term debt we assumed from Lucent in April 2001.
Provision for income taxes. The effective tax rates were (2.3)% and 158.0%
for fiscal 2001 and 2000, respectively. The fiscal 2001 effective tax rate
includes the impact of recording a valuation allowance of approximately $553
million for deferred tax assets, and the effects of non-tax deductible goodwill
amortization and separation costs. The fiscal 2000 effective tax rate includes
the impact of non-tax deductible goodwill amortization and non-tax deductible
purchased in-process research and development.
FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1999
The following table shows the change in revenue by operating segment:
YEAR ENDED
SEPTEMBER 30, CHANGE
--------------- ----------
2000 1999 $ %
------ ------ ---- ---
(DOLLARS IN MILLIONS)
OPERATING SEGMENT:
Infrastructure Systems................................ $3,059 $2,290 $769 34%
Client Systems........................................ 1,649 1,424 225 16
------ ------ ----
Total.............................................. $4,708 $3,714 $994 27%
====== ====== ====
Revenue. Revenue increased 27%, or $994 million, to $4,708 million in
fiscal 2000 from $3,714 million in fiscal 1999, primarily due to volume
increases in both segments. The increase of $769 million in the Infrastructure
segment was driven by volume increases across the segment and led by increased
sales to existing customers of optoelectronic components used in high-speed
transport and submarine network applications. The increase of $225 million in
the Client segment was led by strengthening in the wireless local area
networking and personal computer hard-drive markets. This increase in the Client
segment was negatively impacted by a missed design win with a large customer in
1999 for wireless terminal devices, which resulted in not generating sales from
a generation of that customer's mobile telephones.
Costs and gross margin. Costs increased 31%, or $606 million, to $2,555
million in fiscal 2000 from $1,949 million in fiscal 1999, primarily due to
increased sales volume. Gross margin decreased 1.8 percentage
36
points to 45.7% in fiscal 2000 from 47.5% in fiscal 1999. Gross margin for the
Infrastructure segment was 49.8% in fiscal 2000 and 52.0% in fiscal 1999. The
decrease in Infrastructure gross margin was primarily due to lower average
revenues per unit for integrated circuits and a change in product mix, partially
offset by volume growth in the sale of optoelectronics components, which
resulted in a more efficient utilization of manufacturing capacity for
optoelectronic components. Gross margin for the Client segment decreased to
38.3% in fiscal 2000 from 40.3% in fiscal 1999. The decrease in Client gross
margin was primarily due to a change in product mix, from higher margin
components to lower margin components.
Selling, general and administrative. Selling, general and administrative
expenses decreased 7%, or $38 million, to $535 million in fiscal 2000 from $573
million in fiscal 1999. This decrease was primarily due to lower costs
associated with the implementation of our advanced logistics and planning
systems. These systems were primarily implemented and paid for in fiscal 1999.
Research and development. Research and development expenses increased 21%,
or $144 million, to $827 million in fiscal 2000 from $683 million in fiscal
1999. This increase was primarily due to new and ongoing product development
expenses including $50 million added during the year as a result of our
acquisitions.
Purchased in-process research and development. Purchased in-process
research and development increased $429 million, to $446 million in fiscal 2000
from $17 million in fiscal 1999. This increase was due to the fiscal 2000
acquisitions of Ortel, Agere, Inc., Herrmann and substantially all the assets of
VTC, which resulted in charges of $307 million, $94 million, $34 million and $11
million, respectively.
Amortization of goodwill and other acquired intangibles. Amortization
expense increased $176 million, to $189 million in fiscal 2000 from $13 million
in fiscal 1999. This increase reflects amortization of goodwill associated with
the acquisitions of Ortel, Herrmann and Agere, Inc. during fiscal 2000.
Operating income (loss). Operating income decreased 67%, or $323 million,
to $156 million in fiscal 2000 from $479 million in fiscal 1999. This was driven
primarily by purchased in-process research and development costs, an increase in
the amortization of goodwill and other acquired intangibles and an increase in
research and development cost, partially offset by an increase in gross profit.
Performance measurement and resource allocation for the reportable segments are
based on many factors. The primary financial measure used is operating income by
segment, exclusive of purchased in-process research and development costs and
amortization of goodwill and other acquired intangibles, which is shown in the
following table:
YEAR ENDED
SEPTEMBER 30, CHANGE
------------- ----------
2000 1999 $ %
----- ----- ---- ---
(DOLLARS IN MILLIONS)
OPERATING SEGMENT:
Infrastructure Systems.................................. $658 $478 $180 38%
Client Systems.......................................... 133 31 102 329
---- ---- ----
Total................................................ $791 $509 $282 55%
==== ==== ====
Other income-net. Other income-net decreased 8%, or $3 million, to $33
million in fiscal 2000 from $36 million in fiscal 1999. The $33 million in
fiscal 2000 was comprised primarily of gains on sales of investments of $18
million, $4 million of equity income and a $6 million gain on foreign currency
transactions. The $36 million in fiscal 1999 was comprised primarily of gains on
sales of investments of $32 million, a $20 million equity loss and a $9 million
gain on foreign currency transactions.
Provision for income taxes. The effective tax rates were 158.0% and 33.1%
for fiscal 2000 and 1999, respectively. The increase in effective tax rates was
due to the fiscal 2000 write-offs of purchased in-process research and
development costs that are not deductible for tax purposes. Excluding the impact
of non-tax deductible purchased in-process research and development expenses and
amortization of goodwill and other acquired intangibles expenses, the effective
tax rates were 27.8% and 32.2% for fiscal 2000 and 1999, respectively. The
decrease was primarily due to the tax impact of non-U.S. activity and increased
research tax credits.
37
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, our net cash position was $388 million, which
reflects $1,781 million in cash and cash equivalents less $1,377 million of
short-term debt under our credit facility and $16 million from the current
portion of our capitalized lease obligation.
Net cash used in operations was $344 million for the three months ended
December 31, 2001, compared with $102 million of net cash provided by operations
for the three months ended December 31, 2000. The decline in the cash flow from
operations for the three months ended December 31, 2001, compared with the same
period last year, was driven primarily by the increase in our net loss, as a
result of depressed market conditions and a reduction in accounts payable.
Cash provided by investing activities was $117 million for the three months
ended December 31, 2001 compared with cash used by investing activities of $197
million for the three months ended December 31, 2000. The increase in cash flow
from investing activities is primarily due to proceeds of $107 million from the
sale of property, plant and equipment, proceeds of $53 million from the sale of
investments and a reduction of capital expenditures. Capital expenditures
decreased $158 million to $43 million for the three months ended December 31,
2001, from $201 million for the three months ended December 31, 2000. We are
seeking to limit our capital expenditures principally to projects critical to
winning new business, keeping customer commitments and the completion of a new
office facility adjacent to our current headquarters.
Net cash used in financing activities was $1,144 million for the three
months ended December 31, 2001, compared with cash provided by financing
activities of $95 million for the three months ended December 31, 2000. The
decrease was primarily the result of our repayment of $1,000 million under our
credit facility in connection with the amendment of the facility on October 4,
2001. Subsequent to the amendment of our facility, we further reduced the amount
outstanding under the facility by $123 million to $1,377 million at December 31,
2001. The amounts used to make these repayments resulted from the following
transactions: $50 million from the sale of an available-for-sale investment, $67
million from the sale of our manufacturing facility and related equipment
located in Spain and $6 million from various sale and leaseback transactions.
As of September 30, 2001, our net cash position was $636 million, which
reflects $3,152 million in cash and cash equivalents less $2,516 million of
short-term debt, including a $16 million current portion of capitalized lease
obligations. The $636 million of net cash is primarily the result of our receipt
of $3,448 million of net cash proceeds from our initial public offering, offset
by $2,500 million of short-term debt we assumed from Lucent at that time. We did
not receive any of the proceeds of this debt and Lucent was relieved of all
obligations related to this debt.
Net cash provided by operating activities was $269 million in fiscal 2001
compared to $762 million for fiscal 2000. The decrease in fiscal 2001, compared
with fiscal 2000, reflects a reduction in revenues during a period in which we
increased our manufacturing capacity and infrastructure in anticipation of
higher revenues. The adverse impact on cash caused by our fiscal 2001 net loss
was offset by a $413 million reduction in accounts receivable and a $243 million
increase in accounts payable.
Net cash provided by operating activities was $762 million in fiscal 2000
compared to $690 million for fiscal 1999. The improvement was primarily the
result of increases in net income, excluding the non-cash impact associated with
depreciation and amortization and purchased in-process research and development.
In fiscal 2000 our cash provided by operating activities reflects an increase in
receivables of $237 million as a result of increased revenue. In fiscal 1999 our
cash provided by operating activities reflects a pre-payment of certain costs in
connection with the expansion of our non-U.S. integrated circuits operations.
Net cash used in investing activities was $723 million in fiscal 2001
compared to $829 million and $753 million in fiscal 2000 and 1999, respectively.
Capital expenditures and acquisitions of businesses have historically been the
primary components of our investing activities. Capital expenditures were $723
million, $672 million and $656 million in fiscal 2001, 2000 and 1999,
respectively. Our capital spending has been used primarily in support of our
manufacturing facilities. Capital spending also includes expenditures for
information technology, including computer servers and networking capability.
38
In fiscal 2001 we invested $96 million on the construction of a new office
facility adjacent to our current headquarters and invested $24 million in
capital expenditures related to our separation from Lucent. The remainder of our
capital expenditures supported on-going business requirements. In light of
current business conditions, we are limiting our capital expenditures
principally to projects critical to winning new business or keeping customer
commitments. Our capital investment needs are expected to be significantly lower
in fiscal 2002 than in fiscal 2001, resulting from the current downturn in our
markets.
Net cash provided by financing activities was $3,607 million in fiscal 2001
compared to $67 million and $63 million in fiscal 2000 and 1999, respectively.
The increase in fiscal 2001 was primarily the result of the receipt of the net
cash proceeds from the sale of our common stock in our initial public offering.
Prior to our initial public offering, we relied on Lucent to provide financing
for our operations.
The $2,500 million credit facility that we assumed from Lucent at the time
of our initial public offering was a 364-day facility that was to mature on
February 21, 2002. On October 4, 2001, this credit facility was amended. In
connection with the amendment, we repaid $1,000 million, thereby reducing the
facility to $1,500 million. We also paid $21 million of fees in connection with
the amendment which we will amortize over the life of the facility. The facility
is comprised of term loans and revolving credit loans and is secured by our
principal domestic assets other than the proceeds of our initial public offering
and, while Lucent remains a majority stockholder, real estate. The maturity date
of the facility has been extended from February 22, 2002 to September 30, 2002.
In addition, if we raise at least $500 million in equity or debt capital markets
transactions before September 30, 2002, or $ million after giving effect to
this offering, the maturity date of the facility will be extended to September
30, 2004, with the facility required to be reduced to $750 million on September
30, 2002 and $500 million on September 30, 2003. The debt is not convertible
into any other securities of the company.
The interest rates applicable to borrowings under the facility are based on
a scale indexed to our credit rating. Our credit ratings have declined from BBB-
from Standard and Poor's and Baa3 from Moody's at the time of our initial public
offering to BB- from Standard & Poor's and Ba3 from Moody's as of December 31,
2001 and currently. Based on our credit ratings as of December 31, 2001, the
interest rate under the facility was the applicable LIBOR rate plus 475 basis
points. As discussed below, subsequent to December 31, 2001, we reduced the size
of the facility to less than $1,000 million and therefore reduced the interest
rate for borrowings under the facility to the applicable LIBOR rate plus 400
basis points. Unless our credit ratings change, this rate will remain in effect
for the life of the facility. Any further decline in our credit rating would
increase the interest rate under the facility by 0.25% per year, which would
increase our annual interest expense by approximately $2.5 million. Following
these repayments, $500 million of the facility is now a revolving credit
facility with the remainder considered a term loan. The only periodic debt
service obligation under the amended credit facility is to make quarterly
interest payments.
Under the agreement, we must use proceeds of liquidity raising transactions
to reduce the size of the facility. Liquidity raising transactions are
dispositions of assets, other than sales of inventory and ordinary course
disposals of excess or obsolete property, including among other things
receivables securitizations and sale and leaseback transactions, in each case
outside the ordinary course of business. If we complete liquidity raising
transactions, we must apply 100% (50% if the size of the facility is $500
million or less) of the net cash proceeds we receive from the transactions to
reduce the size of the facility. The agreement also provides that 50% of the net
cash proceeds of the first $500 million and 75% (50% if the size of the facility
is $500 million or less) of the net cash proceeds greater than $500 million from
most sales of debt or equity securities in public or private transactions be
applied to reduce the credit facility. Notwithstanding the foregoing, we must
apply 100% of net cash proceeds over $1,000 million from the issuance of debt
securities that are secured equally with the credit facility to reduce the size
of the credit facility.
On January 18, 2002, we completed the sale of certain assets and
liabilities related to our FPGA business to Lattice Semiconductor Corporation
for $250 million in cash. The net cash proceeds from the sale were used to repay
amounts outstanding under our credit facility in accordance with the terms of
the
39
credit agreement. We believe that the sale of the FPGA business will not have a
material impact on our future results of operations.
On January 24, 2002, we and certain of our subsidiaries entered into a
securitization transaction relating to certain of our and their accounts
receivable. As part of the transaction, we and certain of our subsidiaries
irrevocably transfer accounts receivable on a daily basis to a wholly-owned,
fully consolidated, bankruptcy-remote subsidiary. Because the subsidiary is
bankruptcy-remote, it cannot be liquidated by our stockholders, and in the event
we were to go into bankruptcy, our creditors would have no claim on the
subsidiary's assets. The subsidiary has entered into a loan agreement with
certain financial institutions, pursuant to which the financial institutions
agreed to make loans to the subsidiary secured by the accounts receivable. The
financial institutions have commitments under the loan agreement of up to $200
million; however the amount that we can actually borrow at any time depends on
the amount and nature of the accounts receivable that we have transferred to the
subsidiary. The loan agreement expires on January 21, 2003. On February 1, 2002,
we borrowed $104 million under this agreement. On February 4, 2002, these
proceeds were used to repay amounts outstanding under our credit facility in
accordance with the terms of the credit agreement. Following this repayment and
the repayment of the $250 million from the sale of our FPGA business and $24
million from additional sale and leaseback transactions, our credit facility was
reduced to $999 million.
The credit facility contains financial covenants that require us to: (i)
maintain a minimum level of liquidity, (ii) achieve a minimum level of earnings
before interest, taxes, depreciation and amortization computed in accordance
with the agreement each quarter, (iii) maintain a minimum level of net worth,
computed in accordance with the agreement and (iv) limit capital expenditures.
Other covenants restrict our ability to pay cash dividends, incur indebtedness
and invest cash in our subsidiaries and other businesses. The receivables
securitization has the same four financial covenants and covenant levels as the
credit facility, however, a violation of these covenants will not accelerate
payment or require an immediate cash outlay to cover amounts previously loaned
under the facility, but will end our ability to obtain further loans under the
agreement.
On January 23, 2002, we announced plans to consolidate nine existing
manufacturing, research and development, business management and administrative
facilities in Pennsylvania and New Jersey. The consolidation is expected to be
completed in twelve to eighteen months from the announcement date. We anticipate
the cash required for this consolidation to be between $250 million and $350
million. We plan to discontinue operations and seek buyers for our Reading and
Breinigsville facilities. Through this consolidation we will reduce our square
footage in the two states by about two million square feet, or approximately
50%, significantly lowering cost. We expect to realize approximately $100
million annually in cash savings from these actions, driven primarily by a
reduction in rent and building infrastructure costs. In addition, we plan to
seek a buyer for our wafer fabrication operation in Orlando, Florida.
Our primary source of liquidity is our cash and cash equivalents. We
believe our cash and cash equivalents, together with additional amounts that may
be borrowed under the receivables securitization facility, are sufficient to
meet our cash requirements at least through the end of March 2003, including
repayment of borrowings under the credit facility if its maturity is not
extended, the cash requirements of the facilities consolidation described above
and the other announced restructuring activities. If our revenues are lower than
what our plans contemplate and as a result less cash is generated, or if we no
longer have access to the receivables securitization facility, we would consider
further cash conserving actions to enable us to meet our cash requirements
through the end of March 2003. These actions would include the elimination of
employee bonuses, the acceleration of already planned expense reductions,
further limits on capital spending and the retiming of certain restructuring
initiatives. We cannot assure you that these actions will be feasible at the
time or prove adequate. We also intend to pursue other financing transactions
and will consider asset sales, although we have no committed transactions at
this time. Also, in connection with our spin-off from Lucent, we are
significantly restricted in our ability to issue stock in order to raise
capital. Our planning does not take into account any funds that we may receive
as a result of selling our Orlando, Florida or Reading and Breinigsville,
Pennsylvania facilities or from this offering of notes and put rights.
40
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table aggregates our contractual obligations and commitments
with definitive payment terms which will require significant cash outlays in the
future. The commitment amounts are as of September 30, 2001, with the exception
of the credit facility, which has been adjusted for actual payments related to
its refinancing on October 4, 2001 and other transactions completed prior to
February 4, 2002, when the credit facility was reduced to $999 million, as
discussed above.
YEAR ENDING SEPTEMBER 30,
---------------------------------- LATER
TOTAL 2002 2003 2004 2005 2006 YEARS
------ ------ ---- ---- ---- ---- -----
(DOLLARS IN MILLIONS)
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Credit facility.......................... $ 999 $ 999 $ -- $ -- $ -- $ -- $ --
Capital leases........................... 55 17 22 16 -- -- --
Operating leases......................... 331 142 106 50 29 4 --
------ ------ ---- ---- ---- ---- ----
Total............................... $1,385 $1,158 $128 $ 66 $ 29 $ 4 $ --
====== ====== ==== ==== ==== ==== ====
We also have potential contractual obligations which are contingent upon
certain events and do not have definitive payment terms. Such obligations may
require cash outlays by us in the future. The obligations are discussed below.
In December 1997, we entered into a joint venture, called Silicon
Manufacturing Partners Pte Ltd, or SMP, with Chartered Semiconductor, a leading
manufacturing foundry for integrated circuits, to operate a 54,000 square foot
integrated circuit manufacturing facility in Singapore. We own a 51% equity
interest in this joint venture, and Chartered Semiconductor owns the remaining
49% equity interest. We have an agreement with SMP under which we have agreed to
purchase 51% of the production output from this facility and Chartered
Semiconductor has agreed to purchase the remaining 49% of the production output.
If we fail to purchase the required commitments, we will be required to pay SMP
for the fixed costs associated with the unpurchased wafers. Chartered
Semiconductor is similarly obligated with respect to the wafers allotted to it.
The agreement may be terminated by either party upon two years' written notice,
but may not be terminated prior to February 2008. The agreement may also be
terminated for material breach, bankruptcy or insolvency. Based on forecasted
demand, we believe it is unlikely that we would have to pay any significant
amounts for underutilization in the near future. However, if our purchases under
this agreement are less than anticipated, our cash obligation to SMP may be
significant.
In July 2000, we and Chartered Semiconductor entered into an agreement
committing both parties to jointly develop manufacturing technologies for future
generations of integrated circuits targeted at high-growth communications
markets. We have agreed to invest up to $350 million over a five-year period. As
part of the joint development activities, the two companies are staffing a new
research and development team at Chartered Semiconductor's Woodlands campus in
Singapore. These scientists and engineers are working with Company teams
currently located in the United States, as well as with Chartered
Semiconductor's technology development organization. The agreement may be
terminated for breach of material terms upon 30 days' notice or for convenience
upon six months' notice prior to the planned successful completion of a
development project, in which case the agreement will terminate upon the actual
successful completion of that project.
We have also entered into an agreement with Chartered Semiconductor whereby
Chartered Semiconductor will provide integrated circuit wafer manufacturing
services to us. Under the agreement, we provide a demand forecast to Chartered
Semiconductor for future periods and Chartered commits to have manufacturing
capacity available for our use. If we use less than a certain percent of the
forecasted manufacturing capacity, we may be obligated to pay penalties to
Chartered Semiconductor. We do not expect any penalties under this agreement to
have a material impact on our results of operations or financial condition.
41
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the acquisitions of Agere, Inc., Herrmann, Ortel and
substantially all the assets of VTC in fiscal 2000, and the acquisitions of
Enable and Sybarus in fiscal 1999, a portion of each purchase price was
allocated to purchased in-process research and development. In analyzing these
acquisitions, we made decisions to buy technology that had not yet been
commercialized rather than develop the technology internally. We relied on
factors such as the amount of time it would take to bring the technology to
market in making these decisions. We also considered Lucent's Bell Laboratories'
resource allocation and its progress on comparable technology, if any. Our
management expects to use a similar decision process in the future.
We estimated the fair value of in-process research and development for the
above acquisitions using an income approach. This involved estimating the fair
value of the in-process research and development using the present value of the
estimated after-tax cash flows expected to be generated by the purchased in-
process research and development, using risk-adjusted discount rates and revenue
forecasts as appropriate. The selection of the discount rate was based on
consideration of Lucent's weighted average cost of capital, as well as other
factors known at the time, including the projected useful life of each
technology, profitability levels of each technology, the uncertainty of
technology advances and the stage of completion of each technology. We believe
that the estimated in-process research and development amounts so determined
represented fair value and did not exceed the amount a third party would have
paid for the projects.
Core technology is a product, service or process that exists at the date of
the acquisition and may contribute to the value of any product resulting from
in-process research and development. We deducted an amount representing the
estimated value of any core technology's contribution from the estimated cash
flows used to value in-process research and development. At the date of
acquisition, the in-process research and development projects had not yet
reached technological feasibility and had no alternative future uses.
Accordingly, the value allocated to these projects was capitalized and
immediately expensed at acquisition. If the projects are not successful or
completed in a timely manner, management's product pricing and growth rates may
not be achieved and we may not realize the financial benefits expected from the
projects.
Set forth below are descriptions of the major acquired in-process research
and development projects and our original assumptions in connection with our
significant acquisitions, followed by a current status of the projects. Due to
significant changes in economic, industry and market conditions, particularly in
the latter half of fiscal 2001, the original assumptions at the time of
acquisition, for some of our acquisitions, vary materially from our current
estimates as noted below.
AGERE, INC.
On April 20, 2000, we completed the acquisition of Agere, Inc., which was a
developer and supplier of integrated circuits solutions used in network
processors, which control how data is sent over networks. At the acquisition
date, Agere, Inc. was conducting development and qualification activities
related to the development of a programmable network processor for various
protocols for 2.5 gigabits per second transmission speeds. A protocol is a set
of procedures for the formatting and timing of data transmission between two
pieces of equipment. A gigabit is a unit of measurement of data and is equal to
roughly one billion bits. The allocation to purchased in-process research and
development of $94 million represented its estimated fair value using the
methodology described above.
Agere, Inc.'s in-process research and development projects were
approximately 65% complete at the time of acquisition. The projects were
expected to be completed in November 2000 after approximately two years of
research and development effort. Following completion, the projects were
expected to begin generating economic benefits. Revenue attributable to the
resulting products was estimated to be $21 million in fiscal 2001 and $65
million in fiscal 2002. Revenue was expected to peak in fiscal 2007 and decline
thereafter through the end of the product's life, which was expected to be in
fiscal 2009, as new product technologies were expected to be introduced by us.
Revenue growth was expected to decrease from 205% in fiscal 2002 to 5% in fiscal
2007 and be negative for the remainder of the projection period.
42
At the acquisition date, costs to complete Agere's in-process research and
development were expected to total approximately $3.4 million. Projected future
net cash flows attributable to Agere's in-process research and development,
assuming successful development, were discounted to net present value using a
discount rate of 30%.
Agere, Inc.'s in-process research and development projects related to first
generation network processors were completed in the fourth quarter of fiscal
2000. The second generation processors were completed in the first quarter of
fiscal 2001. Actual costs related to completing these projects were $13 million.
A third generation is expected to be completed in the first quarter of fiscal
2003 at an estimated cost of $2.4 million. Actual revenues for fiscal 2001 were
$4 million, consisting primarily of sales of development systems and models,
which are used by customers for system evaluations and qualifications. Changing
conditions in the targeted market areas for these network processors have led to
a revised revenue forecast for these parts, which is lower than originally
anticipated. Fiscal 2002 revenues are currently projected to be about $13
million, with an annual long-term growth rate of 8% through fiscal 2007 with
negative growth thereafter.
ORTEL CORPORATION
On April 27, 2000, we completed the acquisition of Ortel, which was a
developer and manufacturer of semiconductor-based optoelectronic components used
in fiber optic systems for data communications and cable television networks. At
the acquisition date, Ortel was conducting development, engineering and testing
activities associated with high-speed optical transmitters, receivers and
transceivers.
Ortel's in-process research and development projects ranged from 50% to 75%
complete at the time of acquisition. Ortel's in-process research and development
projects were expected to be completed during the period from June 2000 to April
2001 after approximately two to three and a half years of research and
development effort. Following completion, the projects were expected to begin
generating economic benefits. The allocation to purchased in-process research
and development of $307 million represented its estimated fair value using the
methodology described above. The $307 million was allocated to the following
projects, which are explained below.
- 10G New Products -- $61 million;
- 10G OC-192 Receiver/Daytona Products -- $105 million;
- 980 Products -- $95 million;
- 1550 Products -- $27 million; and
- CATV Products -- $19 million.
Projected net cash flows attributable to Ortel's in-process research and
development, assuming successful development, were discounted to net present
value using a discount rate of 25%.
Revenue attributable to the 10G New Products was estimated to be $5 million
in fiscal 2001 and $30 million in fiscal 2002. 10G New Products are receivers
that incorporate new packaging technologies for high-speed transport and
metropolitan network applications at speeds of 10 gigabits per second. Revenue
was expected to peak in fiscal 2009 and decline thereafter through the end of
the products' life as new product technologies were expected to be introduced by
us. Revenue growth was expected to decrease from 447% in fiscal 2002 to 8% in
fiscal 2009, and be negative for the remainder of the projection period. At the
acquisition date, costs to complete the research and development efforts related
to the products were expected to be $3 million.
Most of the 10G New Products were completed in fiscal 2001 as anticipated
at a cost of $2 million. One product remains in development and is expected to
be completed in fiscal 2002 at an estimated cost of $1 million. There were no
revenues attributable to the 10G New Products in fiscal 2001. Management has
revised its estimated revenue for fiscal 2002 to be $1 million with a long-term
growth rate of 15%.
Revenue attributable to the 10G OC-192 Receiver/Daytona Products was
estimated to be $16 million in fiscal 2001 and $33 million in fiscal 2002. 10G
OC-192 Receiver/Daytona Products are directly modulated lasers and receivers
used for high-speed transport and metropolitan network applications at
43
speeds of 10 gigabits per second. Revenue was expected to peak in fiscal 2009
and decline thereafter through the end of the products' life as new product
technologies were expected to be introduced by us. Revenue growth was expected
to decrease from 166% in fiscal 2003 to 8% in fiscal 2009, and be negative for
the remainder of the projection period. At the acquisition date, costs to
complete the research and development efforts related to the product were
expected to be $1 million.
The 10G OC-192 Receiver/Daytona Products were completed in fiscal 2001.
Actual revenues in fiscal 2001 were $40 million and are currently projected to
decrease to $8 million for fiscal 2002. Revenues are expected to grow annually
at a rate of 10% until fiscal 2008 when a decline in growth is anticipated.
Actual project costs were materially consistent with management's original
estimates.
Revenue attributable to the 980 Products was estimated to be $44 million in
fiscal 2001 and $108 million in fiscal 2002. 980 Products are pump lasers
operating at 980 nanometers wavelength. A nanometer is a unit of measurement of
distance and equals one billionth of a meter. Revenue was expected to peak in
fiscal 2008 and decline thereafter through the end of the products' life as new
product technologies were expected to be introduced by us. Revenue growth was
expected to decrease from 143% in fiscal 2002 to 17% in fiscal 2008, and be
negative for the remainder of the projection period. At the acquisition date,
costs to complete the research and development efforts related to the 980
Products were expected to be $1 million.
The 980 Products were in development and therefore did not yield any
revenues in fiscal 2001. Currently, all design efforts on the 980 products have
been discontinued and there are no expected revenues in fiscal 2002 or any
future period.
Revenue attributable to the 1550 Products was estimated to be $2 million in
fiscal 2001 and $63 million in fiscal 2002. 1550 Products are transmitters and
lasers operating at 1550 nanometers wavelength. Revenue was expected to peak in
fiscal 2008 and decline thereafter through the end of the products' life as new
product technologies were expected to be introduced by us. Revenue growth was
expected to decrease from 33% in fiscal 2003 to 17% in fiscal 2008, and be
negative for the remainder of the projection period. At the acquisition date,
costs to complete the research and development efforts related to the 1550
Products were expected to be $2 million.
The 1550 Products had four distinct product lines. Of these product lines,
one has been completed, one has been cancelled and two are still in-process. It
is anticipated that the in-process research and development for the uncompleted
projects will be finalized in the third quarter of fiscal 2002. Product
development costs for the 1550 products since acquisition have been $1.5 million
and it is anticipated that an additional $0.5 million will be incurred to
complete the products. There were no revenues attributable to these products in
fiscal 2001. Management has lowered its estimate of revenues to be $3 million in
fiscal 2002 with a 10% annual growth rate projected through fiscal 2008 with
negative growth thereafter.
Revenue attributable to the CATV Products was estimated to be $28 million
in fiscal 2001 and $58 million in fiscal 2002. CATV Products are receivers and
return path products for cable television network applications. The return path
allows cable system operators to offer Internet and telephone services, in
direct competition with network services providers. Revenue was expected to peak
in fiscal 2004 and decline thereafter through the end of the products' life as
new product technologies were expected to be introduced by us. Revenue growth
was expected to decrease from 107% in fiscal 2002 to 4% in fiscal 2004 and be
negative for the remainder of the projection period. At the acquisition date,
costs to complete the research and development efforts related to the CATV
Products were expected to be $1 million.
The CATV Products were completed in fiscal 2001 at a cost of $2 million.
Actual revenues in fiscal 2001 were $44 million. Revenue attributable to these
projects is currently estimated to be $35 million in fiscal 2002 with minimal to
no growth anticipated in future years.
HERRMANN TECHNOLOGY, INC.
On June 16, 2000, we completed the acquisition of Herrmann, which was a
developer and supplier of passive optical filters that can be used in
conjunction with active optoelectronic components in products such as
amplifiers. The allocation to in-process research and development of $34 million
represented its
44
estimated fair value using the methodology described above. The $34 million was
allocated primarily to the development of manufacturing processes.
Revenue attributable to the products using these manufacturing processes
was estimated to be $59 million in fiscal 2001 and $91 million in fiscal 2002.
Revenue was expected to peak in fiscal 2005 and decline thereafter through the
end of the products' life as new technologies were expected to be introduced by
us. Revenue growth was expected to decrease from 54.7% in 2002 to 0.7% in fiscal
2005, and be negative for the remainder of the projection period. At the
acquisition date, costs to complete the research and development efforts related
to the processes were expected to be $0.5 million.
Herrmann's in-process research and development projects ranged from 20% to
60% complete at the time of acquisition. Herrmann's in-process research and
development projects were expected to be completed during the period from August
2000 to June 2001 after approximately two to six years of research and
development effort. Following completion, the projects were expected to begin
generating economic benefits. In total, costs to complete Herrmann's in-process
research and development were expected to equal approximately $1.8 million.
Projected future net cash flows attributable to Herrmann's in-process research
and development, assuming successful development, were discounted to net present
value using a discount rate of 27.5%.
Hermann's in-process research and development projects were either
completed by July of 2001 or discontinued due to market conditions. Actual costs
to complete the projects were $1.3 million. Actual revenue in fiscal 2001
attributable to these products was significantly lower than anticipated at $3
million. Management has revised the estimated revenue attributable to these
projects to be $10 million in fiscal 2002 with minimal to no growth anticipated
in future years.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
We are subject to a wide range of laws and regulations relating to
protection of the environment and employee safety and health. We are currently
involved in investigations and/or cleanup of known contamination at eight sites
either voluntarily or pursuant to government directives. There are established
reserves for environmental liabilities where they are probable and reasonably
estimable. Reserves for estimated losses from environmental remediation are,
depending on the site, based primarily upon internal or third party
environmental studies, estimates as to the number, participation level and
financial viability of all potential responsible parties, the extent of
contamination and the nature of required remedial actions. Although we believe
that the reserves are adequate to cover known environmental liabilities, it is
often difficult to estimate with certainty the future cost of such matters.
Therefore, there is no assurance that expenditures that will be required
relating to remedial actions and compliance with applicable environmental laws
will not exceed the amount reflected in the reserves for such matters or will
not have a material adverse effect on our consolidated financial condition,
results of operations or cash flows.
LEGAL PROCEEDINGS
From time to time we are involved in legal proceedings arising in the
ordinary course of business, including unfair labor charges filed by our unions
with the National Labor Relations Board, claims before the U.S. Equal Employment
Opportunity Commission and other employee grievances. We also may be subject to
intellectual property litigation and infringement claims, which could cause us
to incur significant expenses or prevent us from selling our products.
On October 3, 2000, a patent infringement lawsuit was filed against Lucent,
among other optoelectronic components manufacturers, by Litton Systems, Inc. and
The Board of Trustees of the Leland Stanford Junior University in the United
States District Court for the Central District of California (Western Division).
We anticipate we may be named a defendant in the suit. The complaint alleges
that each of the defendants is infringing a patent related to the manufacture of
erbium-doped optical amplifiers. The patent is owned by Stanford University and
is exclusively licensed to Litton. The complaint seeks, among other remedies,
unspecified monetary damages, counsel fees and injunctive relief. This matter is
in its early stages.
45
An investigation was commenced on April 4, 2001, by the U.S. International
Trade Commission based on a request of Proxim, Inc. alleging patent infringement
by 14 companies, including some of our customers for wireless local area
networking products. Proxim alleges infringement of three patents related to
spread-spectrum coding techniques. Spread-spectrum coding techniques refers to a
way of transmitting a signal for wireless communications by spreading the signal
over a wide frequency band. We believe we have valid defenses to Proxim's claims
and have intervened in the investigation in order to defend our customers.
Proxim seeks relief in the form of an exclusion order preventing the importation
by our customers of specified wireless local area networking products, including
some of our products, into the United States. If Proxim were able to obtain an
exclusion order, we believe that the order would likely apply to 802.11(b) card
products and access point products containing such cards for our customers named
in the complaint, and possibly all 802.11(b) card products and access point
products containing such cards imported by us. We believe that any order would
not exclude importation of 802.11(b) chipsets, or impact any potential 802.11(a)
products. While it is possible that an exclusion order, if granted, could affect
products from which we derive a material amount of revenue, we believe that we
could restructure our operations to minimize the impact of such an order on our
business. One of our subsidiaries, Agere Systems Guardian Corp., filed a lawsuit
on May 23, 2001, in the U.S. District Court in Delaware against Proxim alleging
infringement of three patents used in Proxim's wireless local area networking
products.
If we are unsuccessful in resolving these proceedings, as they relate to
us, our operations may be disrupted or we may incur additional costs. Other than
as described above, we do not believe there is any litigation pending that
should have, individually or in the aggregate, a material adverse effect on our
consolidated financial position, results of operations or cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
Statement 142 provides guidance on the financial accounting and reporting for
acquired goodwill and other intangible assets. Under Statement 142, goodwill and
indefinite lived intangible assets will no longer be amortized. Intangible
assets with finite lives will continue to be amortized over their useful lives
which will no longer be limited to a maximum life of forty years. The criteria
for recognizing an intangible asset have also been revised. As a result, we will
need to re-assess the classification and useful lives of our previously acquired
goodwill and other intangible assets. Statement 142 also requires that goodwill
and indefinite lived intangibles be tested for impairment at least annually. The
goodwill impairment test is a two step process that requires goodwill to be
allocated to reporting units. In the first step, the fair value of the reporting
unit is compared to the carrying value of the reporting unit. If the fair value
of the reporting unit is less than the carrying value of the reporting unit, a
goodwill impairment may exist, and the second step of the test is performed. In
the second step, the implied fair value of the goodwill is compared to the
carrying value of the goodwill and an impairment loss will be recognized to the
extent that the carrying value of the goodwill exceeds the implied fair value of
the goodwill. Statement 142 is effective for Agere in fiscal year 2003, although
earlier application is permitted. We plan to adopt Statement 142 effective
October 1, 2002 and are currently evaluating the potential effects of
implementing this standard on our financial condition and results of operations.
Also in July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations." Statement 143 addresses financial accounting and
reporting for legal obligations associated with the retirement of tangible
long-lived assets and their associated retirement costs. In accordance with
Statement 143, retirement obligations will be recognized at fair value in the
period they are incurred. When the liability is initially recorded, the cost
will be capitalized by increasing the asset's carrying value, which is
subsequently depreciated over its useful life. Statement 143 is effective for us
in fiscal year 2003, with earlier application encouraged. We are currently
evaluating the potential effects, if any, on our financial condition and results
of operations of adopting Statement 143, as well as the timing of its adoption.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."
46
Statement 144 primarily addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and also affects certain aspects of
accounting for discontinued operations. Statement 144 is effective for us in
fiscal year 2003, with earlier application encouraged. We are currently
evaluating the potential effects on our financial condition and results of
operations of adopting Statement 144, as well as the timing of its adoption.
EUROPEAN MONETARY UNION -- EURO
Several member countries of the European Union have established fixed
conversion rates between their sovereign currencies and the Euro, and have
adopted the Euro as their new single legal currency. The legacy currencies
remained legal tender in the participating countries for a transition period
between January 1, 1999 and January 1, 2002. During the transition period,
cash-less payments were permitted to be made in the Euro. Beginning on January
1, 2002, the participating countries introduced Euro notes and coins. The
participating countries must withdraw all legacy currencies by February 28, 2002
so that they will no longer be available. The Euro conversion may affect
cross-border competition by creating cross-border price transparency. We will
continue to evaluate issues involving introduction of the Euro as further
accounting, tax and governmental legal and regulatory guidance is available.
Based on current information and our current assessment, it is not expected that
the Euro conversion will have a material adverse effect on our business or
financial condition.
RISK MANAGEMENT
We are exposed to market risk from changes in foreign currency exchange
rates and interest rates that could impact our results of operations and
financial position. We manage our exposure to these market risks through our
regular operating and financing activities and, when deemed appropriate, through
the use of derivative financial instruments. We use derivative financial
instruments as risk management tools and not for speculative purposes. In
addition, derivative financial instruments are entered into with a diversified
group of major financial institutions in order to manage our exposure to
nonperformance on such instruments. Our risk management objective is to minimize
the effects of volatility on our cash flows by identifying the recognized assets
and liabilities or forecasted transactions exposed to these risks and
appropriately hedging the risks.
We use foreign currency forward contracts, and may from time to time use
foreign currency options, to manage the volatility of non-functional currency
cash flows resulting from changes in exchange rates. Foreign currency exchange
contracts are designated for recorded, firmly committed or anticipated purchases
and sales. The use of these derivative financial instruments allows us to reduce
our overall exposure to exchange rate movements, since the gains and losses on
these contracts substantially offset losses and gains on the assets, liabilities
and transactions being hedged. As of September 30, 2001, our primary net foreign
currency market exposures included Singapore dollars and British Pounds
Sterling.
The fair value of foreign currency exchange contracts is subject to changes
in foreign currency exchange rates. For the purpose of assessing specific risks,
we use a sensitivity analysis to determine the effects that market risk
exposures may have on the fair value of our financial instruments and results of
operations. The financial instruments included in our sensitivity analysis are
foreign currency forward contracts. These contracts generally have a duration of
three to six months and are primarily used to hedge firmly committed and
anticipated transactions. The sensitivity analysis excludes the values of
foreign currency denominated receivables and payables because of their short
maturities. To perform the sensitivity analysis, we assess the risk of loss in
fair values from the effect of a hypothetical 10% change in foreign currency
exchange spot rates assuming no change in interest rates. For contracts
outstanding as of September 30, 2001 and 2000, a 10% appreciation in foreign
currency exchange rates against the U.S. dollar from the prevailing market rates
would have increased our pre-tax earnings by approximately $2 million and $12
million, respectively. Conversely, a 10% depreciation in these exchange rates
from the prevailing market rates would have decreased our pre-tax earnings by
approximately $2 million and $12 million, respectively. Consistent with the
nature of the economic hedge of foreign currency exchange contracts, these gains
or losses would be offset by corresponding decreases or increases, respectively,
of the underlying instrument or transaction being hedged.
47
The model assumes a parallel shift in all foreign currency exchange spot
rates. Exchange rates, however, rarely move in the same direction. The
assumption that all exchange rates change in a parallel manner does not
necessarily represent the actual changes in fair value we would incur under
normal market conditions because all variables other than the specific market
risk are held constant.
Effective October 1, 2000, we adopted Statement 133 and its corresponding
amendments under Statement 138. The adoption of Statement 133 resulted in a
cumulative effect of an increase in our net loss of $4 million, net of a tax
benefit of $2 million in fiscal 2001. The increase in our net loss is primarily
due to derivatives not designated as hedging instruments. For the three months
ended December 31, 2001 and 2000, and the fiscal year ended September 30, 2001,
the change in fair market value of derivative instruments was recorded in other
income-net and was not material.
While we hedge certain foreign currency transactions, a decline in value of
non-U.S. dollar currencies may adversely affect our ability to contract for
product sales in U.S. dollars because our products may become more expensive to
purchase in U.S. dollars for local customers doing business in the countries of
the affected currencies.
As of December 31, 2001, we had $1,377 million of short-term variable rate
debt outstanding. To manage the cash flow risk associated with this debt, we
may, from time to time, enter into interest rate swap agreements. There were no
interest rate swap agreements in effect during the three months ended December
31, 2001, fiscal 2001 or fiscal 2000. As of December 31, 2001, a variation of 1%
in the interest rate charged on the short-term debt would result in a change of
approximately $14 million in annual interest expense.
Our investment portfolio consists of equity investments accounted for under
the cost and equity methods. We do not hedge equity price risk.
In connection with this offering, we will be issuing put rights on our
Class A common stock. In accordance with Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative and Hedging Instruments," we will
record the value of the put rights as a liability, and any changes in the value
of the put rights liability will be reflected in our results of operations. The
fair value of the put rights will be determined using an option pricing model
which takes into account our credit risk, the volatility of our stock price and
the time to maturity. If the average closing price or average sale price, as
applicable, of a share of our Class A common stock for the 20 trading days prior
to the maturity date of the notes is less than the exercise price of the put
rights, we will be obligated under the put rights to pay to the trust an amount
of cash equal to the product of (x) the number of shares subject to outstanding
put rights and (y) the difference between the exercise price of the put rights
and such average closing price or sale price, as applicable. As of ,
2002, a 10% decline in the price of our Class A common stock would result in a
$ million increase in the value of the put obligation and a
decrease in our pre-tax earnings.
48
BUSINESS
GENERAL
We are the world's leading provider of components for communications
applications, delivering integrated solutions that form the building blocks for
advanced wired, wireless, and optical communications networks. We also design
and manufacture a wide range of integrated circuit solutions for computer- and
communications-related consumer devices such as cellular phones, modems, and
hard disk drives for personal computers and workstations. In addition, the
company supplies complete wireless computer networking solutions through the
ORiNOCO(TM) product line.
Effective October 1, 2001, we realigned our business operations into two
market-focused groups, Infrastructure Systems and Client Systems, that target
the network equipment and consumer communications markets respectively. Each of
these two groups is a reportable operating segment. The segments each include
revenue from the licensing of intellectual property related to that segment.
The Infrastructure Systems segment is comprised of our former
Optoelectronics segment and portions of our former Integrated Circuits segment
and facilitates the convergence of products from both businesses. This segment
delivers solutions to the high-speed communications systems market. We have
consolidated research and development, as well as marketing, for both
optoelectronic and integrated circuit devices aimed at communications systems.
This allows us to more efficiently design, develop and deliver complete,
interoperable solutions to equipment manufacturers for advanced enterprise,
access, metropolitan, long-haul and undersea applications.
The Client Systems segment consists of the remainder of our former
Integrated Circuits segment and includes our wireless data, computer
communications, storage and wireless terminal solutions products. This segment
delivers integrated circuit solutions for a variety of end-user applications
such as modems, Internet-enabled cellular terminals and hard-disk drives for
computers as well as software, systems and wireless local area network solutions
through the ORiNOCO(TM) product family.
Integrated circuits, or chips, are made using semiconductor wafers
imprinted with a network of electronic components. They are designed to perform
various functions such as processing electronic signals, controlling electronic
system functions and processing and storing data. Optoelectronic components,
including both active and passive components, transmit, process, change, amplify
and receive light that carries data and voice traffic over optical networks.
We sell our products primarily through our direct sales force, but we also
utilize distributors, resellers and electronic commerce. Of our total revenue of
$4,080 million in the fiscal year ended September 30, 2001, $2,674 million, or
66%, was generated by our Infrastructure Systems segment and $1,406 million, or
34%, was generated by our Client Systems segment. Approximately 45% of our
revenue was generated in the United States and 55% internationally. For the
three months ended December 31, 2002, $263 million of our revenue, or 49%, was
generated by our Infrastructure Systems segment, and $274 million of our
revenue, or 51%, was generated by our Client Systems segment. See note 17 to our
annual financial statements included elsewhere in this prospectus for further
information about our Infrastructure Systems and Client Systems segments.
As of December 31, 2001 we employed approximately 12,600 people worldwide.
We have major research and development and manufacturing sites in the United
States, Mexico, Singapore and Thailand.
OUR STRATEGY
We intend to maintain and enhance our position as the leading global
provider of communications components. To accomplish this goal, we are pursuing
the major strategies described below.
- Focus on Future Growth and Profit Opportunities within the Communications
Components Industry. We are focusing resources on segments of the market
for integrated circuits and optoelectronics where we can leverage our
existing technical skills, manufacturing capabilities and customer
49
relationships, and where we believe there is long-term market growth and
profit potential. We will particularly focus on the markets for network
communications equipment and wireless local area networking products.
- Expand and Develop New Customer Relationships. We seek to capitalize on
our status as a stand-alone company to increase our sales by being
selected to develop and supply components for our customers' new
products. We seek to expand our engagements with existing and potential
customers who have been reluctant to buy from us because they are
competitors of Lucent.
- Execute on Management Realignment and Restructuring. We have realigned
our management structure to focus on the communications infrastructure
and client systems markets. We will continue to implement a series of
announced restructuring initiatives focused on reducing expenses and
streamlining operations within these segments, which are intended to
reduce our fixed costs and enable us to more closely match our costs to
the level of the demand from our customers.
- Extend Product and Technical Leadership. We are building on our product
and technical leadership by continuing to work closely with our customers
and making appropriate investments in research and development. Specific
initiatives include:
1. Integrated Solutions. We will continue to leverage our extensive
communications systems experience and extensive product portfolio to
provide integrated solutions for our customers. Our integrated
solutions will provide customers with components and software for
entire functions and subsystems so that customers can design and
market higher performance and lower cost products more quickly. We
also support customers with technical product and systems
understanding to help them use our products.
2. Combined Integrated Circuit and Optoelectronic Solutions. We believe
that customers will increasingly demand combined integrated circuit
and optoelectronic solutions in order to reduce the time and expense
necessary to develop communications equipment. We will take advantage
of our extensive experience, systems understanding and broad product
portfolio in both integrated circuits and optoelectronics to
capitalize on this market opportunity.
INFRASTRUCTURE SYSTEMS
We offer integrated circuits and optoelectronic components for use in a
broad range of communication networks applications. Our products are used
primarily in the following types of equipment:
- network communications equipment, which facilitates the transmission,
switching and management of data and voice traffic within communications
networks;
- network access equipment, such as data communications equipment and cable
television infrastructure equipment, which allow equipment to connect to
communications and cable television networks; and
- wireless infrastructure equipment, such as cellular base stations, which
transmit and receive data and voice communications through radio waves.
COMPETITIVE STRENGTHS
Our infrastructure products are engineered to work together in optical,
wireline and wireless networks. We often sell integrated solutions that combine
multiple components into a single product. We believe our integrated solutions
allow our customers to reduce the size and costs of their network equipment and
reduce their time to develop new products. We also believe these solutions allow
our customers to rely on a smaller number of suppliers and improve the
performance of their products. As a result, our customers are able to meet the
requirements of their end users more quickly and effectively.
We have dedicated engineering groups that develop manufacturing technology,
common design methodology and commonly used product design elements for use
across our Infrastructure Systems
50
segment. By using common core technologies, we simplify our design methods,
create reusable intellectual property and achieve manufacturing efficiencies.
We believe the primary reasons why customers select our products are:
- breadth of product offerings and product design capabilities, including
the ability to deliver integrated solutions;
- performance, as measured by speed, power requirements and reliability;
- feature set;
- price;
- quality and automation of optoelectronic manufacturing processes;
- flexibility, which refers to the ability to design products using our
intellectual property, our customers' intellectual property or a
combination of both; and
- compatibility with other products and communications standards used in
communications networks.
We focus our product development and sales efforts to address the customer
considerations listed above. The relative importance of these factors may vary
depending on the product group or the particular customer's requirements. For
example, the ability to deliver integrated solutions may be a primary concern of
a smaller company with relatively few equipment design resources. It may also be
very important to a more established company that needs to bring new products to
market quickly. On the other hand, high-performance products or the best feature
set may be the most important factor to some customers that have specialized
needs in a particular market segment.
PRODUCTS AND APPLICATIONS
Our infrastructure systems product offerings support four primary
applications:
- processing, aggregation and switching;
- optical core and metro networks;
- optical access and transport; and
- networking.
We offer integrated circuits and optoelectronic components that facilitate
the transmission and switching of data and voice signals within communications
networks, including optical, wireline and wireless networks.
We sell integrated circuit solutions that include physical layer devices,
integrated circuits supporting SONET/SDH communication standards, multi-service
switching fabrics and network processing devices and broadband access devices,
each of which is described below.
Our optoelectronic components are utilized in optical networks. Optical
networks transmit information as pulses of light, or optical signals, through
optical fibers, which are hair-thin glass strands. An optical network utilizes a
number of interdependent active optoelectronic and passive optical components.
An active component is a device that has both optical and electronic properties.
A passive component is a device that functions only in the optical domain. We
primarily offer active optical components, including lasers, modulators,
transmitters and amplifiers, each of which is described below.
Processing, Aggregation and Switching Devices
Multi-Service Switching Fabrics and Network Processing Devices. Switching
devices guide data to different local area networks and wide area networks based
on the intended destination. Multi-service switching devices support the
transmission of voice and video signals as well as data. We sell switch fabrics
and network processors to communications equipment manufacturers. A switch
fabric directs the data
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within a switching device. A network processor is a component that controls how
data is sent over a network or over a switch fabric such that the data retains
its quality of service without interfering with other data traffic. We also
offer supporting software with our switching products. In addition, our
customers sometimes add their own supporting software to switch fabrics and
network processors that they purchase from us to produce complete switching
equipment.
We currently offer switching products for asynchronous transfer mode, or
ATM. We are developing switching products for the Internet protocol standard.
These products are being sampled by some customers but further design work is
required before they will be available for sale in commercial quantities.
Asynchronous transfer mode and Internet protocol refer to different procedures
for the formatting and timing of data transmission between two pieces of
equipment. Our switching integrated solutions reduce the number of required
integrated circuits needed in a switching device.
Broadband Access Devices. Broadband is a general term which refers to
high-speed data transmission. Our broadband access integrated circuits, or
mappers, support data transport between central offices and enterprise sites by
aggregation and termination. Aggregation refers to the combining of many
low-speed, or tributary, data signals from enterprises into higher speed, or
trunk, data signals for transmission to a central office. Termination refers to
the separation of trunk data signals into lower-speed, tributary data signals.
Our products support data transport for T-carrier data transport in North
America. T-carrier is a digital transmission service from a common carrier. We
support similar services worldwide which are referred to as J-carrier in Japan
and E-carrier in Europe. T-carrier services such as T1 and T3 lines are widely
used to create point-to-point networks for use by enterprises. T1 and T3 lines
refer to different levels of T-carrier service which transmit data at 1.5
megabits per second and 44.7 megabits per second, respectively. A megabit is a
unit of measurement for data and is equal to one million bits.
Wireless Infrastructure Devices. We sell integrated circuit solutions used
in wireless infrastructure products, which are primarily cellular base stations
and cellular base transceiver stations. These devices include digital signal
processors for speech compression and encoding and transmission of voice and
data. We also are beginning to sample to some customers radio frequency devices
to transmit and receive signals.
Optical Core and Metro Networks Devices
Our optical core and metro networks devices address several market
segments. We offer a variety of highly reliable, ultrastable components designed
to withstand the rigors of terrestrial and undersea transmission. Customers for
our submarine products are manufacturers of undersea communications equipment.
In addition, our products support high-speed, long-haul transmission of optical
signals at speeds of 2.5 or 10 gigabits per second. We also have 40 gigabits per
second modulators and receivers that are currently being sampled by customers.
Our high-speed transport products can send multiple optical signals for
distances up to 720 kilometers without amplification, and much further when used
in conjunction with optical amplifiers. Customers for our high-speed transport
products are manufacturers of communications equipment who sell to network
services providers that operate long-distance communications networks. Finally,
we sell optoelectronic components that are used in optical networks in
metropolitan areas to carry information between central offices of network
services providers or between large enterprises and central offices. The
information transmitted within these networks is carried for shorter distances,
generally 40 kilometers or less, and at lower speeds than those used in
high-speed transport network applications. We sell products designed for
metropolitan communications networks to manufacturers of communications
equipment, which sell to service providers that operate local exchanges and to
manufacturers of network equipment for enterprises.
Lasers. We offer a variety of lasers for use in high-speed transport,
metropolitan and submarine network applications. Higher power lasers can
transmit light greater distances than lower power lasers. A single laser is
required for each channel in a dense wavelength division multiplexing, or DWDM,
system, which is a system that transmits two or more signals over a single
optical fiber. Communications
52
equipment manufacturers use different types of lasers depending on the needs of
the specific network application.
Modulators. Modulation can be achieved directly by turning a laser on and
off or by external modulators that transmit or interrupt a continuous optical
signal to achieve the same on and off effect. Long-distance and submarine
networks typically use high power lasers and external modulators, while
short-distance networks use direct modulation. Our lithium niobate modulators
are used in high-speed transport and metropolitan network applications, and our
lithium niobate polarization controllers are used in high-speed transport
network applications.
Amplifiers. During transmission, an optical signal must be periodically
renewed because it loses its strength as it travels within the network. Optical
amplifiers increase the strength of an optical signal without converting it back
into an electronic signal. Optical amplifiers represent a major cost efficiency,
as network services providers can reduce the number of costly
optical-to-electronic-to-optical conversions. We offer erbium doped fiber
amplifiers and raman amplifiers in high-speed transport and metropolitan network
applications.
High Performance Transmitters. We offer cooled laser transmitters for
high-speed transport and metropolitan network applications, and tunable laser
transmitters for high-speed transport network applications that are designed to
enable flexible and reconfigurable optical networks.
MEMS Devices. We have introduced optical cross connects and dynamic gain
equalizers, which are our first optical micro electro-mechanical systems, or
MEMS, devices. MEMS are small mechanical products that perform a variety of
optical functions which include optical switching, dynamic gain equalization and
add-drop multiplexing. An optical cross connect is an optical switching device
that maintains the optical signal as light from input to output, without
converting it into electronic form. A dynamic gain equalizer is an optical
device that optimizes transmissions in an optical network by equalizing the
amplitude of specific wavelengths of light within the optical fiber. These
products are being sampled by some customers but further design and
manufacturing process development is required before they will be available for
sale in commercial quantities.
Thin Film Optical Filters. Thin film optical filters are designed to allow
only selected wavelengths of light to pass through them. Our filters are
manufactured by depositing many thin layers on a base of specially made glass.
Thin film optical filters are incorporated into multiplexing and demultiplexing
modules that are used in dense wavelength division multiplexing, or DWDM,
systems, which are systems that transmit two or more signals over a single
fiber. They can also be used to correct the amplitude of the signal coming from
an optical amplifier.
Silicon Waveguides. We have started to sample optical dynamic gain
equalizers, which are our first silicon waveguide products. We believe our
experience in silicon-based integrated circuit manufacturing processes is an
important factor in our ability to manufacture these products. These
silicon-based processes will permit production of these products in high
volumes. In addition, silicon-based technology allows active components such as
transmitters and receivers to be integrated with silicon waveguides, permitting
reductions in size and cost of integrated modules.
Optical Access and Transport Devices
Physical Layer Devices. High-speed physical layer devices are key elements
in the conversion between optical signals and electronic signals in
communications networks. High-speed physical layer devices accept the output
from an optical receiver and convert it into a digital data signal that can be
used in communications switching and processing functions. Our products include
a set of six integrated circuit components for physical layer devices that
provide a complete product offering for 10 gigabits per second transmission. We
offer our customers physical layer device components either separately or
together with optoelectronic components. In particular, we sell a transponder
which combines our physical layer device components together with our
optoelectronic components in a single module.
53
SONET/SDH Network Devices. Synchronous optical networks, which are
typically referred to as SONET, and synchronous digital hierarchy standard
networks, or SDH, carry data, voice and video traffic through a network by
combining lines carrying traffic at slower speeds with lines carrying traffic at
higher speeds. This process is known as multiplexing, and involves directing
traffic from the individual lines into designated time slots in the higher speed
lines, and those lines into still higher speed lines. The SONET/ SDH equipment
that handles the directing of traffic into slower speed and faster speed lines
is the add-drop multiplexor, or ADM. Add-drop multiplexors handle the addition
and removal of traffic from a SONET/SDH communication transmission. We offer
single-chip integrated circuit solutions, or framers, for add-drop multiplexing
of data and voice traffic. In addition, our framers are used in high-speed
routers within an optical network. A router is an interface, or link, between
two networks.
Transponders. Our transponders offer both integrated circuits and
optoelectronic components in one combined unit, or module. This module combines
a transceiver with a multiplexor/demultiplexor into a unified product. A
multiplexor is an electronic device that allows two or more signals to be
combined for transmission over one communications circuit. A demultiplexor
separates two or more signals previously combined by compatible multiplexing
equipment. Our transponders are capable of multiplexing 16 electronic signals
into one optical signal. Our transponders are also capable of demultiplexing one
optical signal into 16 electronic signals. We sell 2.5 gigabits per second
transponders in commercial quantities to customers and recently introduced 10
gigabits per second transponders.
We offer a variety of lasers for use in cable television and data network
applications. Communications equipment manufacturers use different types of
lasers depending on the needs of the specific network application. Lasers used
in optical access markets generally support lower data rates and shorter
transmission distances than the types of lasers used for optical core and metro
networks. We also offer transmitters, receivers and transceivers. We offer
uncooled laser transmitters for metropolitan network applications. Our positive
intrinsic negative, or PIN, receivers are used for high-speed transport,
metropolitan and cable television network applications. Our avalanche photo
detector, or APD, receivers are used for high-speed transport and metropolitan
network applications. We also offer combined transmitters and receivers, which
are called transceivers.
Our optical access devices support cable television and data communications
applications. Over the past ten years, cable system operators have upgraded
their systems to add optical fiber to their networks. Our cable television
optoelectronic components provide a high-speed return path from the consumer's
home to the cable system operator. This return path allows cable system
operators to offer Internet and telephone services, in direct competition with
network services providers. Customers for our cable television optoelectronic
components are manufacturers of cable television transmission equipment.
Our products are also used in high-speed local area data communications. A
local area network links data devices such as servers, computers and printers in
the same localized area to facilitate Internet access and to share files and
programs. As bandwidth and transmission distance requirements of enterprises
have increased, it has become more practical to utilize the superior
transmission capabilities of optical networks to build high-speed local area
networks. These networks require transceivers to convert electronic signals into
optical signals and back into electronic signals at high speeds. Customers for
our data communication optoelectronic components are manufacturers of network
equipment for enterprises.
Networking Devices
Customized Solutions. The majority of our revenue from our networking
devices is derived from the manufacture of customized integrated circuits for
our customers. These integrated circuits incorporate our intellectual property
or combine our intellectual property with our customers' intellectual property
to create a customized solution for these customers. For some customers, we
design and manufacture the integrated circuit while the key intellectual
property belongs solely to our customers. We draw our intellectual property from
the various product areas within the Infrastructure Systems segment in order to
meet our customers' specific requirements.
54
Our systems-level knowledge allows us to turn our customers' design
concepts into a systems solution quickly and effectively. Our intellectual
property gives our customers the flexibility to customize their products to meet
their individual cost and performance objectives.
Analog Line Card and Analog Telephone Products. Traditional voice
telephone equipment uses technology in which voice communications are
transmitted as analog signals until they reach a network services provider's
central office, where analog line cards are located. Analog line cards convert
analog voice signals into digital signals to be transmitted through the
communications network and convert the digital signal coming from the network
back to analog in order to complete the telephone call. Our customers also use
our products in telephone interfaces, or lines, located closer to an end user in
devices such as television set-top boxes, broadband gateways and integrated
access devices. Broadband gateways and integrated access devices combine a
variety of communications technologies such as analog and digital subscriber
line in the end user's premises onto a single telephone line for transmission to
the network. We sell our analog line card and telephone solutions to
manufacturers of communications equipment for use worldwide.
Traditional Voice Systems. We provide integrated circuits to
telecommunications equipment manufacturers for use in traditional voice
telephone networks and integrated services digital network, or ISDN, systems.
These networks are not as advanced as newer voice and data networks that
manufacturers of communications equipment currently offer. We expect sales for
these systems to decline rapidly over the next several years.
CLIENT SYSTEMS
We sell integrated circuits for use in products that allow users to access
communications networks through a variety of different methods. We offer our
customers solutions that include integrated circuits and software. In addition,
we offer integrated circuits for computer hard disk drives and equipment for
wireless local area networking which facilitates data communication between
computers and networks without the use of wires.
Many of our products convert analog signals into digital signals and vice
versa. Analog refers to a transmission technique employing a continuous signal
that varies in amplitude, frequency or phase of the transmission. Digital refers
to a method of transmitting, storing and processing data that uses distinct
electronic or optical pulses to represent the binary digits 0 and 1.
COMPETITIVE STRENGTHS
We believe the primary reasons why customers select our client systems
components are:
- price;
- breadth of product line and ability to offer integrated solutions;
- manufacturing capacity, as measured by ability to satisfy orders;
- performance, as measured by speed, power requirements and reliability;
and
- compatibility of products with other products and communications
standards used in communications networks.
PRODUCTS AND APPLICATIONS
Storage Products
We sell integrated circuits for use in hard disk drives. As applications
used on computers and communications equipment become more complex, we expect an
increased demand for higher storage capability. Within the storage products area
we sell read channels, disk controllers and pre-amplifiers, or preamps. Read
channels convert an analog signal that is generated by reading the stored data
on the hard disk into digital signals. Preamps are used to amplify the initial
signal from the hard disk so the signal can
55
be processed by the read channel. Together, these are key components that are
critical to determining the overall performance of a hard disk drive. We also
develop and sell disk drive controllers, which are used to control signal
processing and communications functions within the disk drive. When a read
channel and a disk controller are integrated into a single solution, this is
referred to as a "super chip." We design and sell hard disk drive super chips to
several leading disk drive manufacturers.
Wireless Local Area Networking Products
We sell integrated circuits and equipment for wireless networks, along with
associated software. We offer our ORiNOCO(TM) products for wireless local area
networking.
ORiNOCO Products. Our ORiNOCO products comprise a complete wireless local
area network system that provides broadband network access through mobile and
fixed data devices. We offer the software and equipment necessary to create and
support wireless local area networks, which are typically referred to as
wireless LANs. Our wireless local area network solution currently supports data
transmission speeds of over 10 megabits per second. We sell a complete solution
for wireless networking that facilitates mobile Internet connectivity to the end
user in an enterprise, home or public space, such as an airport lounge or hotel
lobby.
We sell wireless local area network solutions to network services providers
and to customers that sell to enterprises and home users under the ORiNOCO
brand. We also sell our ORiNOCO products to personal computer manufacturers that
integrate them into their products.
Client Access and Computing Devices
Modem Products. We primarily sell our integrated circuits for modem
products directly to leading manufacturers of personal computers, modems and
other electronic equipment. We also offer integrated circuits and software for
use in digital telephony products. Digital telephony products access and
interface with merged voice and data networks. We sell our digital telephony
solutions to manufacturers of business telephone equipment.
Input/Output Products. Input/output refers to the transfer of data within
and between computers, peripheral equipment, such as printers, scanners and
digital cameras and data networks. We sell input/output products primarily to
manufacturers of computers, peripheral equipment and communications equipment. A
majority of our sales are customized solutions that combine our intellectual
property with that of our customers in the design of our integrated circuits.
Our products support Universal Serial Bus, or USB, and IEEE-1394 industry
standards, which are both established connectivity and transmission standards.
Wireless Mobility Products
We sell integrated circuits for use in digital mobile telephones, and other
wireless data and voice communications products. We also offer supporting
software as part of our comprehensive integrated circuit wireless product
solutions. These solutions include:
- digital signal processors for speech compression and encoding and
transmission of voice and data;
- radio frequency integrated circuits to transmit and receive signals;
- conversion signal processors to convert signals between frequencies used
in digital signal processors and frequencies used for radio transmission;
and
- software that controls the communication process.
We also license hardware and software designs for mobile telephones that
use our integrated circuits.
Most of our wireless products operate on the Global Systems for Mobile
Communications, or GSM, standard. We also sell products that support General
Packet Radio Service, or GPRS, that provide enhanced data transmission
capabilities for GSM mobile phones.
56
Bluetooth Products. We sell integrated circuit solutions and supporting
software for the new market of Bluetooth technology applications. Bluetooth is
an open standard for short-range radio transmission of digital voice and data
that facilitates a wireless personal area network. Bluetooth technology also
makes it easier for data synchronization of mobile computers, mobile telephones
and handheld devices. Bluetooth uses radio waves that can pass through walls and
other non-metal barriers to create a personal area network.
We have started to sell a two-component Bluetooth solution and supporting
software. Our solution facilitates a wireless personal area network which
supports data transmission speeds of up to 1 megabit per second for devices
within an approximately 30-foot radius. We sell our Bluetooth products to
manufacturers of communications and computer equipment.
CUSTOMERS, SALES AND DISTRIBUTION
CUSTOMERS
We have a globally diverse base of customers, consisting primarily of
manufacturers of communications and computer equipment. We generally target as
customers the leaders in the market segments in which our products are used as
well as the companies we believe will be future leaders in these segments. In
fiscal 2001, we directly sold our products to approximately 250 end customers
and indirectly, through distributors, to approximately 1,000 end customers. For
some end customers, we deliver the product to, and are paid by, a third party
associated with the customer, such as their contract manufacturer. Our top 20
end customers in fiscal 2001, based on revenue, accounted for approximately 70%
of our revenue and our top 10 end customers in fiscal 2001, based on revenue,
accounted for approximately 53% of our revenue. Our top ten end customers in
fiscal 2001 were:
Apple Computer, Inc. Lucent Technologies Inc.
Alcatel Maxtor Corp.
Avaya Inc. Nortel Networks Corp.
Cisco Systems, Inc. Seagate Technology, Inc.
Globespan Inc. Tycom (US) Inc.
All of the customers listed above purchased integrated circuits from us.
Alcatel, Avaya, Cisco Systems, Lucent, Nortel and Tycom also purchased
optoelectronic components from us. Our sales to Lucent represented 14.5% of our
revenue for the three months ended December 31, 2001 and 14.9%, 21.3% and 25.7%
of our revenue for fiscal 2001, 2000 and 1999, respectively. No other customer
accounted for 10% or more of our revenue in fiscal 2001, 2000 or 1999.
SALES AND DISTRIBUTION
We have a worldwide sales organization with approximately 500 employees as
of December 31, 2001, located in 24 domestic and 16 international sales offices.
We sell our products globally primarily through our direct sales force. To
complement our direct sales force, we also sell our products through
distributors, which represented approximately 8% of our revenue in fiscal 2001.
When selling both our integrated circuits and optoelectronic components, we
aim to have our customers incorporate our products into the end products they
design and develop. Typically, manufacturers of communications and computer
equipment conduct a competitive process to select suppliers for the parts that
they will include in their end products. Our sales, marketing and technical
personnel work with customers to demonstrate our products' ability to satisfy
any specific requirements. We call winning the competitive process a design win.
A design win is important because it allows us to establish a long-term
relationship with the customer, at least through the life-cycle of the product.
We generally do not, however, enter into written agreements with our customers
after achieving a design win. A customer could terminate our relationship or
discontinue developing the product. Most of our revenue originates from sales
that are the result of design wins.
57
After we achieve a design win and negotiate the terms of the sale, we
deliver our products to our end customers in a number of ways. Our end customers
typically have us ship our products to their facilities directly. In some
instances, however, our customer uses a contract manufacturer to manufacture and
assemble their end product. When our product is being incorporated into an end
product being manufactured by a contract manufacturer, we often ship our product
directly to the contract manufacturer and receive payment from that contract
manufacturer. To determine our sales to particular customers, however, we
recognize this type of transaction as a sale to, and revenue from, the end
customer. Sometimes a customer for which we have achieved a design win will have
us sell that product to a distributor or trading company from which they buy our
product. We recognize these transactions as indirect sales.
MANUFACTURING AND SUPPLIES
MANUFACTURING
We have combined the supply chain management and manufacturing activities
of both integrated circuits devices and optoelectronics components under a new
Operations support organization to bring a full-systems perspective to our
manufacturing processes. This group manages manufacturing and the full supply
chain for both the Infrastructure and Client Systems groups. As of December 31,
2001 we had approximately 6,900 employees devoted to manufacturing.
INTEGRATED CIRCUIT MANUFACTURING
We had six facilities located in three countries devoted to manufacturing
integrated circuits as of December 31, 2001. These sites utilized approximately
2.3 million square feet of space dedicated to manufacturing. As of December 31,
2001, our company-owned and joint venture wafer fabrication was done in the
United States and Singapore, while our assembly and test operations were in the
United States, Singapore and Thailand. In January 2002, we announced our
intention to consolidate our integrated circuit manufacturing operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Facilities Consolidation."
Currently, we manufacture most of our integrated circuits in facilities
that we either own or operate through a joint venture. We also have third-party
manufacturing relationships to improve our manufacturing efficiency and
flexibility and to allow us to focus on manufacturing and developing leading
products. We entered into a joint venture with Chartered Semiconductor
Manufacturing Ltd. in December 1997 to open an integrated circuit manufacturing
facility in Singapore. Under the terms of our agreement with Chartered
Semiconductor, we agreed to purchase 51% of the production output from this
facility and Chartered Semiconductor agreed to purchase the remaining 49% of the
production output. For more information regarding our joint venture with
Chartered Semiconductor, please see "-- Strategic Relationships -- Manufacturing
Joint Venture." In the future, we expect to increase the amount of integrated
circuits we buy at market prices, whether through our relationship with
Chartered Semiconductor or other strategic relationships.
We have implemented sophisticated logistics and planning systems and
manufacturing processes that allow us to manufacture and deliver our integrated
circuits more quickly and reliably. The sophisticated internal systems we are
implementing allow us to start manufacturing a customer's specific order for
some integrated circuits within hours of receipt. Today, we believe we are able
to manufacture silicon wafers faster than most of our competitors. However, as
we increase our percentage of wafer fabrication manufactured through strategic
relationships, we may not be able to maintain our wafer manufacturing cycle
times. We assemble, test and ship our integrated circuits, on average, in
approximately two and a half days. We intend to continue performing these
activities for substantially all of our integrated circuits in the future and to
maintain our assembly and test cycle times.
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OPTOELECTRONIC COMPONENT MANUFACTURING
We had six facilities located in the United States and one facility located
in Mexico devoted to manufacturing optoelectronic components as of December 31,
2001. These sites utilized approximately 700,000 square feet. Currently, we
manufacture substantially all of our optoelectronic components internally. A
small percentage of our components, however, are sent to sub-assembly
manufacturers. These are manufacturers that add some pieces to the unfinished
product and send the unfinished product back to us. In these cases, we complete
the manufacturing of the final product and deliver the product to our customers.
In January 2002, we announced our intention to consolidate our optoelectronic
manufacturing operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Facilities Consolidation."
We intend to explore opportunities to increase our manufacturing
capabilities through joint ventures or strategic relationships with third
parties. If we form these ventures or develop these relationships, we will seek
to ensure consistent quality so that neither our customers nor our customers'
end users can differentiate between products that are manufactured in-house and
those that are not. Additionally, we have started to manufacture some of our
silicon-wafer-based optoelectronic components in our integrated circuit
facilities to capture economies of scale. This allows us to apply our extensive
experience in integrated circuit manufacturing to the high-volume manufacturing
of optoelectronic components.
We have automated the manufacturing of core technologies used in our
optoelectronic components. In particular, we have automated our optical
sub-assembly manufacturing process, which is the core technology used in all of
our laser-based optoelectronic products. The benefits of automation include:
- greater volume;
- improved quality and reliability;
- reduced costs; and
- improved speed in responding to customer demands.
SUPPLIES
At times, the integrated circuits and optoelectronic components industries
have been supply constrained, meaning that demand for components is greater than
the ability of most manufacturers of integrated circuit and optoelectronic
components products, including us and our competitors, to supply products. In
early fiscal 2001, we experienced shortages in supplies of parts for our
products and in the equipment needed to increase the capacity of our
manufacturing plants, although by the end of fiscal 2001, we were not
experiencing shortages. Also, there is a limited number of qualified engineers
with the talent to develop and manufacture new products as quickly as desired. A
significant price increase from our suppliers may cause our gross profit to
decline if we cannot pass the increase to our customers. The loss of a
significant supplier or the inability of a supplier to meet performance and
quality specifications or delivery schedules may cause our revenue to decline.
We currently purchase several different parts that are used in our
optoelectronic components for which there is only one qualified manufacturer of
each part. Some of these single source suppliers also are competitors of ours.
These parts are included in our optical amplifiers, pump lasers used in
submarine networks, lithium niobate modulators and PIN and APD receivers. The
number of qualified alternative suppliers for our single source parts and
processes is limited and the process of qualifying new suppliers requires a
substantial lead time. Although we have not experienced any significant
difficulties in obtaining the above parts or manufacturing processes, we are
currently looking for alternative sources of these parts and processes, either
through internal development or alternative suppliers.
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COMPETITION
We sell infrastructure and client products designed for the communications
and computer applications industries. These market segments are intensely
competitive, and are characterized by:
- rapid technological change;
- evolving standards;
- short product life cycles; and
- price erosion.
The number of competitors has risen in the past few years. We expect the
intensity of competition in the market segments we serve to continue to increase
in the future as existing competitors enhance and expand their product offerings
and as new participants enter these market segments. Increased competition may
result in price reductions, reduced revenues and loss of market share. We cannot
assure you that we will be able to compete successfully against existing or
future competitors. Some of our customers and companies with which we have
strategic relationships also are, or may be in the future, competitors of ours.
The size and number of our competitors vary across our product areas, as do
the resources we have allocated to the segments we target. Therefore, many of
our competitors have greater financial, personnel, production capacity and other
resources than we have in a particular market segment or overall. Competitors
with greater financial resources may be able to offer lower prices, additional
products or services or other incentives that we cannot match or offer. These
competitors may be in a stronger position to respond quickly to new technologies
and may be able to undertake more extensive marketing campaigns. They also may
adopt more aggressive pricing policies and make more attractive offers to
potential customers, employees and strategic partners. These competitors may
make strategic acquisitions or establish cooperative relationships among
themselves or with third parties to increase their ability to gain market share.
Further, some of our competitors are currently selling commercial quantities of
products that we are sampling to our customers, that are still in the initial
stages of development or that we may develop in the future. By being able to
offer these products in commercial quantities before we do, our competitors can
establish significant market share, acquire design wins in customer equipment
programs and create a market position that we may be unable to overcome once we
have completed development and testing of that product. Because we have a
unionized workforce and many of our main competitors are not unionized to the
same extent or at all, our product costs may be higher. As a result, our
competitors may be more profitable or may be able to compete for customers more
effectively based on price. In the event of a union work stoppage at our
facilities, we may be adversely affected.
Our primary competitors within our Infrastructure product areas are listed
in the table below.
PROCESSING AGGREGATION OPTICAL CORE AND
AND SWITCHING METRO NETWORKS OPTICAL ACCESS AND TRANSPORT NETWORKING
--------------------------- --------------------------- ---------------------------- ---------------------------
Applied Micro Circuits Alcatel Agilent Technologies, Inc. Agilent Technologies, Inc.
Corp.
Corning Inc. Applied Micro Circuits Broadcom Corp.
Conexant Systems, Inc. Corp.
Fujitsu Ltd. IBM Corp.
IBM Corp. Finisar Corporation
JDS-Uniphase Corp. Infineon Technologies AG
Intel Corp. Fujitsu Ltd.
Nortel Networks Corp. Legerity
Motorola, Inc. Intel Corp.
LSI Logic Corp.
Texas Instruments JDS-Uniphase Corp.
Incorporated
PMC-Sierra, Inc.
Vitesse Semiconductor
Corporation
60
Our primary competitors within our Client product areas are listed in the
table below.
STORAGE WIRELESS LOCAL AREA NETWORKING CLIENT ACCESS AND COMPUTING WIRELESS MOBILITY
--------------------------- ------------------------------ --------------------------- ---------------------------
IBM Corp. BreezeCOM Ltd. Broadcom Corp. Conexant Systems, Inc.
Infineon Technologies AG Cisco Systems, Inc. Conexant Systems, Inc. Koninklijke Philips
Electronics AG
LSI Logic Corp. D-Link Systems, Inc. Infineon Technologies AG
Motorola, Inc.
Marvell Communications Intersil Holding Corp. Koninklijke Philips
Corp. Electronics AG QUALCOMM Inc.
Proxim, Inc.
STMicroelectronics N.V. Marvell Communications STMicroelectronics N.V.
Texas Instruments Corp.
Incorporated Texas Instruments
PCTel, Inc. Incorporated
While we are the world leader in sales of communications components, our
competitive position varies depending on the market segment and product areas
within these segments. For example, we are number one or two, based on revenue,
in many of our product areas, including the analog modem, baseband integrated
circuits for wireless infrastructure, SONET/SDH integrated circuits and wired
communications integrated circuits. However, our competitive position is not as
strong in the wireless terminal and passive optical component product areas.
While improving our position in many of the product areas where our position is
less well-established is an objective of ours, we cannot assure you that we will
be able to accomplish this goal. Further, because we expect to face increasing
competitive pressures from both current and future competitors in the product
areas we serve, we may not be able to maintain our position in the product areas
in which we are currently a leader.
We believe the following factors are the principal methods of competition
in our industry:
- performance and reliability;
- price;
- compatibility of products with other products and communications
standards used in communications networks;
- product size;
- ability to offer integrated solutions;
- time to market;
- breadth of product line;
- logistics and planning systems; and
- quality of manufacturing processes.
While we believe we are competitive on the basis of all the factors listed
above, we believe some of our competitors compete more favorably on the basis of
price and on delivering products to market more quickly. However, we feel we are
particularly strong in offering integrated solutions, our broad product lines
and our logistics and planning systems.
RESEARCH AND DEVELOPMENT
Our research and development personnel focus on product and manufacturing
process development, which provides the technological basis for our commercial
products, and on basic research, which helps provide the scientific advances
which ultimately lead to new products and technology and manufacturing
processes. Our product and process development team is comprised of
approximately 2,700 development engineers and scientists. Approximately
two-thirds of these development engineers and scientists design and implement
product solutions. The remaining one-third work primarily on manufacturing and
design technology, such as the technology for system-on-a-chip and
high-performance optical modules.
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Our basic research effort is organized into three areas:
- circuits and systems;
- optoelectronics; and
- electronic devices.
Our researchers perform application-focused research, primarily around
optical communications, semiconductor technology and advanced circuit and
systems development for future communications technologies. Across each of the
areas, we also focus on products that seek to combine our integrated circuit and
optoelectronic capabilities. We believe that the combination of our integrated
circuits and optoelectronic components may offer our customers several benefits,
including improved product performance and reduced product size and costs. This
combination also may allow our customers to decrease time-to-market and reduce
the number of their suppliers.
In addition to our internal research and development team, we work closely
with universities around the world. We also have entered into joint research and
development initiatives with a number of our customers.
Our research and development expenditures were $194 million for the three
months ended December 31, 2001 and $951 million, $827 million and $683 million
for fiscal years 2001, 2000 and 1999, respectively. We anticipate that we will
continue to make significant research and development expenditures to maintain
our competitive position with a continuing flow of innovative products,
technology and manufacturing processes, although at lower levels than in fiscal
2001.
STRATEGIC RELATIONSHIPS
As part of our manufacturing strategy, we have entered into joint ventures
with various partners. We also have developed strategic relationships to augment
our technological capabilities.
MANUFACTURING JOINT VENTURE
In December 1997, we entered into a joint venture, called Silicon
Manufacturing Partners, with Chartered Semiconductor Manufacturing Ltd., a
leading manufacturing foundry for integrated circuits, to operate a 54,000
square foot integrated circuit manufacturing facility in Singapore. We have a
51% equity interest in this joint venture, and Chartered Semiconductor owns the
remaining 49% equity interest. Under the terms of our agreement with Chartered
Semiconductor and Silicon Manufacturing Partners, we agreed to purchase 51% of
the production output from this facility and Chartered Semiconductor agreed to
purchase the remaining 49% of the production output. If we do not purchase all
the wafers allotted to us, we are obligated to reimburse the joint venture for
the portion of fixed costs associated with the unpurchased wafers. Chartered
Semiconductor is similarly obligated with respect to the wafers allotted to it.
Chartered Semiconductor will also have the right of first refusal to the wafers
produced in excess of our requirements.
The agreement may be terminated by either party upon two years written
notice, but may not be terminated prior to February 2008. The agreement also may
be terminated for material breach, bankruptcy or insolvency.
STARCORE
In June 1998, we entered into a Joint Design Center operating agreement
with Motorola, Inc. to develop advanced digital signal processor technologies.
We and Motorola develop these technologies in a joint design center called the
StarCore Technology Center located in Atlanta, Georgia. We and Motorola equally
share the funding of the costs and expenses of operating the center. The board
of advisors comprised of ours and Motorola's representatives determines, on a
yearly basis, the annual budget for operating the center. The StarCore
Technology Center designs digital signal processor cores and development tools
that we can incorporate in our complete system-on-a-chip solutions for
communications
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applications. StarCore focuses on digital signal processor technologies for
cellular base stations and the transmission of wireless data and other
applications. The StarCore SC-140 digital signal processor core, the first core
developed by the StarCore Technology Center, was produced in April 1999. We are
currently sampling integrated circuit solutions which include this digital
signal processor core.
During the term of the agreement, the items developed within the joint
design center, other than patents, may be licensed to third parties only upon
mutual consent by Motorola and us. All joint patents, which are patents arising
out of inventions made jointly by our employees or consultants and those of
Motorola where such employees or consultants were assigned to the joint design
center, will be jointly owned by us and Motorola. We and Motorola will be free
to use these jointly owned patents for any purpose and to license third parties
under these patents without approval from the other.
The initial term of the agreement will expire on May 1, 2008, and may be
extended for successive two year periods by mutual agreement. We and Motorola
will review the operations of the joint design center in June 2002 and every two
years thereafter. After any such review either we or Motorola may terminate the
agreement upon one year written notice. The agreement also may be terminated for
breach of material terms, insolvency or bankruptcy.
PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
We own or have rights to a number of patents, trademarks, copyrights, trade
secrets and other intellectual property directly related to and important to our
business. Under the intellectual property agreements we entered into with Lucent
as part of the separation, Lucent has assigned or exclusively licensed to us
approximately 6,000 U.S. patents and patent applications and their corresponding
foreign patents and patent applications. These patents include patents related
to the following technologies:
- integrated circuit and optoelectronic manufacturing processes;
- lasers;
- optical modulators;
- lithium niobate devices;
- optoelectronic receivers; and
- integrated circuits for use in products such as modems, digital signal
processors, wireless communications, network processors and communication
protocols.
In connection with these patents, we have entered into a cross license
agreement with Lucent. In addition, we have received a joint ownership interest
in patents and patent applications relating to optical micro electro-mechanical
systems, or MEMS.
Lucent has also granted us rights and licenses to patents, trademarks,
copyrights, trade secrets and other intellectual property that are not directly
related to our business but help facilitate our business. We also have received
non-exclusive licenses to all other patents retained by Lucent, including
patents in areas such as optical fiber, audio and video coding and
telecommunications systems. In addition, Lucent has conveyed to us numerous
sublicenses under patents of third parties. We derive revenue from licensing our
intellectual property.
In addition, Lucent has assigned to us numerous trademarks, both in the
United States and in foreign countries. The primary trademarks used in the sale
of our products have been transferred to us, except for the Lucent name and logo
and the Bell Laboratories name.
The patents described above include patents of all ages ranging from
pending applications, which will have a duration of 20 years from their filing
dates, through patents soon to expire. The agreements do not provide for
termination.
We indemnify our customers for some of the costs and damages of patent
infringement in circumstances where our product is the primary factor creating
the customer's infringement exposure. We generally exclude coverage where
infringement arises out of the combination of our products with products of
others.
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We expect to protect our products and processes by asserting our
intellectual property rights where appropriate and prudent. We also will obtain
patents, copyrights, and other intellectual property rights used in connection
with our business when practicable and appropriate.
GOVERNMENT REGULATION
Many of our customers' end products that include our integrated circuits or
optoelectronic components are subject to extensive telecommunications-based
regulation by the United States and foreign laws and international treaties. We
must design and manufacture our products to ensure that our customers are able
to satisfy a variety of regulatory requirements and protocols established to,
among other things, avoid interference among users of radio frequencies and to
permit interconnection of equipment. For example, disk drives that include our
integrated circuits need to satisfy Federal Communications Commission emissions
testing. Cellular base stations that include our integrated solutions must be
qualified by the Federal Communications Commission that they meet radio
frequency spectrum requirements. In addition, some of our equipment products,
such as our wireless local area networking products, must be certified to
safety, electrical noise and communications standards compliance.
Each country has different regulations and a different regulatory process.
In order for our customers' products to be used in some jurisdictions,
regulatory approval and, in some cases, specific country compliance testing and
re-testing may be required. The delays inherent in this regulatory approval
process may force our customers to reschedule, postpone or cancel the
incorporation of our products into their products, which may result in
significant reductions in our sales. The failure to comply with current or
future regulations or changes in the interpretation of existing regulations in a
particular country could result in the suspension or cessation of sales in that
country by us or our customers. It also may require us to incur substantial
costs to modify our products to aid our customers in complying with the
regulations of that country.
We work with consultants, counsel and testing laboratories to support our
compliance efforts as necessary. These individuals work to ensure that our
products comply with the requirements of the Federal Communications Commission
in the United States and with the requirements of the European
Telecommunications Standards Institute in western Europe, as well as with the
various individual regulations of other countries.
The regulatory environment in which we operate is subject to changes due to
political, economic and technical factors. In particular, as use of wireless
technology expands and as national governments continue to develop regulations
for this technology, we may need to comply with new regulatory standards
applicable to our products. Changes in our regulatory environment that generally
result from our expansion into new areas or changes in current regulations could
increase the cost of manufacturing our products because we must continually
modify our products to respond to these changes.
In addition, domestic and international authorities continue to regulate
the allocation and auction of the radio frequency spectrum. These regulations
have a direct impact on us because many of our customers' licensed products can
be marketed only if permitted by suitable frequency allocations, auctions and
regulations. The implementation of these regulations may delay our end-users in
deploying their systems, which could, in turn, lead to delays in orders of our
products by our customers and end users. Further, when we license hardware and
software designs for mobile telephones that use our integrated circuits, we work
with our customers to help them achieve full certification approval for their
mobile telephones, which is a prerequisite for them to be able to sell their
mobile telephones.
EMPLOYEES
As of December 31, 2001, we employed approximately 12,600 full-time
employees, including approximately 2,700 research and development employees and
6,900 manufacturing employees. During
64
fiscal 2001, we announced a series of restructuring initiatives that included
closing our Madrid manufacturing location and reducing employment worldwide by
approximately 6,000 positions. Substantially all of the positions have been
eliminated, or were in the process of elimination by December 31, 2001. During
the first quarter of fiscal 2002, we announced an additional workforce reduction
of 950 employees. Of our 12,600 employees at December 31, 2001, approximately
7,200 were management and non union-represented employees, and approximately
3,300 were U.S. union-represented employees covered by collective bargaining
agreements. In addition, approximately 80 employees were union-represented
employees located in Mexico and covered by a collective bargaining agreement.
On May 31, 1998, Lucent entered into a collective bargaining agreement with
the Communications Workers of America and into a separate agreement with the
International Brotherhood of Electrical Workers. In connection with our
separation from Lucent, we will assume the obligations under these agreements
with respect to our U.S. union-represented employees. These agreements will be
effective until May 31, 2003, unless the parties to each agreement reach a
mutual agreement to amend the terms. All of our unionized employees in Mexico
are members of the Mexican National Union of Industrial Workers. We entered into
a collective bargaining agreement with this union in January 2002. As is typical
in Mexico, wages are renegotiated every year, while other terms and conditions
of employment are renegotiated every two years. We believe that we generally
have a good relationship with our employees and the unions that represent them.
We are subject from time to time to unfair labor charges filed by the unions
with the National Labor Relations Board. If we are unsuccessful in resolving
these charges, our operations may be disrupted or we may incur additional costs
that may adversely affect our results of operations. If we experience any work
stoppages by our union employees, we believe that we may be affected to a
greater extent than our competitors.
BACKLOG
Our backlog, which represents the aggregate of the sales price of orders
received from customers, but not yet recognized as revenue, was approximately
$655 million and $2.4 billion on December 31, 2001 and December 31, 2000,
respectively. The majority of these orders are fulfilled within three months.
All orders, however, are subject to possible rescheduling by customers. Our
customers often change their order two or three times between initial order and
delivery. Our customers' frequent changes usually relate to quantities or
delivery dates, but sometimes relate to the specifications of the products we
are shipping. Although we believe that the orders included in the backlog are
firm, generally orders may be cancelled by the customer without penalty. We also
may elect to permit cancellation of orders without penalty where management
believes it is in our best interests to do so. For these reasons, we believe
that our backlog at any given date is not a meaningful indicator of future
revenues.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
We are subject to a wide range of laws and regulations relating to
protection of the environment and employee health and safety. Most of our
manufacturing facilities have undergone regular internal audits relating to
environmental, health and safety requirements. Most of those facilities also are
regularly audited and certified by an independent and accredited third party
registrar, such as Lloyd's Register Quality Assurance, as conforming to the
internationally recognized ISO 14001 standard relating to environmental
management. In addition, most of our non-U.S. manufacturing facilities conform
to BS 8800, the British standard for occupational health and safety management
systems. Based upon these reviews, we believe that our manufacturing facilities
are in substantial compliance with all applicable environmental, health and
safety requirements.
We are subject to environmental laws, including the Comprehensive
Environmental Response, Compensation and Liability Act, also known as Superfund,
that require the cleanup of soil and groundwater contamination at sites
currently or formerly owned or operated by us, or at sites where we may have
sent waste for disposal. These laws often require parties to fund remedial
action at sites regardless of fault. Lucent is a potentially responsible party
at numerous Superfund sites and sites otherwise requiring cleanup action. With
some limited exceptions, under the agreement governing our
65
separation from Lucent, we have assumed all environmental liabilities resulting
from our businesses, which include liabilities for the costs associated with
eight of these sites -- five Superfund sites, two of our former facilities and
one of our current manufacturing facilities.
PROPERTIES
As of December 31, 2001, we operated 12 manufacturing facilities and four
warehouse locations in the United States and four other countries. We also
operated an additional 65 facilities, including research and development
facilities and design centers. We operate facilities in a total of 18 countries.
Our principal owned manufacturing facilities were located in the United States,
Mexico, Singapore and Thailand. We also have a 51% interest in our Silicon
Manufacturing Partners joint venture located in Singapore which is predominantly
used as a manufacturing site. Our facilities have an aggregate floor space of
approximately 8.0 million square feet, of which approximately 5.1 million square
feet is owned and approximately 2.9 million square feet is leased. Our lease
terms range from monthly leases to 14 years. We believe that all of our
facilities and equipment are in good condition and are well maintained and able
to operate at present levels. In January 2002, we announced our intention to
consolidate our facilities. See "Management's Discussion and Analysis of Results
of Operations -- Facilities Consolidation."
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MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
Our board of directors consists of a total of seven directors, one of whom
is an executive officer of our company. Because of Lucent's level of ownership
of our common stock, Lucent effectively has the ability to elect all of our
Directors and may be deemed to be our parent. Henry B. Schacht, Chairman of
Lucent, and Frank A. D'Amelio, Chief Financial Officer of Lucent, were appointed
to the Board at Lucent's request, and they, along with John A. Young, are acting
as representatives of Lucent. The Lucent-representative directors have no
special rights compared to the non-Lucent-representative directors.
Our board is divided into three classes. One class is elected each year for
a term of three years.
The following table sets forth information as of December 31, 2001 as to
persons who are our directors, executive officers or key employees.
NAME AGE POSITION
---- --- --------
Harold A. Wagner.......................... 66 Chairman of the Board
Frank A. D'Amelio......................... 44 Director
John T. Dickson........................... 56 President, Chief Executive Officer and
Director
Rajiv L. Gupta............................ 56 Director
Henry B. Schacht.......................... 67 Director
Rae F. Sedel.............................. 53 Director
John A. Young............................. 69 Director
Ronald D. Black........................... 38 Executive Vice President, Client Systems
Mark T. Greenquist........................ 43 Executive Vice President and Chief
Financial Officer
Peter Kelly............................... 45 Executive Vice President, Operations
Sohail A. Khan............................ 47 Executive Vice President, Infrastructure
Systems
Ahmed Nawaz............................... 52 Executive Vice President, Worldwide Sales
Jean F. Rankin............................ 43 Senior Vice President, General Counsel and
Secretary
Harold A. Wagner, Chairman of the Board since December 2001 and Director
since March 2001. In December 2000, Mr. Wagner retired from his position as
Chairman and Chief Executive Officer of Air Products and Chemicals, Inc., a
position he held since 1998. From 1992 to 1998, Mr. Wagner served as Chairman,
President and Chief Executive Officer of Air Products and Chemicals. Mr. Wagner
is currently Chairman of the Dorothy Rider Pool Healthcare Trust. He is also a
director of CIGNA Corporation, United Technologies Corporation, PACCAR and
Arsenal Digital Solutions Worldwide, Inc. He is also a trustee of Lehigh
University and the Eisenhower Exchange Fellowships, Inc.
Frank A. D'Amelio, Lucent-representative Director since December 2001. Mr.
D'Amelio has been Chief Financial Officer of Lucent since May 2001. From
November 1999 to May 2001, Mr. D'Amelio was group president of Lucent's
Switching Solutions Group and Chairman of Lucent's joint venture with GTE, AG
Communication Systems. From November 1997 to November 1999, Mr. D'Amelio was
vice president for product management and marketing of Lucent's Switching and
Access Group. Prior to that, Mr. D'Amelio had held a number of financial and
management positions at Lucent and AT&T since 1979.
John T. Dickson, Director since March 2001. Mr. Dickson has been our
President and Chief Executive Officer since August 2000. Previously, Mr. Dickson
was Executive Vice President and Chief Executive Officer of Lucent's
Microelectronics and Communications Technologies Group since October 1999. He
joined AT&T in 1993 as Vice President of its Integrated Circuit business unit,
moved to Lucent following its spin-off in 1996, and was named Chief Operating
Officer of Lucent's Microelectronics Group in 1997. Before joining AT&T, Mr.
Dickson was Chairman and Chief Executive Officer of Shographics
67
from 1992 until 1993, was President and Chief Executive Officer of Headland
Technology Incorporated from 1991 to 1992, held various management positions at
ICL plc from 1983 until 1991 and held various management positions at Texas
Instruments from 1969 until 1983. Mr. Dickson is currently a director of the
Semiconductor Industry Association, or SIA, and Mettler-Toledo International
Inc. and a member of the board of trustees of Lehigh Valley Health Network.
Rajiv L. Gupta, Director since March 2001. Mr. Gupta has been Chairman of
the Board of Directors and Chief Executive Officer of Rohm and Haas Co., a
specialty chemical company, since October 1999. From January 1999 to October
1999, he was Vice Chairman of Rohm and Haas. From 1996 to 1998, Mr. Gupta was a
member of the Chairman's Committee at Rohm and Haas and oversaw the company's
electronic materials business group. From 1993 to 1998, he served as a vice
president of the company and director for the Asia-Pacific region. Mr. Gupta is
currently a director of Rohm and Haas, Technitrol, Inc., Vanguard Group and the
American Chemistry Council, formerly the Chemical Manufacturers Association. Mr.
Gupta is also a member of the board of trustees of Drexel University.
Henry B. Schacht, Lucent-representative Director since December 2001. Mr.
Schacht has been Chairman of the Board of Lucent since October 2000 and was
Chief Executive Officer of Lucent from October 2000 through January 2002. He was
also Lucent's Chairman from 1996 to 1998 and Chief Executive Officer from 1996
to 1997. Mr. Schacht was Director and Senior Advisor, Warburg, Pincus & Co., LLC
in 1995 and from 1998 to 2000. Mr. Schacht was Chairman from 1977 to 1995 and
Chief Executive Officer from 1973 to 1994 of Cummins Engine Company, Inc. Mr.
Schacht is also currently a director of Alcoa Inc., Avaya Inc., Johnson &
Johnson, Knoll, Inc. and The New York Times Co.
Rae F. Sedel, Director since March 2001. Ms. Sedel has been a Managing
Director of Russell Reynolds Associates, Inc., an executive recruiting firm,
since 1988. She has also been the head of the technology sector and the lead
partner on sector verticals at Russell Reynolds Associates since 1991.
Previously, Ms. Sedel spent fifteen years with Pacific Telesis where she was
Vice President-Consumer Markets.
John A. Young, Director since March 2001, Chairman of the Board from March
2001 to December 2001 and Lucent-representative Director since December 2001. In
1992, Mr. Young retired from his position as President and Chief Executive
Officer of Hewlett-Packard Company, a position he held since 1978. Mr. Young is
currently a director of Affymetrix Inc., ChevronTexaco Corp., Ciphergen
Biosystems Inc., Fluidigm Corporation, Lucent, Perlegen Sciences Inc. and
GlaxoSmithKline plc.
Ronald D. Black is our Executive Vice President, Client Systems.
Previously, Mr. Black had been Senior Vice President, Strategy and Business
Development at our company from March 2001 to October 2001. Before joining us,
Mr. Black was Vice President and General Manager, Next-Generation Networks
Business Unit of Gemplus from 1998 to 2001. Prior to Gemplus, Mr. Black was the
General Manager of the Networking and Communications Systems Division of
Motorola's Semiconductor Products Sector.
Mark T. Greenquist is our Executive Vice President and Chief Financial
Officer. Prior to joining our company, Mr. Greenquist had been Chief Financial
Officer of General Motors Europe from January 1999 to January 2001. From October
1998 to January 1999, he was Vice President and Corporate Treasurer of Delta Air
Lines, Inc. Prior to joining Delta Air Lines, Mr. Greenquist was at General
Motors from 1986 to 1998 where he held a variety of positions, including
Assistant Treasurer of General Motors, Managing Director and Finance Director of
General Motors Poland and Corporate Treasurer and Manager of Commercial Finance
of Saab Automobile AB.
Peter Kelly is our Executive Vice President, Operations. Previously, Mr.
Kelly had been our Vice President of Operations for Integrated Circuits from
September 2000 to October 2001. Mr. Kelly joined Lucent Microelectronics in
September 2000 from Fujitsu-ICL Systems Inc., a joint venture of ICL and
Fujitsu, where he was Executive Vice President and Chief Operating Officer. Mr.
Kelly had been with Fujitsu-ICL for six years.
Sohail A. Khan is our Executive Vice President of Infrastructure Systems.
Previously, Mr. Kahn had been Executive Vice President of Integrated Circuits
since March 2001. Mr. Khan had been President of
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the Integrated Circuits business of Lucent's Microelectronics and Communications
Technologies Group from April 2000 to March 2001. Mr. Khan was the strategy and
business development Vice President of Lucent's Microelectronics and
Communications Technologies Group from September 1996 to April 2000. From April
1996 to September 1996, Mr. Khan was Vice President of Marketing for MMC
Networks, a developer and supplier of network processing platforms and services.
Mr. Khan joined AT&T in 1990 as the director of marketing and applications
engineering for the digital signal processing product line and moved to Lucent
following its spin-off in 1996. While at AT&T, he held a variety of positions,
including Vice President and General Manager of the Wireless and Multimedia
business unit of AT&T from February 1994 to April 1996. Mr. Khan is currently a
director of Tripath Technology Inc.
Ahmed Nawaz is our Executive Vice President of Worldwide Sales. Mr. Nawaz
has been President of Worldwide Sales, Strategy and Business Development of
Lucent's Microelectronics and Communications Technologies Group since April
2000. He joined AT&T in 1992 and moved to Lucent following its spin-off in 1996.
Mr. Nawaz was Vice President of Lucent's Network Communications business unit
from January 1996 to July 1998. While at AT&T, he was Vice President of the
Applications business unit from 1994 to 1995. Prior to joining AT&T, Mr. Nawaz
was at Texas Instruments Incorporated, where he was responsible for the personal
computer business unit from 1990 to 1992 and also held various marketing and
product management positions.
Jean F. Rankin is our Senior Vice President, General Counsel and Secretary.
Previously, Ms. Rankin was Vice President-Law of Lucent. Ms. Rankin joined AT&T
in 1990 and moved to Lucent after its spin-off in 1996. While at AT&T, she held
various legal positions. From 1986 to 1990, Ms. Rankin was with Cravath, Swaine
& Moore.
COMMITTEES OF THE BOARD OF DIRECTORS
We are managed under the direction of our board of directors. Our board of
directors has established two committees: an audit and finance committee and a
corporate governance and compensation committee.
AUDIT AND FINANCE COMMITTEE
The audit and finance committee is comprised of Ms. Gupta, Mr. Wagner and
Mr. Young, directors who are not our employees. Mr. Wagner is the chairperson of
the audit and finance committee. The audit functions of this committee are
focused on three areas:
- the adequacy of our internal controls and financial reporting process and
the reliability of our financial statements;
- the independence and performance of our internal auditors and independent
auditors; and
- our compliance with legal and regulatory requirements.
This committee meets with management periodically to consider the adequacy
of our internal controls and the objectivity of our financial reporting. This
committee discusses these matters with our independent auditors and with
appropriate company financial personnel.
This committee meets privately with the independent auditors who have
unrestricted access to the committee. It also recommends to the Board the
appointment of the independent auditors and reviews periodically their
performance, fees and independence from management.
The Directors who serve on this committee are all "Independent" for
purposes of the New York Stock Exchange listing standards. That is, the board of
directors has determined that none of the committee members has a relationship
to us that may interfere with the committee's independence from us and our
management.
Management has primary responsibility for our financial statements and the
overall reporting process, including our system of internal controls. The
independent auditors audit the annual financial statements prepared by
management, express an opinion as to whether those financial statements fairly
present our
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financial position, results of operations and cash flows in conformity with
generally accepted accounting principles and discuss with this committee any
issues they believe should be raised with it.
CORPORATE GOVERNANCE AND COMPENSATION COMMITTEE
Our corporate governance and compensation committee is comprised of Ms.
Sedel, Mr. Wagner and Mr. Young, directors who are not our employees. Ms. Sedel
is the chairperson of the corporate governance and compensation committee. The
functions of this committee include:
- recommending to our full board of directors nominees for election as
directors;
- making recommendations to our board of directors from time to time as to
matters of corporate governance;
- administering management incentive compensation plans;
- establishing the compensation of executive officers; and
- reviewing the compensation of directors.
This committee will consider qualified candidates for director suggested by
stockholders in written submissions to our corporate secretary.
DIRECTOR COMPENSATION
All our directors, other than those who are employees of Lucent or us,
receive an annual retainer of $45,000. Directors do not receive separate meeting
fees. Non-employee directors may defer all or a portion of their cash
compensation to a deferred compensation account. Deferred compensation plan
accounts have two components: an Agere stock portion and a cash portion.
Directors can defer receipt of cash retainers to either portion of their
accounts. The value of the stock portion of an account fluctuates based on
changes in the price of our stock. The cash portion of an account earns
interest, compounded quarterly, at an annual rate equal to 120% of the average
interest rate for 10-year U.S. Treasury notes for the previous quarter. Interest
rates for deferrals to the cash account may be revised by the board. In the
event of a potential change in control, as defined in the plan, the plan will be
supported by a benefits protection grantor trust, the assets of which will be
subject to the claims of our creditors. We also provide non-employee directors
with travel accident insurance when traveling on our business.
At the time of our initial public offering, Messrs. Gupta and Wagner and
Ms. Sedal received an option to purchase 50,000 shares of Class A common stock.
At the same time, Mr. Young, who was then our chairman, received an option to
purchase 90,000 shares of Class A common stock. In the future, each outside
director that is appointed to our board of directors will receive an option to
purchase 50,000 shares of our common stock. All outside directors other than our
chairman will receive annually an option to purchase 30,000 shares of our common
stock. Our chairman will receive an option to purchase a total of 55,000 shares
of common stock annually. Options granted to directors will vest after one year
and expire after seven years. The exercise price per share for options granted
under the plan is the fair market value of a share on the date of grant. Options
granted under the plan generally have a seven-year term and become exercisable
on the first anniversary of the date of grant. A total of 2,000,000 shares may
be issued under the Non-Employee Director Stock Plan, either pursuant to stock
options or to satisfy our obligation to deliver shares of common stock in
respect of deferrals by non-employee directors of retainers and earnings on
those deferrals under our Deferred Compensation Plan. The Non-Employee Director
Stock Plan has a 10-year term.
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
To the extent our directors and officers own shares of Lucent common stock
at the time of the distribution, they will participate in the distribution on
the same terms as other holders of Lucent common stock. In addition, any Lucent
stock-based awards held by our officers will be converted to our stock-based
awards at the time of the distribution.
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The following table sets forth information concerning the beneficial
ownership of our Class A common stock and Lucent's common stock as of November
1, 2001 for: (a) each outside director who is not a Lucent representative, (b)
each current director who is a Lucent representative, (c) our Chief Executive
Officer, who is also a director, and the four other most highly compensated
executive officers in the fiscal year ended September 30, 2001 and (d) all of
our current directors and executive officers as a group. To our knowledge,
except as otherwise noted, the named individual or family members had sole
voting and investment power with respect to these securities.
AGERE CLASS A AGERE CLASS B
COMMON STOCK COMMON STOCK LUCENT COMMON
BENEFICIALLY BENEFICIALLY STOCK BENEFICIALLY
NAME OWNED(1) OWNED OWNED(1)(2)
---- ------------- ------------- ------------------
(a)
Rajiv L. Gupta........................... 2,000 -- --
Rae F. Sedel............................. 6,900 -- 750
Harold A. Wagner......................... 5,000 -- --
(b)
Frank A. D'Amelio........................ -- -- 717,683
Henry B. Schacht(3)...................... 37,000,000 908,100,000 2,395,563
John A. Young (3)........................ 37,005,000 908,100,000 5,036
(c)
John T. Dickson.......................... 100 -- 676,023
Mark T. Greenquist....................... 1,250 -- 1,198
Sohail A. Khan........................... -- -- 221,018
Ahmed Nawaz.............................. 1,250 -- 360,862
Daniel A. DiLeo.......................... -- -- 157,725
(d)
Directors and executive officers as a
group (12 persons)..................... 30,250 908,100,000 4,428,068
---------------
(1) No individual director or executive officer identified above owned, and the
directors and executive officers as a group did not own, more than 1% of our
outstanding Class A common stock, our outstanding Class B common stock or
Lucent's outstanding common stock as of November 1, 2001, except for Messrs.
Schacht and Young who, solely by virtue of being directors of Lucent,
beneficially owned 5.1% of our Class A common stock and 100% of our Class B
common stock.
(2) Includes beneficial ownership of the following numbers of shares of Lucent
common stock that (a) may be acquired within 60 days of November 1, 2001
pursuant to stock options awarded under Lucent stock plans or (b) are
subject to Lucent restricted stock unit awards that vest within 60 days of
November 1, 2001:
(A) (B)
--------- ------
Mr. D'Amelio................................................ 635,752 50,000
Mr. Schacht................................................. 2,391,851 --
Mr. Young................................................... 5,036 --
Mr. Dickson................................................. 657,471 12,500
Mr. Khan.................................................... 214,643 6,250
Mr. Nawaz................................................... 324,253 6,250
Mr. DiLeo................................................... 140,935 6,250
Directors and executive officers as a group................. 4,274,839 75,000
(3) The 37,000,000 shares of our Class A common stock and 908,100,000 shares of
our Class B common stock owned by Lucent have been included in the table as
beneficially owned by these individuals because they are directors of Lucent
and share the power to vote and dispose of our shares with the other
directors of Lucent. Messrs. Schacht and Young both disclaim any beneficial
ownership of such shares.
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EXECUTIVE COMPENSATION
The following table sets forth compensation information for our chief
executive officer and our four other executive officers for the fiscal year
ended September 30, 2001. During fiscal 2001, there were five executive
officers. All information set forth in this table reflects compensation earned
by these individuals for service with Lucent for the fiscal year ended September
30, 2000 and, in the case of Mr. Dickson, the fiscal year ended September 30,
1999.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
---------------------------------
AWARDS
----------------------- PAYOUTS
ANNUAL COMPENSATION OTHER RESTRICTED SECURITIES -------
------------------- ANNUAL STOCK UNDERLYING LTIP ALL OTHER
FISCAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION(1) YEAR ($) ($) ($) ($)(2) (#)(3) ($) ($)(4)
------------------------------ ------ ------- --------- ------------ ---------- ---------- ------- ------------
John T. Dickson............ 2001 800,000 -- 22,895 3,522,000 4,185,630 -- 2,500
President and Chief 2000 436,667 350,000 22,745 -- 1,551,242 -- 28,773
Executive Officer 1999 365,000 821,343 20,898 -- 110,803 263,960 32,863
Mark T. Greenquist......... 2001 277,419 270,000(5) -- 174,000 850,000 -- 61,744
Executive Vice President
and Chief Financial Officer
Sohail A. Khan............. 2001 440,000 -- 7,387 812,000 1,429,034 -- 2,500
Executive Vice President, 2000 276,812 250,000 3,807 -- 171,241 -- 31,273
Integrated Circuits
Ahmed Nawaz................ 2001 440,000 -- 7,642 812,000 1,441,959 -- 2,500
Executive Vice President, 2000 325,000 280,000 5,386 -- 133,466 -- 20,689
Sales
Daniel A. DiLeo............ 2001 440,000 -- 6,172 812,000 1,391,684 -- 2,500
Executive Vice President, 2000 297,262 300,000 6,093 -- 97,707 -- 39,245
Optoelectronics
---------------
(1) Includes those who in fiscal 2001 were the Chief Executive Officer or one of
the four other most highly compensated executive officers as measured by
salary and bonus. The positions listed are those that the individuals held
during fiscal 2001.
(2) The amounts shown in this column reflect the value of Lucent restricted
stock unit awards granted by Lucent before our initial public offering. The
awards have been valued for this table using the closing prices of Lucent
common stock on the New York Stock Exchange Composite Transaction Tape on
the grant dates of the awards. Based on the closing price of Lucent common
stock on September 30, 2001, the aggregate number and value of all
restricted stock units held by the executive officers as of that date are as
follows: Mr. Dickson (227,666 -- $1,304,526); Mr. Greenquist
(15,000 -- $85,950); Mr. Khan (50,000 -- $286,500); Mr. Nawaz
(97,007 -- $555,850); and Mr. DiLeo (50,000 -- $286,500). The restricted
stock units granted in fiscal 2001 vest 25% on each anniversary of the grant
date, except for Mr. Greenquist's restricted stock units which vest 20% on
each anniversary of the grant date (except that 100% of his units vest upon
termination of his employment by us other than for cause). Dividend
equivalents will not be paid on these awards. If Lucent completes the
spin-off of our company, unvested Lucent restricted stock units held by
these individuals will be replaced with our restricted stock units.
(3) The amounts shown in this column include options to purchase both Lucent
common stock and our Class A common stock. The number of shares shown for
fiscal 2001 that relate to options to purchase our Class A common stock are
as follows: Mr. Dickson -- 3,435,630; Mr. Greenquist -- 850,000; Mr.
Khan -- 1,194,234; Mr. Nawaz -- 1,241,959; and Mr. DiLeo -- 1,178,284. All
options granted before fiscal 2001 are options to purchase Lucent common
stock. If Lucent completes the spin-off of
72
our company, options to purchase Lucent common stock held by these
individuals will be converted to options to purchase our common stock.
(4) The amounts shown for fiscal 2001 include (a) company contributions to
savings plans as follows: $2,500 each for Messrs. Dickson, Greenquist, Khan,
Nawaz and DiLeo; (b) $1,505 of premiums paid for term insurance for Mr.
Greenquist; and (c) $57,739 of relocation expenses for Mr. Greenquist.
(5) This amount was a hiring bonus paid to Mr. Greenquist when he joined us.
GRANTS OF STOCK OPTIONS
The following table shows all grants of options to acquire shares of our
and Lucent's common stock granted to the executive officers named in the Summary
Compensation Table in the "-- Executive Compensation" section above for the
fiscal year ended September 30, 2001. Pursuant to the employee benefits
agreement, Lucent stock options and restricted stock units held by our
employees, including these executive officers, will be converted to our stock
options and restricted stock units.
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF % OF TOTAL
SHARES OPTIONS GRANT
UNDERLYING GRANTED EXERCISE DATE
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE VALUE ($)(1)
---- ----------- --------------- --------- ---------- ------------
John T. Dickson................ 550,000 0.16% 18.7500 1/31/2011 5,417,885(2)
200,000 0.06% 16.0313 12/25/2010 1,156,720(3)
1,500,000 0.99% 6.0000 3/26/2008 3,831,000(4)
525,000 0.35% 5.5950 7/31/2008 1,145,655(5)
885,630 0.58% 5.5950 7/31/2008 2,092,832(6)
525,000 0.35% 5.5950 7/31/2008 1,240,628(6)
Mark T. Greenquist............. 500,000 0.33% 6.0000 3/26/2008 1,277,000(4)
175,000 0.12% 5.5950 7/31/2008 381,885(5)
175,000 0.12% 5.5950 7/31/2008 413,543(6)
Sohail A. Khan................. 100,000 0.03% 18.7500 1/31/2011 985,070(2)
100,000 0.03% 16.0313 12/25/2010 578,360(3)
600,000 0.40% 6.0000 3/26/2008 1,532,400(4)
210,000 0.14% 5.5950 7/31/2008 458,262(5)
174,234 0.11% 5.5950 7/31/2008 411,732(6)
210,000 0.14% 5.5950 7/31/2008 496,251(6)
9,700 0.00% 16.0313 10/24/2009 47,664(7)
25,100 0.01% 16.0313 10/04/2008 95,006(8)
Ahmed Nawaz.................... 100,000 0.03% 18.7500 1/31/2011 985,070(2)
100,000 0.03% 16.0313 12/25/2010 578,360(3)
600,000 0.40% 6.0000 3/26/2008 1,532,400(4)
210,000 0.14% 5.5950 7/31/2008 458,262(5)
221,959 0.15% 5.5950 7/31/2008 524,511(6)
210,000 0.14% 5.5950 7/31/2008 496,251(6)
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NUMBER OF % OF TOTAL
SHARES OPTIONS GRANT
UNDERLYING GRANTED EXERCISE DATE
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE VALUE ($)(1)
---- ----------- --------------- --------- ---------- ------------
Daniel A. DiLeo................ 100,000 0.03% 18.7500 1/31/2011 985,070(2)
100,000 0.03% 16.0313 12/25/2010 578,360(3)
600,000 0.40% 6.0000 3/26/2008 1,532,400(4)
210,000 0.14% 5.5950 7/31/2008 458,262(5)
158,284 0.10% 5.5950 7/31/2008 374,041(6)
210,000 0.14% 5.5950 7/31/2008 496,251(6)
6,300 0.00% 16.0313 10/04/2008 23,846(8)
7,100 0.00% 16.0313 10/24/2009 34,544(9)
---------------
(1) As permitted by the rules of the Securities and Exchange Commission, we have
used the Black-Scholes option pricing model to estimate the grant date
present value of the options set forth in this table. Our use of this model
should not be construed as an endorsement of its accuracy at valuing
options. All stock option valuation models, including the Black-Scholes
model, require a prediction about the future movement of the stock price.
The real value of the options in this table depends upon the actual changes
in the market price of our or Lucent's common stock, as applicable, during
the applicable period.
(2) Option to purchase Lucent common stock. This option vests 25% on the first
anniversary of the grant date and in equal monthly increments over a
three-year period thereafter. We made the following assumptions when
calculating the grant date present value: the option will be exercised after
4 years, volatility of 64%, annual dividend yield of .006% and a risk-free
rate of return of 4.7%. This option may be transferred to immediate family
members and entities in which immediate family members have an interest.
(3) Option to purchase Lucent common stock. This option vests 25% on the first
anniversary of the grant date and in equal monthly increments over a
three-year period thereafter. We made the following assumptions when
calculating the grant date present value: the option will be exercised after
4 years, volatility of 54%, annual dividend yield of .006% and a risk-free
rate of return of 4.94%. This option may be transferred to immediate family
members and entities in which immediate family members have an interest.
(4) Option to purchase our Class A common stock. This option vests 25% on the
first anniversary of the grant date and in equal monthly increments over a
three-year period thereafter. We made the following assumptions when
calculating the grant date present value: the option will be exercised after
2.5 years, volatility of 65%, no annual dividend yield and a risk-free rate
of return of 4.42%.
(5) Option to purchase our Class A common stock. This option vests 25% on the
first anniversary of the grant date and in equal monthly increments over a
three-year period thereafter, subject to acceleration if we have positive
cash flow not later than the quarter ending September 30, 2002. We made the
following assumptions when calculating the grant date present value: the
option will be exercised after 1.6 years, volatility of 65%, no annual
dividend yield and a risk-free rate of return of 3.69%.
(6) Option to purchase our Class A common stock. This option vests 25% on the
first anniversary of the grant date and in equal monthly increments over a
three-year period thereafter. We made the following assumptions when
calculating the grant date present value: the option will be exercised after
2.5 years, volatility of 65%, no annual dividend yield and a risk-free rate
of return of 3.97%.
(7) Option to purchase Lucent common stock. This option vests on October 25,
2002. We made the following assumptions when calculating the grant date
present value: the option will be exercised after 3.05 years, volatility of
54%, annual dividend yield of .006% and a risk-free rate of return of 4.76%.
74
(8) Option to purchase Lucent common stock. This option vested on October 5,
2001. We made the following assumptions when calculating the grant date
present value: the option will be exercised after 2 years, volatility of
54%, annual dividend yield of .006% and a risk-free rate of return of 4.81%.
(9) Option to purchase Lucent common stock. This option vests on October 25,
2002. We made the following assumptions when calculating the grant date
present value: the option will be exercised after 3 years, volatility of
54%, annual dividend yield of .006% and a risk-free rate of return of 4.76%.
EXERCISE OF STOCK OPTIONS
The following table shows aggregate exercises of options to purchase our
and Lucent's common stock in the fiscal year ended September 30, 2001, by the
executive officers named in the Summary Compensation Table in the "-- Executive
Compensation" section above.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)
EXERCISE REALIZED ----------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
John T. Dickson....... -- -- 434,887(1) 5,657,631(2) -- --
Mark T. Greenquist.... -- -- -- 850,000(3) -- --
Sohail A. Khan........ -- -- 113,674(1) 1,602,458(4) -- --
Ahmed Nawaz........... -- -- 235,667(1) 1,672,169(5) -- --
Daniel A. DiLeo....... -- -- 94,400(1) 1,557,930(6) -- --
---------------
(1) Options to purchase Lucent common stock exercisable on September 30, 2001.
(2) Includes options to purchase 3,435,630 shares of our Class A common stock
and 2,222,001 shares of Lucent common stock.
(3) Options to purchase our Class A common stock.
(4) Options to purchase 1,194,234 shares of our Class A common stock and 408,224
shares of Lucent common stock.
(5) Options to purchase 1,241,959 shares of our Class A common stock and 430,210
shares of Lucent common stock.
(6) Options to purchase 1,178,284 shares of our Class A common stock and 379,646
shares of Lucent common stock.
PENSION PLANS
Most of our U.S. management employees, including the individuals named in
the Summary Compensation Table in the "-- Executive Compensation" section above,
participate in Lucent's non-contributory retirement income plan. Two programs
are available under the Lucent retirement income plan: the service based program
and the account balance program. Participants will be given full credit under
our retirement income plan, which will be adopted at the time of the planned
distribution, for service and compensation accrued under the Lucent retirement
income plan.
The service based program generally covers most management employees hired
prior to January 1, 1999. Pensions provided under this program are computed on
an adjusted career average pay basis. A participant's adjusted career average
pay is equal to 1.4% of the sum of the individual's:
- average annual pay for the five years ending December 31, 1998, excluding
the annual bonus award paid in December 1997, times the number of years
of service prior to January 1, 1999;
75
- pay subsequent to December 31, 1998; and
- annual bonus award paid in December 1997.
Average annual pay includes base salary and annual bonus awards.
The account balance program generally covers management employees hired on
or after January 1, 1999. Under this program, Lucent establishes an account for
each participating employee and makes annual contributions to that account based
on the employee's age, salary and bonus, in accordance with the following
schedule:
CONTRIBUTIONS AS A PERCENT
AGE OF SALARY AND BONUS
--- --------------------------
less than 30................................................ 3.00%
30 - less than 35........................................... 3.75%
35 - less than 40........................................... 4.50%
40 - less than 45........................................... 5.50%
45 - less than 50........................................... 6.75%
50 - less than 55........................................... 8.25%
55+......................................................... 10.00%
In addition, interest is credited on the last day of the year.
The normal retirement age under the service based program is 65. However,
employees who are at least age 50 with at least 15 years of service can retire
with reduced benefits. If an employee's age is at least 50 and, when added to
the employee's years of service, is equal to or greater than 75, the employee
may retire with unreduced pension benefits. A reduction equal to 3% is made for
each year that age plus years of service is less than 75. Once vested, normally
after five years of service, an employee participating in the account balance
program is entitled to the amounts in his or her account when he or she leaves
the company.
Federal laws place limitations on compensation amounts that may be included
under this plan. In 2001, up to $170,000 in eligible base salary and annual
bonus could be included in the calculation under the retirement income plan.
Compensation and benefit amounts that exceed the applicable federal
limitations are taken into account, and pension amounts related to annual bonus
awards payable to executive officers are paid under a supplemental pension plan.
This plan is a non-contributory plan and has the same two programs and uses the
same adjusted career average pay formula and eligibility rules as the retirement
income plan. Pension amounts under the retirement income and supplemental
pension plans are not subject to reductions for social security benefits or
other offset amounts.
The supplemental pension plan also provides executive officers with minimum
pensions. Eligible retired executive officers and surviving spouses may receive
an annual minimum pension equal to 15% of the sum of final base salary plus
annual bonus awards. This minimum pension will be offset by amounts received by
plan participants as pensions under the retirement income and supplemental
pension plans.
In addition, Messrs. Dickson, Khan and Nawaz are entitled to a supplemental
pension benefit under the supplemental pension plan. This benefit provides
additional pension credits equal to the difference between age 35 and the
maximum possible years of service attainable at age 65, but not to exceed actual
net credited service, at one-half the rate in the management pension plan.
If Messrs. Dickson, Khan and Nawaz continue in the positions identified
above and retire at the normal retirement age of 65, the estimated annual
pension payable to them under the retirement income and supplemental pension
plans would be $546,000, $369,000 and $306,000, respectively. These amounts are
single-life annuity amounts. Other optional forms of payment, which provide for
actuarially reduced
76
pensions, are available. Mr. Greenquist's estimated balance in the account
balance program at age 65 would be $3,250,000. This represents a lump sum
payment; other optional forms of payment are available.
AGERE SYSTEMS INC. SHORT TERM INCENTIVE PLAN
The following description of our Agere Systems Inc. Short Term Incentive
Plan is qualified by reference to the full text thereof, a copy of which is
filed as an exhibit to the registration statement of which this prospectus is a
part.
AWARDS
The Short Term Incentive Plan provides for the payment of cash bonuses for
executive officers as determined at or following the end of performance periods
selected by the Corporate Governance and Compensation Committee, in accordance
with targets established at or near the beginning of the performance periods. We
expect that, at least initially, the committee will select participants and
performance targets for each fiscal quarter. Factors that may be considered in
determining the amount of cash bonuses paid to executive officers will be, among
others, the executive officer's individual performance, which may be measured by
the quality of strategic plans, organizational and management development,
special project leadership and similar indicators of individual performance or
other measures, and our financial performance, which may be measured by cash
flow, earnings per share, return on equity, total return to stockholders in the
form of stock price appreciation and dividends, if paid, or other measures. The
maximum amount that may be paid under the plan to an executive officer in any
fiscal year is $9 million. In fiscal 2001, there were 11 participants.
PLAN ADMINISTRATION
The Corporate Governance and Compensation Committee administers the Short
Term Incentive Plan. The committee can make award payments subject to our having
a minimum level of net income established by the committee at or near the
beginning of each performance period, so that awards paid to "covered employees"
within the meaning of Section 162(m) of the Internal Revenue Code can be
deducted by us for tax purposes. Subject to this limitation, the award amount
with respect to an executive officer is determined in the sole discretion of the
committee or, in the case of an award to an officer who is not a "covered
employee," in the sole discretion of the committee or a person or committee to
whom the committee has delegated that authority. Under the plan, net income will
be determined before taxes and excludes (a) extraordinary items; (b) cumulative
effects of changes in accounting principles; (c) securities gains and losses;
(d) amortization or write-off of goodwill, acquired intangibles and purchased
in-process research and development; and (e) nonrecurring items including, but
not limited to, gains or losses on asset dispositions and sales of divisions,
business units or subsidiaries, restructuring and separation charges and gains
and losses from qualified benefit plan curtailments and settlements.
OTHER PROVISIONS
The Board may modify or terminate the Short Term Incentive Plan at any
time.
TAX RULES
The following is a brief summary of the federal income tax consequences of
payments made under the Short Term Incentive Plan based on current federal
income tax laws. This summary is not intended to be exhaustive and does not
describe state or local tax consequences. In general, ordinary income will be
recognized by the executive officers that participate in the plan at the time
that awards are paid or made available to them. At the time that an executive
officer recognizes ordinary income, we will be entitled to a corresponding
deduction if, among other things, (i) the income meets the test of
reasonableness, is an ordinary and necessary business expense, is not an "excess
parachute payment" within the meaning of Section 280G of the Internal Revenue
Code and is not disallowed by the $1 million limitation on compensation paid to
"covered employees" and (ii) any applicable reporting obligations are satisfied.
77
Awards made in the future to any executive officer will be based on the
executive officer's individual performance and our future performance.
Accordingly, the amount of cash bonuses to be paid in the future to current or
future participating officers cannot be determined at this time. Actual amounts
will depend on the individual's and our actual performance. Because the
Corporate Governance and Compensation Committee will select performance targets
under the amended plan for each fiscal quarter rather than for the fiscal year
and quarterly performance targets were not set in fiscal 2001, we cannot
determine the bonuses that would have been paid in fiscal 2001 had this proposal
been in effect.
AGERE SYSTEMS INC. 2001 LONG TERM INCENTIVE PLAN
The following description of our Agere Systems Inc. 2001 Long Term
Incentive Plan is qualified by reference to the full text thereof, a copy of
which is filed as an exhibit to the registration statement of which this
prospectus is a part.
AWARDS
The Agere Systems Inc. 2001 Long Term Incentive Plan provides for the grant
of incentive stock options that qualify under Section 422 of the Internal
Revenue Code and non-statutory stock options, stock appreciation rights,
restricted stock awards, performance awards and other stock unit awards, as such
terms are defined in the Agere Systems Inc. 2001 Long Term Incentive Plan. All
of our employees are eligible to participate in the Agere Systems Inc. 2001 Long
Term Incentive Plan.
SHARES AVAILABLE
The total number of shares of our common stock available for awards granted
under the Agere Systems Inc. 2001 Long Term Incentive Plan is 226 million.
During the term of the plan, no more than 40 million shares of our common stock
will be available for the grant of incentive stock options. No individual may be
granted awards with respect to more than 10 million shares of our common stock
over the term of the plan. Awards under the plan may be granted with respect to
either Class A common stock or Class B common stock. We expect that prior to the
distribution, all awards will be based on Class A common stock. The plan will
expire, unless terminated earlier by the board, when no shares are available for
grant, exercise or settlement of awards.
Any shares issued by us through the assumption of or substitution for
outstanding grants from Lucent or an acquired company will not reduce the number
of shares of our common stock available for grants under the Agere Systems Inc.
2001 Long Term Incentive Plan. Any shares of our common stock issued under the
Agere Systems Inc. 2001 Long Term Incentive Plan may consist, in whole or in
part, of authorized and unissued shares of our common stock, treasury shares of
our common stock or shares of our common stock purchased in the open market or
otherwise. If any shares of our common stock subject to any award are forfeited
or such award otherwise terminates without the issuance of shares of our common
stock, the shares of our common stock subject to such award, to the extent of
any such forfeiture or termination, will again be available for grant under the
Agere Systems Inc. 2001 Long Term Incentive Plan if the holder of the award
shall not have received any benefits of ownership of the shares. Additionally,
shares of our common stock that are subject to an award granted under the plan
that are not issued because of the tender will be used to pay all or part of the
purchase price under the award, or tender or withholding to satisfy all or part
of the tax withholding obligations related to the award, and shares of our
common stock that are purchased by us with cash received upon the exercise of
options granted under the plan will again be available for awards under the
plan. In the event of any corporate event affecting the shares of our common
stock, the corporate governance and compensation committee shall make such
adjustments and other substitutions to the plan and awards under the plan as it
deems equitable or appropriate in its sole discretion.
78
PLAN ADMINISTRATION
The corporate governance and compensation committee of our board of
directors administers the Agere Systems Inc. 2001 Long Term Incentive Plan.
OPTIONS; STOCK APPRECIATION RIGHTS
Options to purchase shares of our common stock may be granted under the
Agere Systems Inc. 2001 Long Term Incentive Plan, either alone or in addition to
other awards. The purchase price per share of our common stock purchasable under
an option will be determined by our corporate governance and compensation
committee, in its sole discretion; provided that such purchase price will not be
less than the fair market value, as defined in the Agere Systems Inc. 2001 Long
Term Incentive Plan, of a share of our Class A common stock or Class B common
stock, as applicable on the date of the grant of the option. The term of each
option will be fixed by our corporate governance and compensation committee in
its sole discretion; provided that no incentive stock option will be exercisable
after the expiration of 10 years from the date the option is granted. Options
will be exercisable at such time or times as determined by our corporate
governance and compensation committee at or subsequent to grant. Subject to the
other provisions of the Agere Systems Inc. 2001 Long Term Incentive Plan and any
applicable award agreement, any option may be exercised by the participant in
such form or forms, including, without limitation, payment by delivery of cash,
shares of our common stock or other consideration including, where permitted by
law and our corporate governance and compensation committee, awards having a
fair market value on the exercise date equal to the total option price, or by
any combination of cash, shares of our common stock and other consideration as
our corporate governance and compensation committee may specify in the
applicable award agreement. In general, options will be subject to the
provisions of our Long Term Incentive Plan Nonstatutory Stock Option Agreement,
a form of which is filed as an exhibit to the registration statement of which
this prospectus is a part. Each agreement will set forth the terms of the
option, including term, exercisability, number and type of shares subject to the
option, vesting and purchase price. In addition, each agreement will contain a
non-solicit provision pursuant to which the option holder will agree not to
solicit or hire any of our employees both while an employee and for a period of
12 months following the option holder's termination of employment with us.
The aggregate fair market value of the shares of our common stock with
respect to which incentive stock options held by any participant may become
exercisable for the first time by such participant during any calendar year
under the Agere Systems Inc. 2001 Long Term Incentive Plan, including under any
of our other benefit plans or under any benefit plans of our parent or
subsidiary corporations, will not exceed $100,000, determined at the time of
grant, or, if different, the maximum limitation in effect at the time of grant
under Section 422 of the Internal Revenue Code, or any successor provision, and
any regulations promulgated thereunder. In its sole discretion, our corporate
governance and compensation committee may provide, at the time of grant, that
the shares of common stock to be issued upon an option's exercise will be in the
form of restricted stock or other similar securities, or may reserve the right
so to provide after the time of grant.
Upon termination of employment, other than for death, disability,
retirement or specified actions initiated by us, a participant will generally
forfeit all unexercisable options and may exercise all exercisable options
within 90 days following such termination.
Stock appreciation rights may be granted to participants either alone or in
addition to other awards and may, but need not, relate to a specific option. Any
stock appreciation right related to an option other than an incentive stock
option may be granted at the same time such option is granted or at any time
thereafter before exercise or expiration of such option. Any stock appreciation
right related to an incentive stock option must be granted at the same time such
option is granted. In the case of any stock appreciation right related to any
option, the stock appreciation right or applicable portion thereof will
terminate and no longer be exercisable upon the termination or exercise of the
related option, except that any stock appreciation right granted with respect to
less than the full number of shares of our common stock covered by a related
option will not be reduced except to the extent that the number of shares of our
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common stock affected by the exercise or termination of the related option
exceeds the number of shares of our common stock not covered by the stock
appreciation right. Any option related to any stock appreciation right will no
longer be exercisable to the extent the related stock appreciation right has
been exercised. Our corporate governance and compensation committee may impose
such conditions or restrictions on the exercise of any stock appreciation right
as it may deem appropriate.
PERFORMANCE AWARDS
Performance-based equity awards may be issued to participants, for no cash
consideration or for such minimum consideration as may be required by applicable
law, either alone or in addition to other awards granted under the Agere Systems
Inc. 2001 Long Term Incentive Plan. The performance criteria to be achieved
during any performance period under the Agere Systems Inc. 2001 Long Term
Incentive Plan and the length of the performance period will be determined by
our corporate governance and compensation committee. Performance awards will
generally be paid only after the end of the relevant performance period.
Performance awards may be paid in cash, shares of our common stock, other
property or any combination thereof, in the sole discretion of our corporate
governance and compensation committee at the time of payment. Performance awards
may be paid in a lump sum or in installments following the close of the
performance period.
OTHER STOCK UNIT AWARDS
Other awards of shares of common stock and other awards that are valued in
whole or in part by reference to, or are otherwise based on, shares of our
common stock or other property may be granted to participants, either alone or
in addition to other awards. Other stock unit awards may be paid in shares of
our common stock, other securities, cash or any other form of property as the
corporate governance and compensation committee may determine.
Shares of our common stock, including securities convertible into shares of
our common stock, subject to other stock unit awards may be issued for no cash
consideration or for such minimum consideration as may be required by applicable
law; shares of our common stock, including securities convertible into such
shares of our common stock pursuant to such a conversion or purchase right may
be purchased by participants for such consideration as our corporate governance
and compensation committee may, in its sole discretion, determine, which will
not be less than the fair market value of such shares of our common stock or
other securities as of the date such purchase right is awarded.
Other stock unit awards include restricted stock unit awards which entitle
the holder to receive a number of shares of common stock after a specified
period of time if the holder remains our employee. In general, these awards will
be granted pursuant to our Long Term Incentive Plan Restricted Stock Unit Award
Agreement, a form of which is filed as an exhibit to the registration statement.
Each agreement will specify, among other things, the number and type of shares
of our common stock subject to the award and the vesting period.
RESTRICTED SHARES OF COMMON STOCK
Restricted stock awards may be issued to participants, for no cash
consideration or for such minimum consideration as may be required by applicable
law, either alone or in addition to other awards granted under the Agere Systems
Inc. 2001 Long Term Incentive Plan. Except as otherwise determined by our
corporate governance and compensation committee at the time of grant, upon
termination of employment for any reason during the restriction period, all
restricted stock awards still subject to restriction will be forfeited by the
participant and reacquired by us.
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CHANGE IN CONTROL
The Agere Systems Inc. 2001 Long Term Incentive Plan generally provides
that, for awards granted on or before February 21, 2002, unless our corporate
governance and compensation committee determines otherwise at the time of grant
with respect to a particular award, in the event of a change in control:
- any options and stock appreciation rights outstanding as of the date the
change in control is determined to have occurred will become fully
exercisable and vested;
- the restrictions and deferral limitations applicable to any restricted
stock awards will lapse;
- all performance awards will be considered to be earned and payable in
full, and any deferral or other restriction will lapse and such
performance awards will be immediately settled or distributed; and
- the restrictions and deferral limitations and other conditions applicable
to any other stock unit awards or any other awards will lapse, and such
other stock unit awards or other awards will become free of all
restrictions, limitations or conditions and become fully vested and
transferable.
For awards granted after February 21, 2002:
- if we are not the surviving entity following a change in control, and the
surviving entity does not assume the outstanding awards granted under the
plan, then all awards will become fully exercisable and vested;
- if we are the surviving entity following a change in control (or the
surviving entity assumes the outstanding awards granted under the plan),
then all awards will remain outstanding; and
- if the employment of a participant in the plan is terminated without
cause within the two years following a change in control and we are the
surviving entity following a change in control (or the surviving entity
assumes the outstanding awards granted under the plan), then all awards
held by the terminated participant will become fully exercisable and
vested.
The Agere Systems Inc. 2001 Long Term Incentive Plan defines change in control
to mean, generally:
- an acquisition by any individual, entity or group of beneficial ownership
of 20% or more of either the then outstanding shares of our common stock
or the combined voting power of our then outstanding voting securities
entitled to vote generally in the election of directors;
- a change in the composition of a majority of our board of directors which
is not supported by the incumbent board of directors;
- the approval by the stockholders of a merger, reorganization or
consolidation or sale or other disposition of all or substantially all of
our assets or, if consummation of such corporate transaction is subject,
at the time of such approval by stockholders, to the consent of any
government or governmental agency, the obtaining of such consent either
explicitly or implicitly by consummation;
- the approval of the stockholders of our complete liquidation or
dissolution; or
- prior to the distribution, a change in control of Lucent.
The distribution will not constitute a change in control under the Agere Systems
Inc. 2001 Long Term Incentive Plan.
The Agere Systems Inc. 2001 Long Term Incentive Plan defines change in
control price, generally, as the higher of the highest price of a share of
common stock during the 60-day period prior to and including the date of a
change in control or if the change in control is the result of a tender or
exchange offer or a corporate transaction, the highest price per share paid in
such tender or exchange offer or corporate transaction.
OTHER PROVISIONS
Our board of directors may amend, alter or discontinue the Agere Systems
Inc. 2001 Long Term Incentive Plan, but no amendment, alteration or
discontinuation may be made that would impair rights under an award previously
granted without the participant's consent.
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Our corporate governance and compensation committee is authorized to make
adjustments in performance award criteria or in the terms and conditions of
other awards in recognition of unusual or nonrecurring events affecting us or
our financial statements or changes in applicable laws, regulations or
accounting principles.
Subject to the provisions of the Agere Systems Inc. 2001 Long Term
Incentive Plan and any award agreement, the recipient of an award, including,
without limitation, any deferred award may, if so determined by our corporate
governance and compensation committee, be entitled to receive, currently or on a
deferred basis, interest or dividends, or interest or dividend equivalents, with
respect to the number of shares of our common stock covered by the award, and
our corporate governance and compensation committee may provide that such
amounts, if any, will be deemed to have been reinvested in additional shares of
our common stock or otherwise reinvested.
The Agere Systems Inc. 2001 Long Term Incentive Plan also provides that, if
the corporate governance and compensation committee determines at the time a
restricted stock award, a performance award or an other stock unit award is
granted to an individual that the individual is, or may be as of the end of the
tax year in which we would claim a tax deduction related to the award, a
"covered employee" within the meaning of Section 162(m) of the Internal Revenue
Code, then that committee may make the lapsing of restrictions thereon and the
distribution of cash, stock or other property pursuant to the award subject to
us having a level of net income determined by the committee. Net income will be
determined before taxes, and will exclude (a) extraordinary items; (b)
cumulative effects of changes in accounting principles; (c) securities gains and
losses; (d) amortization or write-off of goodwill, acquired intangibles and
purchased in-process research and development; and (e) nonrecurring items
including, but not limited to, gains or losses on asset dispositions and sales
of divisions, business units or subsidiaries, restructuring and separation
charges and gains and losses from qualified benefit plan curtailments and
settlements. The Corporate Governance and Compensation Committee will select the
periods that are used to measure net income. The committee will also have the
discretion to reduce, but not increase, the final amount of any performance
award or other stock unit award based on such criteria as individual and company
performance.
The amount of the awards to be paid in the future to current or future
participating officers will be decided at the time and cannot be determined at
this time. Actual amounts will depend on a number of factors, including an
individual's potential contribution to the business, compensation practices at
the time, retention issues and the company's stock price.
TAX RULES
The following is a brief summary of the federal income tax consequences of
certain transactions under the Agere Systems Inc. 2001 Long Term Incentive Plan
based on federal income tax laws in effect on the date hereof. This summary is
not intended to be exhaustive and does not describe state or local tax
consequences.
In general: (i) no income will be recognized by an optionee at the time a
nonqualified option is granted; (ii) at the time of exercise of a nonqualified
option, ordinary income will be recognized by the optionee in an amount equal to
the difference between the purchase price paid for the shares and the fair
market value of the shares if they are nonrestricted on the date of exercise;
and (iii) at the time of sale of shares acquired pursuant to the exercise of a
nonqualified option, any appreciation (or depreciation) in the value of the
shares after the date of exercise will be treated as either short-term or
long-term capital gain (or loss) depending on how long the shares have been
held. No income generally will be recognized by an optionee upon the grant or
qualifying exercise of an incentive stock option. However, for purposes of
calculating the optionee's alternative minimum tax, if any, the difference
between the fair market value of the shares of common stock at exercise and the
purchase price constitutes an item of adjustment. If shares of common stock are
issued to an optionee pursuant to the exercise of an incentive stock option and
no disqualifying disposition of the shares is made by the optionee within two
years after the date of grant or within one year after the transfer of the
shares to the optionee, then upon the sale of the shares any
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amount realized in excess of the purchase price will be taxed to the optionee as
long-term capital gain and any loss sustained will be a long-term capital loss.
If shares of common stock acquired upon the exercise of an incentive stock
option are disposed of prior to the expiration of either holding period
described above, the optionee generally will recognize ordinary income in the
year of disposition in an amount equal to any excess of the fair market value of
the shares at the time of exercise (or, if less, the amount realized on the
disposition of the shares in a sale or exchange) over the option price paid for
the shares. Any further gain (or loss) realized by the optionee generally will
be taxed as short-term or long-term gain (or loss) depending on the holding
period.
No income will be recognized by a participant in connection with the grant
of an appreciation right. When the appreciation right is exercised, the
participant normally will be required to include as taxable ordinary income in
the year of exercise an amount equal to the amount of any cash, and the fair
market value of any nonrestricted shares of common stock, received pursuant to
the exercise.
A recipient of a restricted stock award generally will be subject to tax at
ordinary income rates on the fair market value of the restricted shares, reduced
by any amount paid by the recipient, at such time as the shares are no longer
subject to a substantial risk of forfeiture or restrictions on transfer for
purposes of Section 83 of the Internal Revenue Code. However, a recipient who so
elects under Section 83(b) of the Internal Revenue Code within 30 days of the
date of transfer of the shares to the recipient will have taxable ordinary
income on the date of transfer of the shares equal to the excess of the fair
market value of the shares (determined without regard to the risk of forfeiture
or restrictions on transfer) over any purchase price paid for the shares. If a
Section 83(b) election has not been made, any dividends received with respect to
restricted shares that are subject at that time to a substantial risk of
forfeiture and restrictions on transfer generally will be treated as
compensation that is taxable as ordinary income to the recipient.
Generally, no income will be recognized by a participant in connection with
the grant of a performance award or other stock unit award. Subject to the
specific terms of the award, when the award is paid to the participant, the
participant normally will be required to include as taxable ordinary income in
the year of payment an amount equal to the amount of any cash, and the fair
market value of any nonrestricted shares of common stock, actually or
constructively received.
To the extent that a participant recognizes ordinary income in the
circumstances described above, we will be entitled to a corresponding deduction
provided that, among other things, (i) the income meets the test of
reasonableness, is an ordinary and necessary business expense and is not an
"excess parachute payment" within the meaning of Section 2806 of the Internal
Revenue Code and is not disallowed by the $1 million limitation on compensation
paid to "covered employees" and (ii) any applicable reporting obligations are
satisfied.
DEFERRED COMPENSATION PLAN
We maintain a deferred compensation plan that permits our employees to
defer receipt of part or all of their base salary, short-term incentive payments
and long term incentive payments, and that permits directors to defer receipt of
part or all of their retainers. Deferrals are credited to a cash account, which
is credited with interest at a rate determined by the board of directors from
time to time, or a share equivalent account, depending on the nature of the
deferred payment. Balances under the plan are generally paid to a plan
participant upon attainment of a specific age or after the individual retires
from our company, as elected by the participant.
EXECUTIVE AGREEMENTS
DANIEL A. DILEO
In August 2001, Mr. DiLeo announced he would retire from our company. In
order to provide for management continuity and to allow us to continue
benefitting from Mr. DiLeo's experience in the industry, we entered into an
agreement with Mr. DiLeo, pursuant to which he will continue working for us
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through March 2002, at which time he would be entitled to receive benefits under
the Officer Severance Plan, which is further described in the "-- Officer
Severance Plan" section below, plus an additional $16,042 per month until April
1, 2004 and up to $10,000 to furnish and equip a home office. Mr. DiLeo also
agreed that, until April 1, 2004, he will not compete with us and will not
solicit or employ any person who was an employee of our company in November
2001. Including the compensation that he will receive through April 2004
described above, Mr. DiLeo will be entitled to an estimated annual pension at
age 65 of $190,000, payable as a single-life annuity. Other optional forms of
payment, which provide for actuarially reduced pensions, are available.
MARK T. GREENQUIST
Mr. Greenquist joined our company shortly before our initial public
offering from a position at General Motors in Europe. When he joined us, we
entered into a letter agreement with him.
Under the agreement, Mr. Greenquist is paid an initial base salary of
$400,000 per year and has a target bonus opportunity of 70% of his annual base
salary.
We also agreed to provide Mr. Greenquist with a hiring incentive to
encourage him to join us and to compensate him for incentives that he would
forfeit by leaving his former employer. The hiring incentive included:
- a stock option covering 300,000 shares of our stock granted at the time
of our initial public offering;
- an award of 15,000 Lucent restricted stock units that would vest over a
five-year period; and
- a cash payment of $270,000.
To address Mr. Greenquist's concern that his responsibilities could be
significantly reduced if the spin-off from Lucent were not completed as planned,
the agreement provides for a cash payment to Mr. Greenquist of $680,000 on March
1, 2002, if the spin-off is not completed by that time. Mr. Greenquist has
agreed that we do not have to make this payment until April 1, 2003 unless he
leaves the company earlier.
Mr. Greenquist participates in the Officer Severance Plan. In addition, if
the spin-off does not occur by March 1, 2002 and we do not offer Mr. Greenquist
continued employment as an officer with at least the same salary and target
bonus level, Mr. Greenquist will be entitled to a severance benefit equal to two
times his base salary and target bonus.
OFFICER SEVERANCE PLAN
We have adopted a severance policy that provides for a number of benefits
for an officer who is terminated by us other than for cause or who chooses to
leave following a change in control and within three months of one of the
following events occurring after the change in control: either a diminution in
job responsibility or a material negative change in employment terms, including
a reduction in base salary or a material reduction in target bonus.
The benefits under this policy include continuation of salary and health
and welfare benefits and payment of annual bonus at target levels for two years.
These payments would be taken into account for purposes of computing pensions.
During this two-year period, participation and vesting under our stock-based
benefit plans would continue. An officer can accelerate the payment of the
salary and target bonus, in which event participation in company plans would end
upon payment of those amounts. Payment of any amount under these arrangements
will be conditioned upon signing a release and will be offset by any
individually negotiated arrangements.
RETENTION PLAN
In order to encourage our senior leaders to remain with the company in the
event that our spin-off from Lucent is further delayed, we have adopted a
retention program. Under this program, participating
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senior managers, including our executive officers, will receive cash payments if
the spin-off has not been completed by April 1, 2003 or October 1, 2003, with
one half of the total amount becoming payable on each of those dates if the
spin-off has not been completed. The total amount for each executive officer is
a multiple of the individual's current target pay, which is base salary plus
target bonus. The multiples are five times target pay for the Chief Executive
Officer and four times target pay for the other executive officers. If Lucent
completes the spin-off prior to April 1, 2003, whether following satisfaction of
the EBITDA condition based on its results for the quarter ended March 31, 2002,
or otherwise, we will not make any payments under this plan. If the spin-off is
not completed by October 1, 2003, the maximum amount we might have to pay under
the plan is $47.6 million.
2001 EMPLOYEE STOCK PURCHASE PLAN
ADOPTION AND ADMINISTRATION
We have adopted the 2001 Employee Stock Purchase Plan under which we may
issue up to an aggregate of 85 million shares of our common stock. The shares
sold under the plan may be either Class A common stock or Class B common stock.
The 2001 Employee Stock Purchase Plan is intended to qualify as an "employee
stock purchase plan" within the meaning of Section 423 of the Internal Revenue
Code. The 2001 Employee Stock Purchase Plan is administered by the corporate
governance and compensation committee.
ELIGIBILITY
All employees in the United States and certain employees outside the United
States may participate in the 2001 Employee Stock Purchase Plan. No employee
will be eligible for the grant of any rights under the 2001 Employee Stock
Purchase Plan if immediately after such rights are granted, such employee would
own 5% or more of the total voting power or value of all classes of our stock.
PURCHASE OF SHARES
We have implemented the 2001 Employee Stock Purchase Plan by offering
eligible employees the option to purchase our common stock. To participate in
the 2001 Employee Stock Purchase Plan, an employee must authorize us to deduct
an amount not less than one percent nor more than ten percent of a participant's
total cash compensation from his or her pay during each purchase period within a
longer offering period. The first offering period and the first purchase period
commenced on March 27, 2001. The first purchase period ended on October 31,
2001. Thereafter, the purchase periods will commence on the first day of
November or May and end on the last day of the following April or October,
respectively, of each year. Participating employees will purchase our common
stock at a price per share equal to 85% of the lesser of the fair market value
of a share of our common stock at the beginning of the offering period and the
fair market value of a share of our common stock at the end of the purchase
period. Eligible employees may be granted rights only if the rights, together
with any other rights granted under any other employee stock purchase plan of
ours or of any parent or subsidiary of ours, do not permit such employee to
purchase stock with a fair market value determined at the time of grant in
excess of $25,000 for each calendar year in which such rights are outstanding.
Employees may not purchase more than 1,250 shares of our common stock per
purchase period. For the first offering period, Class A common stock will be
sold under the plan. Our board of directors may elect to switch between having
Class A common stock and Class B common stock sold under the plan, effective at
the beginning of any subsequent offering period.
AMENDMENT AND TERMINATION
The 2001 Employee Stock Purchase Plan will terminate at the direction of
our board of directors or when all of the shares reserved for issuance have been
purchased. Our board of directors may amend the 2001 Employee Stock Purchase
Plan at any time except that stockholder approval is required to amend the plan
to increase the number of shares of our common stock that may be issued under
the plan.
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ARRANGEMENTS BETWEEN LUCENT AND OUR COMPANY
OUR SEPARATION FROM LUCENT
Agere was formed as part of Lucent Technologies' plan to spin-off to its
stockholders its microelectronics business, including its integrated circuits
and optoelectronics divisions. Our Class A common stock began trading on the New
York Stock Exchange following our initial public offering in April 2001. The
separation of our business from Lucent's other businesses was substantially
completed, including the transfer of all assets and liabilities related to these
divisions (other than pension and postretirement plan assets and liabilities,
which have yet to be transferred) when we completed our initial public offering.
As of December 31, 2001, Lucent owned 100% of our outstanding Class B common
stock and 37 million shares of our Class A common stock, which together
represented approximately 84.2% of the combined voting power of both classes of
our voting stock with respect to the election and removal of directors and
approximately 57.8% of the voting power of our outstanding common stock with
respect to all other matters.
Lucent originally announced its intention to distribute all shares of our
common stock it then owned to its stockholders in a tax-free distribution by
September 30, 2001. On August 16, 2001, Lucent amended its credit facilities.
The amended credit facilities modified the conditions that must be met before
Lucent can distribute its Agere stock to its stockholders. The distribution of
Agere stock can occur at Lucent's discretion if the following conditions
contained in its remaining credit agreement are met by Lucent:
- no event of default exists under the credit agreement;
- generate positive EBITDA for the fiscal quarter immediately preceding the
distribution;
- meet a minimum current asset ratio;
- receipt of $5 billion in cash from certain non-operating sources; and
- the total lending commitments under the credit agreement must be reduced
to $1,750 million or less.
Lucent has advised us that it has satisfied the $5 billion requirement
noted above and reduced the total lending commitments below $1.75 billion.
Lucent has also stated that it intends to use the results from the quarter
ending March 31, 2002 to meet the EBITDA conditions, and has indicated that it
cannot provide assurances that the conditions to its obligations to complete the
distribution will be satisfied by a particular date or that the terms and
conditions of its indebtedness will permit the distribution by a particular date
or at all due to uncertain market conditions.
Lucent has received a private letter ruling from the Internal Revenue
Service holding that the distribution of its shares of Agere common stock to its
stockholders in the spin-off will be tax free to Lucent and its stockholders.
The effectiveness of the ruling is conditioned on completion of the spin-off by
June 30, 2002.
TAX LIMITATIONS ON ADDITIONAL ISSUANCE OF OUR STOCK
We are limited in the amount of stock that we can issue because of
potential adverse tax consequences.
First, in order for the distribution to be tax-free to Lucent and its
stockholders, Lucent must distribute "control" of Agere, as defined in Section
368(c) of the Internal Revenue Code. Under Section 368(c), "control" means
ownership of stock possessing at least 80% of the total combined voting power of
all classes of stock entitled to vote for the election and removal of directors
and at least 80% of the total number of shares of each other class of nonvoting
stock. Because we will have only voting stock outstanding, Lucent must
distribute stock representing at least 80% of the combined voting power of our
common stock for the election and removal of directors to satisfy the Section
368(c) control test. We and
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Lucent have issued or transferred stock representing 16% of our voting power.
Thus, before the distribution we may issue only a limited amount of our stock
without violating the Section 368(c) "control" test.
Second, under Section 355(e) of the Internal Revenue Code, Lucent will
recognize taxable gain on the distribution if there are one or more acquisitions
of our stock representing 50% or more of our stock, measured by vote or value,
and the stock acquisitions are part of a plan or series of related transactions
that includes the distribution. Any shares of our common stock acquired within
two years before or after the distribution are presumed to be part of such a
plan unless we can rebut that presumption. Thus, Lucent will recognize taxable
gain on the distribution if the shares issued in the offerings referred to
above, together with any shares we issue to make acquisitions that are
considered part of a plan that includes the distribution, represent 50% or more,
measured by vote or value, of our common stock outstanding after completion of
that offering and such acquisitions. The Company believes that it cannot issue
significant amounts of equity in capital raising transactions without causing
the distribution to be taxable to Lucent under Section 355(e). In addition,
under Treasury regulations, shares issued in acquisitions that occur or are
negotiated less than six months after the distribution will generally be treated
as part of the plan. Consequently, to avoid causing the distribution to be
taxable to Lucent under Section 355(e), we are significantly limited in our
ability to issue our shares in acquisitions that are negotiated or closed within
six months after the distribution. We may continue to be subject to restrictions
on the use of stock for acquisitions after this six-month period. As a practical
matter, without a ruling by the Internal Revenue Service, we cannot issue any of
our stock in acquisitions until six months after the distribution. If issuance
of our stock causes the distribution to be taxable to Lucent under Section
355(e), we would be required to indemnify Lucent against that tax under the tax
sharing agreement.
AGREEMENTS PROVIDING FOR THE SEPARATION OF OUR BUSINESSES FROM LUCENT
We and Lucent and, in some cases, our respective subsidiaries, have entered
into a number of agreements providing for the separation of our businesses from
Lucent, including a separation and distribution agreement to which we and Lucent
are parties and other ancillary agreements. These agreements generally provide
for the transfer from Lucent to us of assets and the assumption by us of
liabilities relating to our businesses, in each case to the extent agreed to by
Lucent and us. We have entered into agreements with Lucent regarding the
transfer and licensing to us of intellectual property relating to our
businesses. We also have entered into agreements governing various interim and
ongoing relationships between the parties including transitional services Lucent
will provide to us.
The agreements relating to our separation from Lucent were made in the
context of a parent-subsidiary relationship and were negotiated in the overall
context of our separation from Lucent. The terms of these agreements may be more
or less favorable to us than those we could have negotiated with unaffiliated
third parties. These agreements govern the relationship between Lucent and us
subsequent to the separation and provide for the allocation of employee benefit,
tax and other liabilities and obligations attributable to periods prior to the
separation. The ancillary agreements include:
- Interim Services and Systems Replication Agreement;
- Fiber Product Purchase Agreement;
- Microelectronics Product Purchase Agreement;
- ORiNOCO Product Purchase Agreement;
- Employee Benefits Agreement;
- Trademark License Agreement;
- Trademark Assignment;
- Trade Dress Assignment;
- Patent and Technology License Agreement;
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- Patent Assignments;
- Technology Assignment and Joint Ownership Agreement;
- Development Project Agreement;
- Joint Design Center Operating Agreement;
- Tax Sharing Agreement; and
- Real Estate Agreements.
In addition, the current federal Tax Allocation Agreement and the current
State and Local Income Tax Allocation Agreement by and among Lucent and its
subsidiaries governing the allocation of income taxes among Lucent and its
subsidiaries will continue to apply to us for taxable periods prior to and
including the distribution. Of the agreements summarized below, the material
agreements have been filed as exhibits to the registration statement of which
this prospectus forms a part. The summaries of these agreements are qualified in
their entirety by reference to the full text of the agreements.
SEPARATION AND DISTRIBUTION AGREEMENT
The Separation and Distribution Agreement sets forth the agreements between
us and Lucent regarding the principal corporate transactions required to effect
our separation from Lucent, our initial public offering and the distribution of
our shares to Lucent's stockholders, and other agreements governing the
relationship between Lucent and us.
The Separation
To effect the separation, Lucent has, or has caused its subsidiaries to,
transfer or agree to transfer, all of the assets of the contributed businesses
to us as described in this prospectus. We have assumed, or have agreed to
assume, and have agreed to perform and fulfill all of the liabilities of the
contributed businesses in accordance with their respective terms. Except as
expressly set forth in the agreement or in any other ancillary agreement,
neither we nor Lucent made any representation or warranty as to:
- the assets, businesses or liabilities transferred or assumed as part of
the separation;
- any consents or approvals required in connection with the transfers;
- the value or freedom from any security interests of any assets
transferred;
- the absence of any defenses or freedom from counterclaim with respect to
any claim of either us or Lucent; or
- the legal sufficiency of any assignment, document or instrument delivered
to convey title to any asset transferred.
Except as expressly set forth in any ancillary agreement, all assets were
transferred on an "as is," "where is" basis, and the respective transferees have
agreed to bear the economic and legal risks that any conveyance was insufficient
to vest in the transferee good and marketable title, free and clear of any
security interest and that any necessary consents or approvals were not obtained
or that requirements of laws or judgments were not complied with.
Conditions to Lucent's Obligation to Complete the Distribution
Lucent's agreement to complete the distribution of its shares of Agere
stock to its stockholders is contingent on the satisfaction of the conditions
described below, and the distribution may not occur by the contemplated time or
at all. Subject to Lucent's rights to terminate its obligation described below,
Lucent
88
is obligated to consummate the distribution if the following conditions are met,
any of which may be waived by Lucent:
- a private letter ruling from the IRS shall have been obtained, and shall
continue in effect, to the effect that, among other things, the
distribution will qualify as a tax-free distribution for federal income
tax purposes under Section 355 of the Internal Revenue Code and the
transfer to us of the assets and the assumption by us of the liabilities
in connection with the separation will not result in recognition of any
gain or loss for federal income tax purposes to Lucent, us or Lucent's or
our stockholders, and such ruling shall be in form and substance
satisfactory to Lucent, in its sole discretion;
- any material governmental approvals and consents necessary to consummate
the distribution shall have been obtained and be in full force and
effect; and
- no order, injunction or decree issued by any court or agency of competent
jurisdiction or other legal restraint or prohibition preventing the
consummation of the distribution shall be in effect, and no other event
outside the control of Lucent shall have occurred or failed to occur that
prevents the consummation of the distribution.
Lucent has agreed to complete the distribution as promptly as practicable
following the satisfaction or waiver of all conditions.
Notwithstanding Lucent's obligation described above, Lucent has the right
to terminate its obligation to complete the distribution if, at any time, after
consultation with our senior management, Lucent's board of directors determines,
in its sole discretion, that the distribution is not in the best interests of
Lucent or its stockholders or if, as of September 30, 2001, the consummation of
the distribution is not permitted under Lucent's then existing indebtedness or
would result in the acceleration of any payment under such indebtedness. Lucent
also may terminate its obligations to complete the distribution if the
distribution has not occurred by September 30, 2002.
Lucent has announced that it remains committed to completing the process of
separating Agere from Lucent, and that it intends to move forward with the
distribution of its shares of Agere stock in a tax-free spin-off to its
stockholders. However, we cannot assure you that the conditions to Lucent's
obligation to complete the distribution will be satisfied by a particular date
or that the terms and conditions of Lucent's indebtedness will permit the
distribution by a particular date or at all.
Releases and Indemnification
The Separation and Distribution Agreement provides for a full and complete
release and discharge of all liabilities between Lucent and us, and our
respective subsidiaries and affiliates, except as expressly set forth in the
agreement. The liabilities released or discharged include liabilities arising
under any contractual agreements or arrangements existing or alleged to exist
between or among any such members on or before the completion of our initial
public offering.
We have agreed to indemnify, hold harmless and defend Lucent, each of its
affiliates and each of their respective directors, officers and employees, from
and against all liabilities relating to, arising out of or resulting from:
- the failure of us or any of our affiliates or any other person or entity
to pay, perform or otherwise promptly discharge any liabilities
associated with the contributed businesses, or any contracts associated
with the contributed businesses, in accordance with their respective
terms;
- the contributed businesses, liabilities or contracts;
- any material breach by us or any of our affiliates, of the agreement or
any of the other ancillary agreements; and
- as part of our initial public offering, any untrue statement or alleged
untrue statement of a material fact or omission or alleged omission to
state a material fact required to be stated in the registration
89
statement or prospectus used as a part of our initial public offering or
necessary to make the statements in the registration statement or
prospectus used as part of our initial public offering not misleading.
Also, we will indemnify Lucent and its affiliates, subject to limited
exceptions, against any claims of patent, copyright or trademark infringement or
trade secret misappropriation with respect to any product, software or other
material provided by or ordered from the contributed businesses prior to the
separation.
Lucent has agreed to indemnify, hold harmless and defend us, each of our
affiliates and each of our respective directors, officers and employees from and
against all liabilities relating to, arising out of or resulting from:
- the failure of Lucent or any affiliate of Lucent or any other person or
entity to pay, perform or otherwise promptly discharge any liabilities of
Lucent or its affiliates other than liabilities associated with the
contributed businesses;
- the Lucent businesses or any liability of Lucent or its affiliates other
than liabilities associated with the separation of the businesses; and
- any material breach by Lucent or any of its affiliates of the agreement
or any of the other ancillary agreements.
Also, Lucent will indemnify us and our affiliates, subject to limited
exceptions, against any claims of patent, copyright or trademark infringement or
trade secret misappropriation with respect to any product, software or other
material provided by or ordered from Lucent's retained businesses prior to the
separation.
The Separation and Distribution Agreement also specifies procedures with
respect to claims subject to indemnification and related matters.
Contingent Liabilities and Contingent Gains
The Separation and Distribution Agreement provides that we and Lucent will
indemnify each other with respect to contingent liabilities relating primarily
to our respective businesses or otherwise assigned to each of us. We and Lucent
will share some contingent liabilities based on agreed upon percentages.
The Separation and Distribution Agreement provides for the sharing of some
contingent liabilities, including:
- any contingent liabilities that do not primarily relate to any business
of Lucent or contingent liabilities that do not primarily relate to any
of our businesses;
- some specifically identified liabilities, other than taxes; and
- shared contingent liabilities within the meaning of the separation and
distribution agreement among AT&T Corp., Lucent and NCR Corporation or
the contribution and distribution agreement between Lucent and Avaya Inc.
Lucent will assume the defense of, and may seek to settle or compromise,
any third party claim that is a shared contingent liability, and those costs and
expenses will be included in the amount to be shared by us and Lucent.
The Separation and Distribution Agreement provides that we and Lucent have
the exclusive right to any benefit received with respect to any contingent gain
that primarily relates to the business of, or that is expressly assigned to, us
or Lucent, respectively.
The Separation and Distribution Agreement provides for the establishment of
a contingent claims committee comprised of one representative designated from
time to time by each of Lucent and us and sets forth procedures for the purpose
of resolving disagreements among the parties as to contingent gains and
contingent liabilities.
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Dispute Resolution
The Separation and Distribution Agreement contains provisions that govern,
except as otherwise provided in any ancillary agreement, the resolution of
disputes, controversies or claims that may arise between us and Lucent. These
provisions contemplate that efforts will be made to resolve disputes,
controversies and claims by escalation of the matter to senior management or
other mutually agreed representatives of us and Lucent. If such efforts are not
successful, either we or Lucent may submit the dispute, controversy or claim to
non-binding mediation. If the dispute is not resolved through mediation, an
action may be brought before any court of competent jurisdiction.
Provisions Relating to Third-Party Intellectual Property License Agreements
The Separation and Distribution Agreement provides, generally, for the
grant by Lucent to us of a sublicense under numerous third-party intellectual
property license agreements. The Patent and Technology License Agreement
provides similar grants to us from Lucent's subsidiary, Lucent Technologies GRL
Corporation, with respect to third party patent license agreements executed by
that subsidiary. The Separation and Distribution Agreement prohibits us from
entering into any agreement to license patents to a third party if those patents
are already licensed by Lucent to the third party and if the new agreement with
us would result in a reduction of royalties paid or to be paid to Lucent by the
third party.
Expenses
Pursuant to the Separation and Distribution Agreement, we paid, or will
pay, the costs, fees and expenses relating to our initial public offering and
the separation. Except as expressly set forth in the Separation and Distribution
Agreement or in any other ancillary agreement, whether or not the distribution
is consummated, all third-party fees, costs and expenses paid or incurred in
connection with the distribution will be paid by Lucent.
Termination
The Separation and Distribution Agreement may be terminated and the
distribution may be amended, modified or abandoned at any time prior to the
distribution date by mutual consent of Lucent and us. Notwithstanding Lucent's
obligation described above, Lucent has the right to terminate its obligation to
complete the distribution if, at any time, after consultation with our senior
management, Lucent's board of directors determines, in its sole discretion, that
the distribution is not in the best interests of Lucent or its stockholders or
if the consummation of the distribution is not permitted under Lucent's then
existing indebtedness or would result in the acceleration of any payment
obligation under such indebtedness. In addition, the obligations of Lucent to
complete the distribution may be terminated by Lucent if the distribution does
not occur on or prior to September 30, 2002. In the event of a termination of
the Separation and Distribution Agreement on or after the completion of our
initial public offering, only the provisions of the Separation and Distribution
Agreement that obligate the parties to pursue the distribution will terminate.
The other provisions of the Separation and Distribution Agreement and the other
agreements Lucent and we entered into will remain in full force and effect.
Waivers and Amendments
No provisions of the Separation and Distribution Agreement or any other
ancillary agreement will be deemed waived, amended, supplemented or modified by
any party, unless the following requirements are met. The waiver, amendment,
supplement or modification must be in writing. Also, the writing must be signed
by the authorized representative against whom it is sought to enforce such
waiver, amendment, supplement or modification.
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INTERIM SERVICES AND SYSTEMS REPLICATION AGREEMENT
We and Lucent have entered into an Interim Services and Systems Replication
Agreement to provide each other, on an interim, transitional basis, with various
data processing, telecommunications and corporate support services including:
- accounting;
- financial management;
- information systems management;
- tax;
- payroll;
- legal;
- human resources administration;
- procurement; and
- other general support.
We also will provide each other, on an interim, transitional basis
additional services that we and Lucent may identify from time to time after the
separation.
The charges for these interim services are generally intended to allow the
providing company to fully recover the allocated direct costs of providing the
services, plus all out-of-pocket costs and expenses, without profit.
The Interim Services and Systems Replication Agreement also provides for
the replication and transfer of designated computer systems used for
administrative support or used in our businesses or Lucent's businesses. The
systems include hardware, software, data storage or maintenance and support
components. The costs and expenses of separating or replicating a system are
intended to be borne by the parties in proportion to their usage of the system
prior to February 1, 2001. Costs and expenses of purchasing new hardware or
obtaining new software licenses will be borne by the party purchasing the new
hardware or licensing the new software.
In general, the services commenced on February 1, 2001 and expired on
September 30, 2001 unless another termination date has been agreed upon by both
parties with respect to a particular service. Most of the services to be
provided under these agreements have been completed. For the three months ended
December 31, 2001 and during fiscal 2001 we paid $1 million and $73 million,
respectively, to Lucent under the terms of the Interim Services and Systems
Replication Agreement.
FIBER, MICROELECTRONICS AND ORINOCO PRODUCT PURCHASE AGREEMENTS
We and Lucent have entered into a Fiber Product Purchase Agreement, a
Microelectronics Product Purchase Agreement and an ORiNOCO Product Purchase
Agreement. The pricing terms for the products and services covered by these
commercial agreements reflect negotiated prices, as is more fully described
below.
The Fiber Product Purchase Agreement governs transactions pursuant to which
Lucent will provide specialty fiber, fiber apparatus and premises cable products
to us for the sole purpose of incorporating these products into finished
products to be sold by us to our customers. Under this agreement, we will have
an obligation to purchase all of our requirements of specified specialty fiber,
fiber apparatus and premises cable products from Lucent. With respect to some
specialty fiber products, we have agreed to provide Lucent with rolling
forecasts of product requirements, some of which will constitute a binding
commitment on our part. The Fiber Product Purchase Agreement commenced on
February 1, 2001, and will expire on January 31, 2004. We and Lucent may extend
this agreement for additional one-year periods with written mutual agreements.
The agreement may be terminated for breach of material terms.
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The Microelectronics Product Purchase Agreement governs purchases of goods
and services by Lucent from us. Under the agreement, Lucent committed to
purchase at least $2,800 million of products from us over a three-year period
beginning February 1, 2001. In limited circumstances, Lucent's purchase
commitment may be reduced or the term may be extended. For the period February
1, 2001 through September 30, 2001, Lucent's purchases under this agreement were
approximately $325 million. In light of Lucent's purchases to date and adverse
market conditions, we are discussing with Lucent ways to restructure Lucent's
obligations under the agreement.
The ORiNOCO Product Purchase Agreement governs transactions in which we
furnish our ORiNOCO products to Lucent for resale. The agreement does not grant
to Lucent an exclusive right to resell the products, but does grant Lucent a
right of first opportunity or refusal for some service provider customers in
exchange for a minimum purchase commitment as may be agreed from time to time.
The pricing in this agreement shall be determined by our list price in effect on
the date of the receipt of an order less any applicable discounts. This
agreement became effective as of February 1, 2001, and will expire on January
31, 2004. We and Lucent may extend this agreement for additional one year
periods with written mutual agreement. The agreement may be terminated for
breach of material terms.
The currently negotiated prices in the Microelectronics Product Purchase
Agreement and the ORiNOCO Product Purchase Agreement take into account the
volume and terms and conditions under which these products are sold to Lucent
and reflect the prices at which these products are sold to other like customers.
As with all other customers, we negotiate volume discounts for Lucent on a
product by product basis. Because Lucent is our largest customer, many, but not
all, of the prices of products it purchases from us are as or more favorable to
it than the prices charged to our other customers. In addition, for both Lucent
and other customers, we negotiate changes to prices as purchasing volumes
change. The Microelectronics Product Purchase Agreement has a most favored
pricing provision for standard products, which are products offered by us to the
general market, that generally provides that the prices at which we offer our
standard products to Lucent will be no less favorable than the price we charge
to other customers, other than distributors and value-added resellers. Many of
the products sold to Lucent are custom products and there are no other customers
for these custom products.
The Fiber Product Purchase Agreement, the Microelectronics Product Purchase
Agreement and the ORiNOCO Product Purchase Agreement also contain provisions
governing:
- orders and delivery;
- payment terms;
- intellectual property matters;
- product warranties;
- product support and documentation;
- engineering, installation, maintenance and other services;
- dispute resolution; and
- limitations on liability.
EMPLOYEE BENEFITS AGREEMENT AND PLANS
We have adopted a variety of employee benefit plans in connection with the
separation and distribution. Until the distribution, our employees and former
employees will continue to participate in many of Lucent's pension and
postretirement plans. During this period, we will bear our allocable share of
the costs of the benefits and the administration of the plans. Generally,
effective immediately after the distribution, we will establish our own pension
and postretirement plans, which will be substantially comparable to Lucent's
plans as in effect at that time.
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Employee Benefits Agreement
We have entered into an employee benefits agreement with Lucent, pursuant
to which we will establish independent pension plans, and have established other
employee benefit plans, that are substantially similar to Lucent's existing
pension plans and other employee benefit plans. This agreement provides for the
transfer of assets and liabilities of various existing Lucent pension and other
employee benefit plans covering Lucent employees who were transferred to us.
Generally, following the distribution, Lucent will cease to have any liability
or obligation to our employees who retire or terminate employment on or after
our initial public offering or to their beneficiaries. Our benefit plans will
assume and be responsible for, or have assumed and are responsible for, as the
case may be, liabilities and obligations to those employees and former employees
under all these benefit plans, programs and practices which we may adopt. The
employee benefits agreement does not preclude us from discontinuing or changing
such plans at any time thereafter, subject to the exceptions noted below.
Retirement Plans
We will establish and administer defined benefit pension plans for our
employees who, immediately prior to our initial public offering, participated in
Lucent's retirement plans. Lucent has agreed to transfer particular assets and
liabilities, based on formulas set forth in the employee benefits agreement,
from the trust for Lucent's defined benefit pension plans to the trust for our
defined benefit pension plans. Each of our eligible employees will, for all
purposes under our defined benefit pension plans, be credited with the service
and any accrued benefit credited to him or her under the terms of the
corresponding Lucent plans as of the distribution.
401(k) Plans
We have established defined contribution 401(k) plans. Our 401(k) plans
include all active employees who immediately prior to our initial public
offering were participants in Lucent's 401(k) plans. Each employee who
participates in an Agere 401(k) plan has been credited with the service and the
account balance credited to him or her as of January 1, 2002 under the terms of
Lucent's 401(k) plans.
Welfare Plans
We have welfare benefit plans to provide welfare benefits, including
retiree medical and life benefits, to our employees and retirees. The assets
funding the liabilities under some of these plans, if any, will be transferred
from trust and other funding vehicles associated with Lucent's plans to the
corresponding trusts and other funding vehicles associated with our plans to the
extent allocable to our employees and retirees according to formulas set forth
in the employee benefits agreement.
Lucent Stock Options, Restricted Stock and Restricted Stock Units
Pursuant to the employee benefits agreement, Lucent stock-based awards held
by our employees will be converted to our stock-based awards at the time of the
distribution. These converted stock-based awards may relate to either our Class
A common stock or our Class B common stock. As part of the conversion, we will
multiply the number of shares purchasable under each converted stock option by a
ratio determined at the time of the conversion and divide the exercise price per
share of each option by the same ratio. The conversion ratio will be the closing
price of Lucent common stock on the day of the distribution or if that day is
not a trading day, the previous trading day, divided by the opening price of our
common stock on the day after the distribution or if that day is not a trading
day, on the next trading day.
The number of shares of our common stock subject to each Lucent restricted
stock award and Lucent restricted stock unit award will be determined by
multiplying the number of shares of Lucent common stock subject to the original
Lucent award by the same conversion ratio. The actual number of shares of our
common stock subject to substituted awards will be determined at the time of the
conversion. Based on the 42,467,215 Lucent stock options, 183,360 restricted
shares of Lucent common stock, and 818,424
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Lucent restricted stock units held by our employees on December 31, 2001, the
following number of shares of our common stock would be subject to substituted
awards after the conversion, assuming the prices for Agere and Lucent common
stock shown below:
--------------------------------------------------------------------------------------------
PRICE OF LUCENT COMMON STOCK
--------------------------------------------------------------------------------------------
$5 $7 $9
---------------------------------------------------------------------------------------------------------------------------------
53,084,019 stock options 74,317,626 stock options 95,551,234 options
$4 1,023,030 restricted stock 1,432,242 restricted stock 1,841,454 restricted shares
units units
229,200 restricted shares 320,880 restricted shares 412,560 restricted shares
---------------------------------------------------------------------------------------------------
42,467,215 options 59,454,101 stock options 76,440,987 options
PRICE OF AGERE $5 818,424 restricted stock units 1,145,794 restricted stock 1,473,163 restricted stock
units units
COMMON STOCK 183,360 restricted shares 256,704 restricted shares 330,048 restricted shares
---------------------------------------------------------------------------------------------------
35,389,346 stock options 49,545,084 stock options 63,700,823 options
$6 682,020 restricted stock units 954,828 restricted stock units 1,227,636 restricted stock
units
152,800 restricted shares 213,920 restricted shares 275,040 restricted shares
---------------------------------------------------------------------------------------------------------------------------------
The number of shares of our common stock subject to substituted awards may
vary significantly from the above number due to changes in the relative values
of our common stock and Lucent common stock. Fractional shares will be rounded
down to the nearest whole number of shares. The conversion will take place at
the time of the distribution or, if earlier, at the time of a change of control
of either Lucent or us. If the conversion takes place at the time of a change of
control, the conversion ratio will be based on Lucent's stock price on the date
of the final prospectus for our initial public offering and the initial public
offering price for our Class A common stock. Generally, all other terms of the
converted stock options, restricted stock and restricted stock units will remain
the same as those in effect immediately prior to the conversion.
TRADEMARK LICENSE AGREEMENT, TRADEMARK ASSIGNMENT AND TRADE DRESS ASSIGNMENT
The primary trademarks used in the sale of our products and services were
transferred to us, except for Lucent's name and logo and the Bell Laboratories
name. We will retain the use of the Lucent name and logo, but not the Bell
Laboratories name, on a royalty-free basis, for a transitional period and, after
the expiration of the transitional period, only to the extent necessary to
deplete pre-existing inventory. We may use the Lucent name together with the
logo on:
- products and packaging through April 1, 2002; and
- advertising and promotion materials through April 1, 2002 in the United
States and through July 1, 2002 outside the United States.
We may use the Lucent name without the logo on:
- products and packaging through September 30, 2002; and
- advertising and promotional materials through July 1, 2002 in the United
States and through January 1, 2003 outside the United States.
We and Lucent have entered into a Trademark License Agreement, Trademark
Assignment and Trade Dress Assignment to effectuate the grant or transfer, as
applicable, of such rights. Subject to conditions set forth in the agreements,
we may also extend these rights to authorized dealers of our products.
Under the Trademark License Agreement, we have an obligation to comply with
specified quality and customer care standards in connection with our use of the
trademarks. Lucent may terminate the Trademark License Agreement in the event of
a change in control of our company.
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TECHNOLOGY ASSIGNMENT AND JOINT OWNERSHIP AGREEMENT
We and Lucent have executed and delivered assignments and other agreements,
including the technology assignment, related to technology currently owned or
controlled by Lucent and its subsidiaries. Technology includes copyrights, mask
works and other intellectual property other than trademarks, trade names, trade
dress, service marks and patent rights. The technology assignment generally
divides ownership of technology between us and Lucent, with each owning
technology that was developed by or for, or purchased for, the respective
businesses of each company. Other technology is owned jointly by us and Lucent.
PATENT ASSIGNMENTS
We and Lucent have executed and delivered patent assignments and other
agreements, related to patents currently owned or controlled by Lucent and its
subsidiaries. The patent assignments divide ownership of patents, patent
applications and foreign counterparts between us and Lucent. The ownership of
patents was divided as follows. First, Agere Systems Guardian Corp. and Agere
Systems Optoelectronics Guardian Corporation was each vested with ownership of
and/or exclusive rights in patents previously held by Lucent that relate
principally to our business. Then shares of Agere Systems Guardian Corp. and
Agere Systems Optoelectronics Guardian Corporation were contributed to us under
the Separation and Distribution Agreement. Lucent and its other subsidiaries
retained ownership of all other patents and patent applications.
PATENT AND TECHNOLOGY LICENSE AGREEMENT
We and some of our subsidiaries, and Lucent and some of its subsidiaries,
have executed and delivered a Patent and Technology License Agreement, related
to patents and technology currently owned or controlled by Lucent and its
subsidiaries and us and our subsidiaries.
The Patent and Technology License Agreement provides for cross-licenses to
each company. We and Lucent, and our respective subsidiaries, granted to each
other, under the patents that each of us has, a nonexclusive, personal,
nontransferable license to make, have made, use, lease, import, offer to sell,
and sell any and all products and services of the businesses in which the
licensed company, including related companies, is now or hereafter engaged. The
cross-licenses also permit each company, subject to limitations, to have third
parties make items under the other company's patents, as well as to pass through
to customers limited rights under the other company's patents with respect to
products and services furnished to customers by the licensed company. Some
patents were licensed exclusively to each party, including a right to grant
sublicenses, subject to retention of a right to use these patents by the
licensing party. Otherwise, the rights to sublicense to unaffiliated third
parties were not granted under the cross-licenses, except for limited rights in
connection with establishing second source suppliers performing joint
development activities or rights to sublicense a divested business. The
cross-licenses between us and Lucent cover all of each company's patents,
including patents issued on patent applications with a filing date prior to
February 1, 2003.
The Patent and Technology License Agreement also grants to us or our
subsidiaries a joint ownership interest in some patents and patent applications,
for example, patents and patent applications relating to MEMS technology.
The Patent and Technology License Agreement also provides for personal,
worldwide, nonexclusive, and non-transferable cross-licenses to each company to
designated technology existing as of the separation date. These rights include
the right to copy, modify and improve any portion of the licensed technology.
Subject to exceptions set forth in the agreement, no right was granted to
sublicense any of the technology other than in connection with the sale or
licensing of products. Subject to restrictions set forth in the agreement, this
agreement further granted to us joint ownership rights in other designated
technology. This agreement became effective as of January 31, 2001.
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We believe that the intellectual property agreements between Lucent and us
do not provide Lucent with sufficient intellectual property to compete with us.
Specifically, the agreements assign to us the technology, which includes trade
secrets, know-how, and copyrights, purchased or developed by or for our
business. Except for limited exceptions, this technology is not licensed to
Lucent. However, as indicated under "Risk Factors -- Risks Related to Our
Separation from Lucent -- We may have potential business conflicts of interests
with Lucent with respect to our past and ongoing relationships and, because of
Lucent's controlling ownership, the resolution of these conflicts may not be on
the most favorable terms to us," Lucent could either reestablish the competitive
capability itself or work with a third party to establish a competitive
capability. Thus, we believe that Lucent does not need access to our technology
to become a competitor of ours.
DEVELOPMENT PROJECT AGREEMENT
We and Lucent entered into a Development Project Agreement under which Bell
Laboratories may perform some research and development activities on a contract
basis for us. We will also perform some research and development activities for
Lucent on a contingent basis. The fees paid under this agreement are expected to
be comparable to those that would be agreed upon by unrelated parties. The
agreement commenced on February 1, 2001, and will expire on January 31, 2004. We
and Lucent may extend this agreement for additional one-year periods with
written mutual agreement. The agreement will terminate at any time if either we
or Lucent materially breach the agreement, and fail to cure the default within
60 days after written notice has been given.
JOINT DESIGN CENTER OPERATING AGREEMENT
We and Lucent entered into a Joint Design Center Operating agreement to
develop technology for micro electro-mechanical systems, or MEMS. We and Lucent
agreed to jointly fund, manage and staff the joint design center over the
following three years. We and Lucent each have a one-half interest in the MEMS
technical information owned by Lucent as of February 1, 2001. We and Lucent have
granted each other a perpetual, nonexclusive, royalty-free license in our
respective patents which issue from applications having an effective first
filing date prior to February 1, 2003 to make and sell MEMS products. All joint
patents, which are patents issued from any application filed with respect to any
invention made jointly by us and Lucent while working on a joint design center
product and conceived or reduced to practice during performance under the
agreement, will be jointly owned by us and Lucent. We and Lucent will be free to
use these jointly owned patents for any purpose and to license third parties
under these patents. Some of these products may be manufactured exclusively for
Lucent, subject to some restrictions, for a limited period following the first
commercial availability of a product, on a case by case basis. The initial term
of the agreement will expire on January 31, 2004. The agreement may be
terminated for breach of material terms or by written notice of either party for
convenience.
TAX SHARING AGREEMENT
We and Lucent have entered into a Tax Sharing Agreement, effective February
1, 2001, which governs Lucent's and our respective rights, responsibilities and
obligations after the distribution with respect to taxes for the periods ending
on or before the distribution or, if earlier, the first date we are no longer a
member of Lucent's consolidated group. Generally, pre-distribution taxes that
are clearly attributable to the business of one party will be borne solely by
that party, and other pre-distribution taxes will be shared by the parties based
on a formula set forth in the Tax Sharing Agreement. In addition, the Tax
Sharing Agreement addresses the allocation of liability for taxes that are
incurred as a result of restructuring activities undertaken to implement the
separation, the distribution or the exchange. Under the Tax Sharing Agreement,
we are generally responsible for the first $50 million of any taxes attributable
to these restructuring activities, and for 14% of any amount of these taxes in
excess of $50 million. However, if the distribution fails to qualify as a
tax-free distribution under Section 355 of the Internal Revenue Code because of
an acquisition of our stock or assets, or some other actions of ours, then we
will be solely liable for any resulting corporate taxes.
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On March 14, 2001, Lucent received a private letter ruling from the
Internal Revenue Service holding that the separation and distribution will
generally be tax-free, based on the assumptions and representations set forth in
the ruling. The ruling did not address some aspects of the separation, including
actions undertaken to transfer the non-U.S. portions of our business to us. The
effectiveness of the ruling is conditioned on completion of the spin-off by June
30, 2002.
The amount of tax liability we expect to pay under the Tax Sharing
Agreement with respect to taxes incurred as a result of restructuring
activities, including taxes attributable to the restructuring of the non-U.S.
portions of our business, is included in the costs, fees and expenses we will
incur relating to our separation from Lucent and our initial public offering.
For a discussion of these costs, fees and expenses, please see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview -- Restructuring and Separation Expenses and Inventory Provision."
Under U.S. federal income tax laws, we and Lucent are jointly and severally
liable for Lucent's federal income taxes attributable to the periods prior to
and including the most recent taxable year of Lucent, which ended on September
30, 2001. This means that if Lucent fails to pay the taxes attributable to it
under the Tax Sharing Agreement for periods prior to and including the current
taxable year of Lucent, we may be liable for any part of, including the whole
amount of, these tax liabilities.
REAL ESTATE AGREEMENTS
Lucent's real estate has been divided between Lucent and us. After the
separation, we acquired outright approximately 80 of Lucent's real estate
locations. These 80 locations comprised 7.8 million square feet. We and Lucent
also continue to share some current work locations for our respective work
forces. The shared locations are approximately 12 of Lucent's real estate
locations. Approximately 50% of these shared locations continue to be owned by
Lucent; the remaining 50% continue to be leased commercially. As a result of the
announced consolidation of our Pennsylvania and New Jersey facilities and other
activities, the majority of the locations currently shared with Lucent will no
longer be occupied by Agere.
Generally, ownership of Lucent's buildings and assignment of commercially
leased buildings was divided between Lucent and us based on which company was
the primary user of the respective building. Based on that allocation method,
Lucent was our landlord or sublandlord for approximately 541,000 square feet of
space. The terms of our leases and subleases from Lucent ranged initially from
one month to 36 months depending on the location. The initial total monthly cost
of leasing these facilities from Lucent was approximately $1.8 million.
A standard form of lease and a standard form of sublease based on
commercial models and comparable to arm's-length agreements were employed.
Subleases for space in commercially leased locations had varying terms generally
to match the terms of the underlying leases. All commercial landlord charges,
such as rent, additional rent, building services and taxes paid directly by
Lucent as the sublandlord, were based on the proportionate share of space
occupied by us as the subtenant and marked up by a management fee payable to
Lucent intended to cover the costs of administering the sublease. Any other
building services provided by Lucent to us were at cost plus an administrative
fee, increased annually to match the consumer price index.
The lease terms for space in owned buildings were determined on a case by
case basis. In general, rent in owned buildings was at market price for
comparable tenants. Real estate taxes were allocated proportionately to us as
the tenant, subject to a management fee. Any building services provided by
Lucent as the landlord were at cost plus an administrative fee, increased
annually to match the consumer price index.
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All necessary leases and subleases for transitional shared real estate
became effective February 1, 2001. We were responsible for our proportionate
share of the full lease obligation in both owned buildings and commercially
leased buildings, except that:
- for space occupied by us equal to or less than 5 percent of the total
space, not to exceed 5,000 square feet, we could cancel the lease or
sublease on 90-day written notice without further liability; and
- for space occupied by us equal to or less than 5 percent of the total
space, not to exceed 15,000 square feet, we or Lucent could cancel the
lease or sublease on nine months' written notice without further
liability.
OTHER AGREEMENTS
We and Lucent will continue the existing State and Local Income Tax
Allocation Agreement and the existing federal Tax Allocation Agreement by and
among Lucent and its subsidiaries. These tax agreements govern the allocation of
state, local and federal income taxes for periods during which we were a member
of Lucent's consolidated group. Aside from the Tax Allocation Agreement, under
U.S. federal income tax laws, we are jointly and severally liable for Lucent's
federal income tax liabilities relating to the taxable periods prior to and
including the most recent taxable year of Lucent, which ended on September 30,
2001. In addition, after the separation, we became a party to Lucent's two
existing collective bargaining agreements. See "Business -- Employees" for a
description of these collective bargaining agreements and how they will operate
after the separation.
HISTORICAL TRANSACTIONS
Revenue from products sold to Lucent was $78 million for the three months
ended December 31, 2001, and $606 million, $1,002 million and $955 million, in
fiscal 2001, 2000 and 1999, respectively. Included in these amounts are revenues
of $65 million and $82 million in fiscal 2000 and 1999, respectively, from sales
to Avaya, which was the enterprise networks business of Lucent until its
spin-off from Lucent on September 30, 2000. Sales to Avaya after that date are
not considered transactions with Lucent. Products purchased from Lucent were $22
million, $23 million and $1 million for fiscal 2001, 2000 and 1999,
respectively. No products were purchased from Lucent during the three months
ended December 31, 2001. In addition, Lucent billed us $23 million, $67 million
and $49 million for fiscal 2001, 2000 and 1999, respectively, for specific
research and development projects related to our businesses.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of November 1, 2001 for each owner of more than
5% of any class of our common stock.
To our knowledge, Lucent has sole voting and investment power over the
shares. The address for Lucent Technologies Inc. is 600 Mountain Avenue, Murray
Hill, NJ 07974.
CLASS A COMMON
STOCK(1) CLASS B COMMON STOCK TOTAL COMMON STOCK
PERCENT OF CLASS PERCENT OF CLASS PERCENT OF EQUITY
----------------------- ------------------------ ------------------------
NO. OF PERCENT OF NO. OF PERCENT OF NO. OF PERCENT OF
NAME OF BENEFICIAL OWNER SHARES CLASS SHARES CLASS SHARES EQUITY
------------------------ ---------- ---------- ----------- ---------- ----------- ----------
Lucent Technologies Inc.(2)............... 37,000,000(3) 5.1 908,100,000 100 945,100,000 57.8(4)
---------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities.
(2) As a result of the pledge of these shares under the Lucent credit
facilities, the lenders under those facilities might, in the event of a
default under the facilities by Lucent, have a right to become beneficial
owners, with voting and investment power, of the shares held by Lucent.
(3) Excludes the Class A common stock into which the Class B common stock held
by Lucent is convertible on a share-for-share basis. The Class B common
stock held by Lucent represented on a converted basis 55.5% of the Class A
common stock that would be outstanding after conversion.
(4) Represents approximately 84.2% of the combined voting power of both classes
of our common stock with respect to the election and removal of directors
and approximately 57.8% of the voting power of our outstanding common stock
with respect to all other matters.
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CERTAIN INDEBTEDNESS
Lucent borrowed approximately $2,500 million of short-term debt under a
credit facility that we assumed on April 2, 2001, upon completion of our initial
public offering. We did not receive any of the proceeds of this short-term debt.
Upon the completion of our initial public offering, Lucent was relieved of all
obligations related to this short-term debt. On October 4, 2001, we amended and
restated the credit agreement governing the credit facility, and in connection
therewith permanently repaid $1,000 million of short-term debt under the
facility. Subsequently, we have repaid amounts outstanding under the facility
such that, at February 4, 2002, $999 million was outstanding.
The facility is comprised of term loans and revolving credit loans and is
secured by our principal domestic assets other than the proceeds of our initial
public offering and, while Lucent remains a majority stockholder, real estate.
$500 million of the facility is a revolving credit facility with the remainder
considered a term loan. The maturity date of the facility has been extended from
February 22, 2002 to September 30, 2002. In addition, if we raise at least $500
million in equity or debt capital markets transactions before September 30,
2002, or $300 million after giving effect to this offering, the maturity date of
the facility will be extended to September 30, 2004, with the facility required
to be reduced to $750 million on September 30, 2002 and $500 million on
September 30, 2003. Under the credit agreement governing the credit facility, we
must use proceeds of certain liquidity raising transactions, asset sales outside
the ordinary course of business and capital markets transactions (including this
offering) to reduce the size of the facility. If we complete the liquidity
raising transactions or sell assets outside the ordinary course of business, we
must apply 100% (50% if the size of the facility is $500 million or less) of the
net cash proceeds we receive from the transactions to reduce the size of the
facility. The agreement also provides that 50% of the net cash proceeds of the
first $500 million and 75% (50% if the size of the facility is $500 million or
less) of the net cash proceeds greater than $500 million from equity and debt
capital markets transactions be applied to reduce the credit facility.
Notwithstanding the foregoing, we must apply 100% of net cash proceeds over
$1,000 million from the issuance of debt securities that are secured equally
with the credit facility to reduce the size of the credit facility. The debt is
not convertible into any other Agere securities.
Interest rates on borrowings under the credit facility are based on the
applicable LIBOR rate, or at our election the prime rate, in each case plus a
spread that will vary depending on our credit rating. For a balance of $1,000
million outstanding under the credit facility for an entire year, a one
percentage point increase in the average interest rate on the obligations, also
effective for an entire year, would increase pre-tax interest expense, and
reduce pre-tax income, by $10 million. For our current ratings of BB- from
Standard & Poor's and Ba3 from Moody's, the interest rate under the credit
facility is the applicable LIBOR rate plus 400 basis points. Unless our credit
ratings change, this rate will remain in effect for the life of the facility.
As discussed above, we are required from time to time to permanently repay
portions of the credit facility, which we expect to replace with additional debt
capital market transactions or other types of new financing. However, we cannot
assure you that such additional financing will be available on acceptable terms,
with lower interest rates than the credit facility, or at all.
The credit agreement governing the credit facility contains certain
restrictions on our activities, including covenants limiting our ability to:
- incur indebtedness at the subsidiary or parent level;
- incur or permit to exist liens or security interests on our assets;
- merge or consolidate with another entity or sell all or substantially all
of our assets;
- make investments in non-affiliates and certain of our subsidiaries;
- make or declare dividends on our capital stock;
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- consummate certain transactions with our affiliates; and
- consummate certain sale and leaseback or collateralized mortgage
obligation transactions.
In addition, we are required to satisfy certain financial covenants under
the terms of the credit facility. These covenants specify minimum liquidity
(measured by cash and cash equivalents, financial assets and available revolving
loans), minimum consolidated EBITDA, minimum consolidated net worth and maximum
capital expenditures at given points in time. Compliance with these covenants
does not currently materially restrict our operations.
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DESCRIPTION OF NOTES
The following description sets forth the material terms of the notes. The
notes will be initially owned by SHARCS Trust I. Under certain circumstances,
the trust will distribute notes to one or more SHARCS holders.
The notes will be issued under an indenture to be dated as of ,
2002 between Agere and The Bank of New York, as indenture trustee. The terms of
the notes include those expressly set forth in the indenture and those made part
of the indenture by reference to the Trust Indenture Act of 1939, as amended.
This description of notes is intended to be a useful overview of the
material provisions of the notes and the indenture. Since this description is
only a summary, you should refer to the indenture for a complete description of
the obligations of Agere and your rights. A copy of the indenture will be filed
as an exhibit to the registration statement of which this prospectus is a part.
You will find the definitions of capitalized terms used in this description
under the heading "Certain Definitions." For purposes of this description,
references to "Agere" refer only to Agere Systems Inc., and not to its
subsidiaries.
GENERAL
THE NOTES
The notes will:
- be general unsecured, senior subordinated obligations of Agere;
- constitute a series of notes issued under the indenture and will be
initially limited to an aggregate principal amount of $200 million;
- mature on July 15, 2007;
- be issued in denominations of $500 and whole multiples of $500; and
- be subordinate in right of payment to all existing and future Senior
Indebtedness of Agere.
INTEREST
Interest on the notes will:
- accrue at the rate of % per year;
- accrue from the date of issuance or the most recent interest payment
date;
- be payable in cash semi-annually in arrears on January 15 and July 15,
commencing on July 15, 2002;
- be payable to the holders of record on the January 1 and July 1
immediately preceding the related interest payment dates; and
- be computed on the basis of a 360-day year comprised of twelve 30-day
months.
OPTIONAL REDEMPTION
The notes will be redeemable for cash, at Agere's option, at any time in
whole, but not in part, at a price equal to the greater of:
- 100% of the principal amount of the notes to be redeemed; and
- the sum of the present values of the remaining scheduled payments on the
notes to be redeemed consisting of principal and interest, exclusive of
interest accrued to the date of redemption, discounted to the date of
redemption on a semiannual basis (assuming a 360-day year consisting of
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twelve 30-day months) at the applicable Treasury Yield plus
basis points plus accrued interest to the date of redemption.
The notes called for redemption become due on the date fixed for
redemption. Notices of redemption will be mailed by first-class mail at least 30
but not more than 60 days before the redemption date to each holder of notes to
be redeemed at its registered address. On and after the redemption date,
interest will cease to accrue on notes that are redeemed.
For purposes of determining the optional redemption price, the following
definitions are applicable:
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the notes that would be utilized, at the time of selection
and in accordance with customary financial practice, in pricing new issues of
corporate debt securities of comparable maturity to the remaining terms of the
notes.
"Comparable Treasury Price" means, with respect to any redemption date:
- the average of the bid and the asked prices for the Comparable Treasury
Issue, expressed as a percentage of its principal amount, at 4:00 p.m. on
the third business day preceding that redemption date, as set forth on
"Telerate Page 500," or such other page as may replace Telerate Page 500;
or
- if Telerate Page 500, or any successor page, is not displayed or does not
contain bid and/or asked prices for the Comparable Treasury Issue at that
time, the average of the Reference Treasury Dealer Quotations obtained by
the indenture trustee for that redemption date, after excluding the
highest and lowest of such Reference Treasury Dealer Quotations, or, if
the indenture trustee is unable to obtain at least four such Reference
Treasury Dealer Quotations, the average of all Reference Treasury Dealer
Quotations obtained by the indenture trustee.
"Independent Investment Banker" means either Salomon Smith Barney Inc. or
J.P. Morgan Securities Inc., as selected by Agere or, if both such firms are
unwilling or unable to select the applicable Comparable Treasury Issue, an
independent investment banking institution of national standing appointed by the
indenture trustee and reasonably acceptable to Agere.
"Reference Treasury Dealer" means Salomon Smith Barney Inc. and J.P. Morgan
Securities Inc. and their respective successors and three other primary U.S.
government securities dealers in New York City selected by the Independent
Investment Banker (each, a "Primary Treasury Dealer"); provided, however, that
if any of the foregoing shall cease to be a Primary Treasury Dealer, Agere shall
substitute therefore another Primary Treasury Dealer.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date for the notes, an average, as
determined by the indenture trustee, of the bid and asked prices for the
Comparable Treasury Issue for the notes, expressed in each case as a percentage
of its principal amount, quoted in writing to the indenture trustee by the
Reference Treasury Dealer at 5:00 p.m., New York City time, on the third
business day preceding the redemption date.
"Treasury Yield" means, with respect to any redemption date applicable to
the notes, the rate per year equal to the semiannual equivalent yield to
maturity, computed as of the third business day immediately preceding the
redemption date, of the Comparable Treasury Issue, assuming a price for the
Comparable Treasury Issue, expressed as a percentage of its principal amount,
equal to the applicable Comparable Treasury Price for the redemption date.
Except as set forth above, the notes will not be redeemable by Agere prior
to maturity and will not be entitled to the benefit of any sinking fund.
RANKING AND SUBORDINATION
The payment of the principal of, premium, if any, and interest on the notes
and any other payment obligations in respect of the notes (including any
obligation to repurchase the notes) will be subordinated to the prior payment in
full in cash or Cash Equivalents when due of all Senior Indebtedness of Agere.
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However, payment from the money or the proceeds of U.S. Government Obligations
held in any defeasance trust (as described under "Defeasance" below) is not
subordinate to any Senior Indebtedness or subject to these restrictions.
As a result of the subordination provisions described below, in the event
of an insolvency, bankruptcy, reorganization, receivership or similar proceeding
relating to Agere, the holders of all Senior Indebtedness will first be entitled
to receive payment in full before the holders of the notes will be entitled to
receive any payment upon the principal of or premium, if any, or interest on the
notes. In addition, holders of Senior Indebtedness may receive more, ratably,
and holders of the notes may receive less, ratably, than other creditors of
Agere. Moreover, the notes will be structurally subordinated to the liabilities
of the subsidiaries of Agere.
As of , 2002, after giving effect to this offering:
- Agere would have had $ in Senior Indebtedness, including the
Indebtedness under the Existing Credit Facility;
- Agere would have had no Senior Subordinated Indebtedness other than the
notes; and
- Agere's subsidiaries would have had $ in Indebtedness, which would have
been effectively senior to the notes.
Although the indenture will limit the amount of indebtedness that Agere and its
Restricted Subsidiaries may incur, such indebtedness may be substantial and all
of it may be Senior Indebtedness.
"Senior Indebtedness" means, with respect to any Person, whether
outstanding on the Issue Date or thereafter Incurred, all Indebtedness of such
Person, including accrued and unpaid interest (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization relating to
such Person at the rate specified in the documentation with respect thereto
whether or not a claim for post filing interest is allowed in such proceeding)
and fees relating thereto; provided, however, that Senior Indebtedness will not
include:
(1) any Indebtedness which, in the instrument creating or evidencing
the same or pursuant to which the same is outstanding, it is provided that
the obligations in respect of such Indebtedness are not superior in right
of, or are subordinate to, payment of the notes;
(2) any obligation of such Person to any Subsidiary;
(3) any liability for federal, state, foreign, local or other taxes
owed or owing by such Person;
(4) any accounts payable or other liability to trade creditors arising
in the ordinary course of business;
(5) any Indebtedness, Guarantee or obligation of such Person that is
expressly subordinate or junior in right of payment to any other
Indebtedness, Guarantee or obligation of such Person, including, without
limitation, any Senior Subordinated Indebtedness and any Subordinated
Obligations; or
(6) any Capital Stock.
Only Indebtedness of Agere that is Senior Indebtedness will rank senior to
the notes. The notes will in all respects rank equally with all other Senior
Subordinated Indebtedness of Agere, if any. As described under "Certain
Covenants -- Limitation on Layering," Agere may not incur any Indebtedness that
is senior in right of payment to the notes, but junior in right of payment to
Senior Indebtedness. Unsecured Indebtedness is not deemed to be subordinate or
junior to Secured Indebtedness merely because it is unsecured.
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Agere may not pay principal of, premium, if any, or interest on, or other
payment obligations in respect of, the notes or make any deposit pursuant to the
provisions described under "Defeasance" below and may not otherwise purchase,
redeem or retire any notes (collectively, "pay the notes") if:
(1) any Senior Indebtedness is not paid when due in cash or Cash
Equivalents; or
(2) any other default on Senior Indebtedness occurs and the maturity
of such Senior Indebtedness is accelerated in accordance with its terms
unless, in either case, the default has been cured or waived and any such
acceleration has been rescinded or such Senior Indebtedness has been paid
in full in cash or Cash Equivalents.
However, Agere may pay the notes if Agere and the indenture trustee receive
written notice approving such payment from the Representative of the Senior
Indebtedness with respect to which either of the events set forth in clause (1)
or (2) of the immediately preceding sentence has occurred and is continuing.
Agere also will not be permitted to pay the notes for a Payment Blockage
Period (as defined below) during the continuance of any default, other than a
default described in clause (1) or (2) of the preceding paragraph, on any
Designated Senior Indebtedness that permits the holders of the Designated Senior
Indebtedness to accelerate its maturity immediately without either further
notice (except such notice as may be required to effect such acceleration) or
the expiration of any applicable grace periods.
A "Payment Blockage Period" commences on the receipt by the indenture
trustee (with a copy to Agere) of written notice (a "Blockage Notice") of a
default of the kind described in the immediately preceding paragraph from the
Representative of the holders of such Designated Senior Indebtedness specifying
an election to effect a Payment Blockage Period and ends 179 days thereafter.
The Payment Blockage Period will end earlier if such Payment Blockage Period is
terminated:
(1) by written notice to the indenture trustee and Agere from the
Person or Persons who gave such Blockage Notice;
(2) because the default giving rise to such Blockage Notice is no
longer continuing; or
(3) because such Designated Senior Indebtedness has been repaid in
full.
Agere may resume payments on the notes after the end of the Payment
Blockage Period, unless the holders of such Designated Senior Indebtedness or
the Representative of such holders have accelerated the maturity of such
Designated Senior Indebtedness. Not more than one Blockage Notice may be given
in any consecutive 360-day period, irrespective of the number of defaults with
respect to Designated Senior Indebtedness during such period, except that if any
Blockage Notice is delivered to the indenture trustee by or on behalf of holders
of Designated Senior Indebtedness (other than holders of the Bank Indebtedness),
a Representative of holders of Bank Indebtedness may give another Blockage
Notice within such period. However, in no event may the total number of days
during which any Payment Blockage Period or Periods is in effect exceed 179 days
in the aggregate during any consecutive 360-day period, and there must be 181
days during any consecutive 360-day period during which no Payment Blockage
Period is in effect.
In the event of:
(1) a total or partial liquidation or a dissolution of Agere;
(2) a reorganization, bankruptcy, insolvency, receivership of or
similar proceeding relating to Agere or its property; or
(3) an assignment for the benefit of creditors or marshaling of
Agere's assets and liabilities, then
the holders of Senior Indebtedness will be entitled to receive payment in full
in cash or Cash Equivalents in respect of Senior Indebtedness (including
interest accruing after, or which would accrue but for, the commencement of any
proceeding at the rate specified in the applicable Senior Indebtedness, whether
or not a claim for such interest would be allowed) before the holders of the
notes will be entitled to receive
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any payment or distribution, in the event of any payment or distribution of the
assets or securities of Agere. In addition, until the Senior Indebtedness is
paid in full in cash or Cash Equivalents, any payment or distribution to which
holders of the notes would be entitled but for the subordination provisions of
the indenture will be made to holders of the Senior Indebtedness as their
interests may appear. If a payment or distribution is made to holders of the
notes that, due to the subordination provisions, should not have been made to
them, such holders are required to hold it in trust for the holders of Senior
Indebtedness and pay it over to them as their interests may appear.
If payment of the notes is accelerated because of an Event of Default,
Agere or the indenture trustee will promptly notify the holders of the
Designated Senior Indebtedness or the Representative of such holders of the
acceleration. Agere may not pay the notes until five Business Days after such
holders or the Representative of the Designated Senior Indebtedness receives
notice of such acceleration and, thereafter, may pay the notes only if the
subordination provisions of the indenture otherwise permit payment at that time.
INDENTURE MAY BE USED FOR ADDITIONAL ISSUANCES
If a trust other than SHARCS Trust I issues additional SHARCS, Agere may,
without the consent of existing note holders, create and issue additional notes
having the same terms and conditions as the notes in all respects, except for
Issue Date and, if applicable, the first payment of interest thereon; provided,
however, that Agere will be permitted to issue such additional notes only if at
the time of, and after giving effect to, such issuance it is in compliance with
the covenants contained in the indenture. Additional notes issued in this manner
will be consolidated with and will form a single series with the previously
outstanding notes. Notwithstanding the foregoing, if another trust issues
SHARCS, such SHARCS will not be related to the SHARCS issued by the SHARCS Trust
I.
CHANGE OF CONTROL
If a Change of Control occurs, each holder of a note will have the right to
require Agere to repurchase all or any part (equal to $500 or a whole multiple
thereof) of such holder's notes at a purchase price in cash equal to 101% of the
principal amount of the notes plus accrued and unpaid interest, if any, to, but
not including, the date of purchase (subject to the right of holders of record
on the relevant record date to receive interest due on the relevant interest
payment date).
Within 30 days following any Change of Control, Agere will mail a notice
(the "Change of Control Offer") to each holder of a note with a copy to the
indenture trustee stating:
(1) that a Change of Control has occurred and that such holder has the
right to require Agere to purchase such holder's notes at a purchase price
in cash equal to 101% of the principal amount of such notes plus accrued
and unpaid interest, if any, to the date of purchase (subject to the right
of holders of record on a record date to receive interest on the relevant
interest payment date) (the "Change of Control Payment");
(2) the repurchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed) (the "Change of
Control Payment Date"); and
(3) the procedures determined by Agere, consistent with the indenture,
that a holder must follow in order to have its notes repurchased.
On the Change of Control Payment Date, Agere will, to the extent lawful:
(1) accept for payment all notes or portions of notes (in whole
multiples of $500) properly tendered under the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all notes or portions of notes so tendered;
and
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(3) deliver or cause to be delivered to the indenture trustee the
notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of notes or portions of notes being purchased by
Agere.
A holder of SHARCS who wishes to exercise the right to require Agere to
repurchase upon the occurrence of a Change of Control must first exchange its
SHARCS early. At the time the notes and common stock are distributed to such
holder, such holder will surrender all rights under the put option agreement
corresponding to such exchanged SHARCS, unless the put rights were previously
accelerated.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the indenture are applicable. Except as described
above with respect to a Change of Control, the indenture does not contain
provisions that permit the holders to require that Agere repurchase or redeem
the notes in the event of a takeover, recapitalization or similar transaction.
Agere will not be required to make a Change of Control Offer upon a Change
of Control if a third party makes the Change of Control Offer in the manner, at
the times and otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control Offer made by Agere and purchases
all notes validly tendered and not withdrawn under such Change of Control Offer.
If Agere effects a defeasance or covenant defeasance of the notes under the
indenture prior to the occurrence of a Change of Control, Agere will not be
obligated to make a Change of Control offer as a result of that Change of
Control. See "Defeasance" below.
None of the provisions relating to Agere's obligation to repurchase the
notes in the event of a Change of Control are waivable by Agere's Board of
Directors. In addition, none of these Change of Control provisions may be
amended without the consent of the holder of each outstanding note.
Agere will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of the indenture, Agere will comply with the applicable securities
laws and regulations and will not be deemed to have breached its obligations
described in the indenture by virtue of the conflict.
Agere's ability to repurchase notes pursuant to a Change of Control Offer
may be limited by a number of factors. The occurrence of an event that
constitutes a Change of Control would constitute an event of default under the
Existing Credit Facility. In addition, certain events that may constitute a
change of control under the Existing Credit Facility and cause an event of
default thereunder may not constitute a Change of Control under the indenture.
Future Indebtedness of Agere and its subsidiaries may also contain prohibitions
of certain events that would constitute a Change of Control or require such
Indebtedness to be repurchased upon a Change of Control. Moreover, the exercise
by the holders of their right to require Agere to repurchase the notes could
cause a default under such Indebtedness, even if the Change of Control itself
does not, due to the financial effect of such repurchase on Agere. Finally,
Agere's ability to pay cash to the holders upon a repurchase may be limited by
Agere's then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases.
The Change of Control provisions described above may deter certain mergers,
tender offers and other takeover attempts involving Agere by increasing the
capital required to effectuate such transactions. The definition of "Change of
Control" includes a disposition of all or substantially all of the property and
assets of Agere and its Restricted Subsidiaries taken as a whole to any Person.
Although there is a limited body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, in certain circumstances there may be a
degree of uncertainty as to whether a particular transaction would involve a
disposition of "all or substantially all" of the property or assets of a Person.
As a result, it may be unclear as to whether a Change of Control has occurred
and whether a holder of notes may require Agere to make an offer to repurchase
the notes as described above.
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CERTAIN COVENANTS
The indenture contains covenants, including, among others, those summarized
below. Following the first day (the "Suspension Date") that:
(a) the notes have an Investment Grade Rating from both of the Rating
Agencies, and
(b) no Default has occurred and is continuing under the indenture,
Agere and its Restricted Subsidiaries will not be subject to the provisions
of the indenture summarized below under:
- "-- Limitation on Indebtedness;"
- "-- Limitation on Restricted Payments;"
- "-- Limitation on Restrictions on Distributions from Restricted
Subsidiaries;"
- "-- Limitation on Sales of Assets and Subsidiary Stock;"
- "-- Limitation on Affiliate Transactions;"
- "-- clause (3) of the first paragraph under "-- Merger and
Consolidation;"
- "-- Future Subsidiary Guarantors;"
- "-- Limitation on Lines of Business;" and
- "-- Events of Default" to the extent it relates to the covenants that are
suspended
(collectively, the "Suspended Covenants"). In addition, the Subsidiary
Guarantees, if any, will be suspended as of the Suspension Date. In the event
that Agere and its Restricted Subsidiaries are not subject to the Suspended
Covenants for any period of time as a result of the preceding sentence, and on
any subsequent date (the "Reversion Date") one or both of the Rating Agencies
withdraws its Investment Grade Rating or downgrades the rating assigned to the
notes below an Investment Grade Rating, then Agere and the Restricted
Subsidiaries will thereafter again be subject to the Suspended Covenants with
respect to events commencing on that date or thereafter and the Subsidiary
Guarantees will be reinstated. The period of time between the Suspension Date
and the Reversion Date is referred to in this description as the "Suspension
Period." Notwithstanding that the Suspended Covenants may be reinstated, no
Default will be deemed to have occurred as a result of any event that occurred
during the Suspension Period.
On the Reversion Date, all Indebtedness Incurred during the Suspension
Period will be classified to have been Incurred pursuant to paragraph (a) of
"Limitation on Indebtedness" or one of the clauses set forth in paragraph (b) of
"-- Limitation on Indebtedness" (to the extent such Indebtedness would be
permitted to be Incurred thereunder as of the Reversion Date and after giving
effect to Indebtedness Incurred prior to the Suspension Period and outstanding
on the Reversion Date). To the extent such Indebtedness would not be so
permitted to be Incurred pursuant to paragraph (a) or (b) of "-- Limitation on
Indebtedness," such Indebtedness will be deemed to have been outstanding on the
Issue Date, so that it is classified as permitted under clause (3) of paragraph
(b) of "-- Limitation on Indebtedness."
Calculations made after the Reversion Date of the amount available to be
made as Restricted Payments under "-- Limitation on Restricted Payments" will be
made as though the covenant described under "-- Limitation on Restricted
Payments" had been in effect since the date the notes were originally issued and
throughout the Suspension Period. Accordingly, Restricted Payments made during
the Suspension Period will reduce the amount available to be made as Restricted
Payments under the first paragraph of "-- Limitation on Restricted Payments" and
the items specified in subclauses (c)(i) through (c)(iv) of the first paragraph
of "-- Limitation on Restricted Payments" will increase the amount available to
be made under the first paragraph.
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For purposes of determining compliance with the first and second paragraphs
of "-- Limitation on Sales of Assets and Subsidiary Stock," on the Reversion
Date, the Net Available Cash from all Asset Dispositions not applied in
accordance with the covenant will be deemed to be reset to zero.
LIMITATION ON INDEBTEDNESS
(a) Agere will not, and will not permit any of its Restricted Subsidiaries
to, Incur any Indebtedness; provided, however, that Agere or any of its
Restricted Subsidiaries that is a Subsidiary Guarantor may Incur Indebtedness
if, on the date of such Incurrence and after giving effect thereto, the
Consolidated Coverage Ratio for Agere and its Restricted Subsidiaries would be
at least (a) 1.75 to 1.00, if such Indebtedness is Incurred on or prior to the
second anniversary of the Issue Date and (b) 2.00 to 1.00, if such Indebtedness
is Incurred thereafter.
(b) Notwithstanding the forgoing paragraph (a), Agere and the Restricted
Subsidiaries may incur the following Indebtedness:
(1) Indebtedness of Agere and its Restricted Subsidiaries Incurred
pursuant to (i) the Existing Credit Facility and (ii) a Bond Issuance (as
defined in the Existing Credit Facility)(other than the notes), in an
aggregate principal amount outstanding not to exceed $1.5 billion less the
aggregate principal amount of repayments of the Existing Credit Facility
with the proceeds from Asset Dispositions; provided, that repayments of
principal amount outstanding under the Existing Credit Facility with the
cash proceeds, if any, from the two dispositions described in clauses (12)
and (13) of the definition of "Asset Disposition" shall be excluded for
purposes of calculating the aggregate principal amount permitted to be
outstanding for this clause (1);
(2) Indebtedness of Agere owing to and held by any Restricted
Subsidiary (other than a Securitization Entity) or Indebtedness of a
Restricted Subsidiary owing to and held by Agere or any Restricted
Subsidiary (other than a Securitization Entity); provided, however,
(a) any subsequent issuance or transfer of Capital Stock or any
other event which results in any such Indebtedness being beneficially
held by a Person other than Agere or a Restricted Subsidiary (other than
a Securitization Entity); and
(b) any sale or other transfer of any such Indebtedness to a Person
other than Agere or a Restricted Subsidiary (other than a Securitization
Entity)
shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness by Agere or such Subsidiary, as the case may be;
(3) Indebtedness (a) represented by the notes, (b) outstanding on the
Issue Date (other than the Indebtedness described in clauses (1), (2), (6),
(8), (9), (10) and (12)) or (c) consisting of Refinancing Indebtedness
Incurred in respect of any Indebtedness described in this clause (3) or
Incurred pursuant to paragraph (a) of this covenant;
(4) (A) Indebtedness of a Restricted Subsidiary Incurred and
outstanding on the date on which such Restricted Subsidiary was acquired by
Agere (other than Indebtedness Incurred (a) to provide all or any portion
of the funds utilized to consummate the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was otherwise acquired by Agere or (b) otherwise
in connection with, or in contemplation of, such acquisition); provided,
however, that at the time such Restricted Subsidiary is acquired by Agere,
Agere would have been able to Incur at least $1.00 of additional
Indebtedness under paragraph (a) of this covenant after giving effect to
the Incurrence of such Indebtedness pursuant to this clause (4) and (B)
Refinancing Indebtedness Incurred by a Restricted Subsidiary in respect of
Indebtedness Incurred by such Restricted Subsidiary pursuant to this clause
(4);
(5) (A) Indebtedness under Hedging Obligations; provided, that in the
case of (a) Currency Agreements, such Currency Agreements are related to
business transactions of Agere or its Restricted Subsidiaries entered into
in the ordinary course of business; and (b) Currency Agreements and
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Interest Rate Agreements, such Currency Agreements and Interest Rate
Agreements are entered into for bona fide hedging purposes of Agere or its
Restricted Subsidiaries (as determined in good faith by the Board of
Directors or senior management of Agere) and substantially correspond in
terms of notional amount, duration, currencies and interest rates, as
applicable, to Indebtedness of Agere or its Restricted Subsidiaries
Incurred without violation of the indenture;
(6) the Incurrence by Agere or any of its Restricted Subsidiaries of
Indebtedness represented by Capitalized Lease Obligations, mortgage
financings or purchase money obligations with respect to assets other than
Capital Stock or other Investments, in each case Incurred for the purpose
of financing all or any part of the purchase price or cost of construction
or improvements of property used in the business of Agere or such
Restricted Subsidiary, Attributable Indebtedness, Indebtedness represented
by Capitalized Lease Obligations and Indebtedness pursuant to CMO
Transactions, and any Refinancing Indebtedness in respect thereof, in an
aggregate principal amount not to exceed 15% of Agere's Consolidated Net
Tangible Assets at any time outstanding;
(7) Indebtedness incurred in respect of workers' compensation claims,
trade letters of credit, standby letters of credit, self-insurance
obligations, performance, surety and similar bonds and completion
guarantees provided by Agere or a Restricted Subsidiary in the ordinary
course of business;
(8) Indebtedness arising from agreements of Agere or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, Incurred or assumed in connection with
the disposition of any business, assets or Capital Stock of a Restricted
Subsidiary, provided, that the maximum aggregate liability in respect of
all such Indebtedness shall at no time exceed the gross proceeds actually
received by Agere and its Restricted Subsidiaries in connection with such
disposition;
(9) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument (except in
the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business, provided, however, that such Indebtedness is
extinguished within five business days of Incurrence;
(10) the Incurrence by Agere or any of its Restricted Subsidiaries of
Indebtedness constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business; provided, however,
that upon the drawing of such letters of credit, such obligations are
reimbursed within 30 days following such drawing;
(11) to the extent constituting Indebtedness, obligations arising from
or representing deferred compensation to employees of Agere or its
Subsidiaries and that are Incurred in the ordinary course of business;
(12) the Subsidiary Guarantees, if any, and other Guarantees by the
Subsidiary Guarantors, if any, of Indebtedness Incurred in accordance with
the provisions of the indenture; provided, that in the event such
Indebtedness that is being Guaranteed is a Subordinated Obligation, then
the related Guarantee shall be subordinated in right of payment to the
Subsidiary Guarantee;
(13) to the extent constituting Indebtedness, obligations under take
or pay or minimum purchase contracts;
(14) (i) Indebtedness incurred pursuant to working capital facilities
entered into by Foreign Subsidiaries of Agere and (ii) Indebtedness of
Foreign Subsidiaries other than pursuant to working capital facilities in
an aggregate principal amount not to exceed $100.0 million at any time
outstanding;
(15) Guarantees of loans and advances to officers and employees of
Agere and its Subsidiaries in the ordinary course of business;
(16) Indebtedness Incurred pursuant to a Qualified Securitization
Transaction; and
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(17) (i) Subordinated Obligations in an amount not to exceed $300.0
million outstanding at any time and (ii) non-cash-interest Subordinated
Obligations; provided, however, that, in each case, (A) such Subordinated
Obligations shall have no scheduled principal payment prior to the 91st day
after the Stated Maturity of the notes; and (B) such Subordinated
Obligations shall have an Average Life greater than the remaining Average
Life of the notes.
Agere will not Incur any Indebtedness under the preceding paragraph if the
proceeds thereof are used, directly or indirectly, to refinance any Subordinated
Obligations of Agere unless such Indebtedness will be subordinated to the notes
to at least the same extent as such Subordinated Obligations. No Subsidiary
Guarantor, if any, will incur any Indebtedness if the proceeds thereof are used,
directly or indirectly, to refinance any Subordinated Obligations of such
Subsidiary Guarantor unless such Indebtedness will be subordinated to the
obligations of such Subsidiary Guarantor under its Subsidiary Guarantee to at
least the same extent as such Subordinated Obligations. No Restricted Subsidiary
may Incur any Indebtedness under the preceding paragraph if the proceeds are
used to refinance Indebtedness of Agere.
(c) For purposes of determining compliance with, and the outstanding
principal amount of any particular Indebtedness incurred pursuant to and in
compliance with, this covenant:
(1) in the event that Indebtedness meets the criteria of more than one
of the types of Indebtedness described in paragraphs (a) and (b) of this
covenant, Agere, in its sole discretion, will classify such item of
Indebtedness on the date of Incurrence and only be required to include the
amount and type of such Indebtedness in one of such clauses; provided, that
an item of Indebtedness may be divided and classified in more than one of
the types of Indebtedness described above; and
(2) the amount of Indebtedness issued at a price that is less than the
principal amount thereof will be equal to the amount of the liability in
respect thereof determined in accordance with GAAP.
Accrual of interest, accrual of dividends, the accretion of accreted value,
the payment of interest in the form of additional Indebtedness and the payment
of dividends in the form of additional shares of Preferred Stock will not be
deemed to be an Incurrence of Indebtedness for purposes of this covenant. The
amount of any Indebtedness outstanding as of any date shall be (i) the accreted
value of the Indebtedness in the case of any Indebtedness issued with original
issue discount and (ii) the principal amount or liquidation preference thereof
in the case of any other Indebtedness.
For purposes of determining compliance with any U.S. dollar-denominated
restriction on the Incurrence of Indebtedness, the U.S. dollar-equivalent
principal amount of Indebtedness denominated in a foreign currency shall be
calculated based on the relevant currency exchange rate in effect on the date
such Indebtedness was Incurred, in the case of term Indebtedness, or first
committed, in the case of revolving credit Indebtedness; provided, that if such
Indebtedness is Incurred to refinance other Indebtedness denominated in a
foreign currency, and such refinancing would cause the applicable U.S.
dollar-dominated restriction to be exceeded if calculated at the relevant
currency exchange rate in effect on the date of such refinancing, such U.S.
dollar-dominated restriction shall be deemed not to have been exceeded so long
as the principal amount of such Refinancing Indebtedness does not exceed the
principal amount of such Indebtedness being refinanced. Notwithstanding any
other provision of this covenant, the maximum amount of Indebtedness that Agere
may incur pursuant to this covenant shall not be deemed to be exceeded solely as
a result of fluctuations in the exchange rate of currencies. The principal
amount of any Indebtedness incurred to refinance other Indebtedness, if Incurred
in a different currency from the Indebtedness being refinanced, shall be
calculated based on the currency exchange rate applicable to the currencies in
which such Refinancing Indebtedness is denominated that is in effect on the date
of such refinancing.
LIMITATION ON LAYERING
Agere will not Incur any Indebtedness if such Indebtedness is subordinate
or junior in ranking in any respect to any Senior Indebtedness unless such
Indebtedness is Senior Subordinated Indebtedness or is contractually
subordinated in right of payment to Senior Subordinated Indebtedness. A
Subsidiary
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Guarantor, if any, will not Incur any Indebtedness if such Indebtedness is
contractually subordinate or junior in ranking in any respect to any Senior
Indebtedness of such Subsidiary Guarantor unless such Indebtedness is Senior
Subordinated Indebtedness of such Subsidiary Guarantor or is contractually
subordinated in right of payment to Senior Subordinated Indebtedness of such
Subsidiary Guarantor.
LIMITATION ON RESTRICTED PAYMENTS
Agere will not, and will not permit any of its Restricted Subsidiaries,
directly or indirectly, to:
(1) declare or pay any dividend or make any distribution on or in
respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving Agere or any of its Restricted
Subsidiaries) except:
(a) dividends or distributions payable in Capital Stock of Agere
(other than Disqualified Stock) or in options, warrants or other rights
to purchase such Capital Stock; and
(b) dividends or distributions payable to Agere or a Restricted
Subsidiary (and if such Restricted Subsidiary is not a Wholly-Owned
Subsidiary, to its other holders of common Capital Stock on a pro rata
basis);
(2) purchase, redeem, retire or otherwise acquire for value any
Capital Stock of Agere held by Persons other than Agere or a Restricted
Subsidiary (other than in exchange for Capital Stock of Agere (other than
Disqualified Stock));
(3) purchase, repurchase, redeem, defease or otherwise acquire or
retire for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment, any Subordinated Obligations of such
Person, if any (other than the purchase, repurchase or other acquisition of
Subordinated Obligations purchased in anticipation of satisfying a sinking
fund obligation, principal installment or final maturity, in each case due
within one year of the date of purchase, repurchase or acquisition); or
(4) make any Restricted Investment in any Person;
(any such dividend, distribution, purchase, redemption, repurchase, defeasance,
other acquisition, retirement or Restricted Investment referred to in clauses
(1) through (4) shall be referred to herein as a "Restricted Payment"), if at
the time Agere or such Restricted Subsidiary makes such Restricted Payment:
(a) a Default shall have occurred and be continuing (or would result
therefrom);
(b) Agere is not able to Incur at least $1.00 of additional
Indebtedness under paragraph (a) of the "Limitation on Indebtedness"
covenant after giving effect, on a pro forma basis, to such Restricted
Payment; or
(c) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made subsequent to the Issue Date would
exceed the sum of:
(i) 50% of Consolidated Net Income for the period (treated as one
accounting period) from October 1, 2002 to the end of the most recent
fiscal quarter ending prior to the date of such Restricted Payment for
which financial statements are publicly available (or, in case such
Consolidated Net Income is a deficit, minus 100% of such deficit);
(ii) the aggregate Net Cash Proceeds received by Agere from the
issue or sale of its Capital Stock (other than Disqualified Stock) or
other capital contributions subsequent to the Issue Date (other than Net
Cash Proceeds received from an issuance or sale of such Capital Stock to
a Subsidiary of Agere or an employee stock ownership plan, option plan
or similar trust to the extent such sale to an employee stock ownership
plan, option plan or similar trust is financed by loans from or
guaranteed by Agere or any Restricted Subsidiary unless such loans have
been repaid with cash on or prior to the date of determination);
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(iii) the amount by which Indebtedness is reduced on Agere's
consolidated balance sheet upon the conversion or exchange (other than
by a Subsidiary of Agere) subsequent to the Issue Date of any
Indebtedness convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of Agere (less the amount of any cash or the fair
market value of other property distributed by Agere upon such conversion
or exchange); and
(iv) the amount equal to the net reduction in Restricted
Investments made by Agere or any of its Restricted Subsidiaries in any
Person resulting from:
(A) repurchases or redemptions of such Restricted Investments by
such Person, proceeds realized upon the sale of such Restricted
Investment to an unaffiliated purchaser, repayments of loans or
advances or other transfers of assets (including by way of dividend
or distribution) by such Person to Agere or any Restricted
Subsidiary; or
(B) the redesignation of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of
"Investment") not to exceed, in the case of any Unrestricted
Subsidiary, the amount of Investments previously made by Agere or any
Restricted Subsidiary in such Unrestricted Subsidiary,
which amount in each case under this clause (iv) was included in the
calculation of the amount of Restricted Payments; provided, however,
that such amount will be excluded from Consolidated Net Income for the
purposes of clause (c)(i) above.
The provisions of the preceding paragraph will not prohibit:
(1) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Capital Stock or Subordinated
Obligations of Agere made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Capital Stock of Agere (other than
Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary or an employee stock ownership plan, option plan or similar
trust to the extent such sale to an employee stock ownership plan, option
plan or similar trust is financed by loans from or guaranteed by Agere or
any Restricted Subsidiary unless such loans have been repaid with cash on
or prior to the date of determination); provided, that (a) such purchase or
redemption will be excluded in subsequent calculations of the amount of
Restricted Payments and (b) the Net Cash Proceeds from such sale will be
excluded from clause (c)(ii) of the preceding paragraph;
(2) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations of Agere
made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Subordinated Obligations of Agere that qualifies as
Refinancing Indebtedness; provided, that such purchase or redemption will
be excluded in subsequent calculations of the amount of Restricted
Payments;
(3) so long as no Default or Event of Default has occurred and is
continuing, any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations from Net
Available Cash to the extent permitted under "-- Limitation on Sales of
Assets and Subsidiary Stock" below; provided, that such purchase or
redemption will be excluded in subsequent calculations of the amount of
Restricted Payments;
(4) dividends paid within 60 days after the date of declaration if at
such date of declaration such dividend would have complied with this
provision; provided, that such dividends will be included in subsequent
calculations of the amount of Restricted Payments;
(5) so long as no Default or Event of Default has occurred and is
continuing,
(a) the purchase, redemption or other acquisition, cancellation or
retirement for value of Capital Stock, or options, warrants, equity
appreciation rights or other rights to purchase or acquire Capital Stock
of Agere or any Restricted Subsidiary or any parent of Agere held by any
existing or former employees, directors or management of Agere or any
Subsidiary of Agere or
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their assigns, estates or heirs, in each case in connection with the
repurchase provisions under employee stock option or stock purchase
agreements or other agreements to compensate employees; provided, that
such purchases, redemptions or other acquisitions, cancellations or
retirement for value pursuant to this clause will not exceed $ million
in the aggregate during any fiscal year; provided, that the amount of
any such repurchase or redemption will be included in subsequent
calculations of the amount of Restricted Payments;
(b) loans or advances to employees or directors of Agere or any
Subsidiary of Agere the proceeds of which are used to purchase Capital
Stock of Agere, in an aggregate amount not in excess of
$ million at any one time outstanding; provided, that the
amount of such loans and advances will be excluded in subsequent
calculations of the amount of Restricted Payments; and
(c) the purchase or other acquisition of Capital Stock to fund an
employee stock purchase plan, repurchases of forfeited restricted stock
and payments made in accordance with the terms of any warrants to
purchase shares of Lucent's common stock as in effect on the Issue Date;
provided, that the amount of such purchases or other acquisitions will
be excluded in subsequent calculations of the amount of Restricted
Payments;
(6) so long as no Default or Event of Default has occurred and is
continuing, the declaration and payment of dividends to holders of any
class or series of Disqualified Stock of Agere issued in accordance with
the terms of the indenture to the extent such dividends are included in the
definition of "Consolidated Interest Expense"; provided, that the payment
of such dividends will be excluded from the calculation of Restricted
Payments;
(7) repurchases of Capital Stock deemed to occur upon the exercise of
stock options if such Capital Stock represents a portion of the exercise
price thereof; provided, that such repurchases will be excluded from
subsequent calculations of the amount of Restricted Payments;
(8) cash dividends or loans to Lucent in amounts equal to the amounts
required for Lucent to pay any Federal, state, local or foreign taxes (and
any related interest and penalties) to the extent that Agere is responsible
for such taxes under the Tax Sharing Agreement; provided, that such
dividends or loans will be excluded from subsequent calculations of the
amount of Restricted Payments;
(9) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations upon the
occurrence of a Change of Control to the extent required by the agreement
governing such Subordinated Obligations but only if Agere shall have
complied with the covenant described under "-- Change of Control" and
purchased all notes tendered pursuant to the offer to repurchase prior to
purchasing or repaying such Subordinated Obligations; provided, however,
that the purchase price (stated as a percentage of principal amount or
issue price plus accrued original issue discount, if less) of such
Subordinated Obligations shall not be greater than the price (stated as a
percentage of principal amount) of the notes pursuant to any such offer to
repurchase the notes in the event of a Change of Control; provided,
further, that any such purchase, repurchase, redemption, defeasance or
other acquisition or retirement for value will be included in subsequent
calculations of the amount of Restricted Payments;
(10) dividends or distributions on or in respect of Agere Preferred
Stock (other than Disqualified Stock) that is convertible into Agere Common
Stock issued after the Issue Date, in an aggregate amount not to exceed 35%
of the proceeds of the issuances of such securities; provided, that the
amount of any such dividends or distributions will be included in
subsequent calculations of the amount of Restricted Payments; and
(11) Restricted Payments in an amount not to exceed $10.0 million in
any 12 month period; provided, that the amount of such Restricted Payments
will be included in the calculation of the amount of Restricted Payments.
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The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of such Restricted Payment of the asset(s) or
securities proposed to be paid, transferred or issued by Agere or such
Restricted Subsidiary, as the case may be, pursuant to such Restricted Payment.
The fair market value of any cash Restricted Payment shall be its face amount
and any non-cash Restricted Payment shall be determined conclusively by the
Board of Directors acting in good faith whose resolution with respect thereto
shall be delivered to the indenture trustee, such determination to be based upon
an opinion or appraisal issued by an accounting, appraisal or investment banking
firm of national standing if such fair market value is estimated to exceed $50.0
million.
LIMITATION ON LIENS
Agere will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur or suffer to exist any Lien (other than
Permitted Liens) upon any of its property or assets (including Capital Stock),
whether owned on the Issue Date or acquired after that date, securing any Senior
Subordinated Indebtedness or Subordinated Obligations of such Person, unless,
contemporaneously with the Incurrence of the Liens, effective provision is made
to secure the Indebtedness due under the indenture and the notes, or, in respect
of Liens on any Restricted Subsidiary's property or assets, the Subsidiary
Guarantee of such Restricted Subsidiary, if any, equally and ratably with (or
prior to in the case of Liens with respect to Subordinated Obligations of such
Person) the Indebtedness secured by such Lien for so long as such Indebtedness
is so secured.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
Agere will not, and will not permit any Restricted Subsidiary to, create or
otherwise cause or permit to exist or become effective any consensual
encumbrance or consensual restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock
or pay any Indebtedness or other obligations owed to Agere or any
Restricted Subsidiary;
(2) make any loans or advances to Agere; or
(3) transfer any of its property or assets to Agere.
The preceding provisions will not prohibit:
(i) any encumbrance or restriction pursuant to an agreement in effect
at or entered into on the Issue Date, including, without limitation, the
indenture and the Existing Credit Facility in effect on such date;
(ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement to which such Restricted Subsidiary is
a party on or before the date on which such Restricted Subsidiary was
acquired by Agere (other than an agreement entered into in connection with,
or with respect to, Indebtedness Incurred as consideration in, or to
provide all or any portion of the funds utilized to consummate, the
transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Restricted Subsidiary or was acquired by
Agere or in contemplation of the transaction) and outstanding on such date;
(iii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement effecting a refunding, replacement or
refinancing of Indebtedness Incurred pursuant to an agreement referred to
in clause (i) or (ii) of this paragraph or this clause (iii) or contained
in any amendment to an agreement referred to in clause (i) or (ii) of this
paragraph or this clause (iii); provided, however, that the encumbrances
and restrictions with respect to such Restricted Subsidiary contained in
any such agreement or amendment are no less favorable in any material
respect to the holders of the notes than the encumbrances and restrictions
contained in the agreements referred to in clauses (i) or (ii) of this
paragraph on the Issue Date or the date such Restricted Subsidiary became a
Restricted Subsidiary, as applicable;
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(iv) in the case of clause (3) of the first paragraph of this
covenant, any encumbrance or restriction:
(a) that restricts in a customary manner the subletting, assignment
or transfer of any property or asset that is subject to a lease, license
or similar contract, or the assignment or transfer of any such lease,
license or other contract;
(b) contained in mortgages, pledges or other security agreements
permitted under the indenture securing Indebtedness of Agere or a
Restricted Subsidiary to the extent such encumbrances or restrictions
restrict the transfer of the property subject to such mortgages, pledges
or other security agreements; or
(c) pursuant to customary provisions restricting dispositions of
real property interests set forth in any reciprocal easement agreements
of Agere or any Restricted Subsidiary;
(v) encumbrances or restrictions of the nature described in clause (3)
of the first paragraph of this covenant imposed by purchase money
obligations for property acquired in the ordinary course of business, to
the extent they are limited to the property so acquired;
(vi) encumbrances or restrictions imposed by any Purchase Money Note
or other Indebtedness or contractual requirements incurred with respect to
a Qualified Securitization Transaction that, in the good faith
determination of the Board of Directors, are necessary to effect such
Qualified Securitization Transaction or are reasonable or customary in
securitization transactions;
(vii) any restriction with respect to a Restricted Subsidiary (or any
of its property or assets) imposed pursuant to an agreement entered into
for the direct or indirect sale or disposition of all or substantially all
the Capital Stock or assets of such Restricted Subsidiary (or the property
or assets that are subject to such restriction) pending the closing of such
sale or disposition;
(viii) any restriction in any agreement that is not more restrictive
than the restrictions under the terms of the Existing Credit Facility as in
effect on the Issue Date;
(ix) encumbrances or restrictions relating to the disposition or
distribution of assets or property in joint venture agreements and other
similar agreements entered into in the ordinary course of business;
(x) any restriction contained in any agreement or instrument governing
Capital Stock (other than Disqualified Stock) of any Restricted Subsidiary
that is in effect on the date the Restricted Subsidiary is acquired by
Agere or a Restricted Subsidiary;
(xi) any restriction on cash or other deposits imposed by customers
under contracts entered into in the ordinary course of business; and
(xii) encumbrances or restrictions arising or existing by reason of
applicable law or any applicable rule, regulation or order.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK
Agere will not, and will not permit any of its Restricted Subsidiaries to,
make any Asset Disposition unless:
(1) Agere or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Disposition at least equal to the
fair market value, as determined in good faith by the Board of Directors of
Agere or such Restricted Subsidiary, as the case may be (including as to
the value of all non-cash consideration), of the shares and assets subject
to such Asset Disposition;
(2) at least 70% of the consideration from such Asset Disposition
received by Agere or such Restricted Subsidiary, as the case may be, is in
the form of cash or Cash Equivalents; and
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(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by Agere or such Restricted Subsidiary, as the case
may be:
(a) first, to the extent Agere or any Restricted Subsidiary, as the
case may be, elects (or is required by the terms of any Senior
Indebtedness), to prepay, repay or purchase Senior Indebtedness of Agere
or Indebtedness (other than any Preferred Stock) of a Restricted
Subsidiary (in each case other than Indebtedness owed to Agere or an
Affiliate of Agere) within 360 days from the later of the date of such
Asset Disposition or the receipt of such Net Available Cash; provided,
however, that, in connection with any prepayment, repayment or purchase
of Senior Indebtedness pursuant to this clause (a), Agere or such
Restricted Subsidiary will retire such Senior Indebtedness and will
cause the related commitment, if any, to be permanently reduced in an
amount equal to the principal amount so prepaid, repaid or purchased;
and
(b) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (a), to the extent Agere or
such Restricted Subsidiary elects, to invest in Additional Assets within
360 days from the later of the date of such Asset Disposition or the
receipt of such Net Available Cash.
Any Net Available Cash from Asset Dispositions that are not applied or
invested as provided in the preceding paragraph will be deemed to constitute
"Excess Proceeds." On the 361st day after an Asset Disposition, if the aggregate
amount of Excess Proceeds exceeds $50.0 million, Agere will be required to make
an offer ("Asset Disposition Offer") to all holders of notes and to the extent
required by the terms thereof, to all holders of other Senior Subordinated
Indebtedness outstanding with similar provisions requiring Agere to make an
offer to purchase such Senior Subordinated Indebtedness with the proceeds from
any Asset Disposition ("Pari Passu Notes"), to purchase the maximum principal
amount of notes and any such Pari Passu Notes to which the Asset Disposition
Offer applies that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the principal amount of the notes
and Pari Passu Notes (or, in the event such Pari Passu Notes were issued with
original issue discount, 100% of the accreted value thereof) plus accrued and
unpaid interest to, but not including, the date of purchase, if any, in
accordance with the procedures set forth in the indenture or the agreements
governing the Pari Passu Notes, as applicable (in the case of the notes, in
whole multiples of $500). To the extent that the aggregate amount of notes and
Pari Passu Notes so validly tendered and not properly withdrawn pursuant to an
Asset Disposition Offer is less than the Excess Proceeds, Agere may use any
remaining Excess Proceeds for general corporate purposes, subject to the other
covenants contained in the indenture. If the aggregate principal amount of notes
surrendered by holders thereof and other Pari Passu Notes surrendered by holders
or lenders, collectively, exceeds the amount of Excess Proceeds, the indenture
trustee shall select the notes and Pari Passu Notes to be purchased on a pro
rata basis on the basis of the aggregate principal amount of tendered notes and
Pari Passu Notes. A holder of SHARCS who wishes to participate in an Asset
Disposition Offer must exchange its SHARCS early to the extent such tendered
notes are accepted. At the time the notes and common stock are distributed to
such holder, such holder will surrender all rights under the put option
agreement corresponding to such exchanged SHARCS, unless the put rights were
previously accelerated. Upon completion of such Asset Disposition Offer, the
amount of Excess Proceeds shall be reset at zero.
The Asset Disposition Offer will remain open for a period of 20 Business
Days following its commencement, except to the extent that a longer period is
required by applicable law (the "Asset Disposition Offer Period"). No later than
five Business Days after the termination of the Asset Disposition Offer Period
(the "Asset Disposition Purchase Date"), Agere will purchase the principal
amount of notes and Pari Passu Notes required to be purchased pursuant to this
covenant (the "Asset Disposition Offer Amount") or, if less than the Asset
Disposition Offer Amount has been so validly tendered, all notes and Pari Passu
Notes validly tendered in response to the Asset Disposition Offer.
On or before the Asset Disposition Purchase Date, Agere will, to the extent
lawful, accept for payment, on a pro rata basis to the extent necessary, the
Asset Disposition Offer Amount of notes and Pari
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Passu Notes or portions of notes and Pari Passu Notes so validly tendered and
not properly withdrawn pursuant to the Asset Disposition Offer, or if less than
the Asset Disposition Offer Amount has been validly tendered and not properly
withdrawn, all notes and Pari Passu Notes so validly tendered and not properly
withdrawn, in each case in whole multiples of $500. Agere will deliver to the
indenture trustee an Officers' Certificate stating that such notes or portions
thereof were accepted for payment by Agere in accordance with the terms of this
covenant and, in addition, Agere will deliver all certificates and notes
required, if any, by the agreements governing the Pari Passu Notes. Agere or the
paying agent, as the case may be, will promptly (but in any case not later than
five Business Days after termination of the Asset Disposition Offer Period) mail
or deliver to each tendering holder of notes or holder or lender of Pari Passu
Notes, as the case may be, an amount equal to the purchase price of the notes or
Pari Passu Notes so validly tendered and not properly withdrawn by such holder
or lender, as the case may be, and accepted by Agere for purchase, and Agere
will promptly issue a new note, and the indenture trustee, upon delivery of an
Officers' Certificate from Agere will authenticate and mail or deliver such new
note to such holder, in a principal amount equal to any unpurchased portion of
the note surrendered; provided, that, in the case of the notes, each such new
note will be in a principal amount of $500 or a whole multiple of $500. In
addition, Agere will take any and all other actions required by the agreements
governing the Pari Passu Notes. Any note not so accepted will be promptly mailed
or delivered by Agere to the holder thereof. Agere will publicly announce the
results of the Asset Disposition Offer on the Asset Disposition Purchase Date.
For the purposes of this covenant, the following will be deemed to be cash:
(1) the assumption by the transferee of Indebtedness of (i) Agere
(other than obligations in respect of Disqualified Stock) or (ii) any
Restricted Subsidiary (other than obligations, in respect of Preferred
Stock) and the release of Agere or such Restricted Subsidiary from all
liability on such Indebtedness in connection with such Asset Disposition
(in which case Agere will, without further action, be deemed to have
applied such deemed cash to Indebtedness in accordance with clause (3)(a)
above); and
(2) securities, notes or other obligations received by Agere or any
Restricted Subsidiary from the transferee that are converted within 90 days
by Agere or such Restricted Subsidiary into cash or Cash Equivalents.
Agere will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of notes pursuant to the indenture. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, Agere will comply with the applicable securities
laws and regulations and will not be deemed to have breached its obligations
under the indenture by virtue of any conflict.
LIMITATION ON AFFILIATE TRANSACTIONS
Agere will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, enter into or conduct any transaction (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of Agere (an "Affiliate Transaction") unless:
(1) the terms of such Affiliate Transaction are no less favorable to
Agere or such Restricted Subsidiary, as the case may be, than those that
could be obtained in a comparable transaction at the time of such
transaction in arm's-length dealings with a Person who is not such an
Affiliate;
(2) in the event such Affiliate Transaction involves an aggregate
amount in excess of $25.0 million, the terms of such transaction have been
approved by a majority of the Board of Directors of Agere having no
personal stake in such transaction, if any (and such majority or
majorities, as the case may be, determines that such Affiliate Transaction
satisfies the criteria in clause (1) above); and
(3) in the event such Affiliate Transaction involves an aggregate
amount in excess of $50.0 million, Agere has received a written opinion
from an independent investment banking,
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accounting or appraisal firm of nationally recognized standing that such
Affiliate Transaction is fair from a financial point of view to Agere and
its Restricted Subsidiaries or is not materially less favorable than those
that might reasonably have been obtained in a comparable transaction at
such time on an arm's-length basis from a Person that is not an Affiliate.
The preceding paragraph will not apply to:
(1) any Restricted Payment (other than a Restricted Investment)
permitted to be made pursuant to the covenant described under "Limitation
on Restricted Payments";
(2) (A) any issuance of securities, or other payments, awards or
grants in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans and (B)
other reasonable fees, compensation, benefits and indemnities paid or
entered into by Agere or its Restricted Subsidiaries in the ordinary course
of business to or with officers, directors or employees of Agere and its
Restricted Subsidiaries;
(3) loans or advances to employees in the ordinary course of business
of Agere or any of its Restricted Subsidiaries;
(4) the payment of reasonable and customary fees paid to, and
indemnity provided on behalf of, officers, directors or employees of Agere
or any Subsidiary;
(5) any transaction between Agere and a Restricted Subsidiary or
between Restricted Subsidiaries;
(6) the performance of obligations of Agere or any of its Restricted
Subsidiaries under the terms of any agreement to which Agere or any of its
Restricted Subsidiaries is a party on the Issue Date, as these agreements
may be renewed, extended, amended, modified or supplemented from time to
time; provided, however, that any future renewal, extension, amendment,
modification or supplement entered into after the Issue Date will be
permitted to the extent that its terms are not materially more
disadvantageous to the holders of the notes than the terms of the
agreements in effect on the Issue Date (as determined in good faith by the
Board of Directors or senior management of Agere); provided, further,
however, that absent other negative changes, a decline, if any, in price
alone shall not render the terms "materially more disadvantageous" so long
as such decline is consistent with industry price erosion;
(7) any Qualified Securitization Transaction, and the Incurrence of
obligations and acquisitions of Permitted Investments and other rights or
assets in connection with a Qualified Securitization Transaction;
(8) any transaction with Lucent, provided, that:
(a) such transaction is entered into or conducted pursuant to
agreements in effect on the Issue Date (the "Existing Agreements");
provided, however, that amendments of or supplements to the Existing
Agreements which increase or decrease, as the case may be, the scheduled
payments or fair market value of property or assets transferred under
these agreements by an aggregate amount in excess of $50.0 million must
satisfy the approval requirements set forth in clause (8)(b) below; or
(b) such transaction is entered into or conducted pursuant to
agreements entered into after the Issue Date and prior to the
Distribution Date and, if such transaction involves an aggregate amount
in excess of $50.0 million, the terms of such transaction have been
approved by a committee of the Board of Directors of Agere consisting
solely of members of such Board that are not designated by Lucent;
(9) any transaction with a Subsidiary or joint venture entered into in
the ordinary course of business (including, without limitation, pursuant to
joint venture agreements) and that is in compliance with the terms of the
indenture, which transaction is, in the reasonable determination of
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the senior management of Agere, fair to Agere or its Restricted
Subsidiaries or on terms at least as favorable as might reasonably have
been obtained at such time from an unaffiliated party; and
(10) the issuance and sale of any Capital Stock (other than
Disqualified Stock) of Agere.
SEC REPORTS
Notwithstanding that Agere may not be subject to the reporting requirements
of Section 13 or 15(d) of the Exchange Act with respect to the notes, to the
extent permitted by the Exchange Act, Agere will file with the SEC, and provide
the indenture trustee and the registered holders of the notes with, the annual
reports and the information, documents and other reports (or copies of such
portions of any of the foregoing as the SEC may by rules and regulations
prescribe) that are specified in Sections 13 and 15(d) of the Exchange Act
within the time periods specified therein. In the event that Agere is not
permitted to file such reports, documents and information with the SEC pursuant
to the Exchange Act, Agere will nevertheless provide such Exchange Act
information to the indenture trustee and the holders of the notes as if Agere
were subject to the reporting requirements of Section) 13 or 15(d) of the
Exchange Act within the time periods specified therein.
MERGER AND CONSOLIDATION
Agere will not consolidate with or merge with or into, or sell, lease,
transfer or otherwise dispose of all or substantially all of its assets to, any
Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor
Company") will be a Person organized and existing under the laws of the
United States of America, any State of the United States or the District of
Columbia and the Successor Company (if not Agere) will expressly assume, by
supplemental indenture, executed and delivered to the indenture trustee, in
form satisfactory to the indenture trustee, all the obligations of Agere
under the notes and the indenture;
(2) immediately after giving effect to such transaction (and treating
any Indebtedness that becomes an obligation of the Successor Company or any
Subsidiary of the Successor Company as a result of such transaction as
having been Incurred by the Successor Company or such Subsidiary at the
time of such transaction), no Default or Event of Default shall have
occurred and be continuing;
(3) immediately after giving effect to such transaction, the Successor
Company would be able to Incur at least $1.00 of additional Indebtedness
under paragraph (a) of the "Limitation on Indebtedness" covenant;
(4) each Subsidiary Guarantor, if any (unless it is the other party to
the transactions above, in which case clause (1) shall apply) shall have by
supplemental indenture confirmed that its Subsidiary Guarantee shall apply
to such Person's obligations in respect of the indenture and the notes; and
(5) Agere shall have delivered to the indenture trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture, if any,
comply with the indenture.
For purposes of this covenant, the sale, lease, transfer or other
disposition of all or substantially all of the properties and assets of one or
more Subsidiaries of Agere, which properties and assets, if held by Agere
instead of such Subsidiaries, would constitute all or substantially all of the
properties and assets of Agere on a consolidated basis, shall be deemed to be
the sale, lease transfer or other disposition of all or substantially all of the
properties and assets of Agere.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, Agere under the indenture, and Agere will be
released from its obligations under the indenture, except that, in the case of a
lease of all or substantially all of its assets, Agere will not be released from
the obligation to pay the principal of, premium, if any, and interest on the
notes.
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Although there is a limited body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, in certain circumstances there may be a
degree of uncertainty as to whether a particular transaction would involve "all
or substantially all" of the property or assets of a Person.
Notwithstanding the preceding clause (3), (x) any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of its properties and
assets to Agere and (y) Agere may merge with an Affiliate incorporated solely
for the purpose of reincorporating Agere in another jurisdiction.
FUTURE SUBSIDIARY GUARANTORS
(a) After the Issue Date, Agere will cause each Restricted Subsidiary
(other than a Foreign Subsidiary) which (i) Guarantees any Indebtedness (other
than Senior Indebtedness) of Agere or (ii) Incurs Indebtedness under paragraph
(a) of the "Limitation on Indebtedness" covenant to execute and deliver to the
indenture trustee a Subsidiary Guarantee pursuant to which such Subsidiary
Guarantor will unconditionally Guarantee, on a joint and several basis, the full
and prompt payment of the principal of, premium, if any and interest on the
notes on a senior subordinated basis.
The obligations of each Subsidiary Guarantor will be limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor (including, without limitation, any
Guarantees under the Existing Credit Facility) and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor under
its Subsidiary Guarantee or pursuant to its contribution obligations under the
indenture, result in the obligations of such Subsidiary Guarantor under its
Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal or state law.
(b) Notwithstanding the foregoing and the other provisions of the
indenture, a Subsidiary Guarantor will be released from its obligations under
its Subsidiary Guarantee if:
(1) such Subsidiary Guarantor is sold or disposed of (whether by
merger, consolidation, the sale of its Capital Stock or the sale of all or
substantially all of its assets (other than by lease) and whether or not
the Subsidiary Guarantor is the surviving corporation in such transaction)
to a Person which is not Agere or a Restricted Subsidiary (other than a
Securitization Entity) and the sale or other disposition is in compliance
with the indenture, including the covenant "-- Limitation on Sales of
Assets and Subsidiary Stock"; or
(2) the Guarantee which resulted in the creation of such Subsidiary
Guarantee, if applicable, is released or discharged, except if such
discharge or release is as a result of payment under such Guarantee.
LIMITATION ON LINES OF BUSINESS
Agere will not, and will not permit any Restricted Subsidiary to, engage in
any business other than a Related Business.
EVENTS OF DEFAULT
Each of the following is an Event of Default:
(1) default in any payment of interest on any note when due, continued
for 30 days, whether or not such payment is prohibited by the provisions
described under "Ranking and Subordination";
(2) default in the payment of principal of or premium, if any, on any
note when due at its Stated Maturity, upon optional redemption, upon
required repurchase, upon declaration or otherwise, whether or not such
payment is prohibited by the provisions described under "Ranking and
Subordination";
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(3) failure by Agere or a Subsidiary Guarantor, if any, to comply with
its obligations under "Certain Covenants -- Merger and Consolidation";
(4) failure by Agere to comply for 30 days after notice with any of
its obligations under the covenants described under "Change of Control" or
under the covenants described under "Certain Covenants" (in each case,
other than a failure to purchase notes which will constitute an Event of
Default under clause (2) of this paragraph and other than a failure to
comply with "Certain Covenants -- Merger and Consolidation" which is
covered by clause (3) of this paragraph);
(5) failure by Agere to comply for 60 days after notice with its other
agreements contained in the indenture;
(6) the failure by Agere or any Restricted Subsidiary to pay any
Indebtedness within any applicable grace period after final maturity or the
acceleration of any such Indebtedness by the holders thereof because of a
default if the total amount of such Indebtedness unpaid or accelerated
exceeds $100.0 million or its foreign currency equivalent (the "cross
acceleration provision") and such failure continues for 30 days; provided,
that this clause (6) shall not apply shall not apply to (A) any notice of
wind-down or any comparable notice to be given in connection with a
Qualified Securitization Transaction or (B) any wind-down, or comparable
event, with respect to a Qualified Securitization Transaction;
(7) certain events of bankruptcy, insolvency or reorganization of
Agere or a Significant Subsidiary or group of Restricted Subsidiaries that,
taken together (as of the latest audited consolidated financial statements
for Agere and its Restricted Subsidiaries), would constitute a Significant
Subsidiary (the "bankruptcy provisions");
(8) failure by Agere or any Significant Subsidiary or group of
Restricted Subsidiaries that, taken together (as of the latest audited
consolidated financial statements for Agere and its Restricted
Subsidiaries), would constitute a Significant Subsidiary to pay final
judgments aggregating in excess of $100.0 million (net of any amounts for
which a reputable and creditworthy insurance company is liable, unless such
insurance company has disclaimed such liability in writing), which
judgments are not paid, discharged or stayed for a period of 60 days
following such judgments and none of such judgments has been discharged,
waived or stayed (the "judgment default provision"); and
(9) a Subsidiary Guarantee, if any, of a Significant Subsidiary or
group of Restricted Subsidiaries that, taken together (as of the latest
audited consolidated financial statements for Agere and its Restricted
Subsidiaries), would constitute a Significant Subsidiary ceases to be in
full force and effect (except as contemplated by the terms of the
indenture) or is declared null and void in a judicial proceeding or a
Subsidiary Guarantor, if any, that is a Significant Subsidiary or group of
Subsidiary Guarantors that, taken together (as of the latest audited
consolidated financial statements for Agere and its Restricted
Subsidiaries), would constitute a Significant Subsidiary denies or
disaffirms its obligations under the indenture or its Subsidiary Guarantee.
However, a default under clauses (4) and (5) of this paragraph will not
constitute an Event of Default until the indenture trustee or the holders of 25%
in principal amount of the outstanding notes notify Agere of the default and
Agere does not cure such default within the time specified in clauses (4) and
(5) of this paragraph after receipt of such notice. An Event of Default
described in clause (1) above, or in clause (2) above with respect to an
optional redemption, is a "Payment Default."
If an Event of Default other than an Event of Default described in clause
(7) above occurs and is continuing, the indenture trustee by notice to Agere, or
the holders of at least 25% in principal amount of the outstanding notes by
notice to Agere and the indenture trustee, may, and the indenture trustee at the
request of such holders shall, declare the principal of, premium, if any, and
accrued and unpaid interest, if any, on all the notes to be due and payable in
cash (such event is referred to as an "Acceleration"). Upon such a declaration,
such principal, premium and accrued and unpaid interest will be due and payable
immediately in cash.
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In the event of an Acceleration because an Event of Default described in
clause (6) above has occurred and is continuing such Acceleration shall be
automatically annulled if the event of default or payment default triggering
such Event of Default pursuant to clause (6) shall be remedied or cured by Agere
or a Restricted Subsidiary or waived by the holders of the relevant Indebtedness
within 20 days after the declaration of acceleration with respect thereto and if
(i) the annulment of the Acceleration would not conflict with any judgment or
decree of a court of competent jurisdiction and (ii) all existing Events of
Default, except nonpayment of principal, premium or interest on the notes that
became due solely because of the acceleration of the notes, have been cured or
waived.
If an Event of Default described in clause (7) above occurs and is
continuing, the principal of, premium, if any, and accrued and unpaid interest
on all of the notes will become and be immediately due and payable in cash
without any declaration or other act on the part of the indenture trustee or any
holders. If a bankruptcy proceeding is commenced in respect of Agere, the claim
of the holder of the notes will be, under the Bankruptcy Code, limited to the
issue price of the notes plus the portion of the original issue discount that
has accrued from the Issue Date to the commencement of the proceeding.
WAIVER OF DEFAULT
The holders of a majority in principal amount of the notes then outstanding
may, on behalf of the holders of all notes, waive any past Default under the
indenture with respect to the notes (except a Default in the payment of
principal, premium or interest on the notes) and rescind any such acceleration
with respect to the notes and its consequences if (i) rescission would not
conflict with any judgment or decree of a court of competent jurisdiction and
(ii) all existing Events of Default, other than the nonpayment of the principal
of, premium, if any, and interest on the notes that have become due solely by
such declaration of acceleration, have been cured or waived.
PROCEDURES FOR PURSUING REMEDIES
Subject to the provisions of the indenture relating to the duties of the
indenture trustee, if an Event of Default occurs and is continuing, the
indenture trustee will be under no obligation to exercise any of the rights or
powers under the indenture at the request or direction of any of the holders
unless such holders have offered to the indenture trustee reasonable indemnity
or security against any loss, liability or expense. Except to enforce the right
to receive payment of principal, premium, if any, or interest when due, no
holder may pursue any remedy with respect to the indenture or the notes unless:
(1) such holder has previously given the indenture trustee notice that
an Event of Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding
notes have requested the indenture trustee to pursue the remedy;
(3) such holders have offered the indenture trustee reasonable
security or indemnity against any loss, liability or expense;
(4) the indenture trustee has not complied with such request within 60
days after the receipt of the request and the offer of security or
indemnity; and
(5) the holders of a majority in principal amount of the outstanding
notes have not given the indenture trustee a direction that, in the opinion
of the indenture trustee, is inconsistent with such request within such
60-day period.
Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the indenture
trustee or of exercising any trust or power conferred on the indenture trustee.
The indenture provides that in the event an Event of Default has occurred and is
continuing, the indenture trustee will be required in the exercise of its powers
to use the degree of care that a prudent person would use in the conduct of its
own affairs. The indenture trustee, however, may refuse to follow any direction
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that conflicts with law or the indenture or that the indenture trustee
determines is unduly prejudicial to the rights of any other holder or that would
involve the indenture trustee in personal liability. Prior to taking any action
under the indenture, the indenture trustee will be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses caused
by taking or not taking such action.
NOTICES
The indenture provides that if a Default occurs and is continuing and is
known to the indenture trustee, the indenture trustee must mail to each holder
notice of the Default within 90 days after it occurs. Except in the case of a
Default in the payment of principal of, premium, if any, or interest on any
note, the indenture trustee may withhold notice if and so long as a committee of
trust officers of the indenture trustee in good faith determines that
withholding notice is not opposed to the interests of the holders.
In addition, Agere is required to deliver to the indenture trustee, within
120 days after the end of each fiscal year, a certificate indicating whether the
signers thereof know of any Default that occurred during the previous year.
Agere also is required to deliver to the indenture trustee, within 30 days after
the occurrence thereof, written notice of any events which would constitute
certain Defaults, their status and what action Agere is taking or proposes to
take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the indenture may be amended with the
consent of the holders of a majority in principal amount of the notes then
outstanding (including, without limitation, consents obtained in connection with
a purchase of, or tender offer or exchange offer for, notes) and, subject to
certain exceptions, any past default or compliance with any provisions may be
waived with the consent of the holders of a majority in principal amount of the
notes then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes).
However, without the consent of each holder of an outstanding note affected, no
amendment may, among other things:
(1) reduce the amount of notes whose holders must consent to an
amendment;
(2) reduce the stated rate of or extend the stated time for payment of
interest on any note;
(3) reduce the principal of or extend the Stated Maturity of any note;
(4) reduce the premium payable upon the redemption or repurchase of
any note or change the time at which any note may be redeemed or
repurchased as described above under "Optional Redemption," "Change of
Control" and "Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock" or any similar provision, whether through an amendment or
waiver of provisions in the covenants, definitions or otherwise;
(5) make any note payable in money other than that stated in the note;
(6) impair the right of any holder to receive payment of, premium, if
any, principal of and interest on such holder's notes on or after the due
dates therefor or to institute suit for the enforcement of any payment on
or with respect to such holder's notes; or
(7) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions.
Without the consent of any holder, Agere and the indenture trustee may
amend the indenture to:
(1) cure any ambiguity, omission, defect or inconsistency;
(2) provide for the assumption by a successor corporation,
partnership, trust or limited liability company of the obligations of Agere
under the indenture;
(3) provide for uncertificated notes in addition to or in place of
certificated notes (provided that the uncertificated notes are issued in
registered form for purposes of Section) 163(f) of the Code, or
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in a manner such that the uncertificated notes are described in Section)
163(f) (2) (B) of the Code);
(4) add Guarantees with respect to the notes or release a Subsidiary
Guarantee, if any, in accord with the applicable provisions of the
indenture;
(5) secure the notes;
(6) add to the covenants of Agere for the benefit of the holders or
surrender any right or power conferred upon Agere;
(7) make any change that does not adversely affect the rights of any
holder in any material respect; or
(8) comply with any requirement of the SEC in connection with the
qualification of the indenture under the Trust Indenture Act.
However, no amendment may be made to the subordination provisions of the
indenture that adversely affects the rights of any holder of Senior Indebtedness
then outstanding unless the holders of such Senior Indebtedness (or any group or
representative thereof authorized to give a consent) consent to such change.
The consent of the holders is not necessary under the indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment. After an amendment under the
indenture becomes effective, Agere is required to mail to the holders a notice
briefly describing such amendment. However, the failure to give such notice to
all the holders, or any defect in the notice, will not impair or affect the
validity of the amendment.
DEFEASANCE
Agere at any time may terminate all of its obligations under the notes and
the indenture ("legal defeasance"), except for certain obligations, including
those respecting the defeasance trust and obligations to register the transfer
or exchange of the notes, to replace mutilated, destroyed, lost or stolen notes
and to maintain a registrar and paying agent in respect of the notes. If Agere
exercises its legal defeasance option, the Subsidiary Guarantees, if any, in
effect at such time will terminate.
Agere at any time may terminate its obligations under covenants described
under "Change of Control" and "Certain Covenants" (other than "Merger and
Consolidation"), the operation of the cross-default upon a payment default,
cross acceleration provisions, the bankruptcy provisions with respect to
Significant Subsidiaries, the judgment default provision and the Subsidiary
Guarantee provision, if applicable, described under "Events of Default" and the
limitations contained in clause (3) under "Certain Covenants-Merger and
Consolidation" ("covenant defeasance").
Agere may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If Agere exercises its legal
defeasance option, payment of the notes may not be accelerated because of an
Event of Default with respect to the notes. If Agere exercises its covenant
defeasance option, payment of the notes may not be accelerated because of an
Event of Default specified in clause (4), (5), (6), (7) (with respect only to
Significant Subsidiaries or "groups" of Subsidiaries), (8) or (9) under "Events
of Default" or because of the failure of Agere to comply with clause (3) under
"Certain Covenants-Merger and Consolidation".
In order to exercise either defeasance option, Agere must irrevocably
deposit in trust (the "defeasance trust") with the indenture trustee money or
U.S. Government Obligations for the payment of principal, premium, if any, and
interest on the notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the indenture
trustee of an Opinion of Counsel (subject to customary exceptions and
exclusions) to the effect that holders of the notes will not recognize income,
gain or loss for Federal income tax purposes as a result of such deposit and
defeasance and will be subject to Federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred. In the case of legal defeasance
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only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of Agere or of
any stockholder of Agere, as such, shall have any liability for any obligations
of Agere under the notes, the indenture, the Subsidiary Guarantees, if any, or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each holder by accepting a note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the notes. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the SEC that such a waiver is
against public policy.
CONCERNING THE INDENTURE TRUSTEE
The indenture will contain certain limitations on the rights of the
indenture trustee, should it become a creditor of Agere, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The indenture trustee will be
permitted to engage in other transactions; however, if it acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the SEC for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the indenture trustee, subject
to certain exceptions. The indenture will provide that in case an Event of
Default shall occur and be continuing, the indenture trustee will be required,
in the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the indenture trustee
will be under no obligation to exercise any of its rights or powers under the
indenture at the request of any holder of notes, unless such holder shall have
offered to the indenture trustee security and indemnity satisfactory to it
against any loss, liability or expense.
The Bank of New York is the indenture trustee under the indenture and has
been appointed by Agere as registrar and paying agent with regard to the notes.
PAYMENTS ON THE NOTES; PAYING AGENT AND REGISTRAR
Payments in respect of the notes held in global form, whether or not held
by the trust, shall be made to The Depository Trust Company, which shall credit
the relevant accounts at DTC on the applicable distribution dates, or if the
notes are not represented by one or more global certificates, such payments
shall be made by check mailed to holders of the notes at their registered
address as it appears in the registrar's books. Agere has initially designated
the corporate trust office of the indenture trustee in New York, New York to act
as its paying agent and registrar. Agere may, however, change the paying agent
or registrar without prior notice to the holders of the notes, and Agere or any
of its Restricted Subsidiaries may act as paying agent or registrar.
TRANSFER AND EXCHANGE
A holder may transfer or exchange the notes in accordance with the
indenture. The registrar and the indenture trustee may require a holder, among
other things, to furnish appropriate endorsements and transfer documents. No
service charge will be imposed by Agere, the indenture trustee or the registrar
for any registration of transfer or exchange of notes, but Agere may require a
holder to pay a sum sufficient to cover any transfer tax or other similar
governmental charge required by law or permitted by the indenture. Agere is not
required to transfer or exchange any note selected for redemption. Also, Agere
is not required to transfer or exchange any note for a period of 15 days before
a selection of notes to be redeemed.
The registered holder of a note will be treated as the owner of it for all
purposes.
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GOVERNING LAW
The indenture provides that it and the notes will be governed by, and
construed and interpreted in accordance with, the laws of the State of New York.
CERTAIN DEFINITIONS
"Accounts" shall have the meaning given to such term in the Uniform
Commercial Code as in effect in the State of New York; and, with respect to
Agere and its Subsidiaries, all such Accounts of such Persons, whether now
existing or existing in the future, including, without limitation:
(1) all accounts receivable of such Person, including all accounts created
by or arising from all of such Person's Intellectual Property licensing
arrangements or sales of goods or rendition of services made under any of its
trade names, or through any of its divisions;
(2) all unpaid rights of such Person (including rescission, replevin,
reclamation and stopping in transit) relating to the foregoing or arising
therefrom;
(3) all rights to any goods represented by any of the foregoing, including
returned or repossessed goods;
(4) all reserves and credit balances held by such Person with respect to
any such accounts receivable or any obligors thereon;
(5) all letters of credit, guarantees or collateral for any of the
foregoing;
(6) all rights to any Intellectual Property related to any of the foregoing
clauses (1) through (5); and
(7) all insurance policies or other rights related to any of the foregoing.
"Additional Assets" means:
(1) any property or assets (other than Indebtedness and Capital Stock)
to be used by Agere or a Restricted Subsidiary in a Related Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary
as a result of the acquisition of such Capital Stock by Agere or a
Restricted Subsidiary; or
(3) the Capital Stock constituting a minority interest in any Person
that at such time is a Restricted Subsidiary;
provided, however, that, in the case of clauses (2) and (3), such Restricted
Subsidiary is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing;
provided, that, for purposes of the covenants described under "-- Certain
Covenants -- Limitation on Restricted Payments," "-- Certain
Covenants -- Limitation on Affiliate Transactions" and "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only,
beneficial ownership of 10% or more of the total ordinary voting power of the
Voting Stock on a fully diluted basis of a Person shall be deemed to be control.
"Asset Disposition" means any sale, lease (other than an operating lease
entered into in the ordinary course of business), transfer, issuance or other
disposition, or a series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan, of (i) shares of Capital Stock of a
Subsidiary (other than directors' qualifying shares or shares required by
applicable law to be held by a Person other than Agere or a Restricted
Subsidiary), or (ii) property or other assets (each referred to for the purposes
of this definition as a "disposition") by Agere or any of its Restricted
Subsidiaries, including any disposition by means of a merger, consolidation or
similar transaction.
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Notwithstanding the preceding, the following items shall not be deemed to
be Asset Dispositions:
(1) a disposition by a Restricted Subsidiary to Agere or another
Restricted Subsidiary (other than a Securitization Entity) or by Agere to a
Restricted Subsidiary (other than a Securitization Entity);
(2) the sale of Cash Equivalents in the ordinary course of business;
(3) a disposition of inventory in the ordinary course of business;
(4) a disposition of (i) obsolete or worn out equipment or other
assets or (ii) equipment or other assets that are no longer needed or
useful in the conduct of the business of Agere and its Restricted
Subsidiaries; provided, that, in each case, such equipment or other assets
are disposed of in the ordinary course of business;
(5) transactions permitted under "Certain Covenants-Merger and
Consolidation";
(6) an issuance of Capital Stock by a Restricted Subsidiary to Agere
or to another Restricted Subsidiary (other than a Securitization Entity);
(7) for purposes of "Certain Covenants -- Limitation on Sales of
Assets and Subsidiary Stock" only, the making of a Permitted Investment or
a disposition that constitutes a Restricted Payment permitted under
"Certain Covenants -- Limitation on Restricted Payments";
(8) sales, conveyances and other transfers pursuant to any Qualified
Securitization Transaction;
(9) dispositions of assets in a single transaction or series of
related transactions with an aggregate fair market value in any fiscal year
of less than $25.0 million;
(10) dispositions in connection with Permitted Liens;
(11) the licensing or sublicensing of Intellectual Property or other
general intangibles and licenses, leases or subleases of other property in
the ordinary course of business which do not materially interfere with the
business of Agere and its Restricted Subsidiaries;
(12) to the extent the consideration received for the disposition of
the Orlando, Florida facility and related assets (or Capital Stock of the
Subsidiary that owns such facility and related assets) consists of
securities of the Person acquiring such facility and related assets (or
Capital Stock), the disposition of such facility and related assets;
provided, however, that to the extent the consideration received for the
disposition of such facility and related assets consists of cash and Cash
Equivalents, such cash and Cash Equivalents shall be applied under the
"Limitation on Sales of Assets and Subsidiary Stock" covenant;
(13) to the extent the consideration received for the disposition of
the Reading, Pennsylvania facility and related assets (or Capital Stock of
the Subsidiary that owns such facility and related assets) consists of
securities of the Person acquiring such facility and related assets (or
Capital Stock), the disposition of such facility and related assets;
provided, however, that to the extent the consideration received for the
disposition of such facility and related assets consists of cash and Cash
Equivalents, such cash and Cash Equivalents shall be applied under the
"Limitation on Sales of Assets and Subsidiary Stock" covenant;
(14) dispositions in connection with Hedging Obligations; and
(15) foreclosure on assets.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate implicit in such transaction, compounded semi-annually) of the
total obligations of the lessee for rental payments during the remaining term of
the lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended). "Average Life" means, as of the date of
determination, with respect to any Indebtedness or Preferred Stock, the quotient
obtained by dividing (1) the sum of the products of the numbers of years from
the date of determination to the dates of each successive scheduled principal
payment of such Indebtedness or redemption or similar payment with respect to
such Preferred Stock multiplied by the amount of such payment by (2) the sum of
all such payments.
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"Bank Indebtedness" means any and all amounts, whether outstanding on the
Issue Date or thereafter Incurred, payable by Agere under or in respect of the
Existing Credit Facility and any related notes, collateral documents, letters of
credit and guarantees and any Interest Rate Agreement entered into in connection
with the Existing Credit Facility, including principal, premium, if any,
interest, fees, charges, expenses, reimbursement obligations, guarantees and all
other amounts payable thereunder or in respect thereof.
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Business Day" means each day which is not a Saturday, Sunday or other day
on which banking institutions are not required by law or regulation to be open
in the State of New York.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participation or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation will be the capitalized amount of such obligation at the time any
determination thereof is to be made as determined in accordance with GAAP, and
the Stated Maturity thereof will be the date of the last payment of rent or any
other amount due under such lease prior to the first date such lease may be
terminated without penalty.
"Cash Equivalents" means:
(1) securities issued or directly and fully guaranteed or insured by
the United States Government or any agency or instrumentality of the United
States (provided that the full faith and credit of the United States is
pledged in support thereof), having maturities of not more than one year
from the date of acquisition;
(2) marketable general obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one year from the date of
acquisition of the United States (provided that the full faith and credit
of the United States is pledged in support thereof) and, at the time of
acquisition, having a credit rating of "A" or better from either Standard &
Poor's Ratings Services or Moody's Investors Service, Inc.;
(3) certificates of deposit, time deposits, Eurodollar time deposits,
overnight bank deposits or bankers' acceptances having maturities of not
more than one year from the date of acquisition thereof issued by any
commercial bank the long-term debt of which is rated at the time of
acquisition thereof at least "A" or the equivalent thereof by Standard &
Poor's Ratings Services, or "A" or the equivalent thereof by Moody's
Investors Service, Inc., and having combined capital and surplus in excess
of $500 million;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (1), (2) and (3)
entered into with any bank meeting the qualifications specified in clause
(3) above;
(5) commercial paper rated at the time of acquisition thereof at least
"A-2" or the equivalent thereof by Standard & Poor's Ratings Services or
"P-2" or the equivalent thereof by Moody's Investors Service, Inc., or
carrying an equivalent rating by a nationally recognized rating agency, if
both of the two named rating agencies cease publishing ratings of
investments, and in any case maturing within one year after the date of
acquisition thereof; and
(6) interests in any investment company or money market fund which
invests solely in instruments of the type specified in clauses (1) through
(5) above.
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"Change of Control" means:
(1) any "person" or "group" of related persons (as such terms are used
in Sections 13(d) and 14(d) of the Exchange Act) (other than a Permitted
Holder prior to the Distribution Date), is or becomes the beneficial owner
(as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
such person or group shall be deemed to have "beneficial ownership" of all
shares that any such person or group has the right to acquire, whether such
right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 35% of the total voting power of the
Voting Stock of Agere (or its successor by merger, consolidation or
purchase of all or substantially all of its assets); provided, however,
that, if prior to the Distribution Date, the Permitted Holders beneficially
own (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly
or indirectly, in the aggregate a lesser percentage of the total voting
power of the Voting Stock of Agere than such other person or group and do
not have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the Board of Directors (for
the purposes of this clause, such person or group shall be deemed to
beneficially own any Voting Stock of Agere held by a parent entity, if such
person or group "beneficially owns" (as defined above), directly or
indirectly, more than 35% of the voting power of the Voting Stock of such
parent entity and, if prior to the Distribution Date, the Permitted Holders
beneficially own (as defined in this proviso), directly or indirectly, in
the aggregate a lesser percentage of the voting power of the Voting Stock
of such parent entity and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of the
board of directors of such parent entity);
(2) the first day on which a majority of the members of the Board of
Directors of Agere are not Continuing Directors;
(3) the sale, transfer or other disposition (other than by way of
consolidation or merger), in one or a series of related transactions, of
all or substantially all of the assets of Agere determined on a
consolidated basis to another Person (other than, if prior to the
Distribution Date, to a Person that is controlled by the Permitted
Holders), unless the transferee Person becomes the obligor in respect of
the notes and is a Subsidiary of the transferor of such assets;
(4) the consolidation or merger of Agere with or into another Person
or the merger of another Person with or into Agere (other than, in all such
cases, if prior to the Distribution Date, a Person that is controlled by
the Permitted Holders), and the securities of Agere that are outstanding
immediately prior to such transaction and represent 100% of the aggregate
voting power of the Voting Stock of Agere are changed into or exchanged for
cash, securities or property, unless pursuant to such transaction such
securities are changed into or exchanged for, in addition to any other
consideration, securities of the surviving Person that represent
immediately after such transaction, at least a majority of the aggregate
voting power of the Voting Stock of the surviving Person; or
(5) the adoption by the stockholders of Agere of a plan or proposal
for the liquidation or dissolution of Agere.
"CMO Transaction" shall mean any financing arrangement involving the
issuance of securities supported by Liens (or Indebtedness secured by Liens) on
real estate owned by Agere or any Subsidiary.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means with respect to any Person, any and all shares,
interest or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of such Person's common stock whether or not
outstanding on the Issue Date, and includes, without limitation, all series and
classes of such common stock.
"Consolidated Coverage Ratio" means as of any date of determination, with
respect to any Person,
(i) for any date of determination occurring prior to the date on which
financial statements for the fiscal quarter ending March 31, 2003 are made
publicly available, the ratio of (x) the aggregate
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amount of Consolidated EBITDA for the two fiscal quarters ending December
31, 2002 to (y) Consolidated Interest Expense for such two fiscal quarters;
(ii) for any date of determination occurring on or after the date on
which financial statements for the fiscal quarter ending March 31, 2003 are
made publicly available and prior to the date on which financial statements
for the fiscal quarter ending June 30, 2003 are made publicly available,
the ratio of (x) the aggregate amount of Consolidated EBITDA for the three
fiscal quarters ending March 31, 2003 to (y) Consolidated Interest Expense
for such three fiscal quarters; and
(iii) for any date of determination on or after the date on which
financial statements for the fiscal quarter ending June 30, 2003 are made
publicly available, the ratio of (x) the aggregate amount of Consolidated
EBITDA of such Person for the period of the most recent four consecutive
fiscal quarters ending prior to the date of such determination for which
financial statements are made publicly available to (y) Consolidated
Interest Expense for such four fiscal quarters,
provided, however, that:
(1) if Agere or any Restricted Subsidiary:
(a) has Incurred any Indebtedness since the beginning of any such
period that remains outstanding on such date of determination or if the
transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an Incurrence of Indebtedness, Consolidated EBITDA and
Consolidated Interest Expense for such period will be calculated after
giving effect on a pro forma basis to (x) such Indebtedness as if such
Indebtedness had been Incurred on the first day of such period (except
that in making such computation, the amount of Indebtedness under any
revolving credit facility outstanding on the date of such calculation
will be computed based on (i) the average daily balance of such
Indebtedness during such period or such shorter period for which such
facility was outstanding or (ii) if such facility was created after the
end of such period, the average daily balance of such Indebtedness
during the period from the date of creation of such facility to the date
of such calculation) and (y) the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds
of such new Indebtedness as if such discharge had occurred on the first
day of such period; or
(b) has repaid, repurchased, defeased or otherwise discharged any
Indebtedness since the beginning of any such period that is no longer
outstanding on such date of determination or if the transaction giving
rise to the need to calculate the Consolidated Coverage Ratio involves a
discharge of Indebtedness (in each case other than Indebtedness incurred
under any revolving credit facility unless such Indebtedness has been
permanently repaid and the related commitment terminated), Consolidated
EBITDA and Consolidated Interest Expense for such period will be
calculated after giving effect on a pro forma basis to such discharge of
such Indebtedness, including with the proceeds of such new Indebtedness,
as if such discharge had occurred on the first day of such period;
(2) if since the beginning of any such period Agere or any Restricted
Subsidiary will have made any Asset Disposition or if the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio is an
Asset Disposition:
(a) the Consolidated EBITDA for such period will be reduced by an
amount equal to the Consolidated EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset
Disposition for such period or increased by an amount equal to the
Consolidated EBITDA (if negative) directly attributable thereto for such
period; and
(b) Consolidated Interest Expense for such period will be reduced
by an amount equal to the Consolidated Interest Expense directly
attributable to any Indebtedness of Agere or any Restricted Subsidiary
repaid, repurchased, defeased or otherwise discharged with respect to
Agere and its continuing Restricted Subsidiaries in connection with such
Asset Disposition for such period (or, if the Capital Stock of any
Restricted Subsidiary is sold, the Consolidated Interest
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Expense for such period directly attributable to the Indebtedness of
such Restricted Subsidiary to the extent Agere and its continuing
Restricted Subsidiaries are no longer liable for such Indebtedness after
such sale);
(3) if since the beginning of any such period Agere or any Restricted
Subsidiary (by merger or otherwise) will have made an Investment in any
Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary
or is merged with or into Agere) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction causing a
calculation to be made hereunder, which constitutes all or substantially
all of an operating unit, division or line of business, Consolidated EBITDA
and Consolidated Interest Expense for such period will be calculated after
giving pro forma effect thereto (including the Incurrence of any
Indebtedness) as if such Investment or acquisition occurred on the first
day of such period; and
(4) if since the beginning of any such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into
Agere or any Restricted Subsidiary since the beginning of such period) will
have made any Asset Disposition or any Investment or acquisition of assets
that would have required an adjustment pursuant to clause (2) or (3) above
if made by Agere or a Restricted Subsidiary during such period,
Consolidated EBITDA and Consolidated Interest Expense for such period will
be calculated after giving pro forma effect thereto as if such Asset
Disposition or Investment or acquisition of assets occurred on the first
day of such period.
For purposes of this definition, whenever pro forma effect is to be given to any
calculation under this definition, the pro forma calculations will be determined
in good faith by a responsible financial or accounting officer of Agere
(including pro forma expense and cost reductions calculated on a basis
consistent with Regulation S-X under the Securities Act). If any Indebtedness
bears a floating rate of interest and is being given pro forma effect, the
interest expense on such Indebtedness will be calculated as if the rate in
effect on the date of determination had been the applicable rate for the entire
period (taking into account any Interest Rate Agreement applicable to such
Indebtedness if such Interest Rate Agreement has a remaining term in excess of
12 months).
"Consolidated EBITDA" (i) for any period prior to the fiscal quarter ending
September 30, 2002 means zero and (ii) for any period thereafter, without
duplication, the Consolidated Net Income for such period, plus Consolidated
Interest Expense for such period plus the following to the extent deducted in
calculating such Consolidated Net Income:
(1) Consolidated Income Taxes;
(2) consolidated depreciation expense;
(3) consolidated amortization expense;
(4) other non-cash charges reducing Consolidated Net Income (excluding
any such non-cash charge to the extent it represents an accrual of or
reserve for cash charges in any future period or amortization of a prepaid
cash expense that was paid in a prior period not included in the
calculation);
(5) charges or expenses relating to purchased in-process research and
development;
(6) the after-tax effects of up to an aggregate amount after the Issue
Date of $775.0 million of pre-tax business restructuring charges and
related charges and expenses taken after the Issue Date; and
(7) the after-tax effects of up to an aggregate amount after the Issue
Date of $165.0 million of one-time expenses related to the distribution to
Lucent's securityholders of all of the common stock of Agere held by Lucent
after the initial public offering of Agere common stock (including employee
relocation and retention expenses related to the deferral of such
distribution and facility consolidation).
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Notwithstanding the preceding sentence, clauses (1) through (7) above relating
to amounts of a Restricted Subsidiary of a Person will be added to Consolidated
Net Income to compute Consolidated EBITDA of such Person (A) only to the extent
(and in the same proportion, including by reason of minority interest) that the
net income (loss) of such Restricted Subsidiary was included in calculating the
Consolidated Net Income of such Person and (B) to the extent the amounts set
forth in clauses (2) through (7) above are in excess of those necessary to
offset a net loss of such Restricted Subsidiary or if such Restricted Subsidiary
has net income for such period included in Consolidated Net Income, only if a
corresponding amount would be permitted at the date of determination to be
dividended to Agere by such Restricted Subsidiary without prior approval (that
has not been obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Restricted Subsidiary or its stockholders.
"Consolidated Income Taxes" means, with respect to any Person for any
period, taxes imposed upon such Person or other payments required to be made by
such Person by any governmental authority which taxes or other payments are
calculated by reference to the income or profits of such Person or such Person
and its Restricted Subsidiaries (to the extent such income or profits were
included in computing Consolidated Net Income for such period), regardless of
whether such taxes or payments are required to be remitted to any governmental
authority.
"Consolidated Interest Expense" means, for any period, the total interest
expense of Agere and its consolidated Restricted Subsidiaries, whether paid or
accrued, plus, to the extent not included in such interest expense:
(1) interest expense attributable to capital leases and the interest
expense attributable to leases constituting part of a Sale/Leaseback
Transaction;
(2) amortization of debt discount and debt issuance cost;
(3) capitalized interest;
(4) non-cash interest expense;
(5) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing;
(6) interest actually paid by Agere or any such Restricted Subsidiary
under any Guarantee of Indebtedness or other obligation of any other
Person;
(7) net costs associated with Hedging Obligations (including
amortization of fees);
(8) the product of (a) all dividends paid or payable in cash, Cash
Equivalents or Indebtedness or accrued during such period on any series of
Disqualified Stock of such Person or on Preferred Stock of its Restricted
Subsidiaries payable to a party other than Agere or a Restricted
Subsidiary, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state,
provincial and local statutory tax rate of such Person, expressed as a
decimal, in each case, as estimated by the Chief Financial Officer of Agere
in good faith;
(9) interest Incurred in connection with Investments in discontinued
operations; and
(10) the cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such plan or
trust to pay interest or fees to any Person (other than Agere and its
Restricted Subsidiaries) in connection with Indebtedness Incurred by such
plan or trust; provided, however, that there will be excluded therefrom any
such interest expense of any Unrestricted Subsidiary to the extent the
related Indebtedness is not Guaranteed or paid by Agere or any Restricted
Subsidiary.
For purposes of the foregoing, total interest expense will be determined after
giving effect to any net payments made or received by Agere and its Subsidiaries
with respect to Interest Rate Agreements.
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"Consolidated Net Income" means, for any period, the net income (loss) of
Agere and its consolidated Subsidiaries determined in accordance with GAAP;
provided, however, that there will not be included in such Consolidated Net
Income:
(1) any net income (loss) of any Person (other than Agere) if such
Person is not a Restricted Subsidiary, except that:
(a) subject to the limitations contained in clauses (4), (5) and
(6) below, Agere's equity in the net income of any such Person for such
period will be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during such
period to Agere or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution
to a Restricted Subsidiary, to the limitations contained in clause (3)
below); and
(b) Agere's equity in a net loss of any such Person (other than an
Unrestricted Subsidiary) for such period will be included in determining
such Consolidated Net Income to the extent such loss has been funded
with cash from Agere or a Restricted Subsidiary;
(2) any net income (loss) of any Person acquired by Agere or a
Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition;
(3) any net income (but not loss) of any Restricted Subsidiary if such
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to Agere, except that:
(a) subject to the limitations contained in clauses (4), (5) and
(6) below, Agere's equity in the net income of any such Restricted
Subsidiary for such period will be included in such Consolidated Net
Income up to the aggregate amount of cash that could have been
distributed by such Restricted Subsidiary during such period to Agere or
another Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution to another
Restricted Subsidiary, to the limitation contained in this clause); and
(b) Agere's equity in a net loss of any such Restricted Subsidiary
for such period will be included in determining such Consolidated Net
Income;
(4) any gain (loss) realized upon the sale or other disposition of any
property, plant or equipment of Agere or its consolidated Restricted
Subsidiaries (including pursuant to any Sale/ Leaseback Transaction) which
is not sold or otherwise disposed of in the ordinary course of business and
any gain (loss) realized upon the sale or other disposition of any Capital
Stock of any Person;
(5) any extraordinary gain or loss; and
(6) the cumulative effect of a change in accounting principles.
"Consolidated Net Tangible Assets" means the total amount of assets (less
applicable reserves and other properly deductible items) after deducting
therefrom (a) all current liabilities (excluding any thereof which are by their
terms extendible or renewable at the option of the obligor thereon to a time
more than 12 months after the time as of which the amount thereof is being
computed), and (b) all goodwill, trade names, trademarks, patents, unamortized
debt discount and expense and other like intangible assets, all as set forth on
the most recent consolidated balance sheet of Agere and its Subsidiaries and
computed in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of Agere who: (1) was a member of such Board on the
Issue Date; or (2) was nominated for election or elected to such Board with the
approval of a majority of such Board still in office who were either members of
such Board on the Issue Date or whose such nomination or election was so
approved.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
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"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (1) the Bank Indebtedness (to the
extent such Bank Indebtedness constitutes Senior Indebtedness) and (2) any other
Senior Indebtedness which, at the date of determination, has an aggregate
principal amount outstanding of, or under which, at the date of determination,
the holders thereof are committed to lend up to, at least $ million and
is specifically designated in the instrument evidencing or governing such Senior
Indebtedness as "Designated Senior Indebtedness" for purposes of the indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
of such Person which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable at the option of the holder) or
upon the happening of any event:
(1) matures or is mandatorily redeemable (other than redeemable only
for Capital Stock of such Person which is not itself Disqualified Stock)
pursuant to a sinking fund obligation or otherwise;
(2) is convertible or exchangeable for Indebtedness or Disqualified
Stock (excluding Capital Stock which is convertible or exchangeable solely
at the option of Agere or a Restricted Subsidiary); or
(3) is redeemable (other than redeemable only for Capital Stock of
such Person which is not itself Disqualified Stock) at the option of the
holder of the Capital Stock thereof, in whole or in part,
in each case on or prior to the date that is 91 days after the date (a) on which
the notes mature or (b) on which there are no notes outstanding, provided, that
only the portion of Capital Stock which so matures or is mandatorily redeemable,
is so convertible or exchangeable or is so redeemable at the option of the
holder thereof prior to such date will be deemed to be Disqualified Stock;
provided, further, that any Capital Stock that would constitute Disqualified
Stock solely because the holders thereof have the right to require Agere to
repurchase such Capital Stock upon the occurrence of a change of control or
asset sale shall not constitute Disqualified Stock if the terms of such Capital
Stock (and all such securities into which it is convertible or for which it is
exchangeable) provide that Agere may not repurchase or redeem any such Capital
Stock (and all such securities into which it is convertible or for which it is
exchangeable) pursuant to such provision prior to compliance by Agere with the
provisions of the indenture described under the captions "Change of Control" and
"Limitation on Sales of Assets and Subsidiary Stock" and such repurchase or
redemption complies with "Certain Covenants -- Restricted Payments."
"Distribution Date" means the first date on which Lucent shall own less
than % of the outstanding common stock of Agere.
"Existing Credit Facility" means the $1,500,000,000 Amended and Restated
Revolving Credit and Term Loan Facility Agreement, dated as of February 22,
2001, as amended and restated as of October 4, 2001, among Agere, Salomon Smith
Barney Inc., as syndication agent, and JPMorgan Chase Bank (formerly known as
The Chase Manhattan Bank), as administrative agent and the other lenders parties
thereto, including any related notes, collateral documents, letters of credit,
guarantees, instruments, agreements and Interest Rate Agreements, executed in
connection therewith, as amended, restated, supplemented, waived, extended,
renewed, replaced (in whole or in part, whether or not upon termination, and
whether with the original lenders or agents or otherwise), refinanced (in whole
or in part), restructured, repaid, refunded or otherwise modified from time to
time or any other credit agreement, indenture or other evidence of Indebtedness.
"Foreign Subsidiary" shall mean any Subsidiary of Agere that is not
organized under the laws of any jurisdiction within the United States.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in (1)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (2) statements and
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pronouncements of the Financial Accounting Standards Board, (3) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (4) the rules and regulations of the SEC governing the
inclusion of financial statements (including pro forma financial statements) in
periodic reports required to be filed pursuant to Section) 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC. All ratios and
computations based on GAAP contained in the indenture will be computed in
conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such other Person (whether arising by
virtue of partnership arrangements, or by agreement to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement conditions or otherwise); or
(2) entered into for purposes of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" will not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement and in the case of
Agere, the Put Option Agreement as well.
"Incur" means issue, create, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
Person existing at the time such Person becomes a Restricted Subsidiary (whether
by merger, consolidation, acquisition or otherwise) will be deemed to be
Incurred by such Restricted Subsidiary at the time it becomes a Restricted
Subsidiary; and the terms "Incurred" and "Incurrence" have meanings correlative
to the foregoing.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal of and premium (to the extent that such premium has
become due and payable), if any, in respect of indebtedness of such Person
for borrowed money;
(2) the principal of and premium (to the extent that such premium has
become due and payable), if any, in respect of obligations of such Person
evidenced by bonds, debentures, notes or other similar instruments;
(3) the principal component of all obligations of such Person or the
reimbursement of any obligor in respect of letters of credit, bankers'
acceptances or other similar instruments (except to the extent such
reimbursement obligation relates to letters of credit securing obligations
(other than those referred to in clauses (1) or (2) above) entered into in
the ordinary course of business and is not drawn or, if and to the extent
drawn, such obligation is satisfied within 30 days of drawing);
(4) the principal component of all obligations of such Person to pay
the deferred and unpaid purchase price of property (except trade payables),
which purchase price is due more than six months after the date of placing
such property in service or taking delivery and title thereto;
(5) Capitalized Lease Obligations and all Attributable Indebtedness of
such Person;
(6) the principal component or liquidation preference of all
obligations of such Person with respect to the redemption, repayment or
other repurchase of any Disqualified Stock or, with respect to any
Subsidiary, any Preferred Stock (but excluding, in each case, any accrued
dividends);
(7) the principal component of all Indebtedness of other Persons
secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; provided, however, that
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the amount of such Indebtedness will be the lesser of (a) the fair market
value of such asset at such date of determination and (b) the amount of
such Indebtedness of such other Persons;
(8) the principal component of Indebtedness of other Persons to the
extent Guaranteed by such Person; and
(9) to the extent not otherwise included in this definition, net
obligations of such Person under Currency Agreements and Interest Rate
Agreements (the amount of any such obligations to be equal at any time to
the termination value of such agreement or arrangement giving rise to such
obligation that would be payable by such Person at such time); provided,
however, that an increase in the amount of such Indebtedness as a result of
market fluctuations shall not be deemed an "Incurrence" of Indebtedness for
purposes of the covenant described under "Limitations on Indebtedness".
Notwithstanding the foregoing, in connection with the purchase by Agere or any
Restricted Subsidiary of any business, the term "Indebtedness" will exclude
post-closing payment adjustments to which the seller may become entitled to the
extent such payment is determined by a final closing balance sheet or such
payment depends on the performance of such business after the closing; provided,
however, that, at the time of closing, the amount of any such payment is not
determinable and, to the extent such payment thereafter becomes fixed and
determined, the amount is paid within 30 days thereafter. The amount of
Indebtedness of any Person at any date will be the outstanding balance at such
date of all unconditional obligations as described above and the maximum
liability, upon the occurrence of the contingency giving rise to the obligation,
of any contingent obligations at such date.
In addition, "Indebtedness" of any Person shall include Indebtedness
described in the preceding paragraph that would not appear as a liability on the
balance sheet of such Person if:
(1) such Indebtedness is the obligation of a partnership or joint
venture that is not a Restricted Subsidiary (a "Joint Venture");
(2) such Person or a Restricted Subsidiary of such Person is a general
partner of the Joint Venture (a "General Partner"); and
(3) there is recourse, by contract or operation of law, with respect
to the payment of such Indebtedness to property or assets of such Person or
a Restricted Subsidiary of such Person; and then such Indebtedness shall be
treated as Indebtedness of such Person in an amount not to exceed:
(a) the lesser of (i) the net assets of the General Partner and
(ii) the amount of such obligations to the extent that there is
recourse, by contract or operation of law, to the property or assets of
such Person or a Restricted Subsidiary of such Person; or
(b) if less than the amount determined pursuant to clause (a)
immediately above, the actual amount of such Indebtedness that is
recourse to such Person or a Restricted Subsidiary of such Person, if
the Indebtedness is evidenced by a writing and is for a determinable
amount and the related interest expense shall be included in
Consolidated Interest Expense to the extent actually paid by Agere or
its Restricted Subsidiaries.
"Intellectual Property" shall mean, collectively, all rights, priorities
and privileges relating to intellectual property, whether arising under United
States, multinational or foreign laws or otherwise, and all rights to sue at law
or in equity for any infringement or impairment thereof, including the right to
receive all proceeds and damages therefrom.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of any direct or
indirect advance, loan (other than advances to customers in the ordinary course
of business) or other extension of credit (including by way of Guarantee or
similar
138
arrangement, but excluding any debt or extension of credit represented by a bank
deposit other than a time deposit) or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase or acquisition of
Capital Stock, Indebtedness or other similar instruments issued by, such Person
and all other items that are or would be classified as investments on a balance
sheet prepared in accordance with GAAP; provided, that none of the following
will be deemed to be an Investment:
(1) Hedging Obligations entered into in the ordinary course of
business and in compliance with the indenture;
(2) endorsements of negotiable instruments and documents in the
ordinary course of business; and
(3) an acquisition of assets, Capital Stock or other securities by
Agere or a Subsidiary for consideration to the extent such consideration
consists of Common Stock of Agere.
For purposes of the definition of "Unrestricted Subsidiary," the definition
of "Restricted Payment" and "Certain Covenants -- Limitation on Restricted
Payments",
(1) "Investment" will include the portion (proportionate to Agere's
equity interest in a Restricted Subsidiary to be designated as an
Unrestricted Subsidiary) of the fair market value of the net assets of such
Restricted Subsidiary at the time that such Restricted Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, Agere will be
deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary in an amount (if positive) equal to (a) Agere's "Investment" in
such Subsidiary at the time of such redesignation less (b) the portion
(proportionate to Agere's equity interest in such Subsidiary) of the fair
market value of the net assets (as conclusively determined by the Board of
Directors of Agere in good faith) of such Subsidiary at the time that such
Subsidiary is so re-designated a Restricted Subsidiary; and
(2) any property transferred to or from an Unrestricted Subsidiary
will be valued at its fair market value at the time of such transfer, in
each case as determined in good faith by the Board of Directors of Agere
or, in the case of property with a fair market value not in excess of $25.0
million, an officer of Agere. If Agere or any Restricted Subsidiary sells
or otherwise disposes of any Voting Stock of any Restricted Subsidiary such
that, after giving effect to any such sale or disposition, such entity is
no longer a Subsidiary of Agere, Agere shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair
market value (as conclusively determined by the Board of Directors of Agere
in good faith) of the Capital Stock of such Subsidiary not sold or disposed
of.
"Investment Grade Rating" means a rating equal to or higher than Baa3 (or
the equivalent) by Moody's Investors Service, Inc. and BBB- (or the equivalent)
by Standard & Poor's Ratings Group, Inc., or an equivalent rating by any other
Rating Agency.
"Issue Date" means the date on which the notes (not including any
additional notes, if any) are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Lucent" means Lucent Technologies Inc., a Delaware corporation (or its
successor by merger, consolidation, purchase of all or substantially all of its
assets or otherwise).
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to the properties or assets
139
that are the subject of such Asset Disposition or received in any other noncash
form) therefrom, in each case net of:
(1) all legal, accounting, investment banking, title and recording tax
expenses, commissions and other fees and expenses incurred, and all
Federal, state, provincial, foreign and local taxes required to be paid or
accrued as a liability under GAAP, as a consequence of such Asset
Disposition;
(2) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of
any Lien upon such assets, or which must by its terms, or in order to
obtain a necessary consent to such Asset Disposition, or by applicable law
be repaid out of the proceeds from such Asset Disposition;
(3) all distributions and other payments required to be made to
minority interest holders in Subsidiaries or joint ventures as a result of
such Asset Disposition; and
(4) the deduction of appropriate amounts to be provided by the seller
as a reserve, in accordance with GAAP, against any liabilities associated
with the assets disposed of in such Asset Disposition and retained by Agere
or any Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, listing fees,
discounts or commissions and brokerage, consultant and other fees and charges
actually incurred in connection with such issuance or sale and net of taxes paid
or payable as a result of such issuance or sale.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary of Agere.
"Officers' Certificate" means a certificate signed by two Officers or by an
Officer and either an Assistant Treasurer or an Assistant Secretary of Agere.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the indenture trustee. The counsel may be an employee of or
counsel to Agere or the indenture trustee.
"Permitted Holders" means Lucent and any wholly-owned Subsidiary thereof.
"Permitted Investment" means an Investment by Agere or any Restricted
Subsidiary in:
(1) a Restricted Subsidiary (other than a Securitization Entity) or a
Person which will, upon the making of such Investment, become a Restricted
Subsidiary (other than a Securitization Entity); provided, however, that
the primary business of such Restricted Subsidiary is a Related Business;
(2) any Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, Agere or a Restricted Subsidiary (other
than a Securitization Entity); provided, however, that such Person's
primary business is a Related Business;
(3) cash and Cash Equivalents;
(4) receivables owing to Agere or any Restricted Subsidiary created or
acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms; provided, however, that such trade
terms may include such concessionary trade terms as Agere or any such
Restricted Subsidiary deems reasonable under the circumstances;
(5) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of
business;
(6) loans or advances to employees made in the ordinary course of
business consistent with past practices of Agere or such Restricted
Subsidiary;
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(7) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to Agere or any
Restricted Subsidiary or in satisfaction of judgments or pursuant to any
plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of a debtor;
(8) existence on the Issue Date;
(9) Currency Agreements, Interest Rate Agreements and related Hedging
Obligations, which transactions or obligations are Incurred in compliance
with "Certain Covenants -- Limitation on Indebtedness";
(10) aggregate amount at the time of such Investment, together with
all other Investments pursuant to this clause (10), not to exceed
$ million outstanding at any one time;
(11) Guarantees issued in accordance with "Certain
Covenants -- Limitations on Indebtedness";
(12) a Securitization Entity or any Investment by a Securitization
Entity in any other Person, in each case, in connection with a Qualified
Securitization Transaction, provided, however, that any Investment in a
Securitization Entity is in the form of (i) a Purchase Money Note; (ii) any
equity interest; (iii) obligations of the Securitization Entity to pay the
purchase price for assets transferred to it; or (iv) interests in
Receivable, Intellectual Property and related assets generated by Agere or
a Restricted Subsidiary and transferred to any Person in connection with a
Qualified Securitization Transaction or any such Person owning such
Receivables or Intellectual Property;
(13) Unrestricted Subsidiaries or joint ventures, in an aggregate
amount not to exceed $40.0 million on or prior to September 30, 2002, and
after September 30, 2002, in an aggregate amount not to exceed, in any
fiscal year, the sum of (A) $125.0 million, (B) up to $25.0 million
unutilized investment capacity from the immediately preceding fiscal year,
and (C) up to $15.0 million investment capacity from the immediately
succeeding fiscal year; provided, that the baskets set forth above may be
replenished with respect to any fiscal year, up to the sum of the limits
set forth in clauses (A), (B) and (C), by the amount of Net Cash Proceeds
realized from the sale of any interest in Unrestricted Subsidiaries or
joint ventures (the Investment in which was permitted under this clause
(13)) or distributions or loan repayments thereon, in each case, in such
fiscal year;
(14) any Person if made as a result of the receipt of non-cash
consideration from an Asset Disposition that was made pursuant to and in
compliance with "Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock";
(15) any Person if made as a result of the receipt of non-cash
consideration from the disposition of the Orlando, Florida facility (or
Capital Stock of the Subsidiary that owns such facility); provided,
however, that such Investment shall not exceed the amount of securities of
the Person acquiring such facility (or Capital Stock) received in such
disposition;
(16) any Person if made as a result of the receipt of non-cash
consideration from the disposition of the Reading, Pennsylvania facility
(or Capital Stock of the Subsidiary that owns such facility); provided,
however, that such Investment shall not exceed the amount of securities of
the Person acquiring such facility (or Capital Stock) received in such
disposition;
(17) Silicon Manufacturing Partners Pte Ltd in an aggregate amount not
to exceed $ million;
(18) Investments to the extent such Investments are acquired by
contribution of Intellectual Property (together with Intellectual Property
licensed prior to the Issue Date for use in joint development) for products
not sold as of the Issue Date; and
(19) any Person if such Investment was acquired in consideration for
the proceeds of the issuance of Capital Stock (other than Disqualified
Stock) of Agere; provided, that such Capital Stock was issued specifically
to provide the consideration for such acquisition; provided, further, that
such
141
proceeds will be excluded from subsequent calculations of the amount of
Restricted Payments; and provided, further, that such Person's primary
business is a Related Business.
"Permitted Liens" means, with respect to any Person:
(1) Liens securing Indebtedness and other obligations of Agere under
the Existing Credit Facility and related Interest Rate Agreements and other
Senior Indebtedness and Liens on assets of Restricted Subsidiaries that
have Incurred Guarantees of Indebtedness and other obligations of Agere
under the Existing Credit Facility and other Senior Indebtedness of such
Person permitted to be Incurred under the indenture;
(2) pledges or deposits by such Person under workmen's compensation
laws, unemployment insurance laws or similar legislation, or good faith
deposits in connection with bids, tenders, contracts (other than for the
payment of Indebtedness) or leases to which such Person is a party, or
deposits to secure public or statutory obligations of such Person or
deposits or cash or United States government bonds to secure surety or
appeal bonds to which such Person is a party, or deposits as security for
contested taxes or import or customs duties or for the payment of rent, in
each case Incurred in the ordinary course of business;
(3) Liens imposed by law, including carriers', warehousemen's and
mechanics' Liens, in each case for sums not yet due or being contested in
good faith by appropriate proceedings if a reserve or other appropriate
provisions, if any, as shall be required by GAAP shall have been made in
respect thereof;
(4) Liens for taxes, assessments or other governmental charges not yet
subject to penalties for non-payment or which are being contested in good
faith by appropriate proceedings provided appropriate reserves required
pursuant to GAAP have been made in respect thereof;
(5) Liens in favor of issuers of surety or performance bonds or
letters of credit or bankers' acceptances issued pursuant to the request of
and for the account of such Person in the ordinary course of its business;
provided, however, that such letters of credit do not constitute
Indebtedness;
(6) encumbrances, easements or reservations of, or rights of others
for, licenses, rights of way, sewers, electric lines, telegraph and
telephone lines and other similar purposes, or zoning or other restrictions
as to the use of real properties or Liens incidental to the conduct of the
business of such Person or to the ownership of its properties which do not
in the aggregate materially adversely affect the value of said properties
or materially impair their use in the operation of the business of such
Person;
(7) Liens securing Hedging Obligations so long as the related
Indebtedness is, and is permitted to be under the indenture, secured by a
Lien on the same property securing such Hedging Obligation;
(8) leases and subleases of real property which do not materially
interfere with the ordinary conduct of the business of Agere or any of its
Restricted Subsidiaries;
(9) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment have not been
finally terminated or the period within which such proceedings may be
initiated has not expired;
(10) Liens for the purpose of securing the payment of all or a part of
the purchase price of, or Capitalized Lease Obligations with respect to,
assets or property acquired or constructed in the ordinary course of
business, provided, that:
(a) the aggregate principal amount of Indebtedness secured by such
Liens is otherwise permitted to be Incurred under the indenture and does
not exceed the cost of the assets or property so acquired or
constructed; and
142
(b) such Liens are created within 180 days of construction or
acquisition of such assets or property and do not encumber any other
assets or property of Agere or any Restricted Subsidiary other than such
assets or property and assets affixed or appurtenant thereto;
(11) Liens arising solely by virtue of any statutory or common law
provisions relating to banker's Liens, rights of set-off or similar rights
and remedies as to deposit accounts or other funds maintained with a
depositary institution; provided, that:
(a) such deposit account is not a dedicated cash collateral account
and is not subject to restrictions against access by Agere in excess of
those set forth by regulations promulgated by the Federal Reserve Board;
and
(b) such deposit account is not intended by Agere or any Restricted
Subsidiary to provide collateral to the depository institution;
(12) Liens arising from Uniform Commercial Code financing statement
filings regarding operating leases entered into by Agere and its Restricted
Subsidiaries in the ordinary course of business;
(13) Liens existing on the Issue Date;
(14) Liens on property or shares of stock of a Person at the time such
Person becomes a Restricted Subsidiary; provided, however, that such Liens
may not extend to any other property owned by Agere or any Restricted
Subsidiary;
(15) Liens on property at the time Agere or a Restricted Subsidiary
acquired the property, including any acquisition by means of a merger or
consolidation with or into Agere or any Restricted Subsidiary; provided,
however, that such Liens may not extend to any other property owned by
Agere or any Restricted Subsidiary;
(16) Liens securing Indebtedness or other obligations of a Restricted
Subsidiary owing to Agere or a Restricted Subsidiary (other than a
Securitization Entity);
(17) Liens securing the notes (and Subsidiary Guarantees, if any);
(18) Liens securing Refinancing Indebtedness Incurred to Refinance
Indebtedness that was previously so secured, provided that any such Lien is
limited to all or part of the same property or assets (plus improvements,
accessions, proceeds or dividends or distributions in respect thereof) that
secured (or, under the written arrangements under which the original Lien
arose, could secure) the Indebtedness being Refinanced or is in respect of
property that is the security for a Permitted Lien hereunder;
(19) Liens Incurred pursuant to Sale/Leaseback Transactions or CMO
Transactions permitted by the covenant described under "-- Limitations on
Indebtedness;"
(20) Liens on the new headquarters facility and related property of
Agere located in Allentown and Hanover Township, Pennsylvania Incurred to
facilitate the financing of this property in an aggregate amount not to
exceed $250.0 million so long as the proceeds of such financing are treated
as proceeds from an Asset Disposition and applied in compliance with the
covenant described under "-- Limitation on Sales of Assets and Subsidiary
Stock;"
(21) Liens on any principal manufacturing property of Agere to
facilitate the financing of such property so long as the proceeds of such
financing are treated as proceeds from an Asset Disposition and applied in
compliance with the covenant described under "-- Limitation on Sales of
Assets and Subsidiary Stock;" and
(22) Liens incurred pursuant to Qualified Securitization Transactions
and related assignments and sales of any income or revenues (including
Receivables and Intellectual Property), including Liens on the assets of
any Securitization Entity created pursuant to any Qualified Securitization
Transaction and Liens Incurred by Agere and its other Subsidiaries on
Receivables or Intellectual
143
Property to secure obligations owing by them in respect of any such
Qualified Securitization Transaction.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company, government or any agency or political subdivision thereof or
any other entity.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares
of Capital Stock of any other class of such Person.
"Purchase Money Note" means a promissory note of a Securitization Entity
evidencing a line of credit or other extension of credit (including deferred
purchase price), which may be irrevocable, from Agere or any Restricted
Subsidiary in connection with a Qualified Securitization Transaction to a
Securitization Entity, which note is repayable from cash available to the
Securitization Entity, other than amounts required to be established as reserves
pursuant to agreements, amounts paid to investors in respect of interest,
principal and other amounts owing to such investors and amounts owing to such
investors and amounts paid in connection with the purchase of newly generated
Receivables or Intellectual Property.
"Put Option Agreement" means the put option agreement entered into on the
date of the indenture between Agere and SHARCS Trust I.
"Qualified Securitization Transaction" means any transaction or series of
transactions that may be entered into by Agere or any of its Restricted
Subsidiaries pursuant to which Agere or any of its Restricted Subsidiaries may
sell, convey or otherwise transfer to (1) a Securitization Entity (in the case
of a transfer by Agere or any of its Restricted Subsidiaries) and (2) any other
Person (in the case of a transfer by a Securitization Entity), or may grant a
security interest in, any Receivables or Intellectual Property (whether now
existing or arising in the future) of Agere or any of its Restricted
Subsidiaries, and any assets related thereto including, without limitation, all
collateral securing such Receivables or Intellectual Property, all contracts and
all guarantees or other obligations in respect of such Receivables or
Intellectual Property, the proceeds of such Receivables or Intellectual Property
and other assets which are customarily transferred, or in respect of which
security interests are customarily granted in connection with asset
securitization involving Receivables or Intellectual Property.
"Rating Agencies" means Standard & Poor's Ratings Group, Inc. and Moody's
Investors Service, Inc. or if Standard & Poor's Ratings Group, Inc. or Moody's
Investors Service, Inc. or both shall not make a rating on the notes publicly
available, a nationally recognized statistical rating agency or agencies, as the
case may be, selected by Agere (as certified by a resolution of the Board of
Directors) which shall be substituted for Standard & Poor's Ratings Group, Inc.
or Moody's Investors Service, Inc. or both, as the case may be.
"Receivables" shall mean all Accounts and accounts receivable of Agere or
any of its Subsidiaries (including any thereof constituting or evidenced by
chattel paper, instruments or general intangibles), and all proceeds thereof and
rights (contractual and other) and collateral related thereto.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
refund, repay, prepay, redeem, defease, retire, replace, exchange or renew, or
to issue other Indebtedness in exchange or replacement for such Indebtedness.
"Refinance" or "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that is Incurred to Refinance
any Indebtedness existing on the Issue Date or Incurred in compliance with the
indenture (including Indebtedness that Refinances Refinancing Indebtedness),
provided, however, that:
(1) the Refinancing Indebtedness has a Stated Maturity no earlier than
the Indebtedness being Refinanced;
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(2) the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being Refinanced;
(3) such Refinancing Indebtedness is Incurred in an aggregate
principal amount (or if issued with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount
(or if issued with original issue discount, the aggregate accreted value)
then outstanding or committed of Indebtedness being Refinanced; and
(4) if the Indebtedness being Refinanced is subordinated in right of
payment to the notes or a Subsidiary Guarantee, if any, such Refinancing
Indebtedness is subordinated in right of payment to the notes or such
Subsidiary Guarantee at least the same extent as the Indebtedness being
Refinanced;
provided, however, that clauses (1) and (2) will not apply to any refunding or
refinancing of any Senior Indebtedness; provided, further, however, that
Refinancing Indebtedness shall not include Indebtedness of Agere or a Restricted
Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any business that is the same as or related,
ancillary or complementary to any of the businesses of Agere and its Restricted
Subsidiaries on the date of the indenture.
"Representative" means any trustee, agent or representative, if any, of an
issue of Indebtedness; provided that when used in connection with the Existing
Credit Facility, the term "Representative" shall refer to the administrative
agent under the Existing Credit Facility.
"Restricted Investment" means any Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of Agere other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby Agere or a Restricted Subsidiary transfers
such property to a Person and Agere or a Restricted Subsidiary leases it from
such Person.
"Secured Indebtedness" means any Indebtedness of Agere secured by a Lien.
"Securitization Entity" means a Wholly-Owned Subsidiary of Agere (or
another Person in which Agere or any Restricted Subsidiary makes an Investment
and to which Agere or any Restricted Subsidiary transfers Receivables or
Intellectual Property and related assets) which engages in no activities other
than in connection with the acquisition and financing of Receivables or
Intellectual Property and activities related thereto and which is designated by
the Board of Directors of Agere (as provided below) as a Securitization Entity:
(1) no portion of the Indebtedness or any other obligations
(contingent or otherwise) of which:
(a) is guaranteed by Agere or any Restricted Subsidiary (excluding
guarantees of Obligations (other than the principal of, and interest on,
Indebtedness) pursuant to Standard Securitization Undertakings);
(b) is recourse to or obligates Agere or any Restricted Subsidiary
in any way other than pursuant to Standard Securitization Undertakings;
or
(c) subjects any property or asset of Agere or any Restricted
Subsidiary, directly or indirectly, contingently or otherwise, to the
satisfaction thereof, other than pursuant to Standard Securitization
Undertakings and Liens supporting such Standard Securitization
Undertakings;
(2) with which neither Agere nor any Restricted Subsidiary has any
material contract, agreement, arrangement or understanding (except in
connection with a Purchase Money Note or Qualified Securitization
Transaction) other than on terms no less favorable to Agere or such
Restricted Subsidiary than those that might be obtained at the time from
Persons that are not
145
Affiliates of Agere, other than fees payable in the ordinary course of
business in connection with servicing accounts receivable; and
(3) to which neither Agere nor any Restricted Subsidiary has any
obligation to maintain or preserve such entity's financial condition or
cause such entity to achieve certain levels of operating results.
Any such designation by the Board of Directors of Agere shall be evidenced to
the indenture trustee by filing with the indenture trustee a certified copy of
the resolution of the Board of Directors of Agere giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions.
"Senior Subordinated Indebtedness" means, with respect to Agere, the notes
and any other Indebtedness of Agere that specifically provides that such
Indebtedness is to rank equally with the notes in right of payment and is not
subordinated by its terms in right of payment to any Indebtedness or other
obligation of Agere which is not Senior Indebtedness, and with respect to a
Subsidiary Guarantor, if any, the obligations of such Subsidiary Guarantor under
the Subsidiary Guarantee and any other Indebtedness of such Subsidiary Guarantor
that specifically provides that such Indebtedness is to rank equally in right of
payment with the obligations of such Subsidiary Guarantor under the Subsidiary
Guarantee and is not expressly subordinated by its terms in right of payment to
any Indebtedness of such Subsidiary Guarantor which is not Senior Indebtedness
of such Subsidiary Guarantor.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of Agere within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by Agere or any Restricted Subsidiary
which are reasonably customary in securitization transactions involving
Receivables and/or Intellectual Property, including in connection with any
servicing obligations assumed by Agere or any Restricted Subsidiary in respect
of such Receivables or Intellectual Property.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision, but shall not include any contingent obligations to repay, redeem or
repurchase any such principal prior to the date originally scheduled for the
payment thereof.
"Subordinated Obligation" of a Person means any Indebtedness of such Person
(whether outstanding on the Issue Date or thereafter Incurred) which is
subordinate or junior in right of payment to the notes pursuant to a written
agreement.
"Subsidiary" of any Person means any corporation, association, partnership,
joint venture, limited liability company or other business entity of which more
than 50% of the total voting power of shares of Voting Stock or other interests
(including partnership and joint venture interests) entitled (without regard to
the occurrence of any contingency) to vote in the election of directors,
managers or indenture trustees thereof is at the time owned or controlled,
directly or indirectly, by (1) such Person, (2) such Person and one or more
Subsidiaries of such Person or (3) one or more Subsidiaries of such Person.
Unless otherwise specified herein, each reference to a Subsidiary will refer to
a Subsidiary of Agere.
"Subsidiary Guarantee" means, individually, any Guarantee of payment of the
notes by a Subsidiary Guarantor pursuant to the terms of the indenture, and,
collectively, all such Guarantees. Each such Subsidiary Guarantee will be in the
form prescribed by the indenture. As of the Issue Date, there are no Subsidiary
Guarantees.
"Subsidiary Guarantor" means any Restricted Subsidiary that executes and
delivers a supplemental indenture to the indenture providing for a Subsidiary
Guarantee. As of the Issue Date, there are no Subsidiary Guarantors.
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"Tax Sharing Agreement" means the Tax Sharing Agreement by and between
Lucent and Agere, dated as of February 1, 2001.
"Unrestricted Subsidiary" means Silicon Manufacturing Partners Pte Ltd, LD
Fiber Optics LLC, FiNET Technologies, Lucent Technologies Semiconductor
Marketing Japan and:
(1) any Subsidiary of Agere that at the time of determination shall be
designated an Unrestricted Subsidiary by the Board of Directors of Agere in
the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors of Agere may designate any Subsidiary of Agere
(including any newly acquired or newly formed Subsidiary or a Person becoming a
Subsidiary through merger or consolidation or Investment therein) to be an
Unrestricted Subsidiary only if:
(1) such Subsidiary or any of its Subsidiaries does not own any
Capital Stock or Indebtedness of, or have any Investment in, or own or hold
any Lien on any property of, any other Subsidiary of Agere which is not a
Subsidiary of the Subsidiary to be so designated or otherwise an
Unrestricted Subsidiary; and
(2) either such Subsidiary has total assets of $1,000 or less or such
designation and the Investment of Agere in such Subsidiary complies with
"Certain Covenants -- Limitation on Restricted Payments".
Any such designation by the Board of Directors of Agere shall be evidenced
to the indenture trustee by filing with the indenture trustee a resolution of
the Board of Directors of Agere giving effect to such designation and an
Officers' Certificate certifying that such designation complies with the
foregoing conditions.
The Board of Directors of Agere may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary; provided that immediately after giving effect to
such designation, no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof and Agere could incur at
least $1.00 of additional Indebtedness under paragraph (a) of the "Limitation on
Indebtedness" covenant on a pro forma basis taking into account such
designation.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests of such Person then outstanding and normally entitled (without regard
to any contingency) to vote in the election of directors, managers or trustees
thereof.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary, all of the Capital
Stock of which (other than directors' qualifying shares) is owned by Agere or
one or more other Wholly-Owned Subsidiaries.
BOOK-ENTRY ISSUANCE
The notes will be represented by one or more global notes that will be
deposited with and registered in the name of DTC or its nominee. Initially, all
of the notes will be beneficially owned by the trust. Under certain
circumstances, notes will be distributed by the trust to one or more SHARCS
holders. These notes will be beneficially owned by that holder or holders. Agere
will not issue a certificated note or notes, except in the limited circumstances
described below.
Each global note will be issued to DTC, which will keep a computerized
record of its participants whose clients have purchased the notes. Each
participant will then keep a record of its own clients. Unless it is exchanged
in whole or in part for a certificated note, a global note may not be
transferred. DTC, its
147
nominees and their successors may, however, transfer a global note as a whole to
one another, and these transfers are required to be recorded on our records or a
register to be maintained by the indenture trustee.
Beneficial interests in a global note will be shown on, and transfers of
beneficial interests in the global note will be made only through, records
maintained by DTC and its participants. DTC has provided Agere with the
following information: DTC is a limited-purpose trust company organized under
the New York Banking Law, a "banking organization" within the meaning of the New
York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered under the provisions of Section 17A of the
Securities Exchange Act of 1934. DTC holds securities that its direct
participants deposit with DTC. DTC also records the settlements among direct
participants of securities transactions, such as transfers and pledges, in
deposited securities through computerized records for direct participants'
accounts. This book-entry system eliminates the need to exchange certificated
securities. Direct participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations.
DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
direct participant. The rules that apply to DTC and its participants are on file
with the SEC.
DTC is owned by a number of its direct participants and by the New York
Stock Exchange, Inc., the American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc.
When you purchase notes through the DTC system, the purchases must be made
by or through a direct participant, which will receive credit for the notes on
DTC's records. When you actually purchase the notes, you will become their
beneficial owner. Your ownership interest will be recorded only on the direct or
indirect participants' records. DTC will have no knowledge of your individual
ownership of the notes. DTC's records will show only the identity of the direct
participants and the principal amount of the notes held by or through them. You
will not receive a written confirmation of your purchase or sale or any periodic
account statement directly from DTC. You should instead receive these from your
direct or indirect participant. As a result, the direct or indirect participants
are responsible for keeping accurate account of the holdings of their customers.
The indenture trustee will wire payments on the notes to DTC's nominee. Agere
and the indenture trustee will treat DTC's nominee as the owner of each global
note for all purposes. Accordingly, Agere, the indenture trustee and any paying
agent will have no direct responsibility or liability to pay amounts due on a
global note to you or any other beneficial owners in that global note.
It is DTC's current practice, upon receipt of any payment of distributions
or liquidation amounts, to proportionately credit direct participants' accounts
on the payment date based on their holdings. In addition, it is DTC's current
practice to pass through any consenting or voting rights to such participants by
using an omnibus proxy. Those participants will, in turn, make payments to and
solicit votes from you, the ultimate owner of the notes, based on their
customary practices. Payments to you will be the responsibility of the
participants and not of DTC, the indenture trustee or Agere.
Notes represented by one or more global notes will be exchangeable for
certificated notes with the same terms in authorized denominations only if:
- DTC is unwilling or unable to continue as a depository or ceases to be a
clearing agency registered under applicable law, and a successor is not
appointed to Agere within 90 days;
- an event of default occurs and is continuing in respect of the notes; or
- Agere decides to discontinue the book-entry system.
If a global note is exchanged for certificated notes, the indenture trustee
will keep the registration books for the notes at its corporate office and
follow customary practices and procedures regarding those certificated notes.
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EUROCLEAR AND CLEARSTREAM
Links have been established among DTC, Clearstream Banking S.A. and
Euroclear Bank S.A./N.V., which are two European book-entry depositories similar
to DTC, to facilitate the cross-market transfers of the notes associated with
secondary market trading.
Noteholders may hold their notes through the accounts maintained by
Euroclear or Clearstream in DTC only if they are participants of those systems,
or indirectly through organizations which are participants in those systems.
Euroclear and Clearstream will hold omnibus book-entry positions on behalf
of their participants through customers' securities accounts in Euroclear's and
Clearstream's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the names of the
nominees of the depositaries on the books of DTC. All securities in Euroclear
and Clearstream are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts.
Transfers of notes by persons holding through Euroclear or Clearstream
participants will be effected through DTC, in accordance with DTC rules, on
behalf of the relevant European international clearing system by its
depositaries; however, such transactions will require delivery of exercise
instructions to the relevant European international clearing system by the
participant in such system in accordance with its rules and procedures and
within its established deadlines (European time). The relevant European
international clearing system will, if the exercise meets its requirements,
deliver instructions to its depositaries to take action to effect exercise of
the notes on its behalf by delivering notes through DTC and receiving payment in
accordance with its normal procedures for next-day funds settlement. Payments
with respect to the notes held through Euroclear an Clearstream will be credited
to the cash accounts of Euroclear participants or Clearstream participants in
accordance with the relevant system's rules and procedures, to the extent
received by its depositaries.
All information in this prospectus on Euroclear and Clearstream is derived
form Euroclear or Clearstream, as the case may be, and reflects the policies of
such organizations. These organizations may change these policies without
notice.
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DESCRIPTION OF PUT RIGHTS
The following description sets forth the material terms of the put rights.
It does not purport to be complete and is qualified in its entirety by reference
to the put option agreement, including the definitions therein of certain terms.
A copy of the put option agreement will be filed as an exhibit to the
registration statement of which this prospectus is a part. Capitalized terms
used but not defined in this section have the meanings set forth under
"Description of Notes."
GENERAL
The put rights will be issued pursuant to the put option agreement to be
dated , 2002 between Agere and SHARCS Trust I. The put rights are not
transferable and cannot be held or exercised by anyone other than SHARCS Trust
I. The aggregate number of put rights to be issued is set forth on the cover
page of this prospectus. Subject to certain anti-dilution adjustments, each put
right relates to one share of Class A common stock of Agere (the "Common
Stock").
On the Exercise Date (as defined below), Agere will pay to the trust for
each share of Common Stock that relates to a put right it then holds the amount,
if any, by which $ , as adjusted for any dilutive events, exceeds the
average closing or sale price of a share of the Common Stock during the
20-trading day period preceding such date.
The put option agreement is a contract between Agere and the trust for the
benefit of the holders of the SHARCS. The put rights are "cash-settled" rights,
whereby Agere will settle its obligations on the Exercise Date in cash. The put
rights will be deemed to be automatically exercised on the Exercise Date of the
put rights.
The put rights constitute unsecured senior subordinated obligations of
Agere. Payment under the put option agreement will be subordinated to the prior
payment in cash or Cash Equivalents when due of all Senior Indebtedness of
Agere.
EXERCISE DATE
The exercise date of the put rights is July 15, 2007, or such earlier date
upon which such exercise date is accelerated as discussed below (the "Exercise
Date").
SETTLEMENT VALUE
On the Exercise Date, Agere will pay the trust an aggregate amount equal to
the sum of:
- the number of Cash Delivery Shares times the amount, if any, by which (A)
the Put Price exceeds (B) the Average Sale Price; plus
- the number of Physical Delivery Shares times the amount, if any, by which
(A) the Put Price exceeds (B) the Average Closing Price.
The settlement value per put right will vary depending on the method of
settlement selected by the holders of the SHARCS. A holder of the SHARCS can
select either cash delivery or physical delivery of its proportionate share of
Common Stock held by the trust. If the SHARCS holder elects cash delivery, the
value of the Common Stock is determined based on the selling price of the Common
Stock by the trust over a trading period (net of reasonable brokerage fees),
whereas if the SHARCS holder elects physical delivery, the value of the Common
Stock is determined based on the average closing price over that same trading
period.
The Bank of New York, as calculation agent for the put rights, will
calculate the settlement value of the put rights.
"Average Closing Price" means the average of the Closing Prices of a share
of the Common Stock over the 20 Trading Days immediately prior to, but not
including, the Exercise Date; provided, however, that if there are not 20
Trading Days for the Common Stock occurring later than the 25th Business Day
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immediately prior to, but not including, such Exercise Date, the Average Closing
Price will be based on the number of Trading Days that there are in that period.
"Average Sale Price" means (a) the aggregate proceeds (net of reasonable
and customary brokers' commissions) actually received in respect of the trust's
sale of the Cash Delivery Shares, divided by (b) the total number of Cash
Delivery Shares sold by the trust.
"Cash Delivery Shares" means the number of shares of Common Stock held by
the trust as to which the holders of SHARCS have elected to receive cash
settlement of such common stock. Holders of the SHARCS may make such election on
or prior to the 25th Business Day prior to the maturity date of the trust by
notification to the trust. Holders that do not make such election will receive
the Common Stock on the maturity date of the trust. For such shares, the trust
will sell, in the principal exchange or market for the Common Stock at that
time, one-twentieth of the Cash Delivery Shares on each of the 20 Trading Days
immediately preceding the Exercise Date, provided, however, that if there are
not 20 Trading Days for the Common Stock occurring later than the 25th Business
Day immediately prior to, but not including, the Exercise Date, the trust will
sell the Common Stock over the number of Trading Days that there are in as
nearly pro rata proportions as is practicable. The brokers will be selected by
the trust to effect such sales in a manner permissible under the Investment
Company Act.
"Closing Price" of any security on any date of determination means:
(1) the closing sale price (or, if no closing price is reported, the
last reported sale price) of such security (regular way) on the New York
Stock Exchange on such date,
(2) if such security is not listed for trading on the New York Stock
Exchange on any such date, the closing sale price (or, if no closing price
is reported, the last reported sale price) of such security on the
principal United States national or regional securities exchange on which
such security is so listed or traded,
(3) if such security is not so listed or traded on any United States
national or regional securities exchange, the closing sale price (or, if no
closing price is reported, the last reported sale price) of such security
as reported by NASDAQ,
(4) if such security is not so reported, the last quoted bid price for
such security in the over-the-counter market as reported by the National
Quotation Bureau or similar organization, or
(5) if such bid price is not available, the average of the mid-point
of the last bid and ask prices of such security on such date obtained from
at least three nationally recognized independent investment banking firms
that the Administrator selects for such purpose.
"Physical Delivery Shares" means the number of shares of Common Stock held
by the trust as to which the holders of SHARCS have not elected to receive cash
settlement of such Common Stock.
"Put Price" means $ (subject to certain anti-dilution adjustments).
"Trading Day" means a day on which the Common Stock may be traded on the
national or regional securities exchange or association or over-the-counter
market that is the primary market for the trading of the Common Stock.
NOTICE
The put rights will be deemed to be automatically exercised on the Exercise
Date (or earlier if accelerated under certain circumstances discussed below).
The calculation agent will notify Agere (1) not later than the 20th Business Day
preceding the Exercise Date, of the number of Cash Delivery Shares and the
number of Physical Delivery Shares; (2) not later than noon on the Business Day
following each Trading Day that is used to calculate the Average Sale Price or
the Average Closing Price, of the number of shares sold and the aggregate net
proceeds to be received by the trust in respect of its sale of Cash Delivery
Shares on such preceding Trading Day and the Closing Price of the Common Stock
on such preceding Trading Day; and (c) not later than 6:00 p.m. (New York City
time) on the Business
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Day immediately preceding the Exercise Date, of the amount of the settlement
value of the put rights and its calculation of each component thereof.
SETTLEMENT
On the Exercise Date, Agere will pay the settlement value of the put rights
by wire transfer of immediately available funds to an account in New York City
designated at least two Business Days prior to the Exercise Date by the trust.
ACCELERATION UPON A CERTAIN CASH OFFER
In the event of a Change of Control that results from the consummation of
an offer for Common Stock in which:
(1) at least 25% of the total consideration per share of Common Stock is in
cash;
(2) the total consideration per share is less than the Put Price; and
(3) more than 50% of the voting power with respect to the election of
directors of the Voting Stock and more than 50% of the outstanding shares of
Agere common stock is acquired
(a "Cash Offer Acceleration"), the Exercise Date will be accelerated to the date
of the consummation of such offer and Agere's obligations, if any, under the put
option agreement will become due and payable on the Business Day following its
receipt of the calculation of the settlement value from the calculation agent.
Within two Business Days after such Cash Offer Acceleration, the calculation
agent will calculate the settlement value of the put rights, treating the date
of the consummation of such offer as the Exercise Date and determining the
Average Closing Price based on the 20 Trading Days ending on such accelerated
Exercise Date.
ACCELERATION UPON PAYMENT DEFAULT
Upon Acceleration as a result of a Payment Default, the Exercise Date will
be accelerated to the date of such Acceleration and Agere's obligations, if any,
under the put option agreement will become due and payable on the Business Day
following its receipt of the calculation of the settlement value from the
calculation agent. Within two Business Days after such Acceleration, the
calculation agent will calculate the settlement value of the put rights,
treating the date of the occurrence of such Payment Default as the Exercise Date
and determining the Average Closing Price based on the 20 Trading Days ending on
such accelerated Exercise Date.
MERGER, CONSOLIDATION, SALE OR OTHER DISPOSITION
If at any time Agere consolidates with or merges with or into, or conveys,
transfers, or leases all or substantially all of its assets to, any Person, then
the resulting, surviving or transferee Person will succeed to the obligations of
Agere under the put option agreement, except that, in the case of a lease of all
or substantially all of its assets, Agere will not be released from the
obligation to pay the settlement value of the put rights.
LISTING
The put rights will not be listed on any exchange.
GOVERNING LAW
The put option agreement will be governed by New York law.
EXPIRATION OF PUT RIGHTS PRIOR TO EXERCISE DATE
Upon the occurrence of:
- an Event of Default other than a Payment Default;
- an Asset Disposition Offer;
- a Change of Control; or
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- a Borrow Constraint Event (as defined below),
a holder of a SHARCS will have the right on any Business Day prior to the 25th
Business Day before the Exercise Date, 2007, to deliver such holder's SHARCS to
the trust in exchange for $500 aggregate principal amount of notes held by the
trust and shares (subject to certain anti-dilution adjustments) of
Common Stock held by the trust (or such other property as such Common Stock may
have been converted into prior to the exercise of such right). Upon any such
exchange, the put rights associated with such shares of Common Stock will expire
without payment to the SHARCS holder exchanging early (unless there has been a
Cash Offer Acceleration) and neither the trust nor any holder of a SHARCS will
be entitled to any benefits of the put option agreement with respect to such put
rights (unless there has been a Cash Offer Acceleration).
"Borrow Constraint Event" means that the amount of Common Stock available
for borrow by investors executing short sales to maintain hedged positions in
the SHARCS has become constrained, or the cost of maintaining such hedged
positions has significantly increased, in the sole judgment of Salomon Smith
Barney Inc. and J.P. Morgan Securities Inc., as determination agents of the
trust, when compared to such amount available or such cost on the date of the
offering of the SHARCS.
ANTI-DILUTION ADJUSTMENTS
The put rights are subject to adjustment if Agere:
(1) pays a stock dividend or makes a distribution, in either case, to
all holders of the Common Stock in shares of such Common Stock,
(2) subdivides or splits all of its outstanding shares of Common
Stock into a greater number of shares of Common Stock,
(3) combines all of its outstanding shares of Common Stock into a
smaller number of shares of Common Stock,
(4) pays or declares a cash dividend or distribution to all holders
of its Common Stock,
(5) issues rights or warrants that are immediately exercisable to all
holders of Common Stock entitling them for a period of not more than 45
days from the date of issuance to subscribe for or purchase shares of
Common Stock at a price per share less than the Market Price (as defined
below), or
(6) pays or declares a dividend or distribution to all holders of its
Common Stock in evidences of its indebtedness or other assets or issues to
all holders of its Common Stock rights or warrants entitling them to
subscribe for or purchase any of its securities (excluding any dividends or
distributions referred to in clause (4) above or rights or warrants
referred to in clause (5) above).
In the case of the events referred to in clauses (1), (2) or (3) above:
(i) the number of shares of Common Stock that relate to each put right
will be adjusted by multiplying such number of shares immediately prior to
such event by a fraction, the numerator of which will be the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which will be the number of shares of Common Stock
outstanding immediately prior to such event; and
(ii) the Put Price immediately prior to such event will be adjusted by
multiplying such Put Price by a fraction, the numerator of which will be
the number of shares of Common Stock outstanding immediately prior to such
event and the denominator of which will be the number of shares of Common
Stock outstanding immediately after such event.
Such adjustment will become effective at the opening of business on
the Business Day following: (x) in the case of an event referred to in
clause (1) above, the date fixed for determination of the stockholders
entitled to receive the dividend or other distribution, or (y) in the case
of an event
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referred to in clause (2) or (3) above, the date upon which the subdivision
or combination becomes effective. If any dividend or distribution of the
type referred to in clause (1) above is declared but not so paid or made,
the number of shares of Common Stock that relate to each put right will be
adjusted to the number of shares of Common Stock that would relate to each
put right which would then be in effect if such dividend or distribution
were not declared.
In the case of an event referred to in clauses (4), (5) or (6):
(i) the number of shares that relate to each put right will not be
adjusted; and
(ii) the Put Price will be adjusted by subtracting from such Put Price
an amount equal to: (A) in the case of a cash dividend, the amount of such
cash to be paid in respect of the number of shares of Common Stock subject
to each put right, or (B) in the case of any other dividend, distribution
or issuance, the Fair Market Value of the rights, warrants, evidence of its
indebtedness or other assets to be distributed or issued in respect of the
number of shares of Common Stock subject to each put right.
Such adjustment will be effective from and after the date fixed for
determination of the stockholders entitled to receive the dividend, distribution
or issuance.
"Fair Market Value" means:
(A) with respect to rights or warrants referred to in clause (5)
above, the product of (i) the Market Price multiplied by (ii) one minus a
fraction:
(x) the numerator of which will be the number of shares of Common
Stock outstanding on the record date for the issuance of such rights or
warrants plus the number of shares of Common Stock that the aggregate
offering price of the total number of shares so offered for subscription
or purchase would purchase at the Market Price; and
(y) the denominator of which will be the number of shares of Common
Stock outstanding on such record date plus the number of additional
shares of Common Stock so offered for subscription or purchase.
For purposes of this paragraph, the issuance of rights or warrants to
subscribe for or purchase securities convertible into Common Stock will be
deemed to be the issuance of rights or warrants to purchase the Common
Stock into which such securities are convertible at an aggregate offering
price equal to the aggregate offering price of such securities plus the
minimum aggregate amount (if any) payable upon conversion of such
securities into Common Stock;
(B) with respect to Reported Securities, the Closing Price per share
of such securities on the applicable record date; and
(C) with respect to evidences of indebtedness, rights, warrants or
other assets (excluding Reported Securities and rights or warrants referred
to in clause (5) above), the average fair market value of such evidences of
indebtedness, rights, warrants or other assets as determined by at least
three nationally recognized independent investment banking, accounting or
appraisal firms selected by Agere.
"Reported Securities" means securities that are (1) listed on a United
States national securities exchange, (2) reported on a United States securities
system subject to last sale reporting, (3) traded in the over-the-counter market
and reported on the National Quotation Bureau or similar organization or (4) for
which bid and ask prices are available from at least three nationally recognized
investment banking firms.
In the event of a consolidation or merger of Agere with or into another
entity, or the sale or transfer of all or substantially all of Agere's assets to
any Person, in which all the Common Stock held by the trust
154
is changed into or exchanged for cash, capital stock of the continuing entity or
another Person ("Surviving Capital Stock) or other securities or property:
(i) each put right will relate to the number of shares of such
Surviving Capital Stock received by the trust in respect of the number of
shares of Common Stock that relate to such put right in such consolidation,
merger or sale or transfer of assets;
(ii) the Put Price immediately prior to such merger, consolidation or
sale or transfer of assets will be adjusted by multiplying such Put Price
by a fraction, the numerator of which will be the number of shares of
Common Stock subject to each put right immediately prior to such
consolidation, merger or sale of transfer of assets and the denominator of
which will be the number of shares of Surviving Capital Stock that relate
to each put right immediately after such consolidation, merger or sale or
transfer of assets;
(iii) such Surviving Capital Stock will be deemed to be Common Stock
for purposes of determining the Average Sale Price or Average Closing
Price; and
(iv) the Put Price (after giving effect to the adjustments described
in clauses (i), (ii) and (iii) above) will be adjusted treating any cash,
securities or property (other than Surviving Capital Stock) as a dividend
or other distribution on the Surviving Capital Stock.
"Market Price" means, as of any date of determination, the Closing Price
per share of Common Stock on the date fixed for determination of holders of
Common Stock entitled to receive a distribution from Agere or, if such date is
not a Trading Day, the next preceding Trading Day; provided, however, that if
there is not a Trading Day for the Common Stock occurring later than the 10th
calendar day immediately prior to, but not including, such date, the Market
Price will be determined as the market value per share of the Common Stock as of
such date as determined by a nationally recognized independent investment
banking firm that the calculation agent retains for such purpose.
All adjustments to the put right will be calculated to the nearest cent or
1/1,000th of a share, as the case may be. No adjustment in the put right will be
made unless such adjustment would require an increase or decrease of at least 1%
therein; provided, however, that any adjustments which by reason of the
foregoing are not required to be made will be carried forward and taken into
account in any subsequent adjustment. In the case of the reclassification of any
shares of Common Stock into any equity securities of Agere other than the Common
Stock, such equity securities will be deemed shares of Common Stock for all
purposes. Each such adjustment to the put right will be made successively.
Agere is required under the put option agreement to notify the trust
promptly upon becoming aware that an event requiring an adjustment to the put
right is publicly announced or has occurred.
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DESCRIPTION OF COMMON STOCK
The following information reflects our amended and restated certificate of
incorporation and amended and restated by-laws.
GENERAL
Our authorized capital stock consists of 5 billion shares of Class A common
stock, par value $.01 per share, 5 billion shares of Class B common stock, par
value $.01 per share, and 250 million shares of preferred stock, par value $1.00
per share. On December 31, 2001:
- of the 5 billion authorized shares of Class A common stock, 727,429,667
shares were outstanding; and
- of the 5 billion authorized shares of Class B common stock, 908,100,000
shares were outstanding and held by Lucent.
No shares of our preferred stock were outstanding.
COMMON STOCK
Voting Rights
The holders of Class A common stock and Class B common stock generally have
identical rights, except that holders of Class A common stock are entitled to
one vote per share while holders of Class B common stock are entitled to four
votes per share for the election or removal of our directors. For all other
matters to be voted on by our stockholders, the holders of Class A common stock
and the holders of Class B common stock are entitled to one vote per share.
Holders of shares of Class A common stock and Class B common stock are not
entitled to cumulate their votes in the election of directors. Generally, all
matters to be voted on by stockholders must be approved by a majority of the
votes entitled to be cast by the holders of Class A common stock and Class B
common stock present in person or represented by proxy, voting together as a
single class, subject to any voting rights granted to holders of any preferred
stock. SHARCS Trust I has advised us that it intends to acquire shares of our
Class A common stock in private transactions or the open market and, pursuant to
trust policy, will vote the Class A common stock that it holds proportionately
in accordance with all votes cast by all other holders of all classes of our
common stock (without regard to shares of other holders for which no vote is
cast). Accordingly, the vote of the shares held by the trust will not increase
or decrease the percentage of shares voted for or against any proposal.
Amendments to our amended and restated certificate of incorporation that
would alter or change the powers, preferences or special rights of the Class A
common stock or the Class B common stock so as to affect them adversely also
must be approved by a majority of the votes entitled to be cast by the holders
of the outstanding shares of the class affected by the proposed amendment,
voting as a separate class, and holders of Class A common stock are not entitled
to vote on any alteration or change in the powers, preferences or special rights
of the Class B common stock that would not adversely affect the rights of
holders of Class A common stock. For purposes of the foregoing provisions, any
alteration or change with respect to, and any provision for, the voluntary,
mandatory or other conversion or exchange of the Class B common stock into or
for Class A common stock on a one-for-one basis shall be deemed not to adversely
affect the rights of the Class A common stock. Any amendment to our amended and
restated certificate of incorporation to increase the authorized shares of any
class of our capital stock requires the approval only of a majority of the votes
entitled to be cast by the holders of Class A common stock and Class B common
stock, voting together as a single class.
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Dividends
Holders of Class A common stock and Class B common stock will share equally
on a per share basis in any dividend declared by our board of directors, subject
to any preferential rights of any outstanding preferred stock. However,
dividends payable in shares of common stock may be paid only as follows:
- only shares of Class A common stock may be paid to holders of Class A
common stock; and
- only shares of Class B common stock may be paid to holders of Class B
common stock.
The number of shares paid as described above will be equal on a per share basis
with respect to each outstanding share of Class A common stock and Class B
common stock.
We may not reclassify, subdivide or combine shares of either class of
common stock without, at the same time, proportionally reclassifying,
subdividing or combining shares of the other class.
Conversion
Each share of Class B common stock is convertible while held by Lucent or
any of its subsidiaries, excluding us, at the option of the holder into one
share of Class A common stock. Following any distribution of Class B common
stock to stockholders of Lucent in a transaction, including any distribution in
exchange for Lucent shares or securities, intended to qualify as a tax-free
distribution under Section 355 of the Code, or any corresponding provision of
any successor statute, shares of Class B common stock will no longer be
convertible into shares of Class A common stock.
Prior to a distribution, any shares of Class B common stock transferred to
a person other than Lucent or any of its affiliates, excluding us, will
automatically be converted into shares of Class A common stock upon such
transfer. Shares of Class B common stock transferred to stockholders of Lucent
in a distribution will not be converted into shares of Class A common stock and,
following a distribution, shares of Class B common stock will be transferable as
Class B common stock, subject to applicable laws.
All shares of Class B common stock will automatically be converted into
Class A common stock if a distribution has not occurred and the number of
outstanding shares of Class B common stock owned by Lucent falls below 50% of
the aggregate number of outstanding shares of common stock. This automatic
conversion of Class B common stock into Class A common stock will prevent Lucent
from decreasing its economic interest in us to less than 50% while still
retaining control of more than 80% of our voting power. All conversions
described in this section will be effected on a share-for-share basis.
Other Rights
Unless approved by a majority of the votes entitled to be cast by the
holders of the outstanding shares of each class of common stock, voting
separately as a class, in the event of any reorganization or consolidation of us
with one or more entities or a merger of us with another entity in which shares
of common stock are converted into or exchangeable for shares of stock, other
securities, cash or other property, all holders of common stock, regardless of
class, will be entitled to receive the same kind and amount of shares of stock,
other securities, cash or other property.
On any liquidation, dissolution or winding up of us, after payment in full
of the amounts required to be paid to holders of preferred stock, if any, all
holders of common stock, regardless of class, are entitled to receive the same
amount per share with respect to any distribution of assets to holders of shares
of common stock.
No shares of either class of common stock are subject to redemption or have
preemptive rights to purchase additional shares of our common stock or other
securities.
157
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION AND BY-LAWS
BOARD OF DIRECTORS
Our certificate of incorporation provides that, except as otherwise fixed
by or pursuant to the provisions of a certificate of designations setting forth
the rights of the holders of any class or series of our preferred stock, the
number of our directors will be fixed from time to time exclusively pursuant to
a resolution adopted by a majority of the total number of directors which we
would have if there were no vacancies, but shall not be less than three. Our
directors, other than those who may be elected by the holders of our preferred
stock, will be classified, with respect to the time for which they severally
hold office, into three classes, as nearly equal in number as possible.
Directors are elected for a term of office to expire at the third succeeding
annual meeting of stockholders after their election, with each director to hold
office until such person's successor is duly elected and qualified.
Our certificate of incorporation provides that, except as otherwise
provided for or fixed by or pursuant to a certificate of designations setting
forth the rights of the holders of any class or series of our preferred stock,
newly created directorships resulting from any increase in the number of
directors and any vacancies on our board resulting from death, resignation,
disqualification, removal or other cause will be filled only by the affirmative
vote of a majority of the remaining directors then in office, even though less
than a quorum of our board, and not by the stockholders. Any director elected in
accordance with the preceding sentence will hold office for the remainder of the
full term of the class of directors in which the new directorship was created or
the vacancy occurred and until such director's successor shall have been duly
elected and qualified. No decrease in the number of directors constituting our
board of directors will shorten the term of any incumbent director. Our
certificate of incorporation provides that as long as Lucent holds a majority of
our outstanding common stock, subject to the rights of holders of any series of
preferred stock, any director may be removed, with or without cause, by the
affirmative vote of the holders of at least a majority of the voting power of
all voting stock then outstanding, voting together as a single class. Following
such time, directors may be removed only for cause by the affirmative vote of
the holders of at least a majority of the voting power of all voting stock then
outstanding, voting together as a single class.
These provisions would preclude a third party from removing incumbent
directors and simultaneously gaining control of our board of directors by
filling the vacancies created by removal with its own nominees. Under the
classified board provisions described above, it would take at least two
elections of directors for any individual or group to gain control of our board
of directors. Accordingly, these provisions could discourage a third party from
initiating a proxy contest, making a tender offer or otherwise attempting to
gain control of us.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
Our certificate of incorporation provides that, effective as of the time
Lucent no longer holds a majority of our outstanding common stock, any action
required or permitted to be taken by our stockholders must be effected at a duly
called annual or special meeting of such holders and may not be effected by any
consent in writing by such holders. Except as otherwise required by law and
subject to the rights of the holders of any of our preferred stock, special
meetings of our stockholders for any purpose or purposes may be called only by
our board of directors pursuant to a resolution stating the purpose or purposes
thereof approved by a majority of the whole board of directors or by our
chairman of the board, and any power of our stockholders to call a special
meeting is specifically denied. No business other than that stated in the notice
shall be transacted at any special meeting. These provisions may have the effect
of delaying consideration of a stockholder proposal until the next annual
meeting unless a special meeting is called by our board or the chairman of the
board.
158
ADVANCE NOTICE PROCEDURES
Our by-laws establish an advance notice procedure for stockholders to make
nominations of candidates for election as directors or to bring other business
before an annual meeting of our stockholders. Our stockholder notice procedure
provides that only persons who are nominated by, or at the direction of, our
board of directors, or by a stockholder who has given timely written notice to
our secretary prior to the meeting at which directors are to be elected, will be
eligible for election as our directors. Our stockholder notice procedure also
provides that at an annual meeting only such business may be conducted as has
been brought before the meeting by, or at the direction of, our board of
directors, or by a stockholder who has given timely written notice to our
secretary of such stockholder's intention to bring such business before such
meeting. Under our stockholder notice procedure, for notice of stockholder
nominations to be made at an annual meeting to be timely, such notice must be
received by our secretary not later than the close of business on the 45th
calendar day nor earlier than the 75th calendar day prior to the first
anniversary of the record date of stockholders entitled to vote at the preceding
year's annual meeting, except that, in the event that the record date is more
than 30 calendar days before or more than 60 calendar days after such
anniversary date, notice by the stockholder to be timely must be so delivered
not earlier than the close of business on the 75th calendar day prior to such
record date and not later than the close of business on the later of the 45th
calendar day prior to such record date or the 10th calendar day following the
day on which public announcement of such record date is first made by us.
Notwithstanding the foregoing, in the event that the number of directors to
be elected to our board of directors is increased and there is no public
announcement by us naming all of the nominees for director or specifying the
size of our increased board of directors at least 55 calendar days prior to the
first anniversary of the preceding year's annual meeting, a stockholder's notice
also will be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to our secretary
not later than the close of business on the 10th calendar day following the day
on which such public announcement is first made by us. Under our stockholder
notice procedure, for notice of a stockholder nomination to be made at a special
meeting at which directors are to be elected to be timely, such notice must be
received by us not earlier than the close of business on the 75th calendar day
prior to such special meeting and not later than the close of business on the
later of the 45th calendar day prior to such special meeting or the 10th
calendar day following the day on which public announcement is first made of the
date of the special meeting and of the nominees proposed by our board of
directors to be elected at such meeting.
In addition, under our stockholder notice procedure, a stockholder's notice
to us proposing to nominate a person for election as a director or relating to
the conduct of business other than the nomination of directors must contain the
information required by our by-laws. If the chairman of a meeting determines
that an individual was not nominated, or other business was not brought before
the meeting, in accordance with our stockholder notice procedure, such
individual will not be eligible for election as a director, or such business
will not be conducted at such meeting, as the case may be.
AMENDMENT
Our amended and restated certificate of incorporation provides that the
affirmative vote of the holders of at least 80% of our voting stock then
outstanding, voting together as a single class, is required to amend provisions
of the certificate relating to the number, election and term of our directors;
the nomination of director candidates and the proposal of business by
stockholders; the filling of vacancies; and the removal of directors. Our
certificate further provides that the related by-laws described above, including
the stockholder notice procedure, may be amended only by our board of directors
or by the affirmative vote of the holders of at least 80% of the voting power of
the outstanding shares of voting stock, voting together as a single class.
159
RIGHTS AGREEMENT
Our board of directors has adopted a rights agreement, with The Bank of New
York as rights agent. The Rights Agreement has been filed as an exhibit to the
registration statement of which this prospectus is a part.
ANTI-TAKEOVER EFFECTS
The rights may have anti-takeover effects. If the rights become
exercisable, the rights will cause substantial dilution to a person or group
that attempts to acquire or merge with us in most cases. Accordingly, the
existence of the rights may deter a potential acquiror from making a takeover
proposal or tender offer. The rights should not interfere with any merger or
other business combination approved by our board of directors since we may
redeem the rights as described below and since a transaction approved by our
board of directors would not cause the rights to become exercisable.
EXERCISABILITY OF RIGHTS
Under the rights agreement, one Class A right attaches to each share of our
Class A common stock outstanding, one Class B right attaches to each share of
our Class B common stock outstanding and, when exercisable, entitles the
registered holder to purchase from us one one-thousandth of a share of Series A
Junior Participating Preferred Stock, par value $1.00 per share, at an initial
purchase price of $100, subject to the customary antidilution adjustments. For a
description of the terms of our Series A Junior Participating Preferred Stock,
see "-- Series A Junior Participating Preferred Stock." For the purposes of the
rights agreement, an acquiring person is a person or group besides our company
or Lucent, prior to the distribution, who is the beneficial owner of:
- 10% or more of the Class A common stock then outstanding;
- 10% or more of the Class B common stock then outstanding; or
- our common stock which has the right to cast 10% or more of the votes
that may be cast by all outstanding shares for the election of directors
of our company.
The rights will not become exercisable until the earliest of:
- 10 days following a public announcement that a person or group has become
an acquiring person;
- 10 days after our board of directors first determines that a person or
group has become an acquiring person; or
- such date, if any, as may be designated by our board of directors
following the commencement of, or the announcement of an intention to
commence, a tender offer or exchange offer that would result in a person
or group becoming an acquiring person.
Additionally, at any time a person or a group has become an acquiring
person and we have registered the securities subject to the rights under the
Securities Act, the flip-in or flip-over features of the rights or, at the
discretion of our board of directors, the exchange features of the rights, may
be exercised by any holder, except for such person or group.
"FLIP IN" FEATURE
In the event a person or group becomes an acquiring person, each holder of
a right, except for such person or group, will have the right to acquire, upon
exercise of the right, instead of one one-thousandth of a share of our Series A
Preferred Stock, shares of our Class A or Class B common stock, as the case may
be, having a value equal to twice the exercise price of the right. For example,
assuming that the initial purchase price of $100 is in effect on the date that
the flip-in feature of the right is exercised, any holder of a Class A right,
except for the acquiring person, can exercise his or her Class A right by paying
us $100 in order to receive from us shares of Class A common stock having a
value equal to $200.
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"EXCHANGE" FEATURE
At any time after a person or group becomes an acquiring person, but is the
beneficial owner of less than 50%, of our common shares then outstanding, our
board of directors may, at its option, exchange all or some of the rights,
except for those held by such person or group, for our common stock at an
exchange ratio of one share of the relevant class of common stock per right,
subject to adjustment, and cash instead of fractional shares, if any. Use of
this exchange feature means that eligible rights holders would not have to pay a
purchase price before receiving shares of our common stock.
"FLIP OVER" FEATURE
In the event we are acquired in a merger or other business combination
transaction or 50% or more of our assets or our earning power and our
subsidiaries, taken as a whole, are sold, each holder of a right, except for the
acquiring person, will have the right to receive, upon exercise of the right,
the number of shares of the acquiring company's capital common stock having a
value equal to twice the exercise price of the right.
REDEMPTION OF RIGHTS
At any time before a person becomes an acquiring person our board of
directors may redeem all of the outstanding rights at a redemption price of
$0.01 per right, subject to adjustment. The right to exercise the rights, as
described under "-- Exercisability of Rights," will terminate upon action of the
board of directors ordering redemption, and at such time, the holders of the
rights will have the right to receive only the redemption price for each right
held.
AMENDMENT OF RIGHTS
At any time before a person or group becomes an acquiring person, the terms
of the existing rights agreement may be amended by our board of directors
without the consent of the holders of the rights.
However, at any time after a person or group becomes an acquiring person,
our board of directors may not adopt amendments to the existing rights agreement
without the consent of the holders of the rights that adversely affect the
interests of holders of the rights or that alter the conditions for amending the
rights agreement. Furthermore, once the rights are no longer redeemable, our
board of directors may not adopt any amendment that would cause the rights again
to be redeemable.
TERMINATION OF RIGHTS
If not previously exercised, the rights will expire 10 years from the date
that the rights agreement commences, unless we earlier redeem or exchange the
rights or extend the final expiration date.
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
In connection with the creation of the rights, as described above, our
board of directors has authorized the issuance of shares of Preferred Stock as
Series A Junior Participating Stock.
We have designed the dividend, liquidation, voting and redemption features
of our Series A Junior Participating Preferred Stock so that the value of one
one-thousandth of a share of our Series A Junior Participating Preferred Stock
approximates the value of one share of our common stock. Shares of our Series A
Junior Participating Preferred Stock may only be purchased after the rights have
become exercisable, and each share of the Series A Junior Participating
Preferred Stock:
- is nonredeemable and junior to all other series of preferred stock,
unless otherwise provided in the terms of those series of preferred stock;
- will have a preferential dividend in an amount equal to the greater of
$1.00 or 1,000 times any dividend declared on each share of common stock;
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- in the event of liquidation, will entitle its holder to receive a
preferred liquidation payment equal to 1,000 times the payment made per
share of common stock;
- will have 1,000 votes, voting together with the common stock and any
other capital stock with general voting rights; and
- in the event of any merger, consolidation or other transaction in which
shares of common stock are converted or exchanged, will be entitled to
receive 1,000 times the amount and type of consideration received per
share of common stock.
The rights of our Series A Junior Participating Preferred Stock as to
dividends, liquidation and voting, and in the event of mergers and
consolidations, are protected by customary antidilution provisions.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Section 145 of the General Corporation Law of the State of Delaware
provides that a corporation may indemnify directors and officers as well as
other employees and individuals against expenses including attorneys' fees,
judgments, fines and amounts paid in settlement in connection with various
actions, suits or proceedings, whether civil, criminal, administrative or
investigative other than an action by or in the right of the corporation, known
as a derivative action, if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if they had
no reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses including attorneys' fees incurred in connection with the
defense or settlement of such actions, and the statute requires court approval
before there can be any indemnification where the person seeking indemnification
has been found liable to the corporation. The statute provides that it is not
exclusive of other indemnification that may be granted by a corporation's
by-laws, disinterested director vote, stockholder vote, agreement or otherwise.
Our certificate of incorporation provides that each person who was or is
made a party or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person, or a person of whom such
person is the legal representative, is or was a director or officer of us or,
while a director or officer of us, is or was serving at our request as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is the alleged
action of such person in an official capacity as a director, officer, employee
or agent or in any other capacity while serving as a director, officer, employee
or agent, will be indemnified and held harmless by us to the fullest extent
authorized by the General Corporation Law of the State of Delaware, as the same
exists or may hereafter be amended against all expense, liability and loss
reasonably incurred or suffered by such person in connection therewith. Our
certificate of incorporation also provides that we will pay the expenses
incurred in defending any such proceeding in advance of its final disposition,
subject to the provisions of the General Corporation Law of the State of
Delaware. Such rights are not exclusive of any other right which any person may
have or thereafter acquire under any statute, provision of the certificate,
by-law, agreement, vote of stockholders or disinterested directors or otherwise.
No repeal or modification of such provision will in any way diminish or
adversely affect the rights of any director, officer, employee or agent of us
thereunder in respect of any occurrence or matter arising prior to any such
repeal or modification. Our amended and restated certificate of incorporation
also specifically authorizes us to maintain insurance and to grant similar
indemnification rights to our employees or agents.
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The General Corporation Law of the State of Delaware permits a corporation
to provide in its certificate of incorporation that a director of the
corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability for:
- any breach of the director's duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- payments of unlawful dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation provides that none of our directors will
be personally liable to us or our stockholders for monetary damages for breach
of fiduciary duty as a director, except, if required by the General Corporation
Law of the State of Delaware as amended from time to time, for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the General Corporation Law of the State of
Delaware, which concerns unlawful payments of dividends, stock purchases
or redemptions; or
- for any transaction from which the director derived an improper personal
benefit.
Neither the amendment nor repeal of such provision will eliminate or reduce
the effect of such provision in respect of any matter occurring, or any cause of
action, suit or claim that, but for such provision, would accrue or arise prior
to such amendment or repeal.
The separation and distribution agreement provides for indemnification by
us of Lucent and its directors, officers and employees for some liabilities,
including liabilities under the Securities Act.
DELAWARE BUSINESS COMBINATION STATUTE
Our amended and restated certificate of incorporation contains a provision
by which we expressly elect not to be governed by Section 203 of the General
Corporation Law of the State of Delaware, which is described below. Accordingly,
we are not currently subject to Section 203. However, stockholders can approve
an amendment to our certificate of incorporation to elect to be subject to
Section 203 of the General Corporation Law of the State of Delaware. Our
certificate of incorporation provides that prior to the distribution, Lucent may
act by written consent in lieu of a meeting to approve such an amendment. Thus,
Lucent, as a controlling stockholder, may cause such an election prior to the
distribution without a meeting of stockholders.
Section 203 of the General Corporation Law of the State of Delaware
provides that, subject to exceptions set forth therein, an interested
stockholder of a Delaware corporation shall not engage in any business
combination, including mergers or consolidations or acquisitions of additional
shares of the corporation, with the corporation for a three-year period
following the time that such stockholder became an interested stockholder
unless:
- prior to such time, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an "interested stockholder," the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, other than statutorily excluded shares; or
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- on or subsequent to such time, the business combination is approved by
the board of directors of the corporation and authorized at an annual or
special meeting of stockholders by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
Except as otherwise set forth in Section 203, an interested stockholder is
defined to include:
- any person that is the owner of 15% or more of the outstanding voting
stock of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within three years immediately prior
to the date of determination; and
- the affiliates and associates of any such person.
Our election to not be subject to Section 203 may have positive or negative
consequences, depending on the circumstances. If we were subject to Section 203,
Section 203 might have made it more difficult for a person who would be an
interested stockholder to effect various business combinations with us for a
three-year period. Section 203 also might have had the effect of preventing
changes in our management. It is possible that Section 203, if we had elected to
be subject to it, could have made it more difficult to accomplish transactions
which our stockholders may otherwise deem to be in their best interests. The
provisions of Section 203, were it applicable, might have caused persons
interested in acquiring us to negotiate in advance with our board of directors.
In addition, because we did not elect to be subject to Section 203, Lucent, as a
controlling stockholder, may find it easier prior to the distribution to sell
its controlling interest to a third party because Section 203 would not apply to
such third party. The restrictions on business combinations set forth in Section
203 would not have been applicable to Lucent so long as Lucent continued to hold
15% or more of our common stock.
TRANSFER AGENT AND REGISTRAR
The Bank of New York is the transfer agent and registrar for our common
stock.
NEW YORK STOCK EXCHANGE LISTING
Our Class A common stock is listed on the New York Stock Exchange under the
symbol "AGR.A."
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of material U.S. federal income tax
considerations applicable to initial holders of the notes and put rights who
purchase their notes and put rights at the initial offering price. This summary
is based upon provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), treasury regulations, rulings and decisions currently in effect, all of
which are subject to change (possibly with retroactive effect). The discussion
does not purport to deal with all aspects of federal taxation that may be
relevant to particular investors in light of their personal investment
circumstances (for example, to persons whose functional currency is not the U.S.
dollar, or to persons holding notes or put rights as part of a conversion
transaction or as part of a hedge or hedging transaction), nor does it discuss
federal income tax considerations applicable to certain types of investors
subject to special treatment under the federal income tax laws (for example,
banks, regulated investment companies, dealers in securities, traders in
securities electing to mark to market, insurance companies, tax-exempt
organizations and financial institutions). In addition, the discussion does not
consider the effect of any alternative minimum taxes or any foreign, state,
local, gift, estate or other tax laws that may be applicable to a particular
investor. The discussion assumes that investors will hold the notes and put
rights as capital assets within the meaning of Section 1221 of the Code. A
prospective purchaser is strongly urged to consult such prospective purchaser's
tax advisor regarding the particular tax consequences to such prospective
purchaser of purchasing, holding and disposing of the notes and put rights.
For purposes of this discussion, a U.S. holder means a beneficial owner of
the notes and put rights that is (i) a citizen or resident of the U.S. for U.S.
federal income tax purposes, (ii) a corporation (or other entity treated as a
corporation for U.S. federal income tax purposes) created or organized in or
under the laws of the U.S. or any political subdivision thereof, (iii) an estate
the income of which is subject to U.S. federal income tax regardless of its
source or (iv) a trust if (A) a court within the U.S. is able to exercise
primary supervision over the administration of the trust and (B) one or more
U.S. persons have the authority to control all substantial decisions of the
trust. A non-U.S. holder means a beneficial owner of the notes and put rights
that is not a U.S. holder. The U.S. federal income tax treatment of a holder
that holds a note or put rights through a partnership (including any entity
treated as a partnership for U.S. federal income tax purposes) will generally
depend on the status of the holder and the activities of the partnership. A
holder who holds a note or put rights through a partnership should consult his,
her or its tax advisor regarding the particular federal income tax consequences
applicable to such holder.
CONSEQUENCES TO U.S. HOLDERS
TAX TREATMENT OF NOTES
Interest and Original Issue Discount
The stated interest payable on the notes generally will be taxable to a
U.S. holder of notes as ordinary income at the time that it is paid or accrued
in accordance with the U.S. holder's regular method of accounting for U.S.
federal income tax purposes.
The notes will be issued with original issue discount for U.S. federal
income tax purposes. In general, original discount on the notes, defined as the
excess of "stated redemption price at maturity" over "issue price," must be
included in a U.S. holder's gross taxable income in advance of the receipt of
cash representing that income, and such amounts will increase periodically over
the life of the notes.
A debt instrument's stated redemption price at maturity is the sum of all
payments provided by the instrument other than payments of "qualified stated
interest," which is defined as stated interest that is unconditionally payable
at least annually at a single fixed rate. The semiannual interest payments on
the notes will be "qualified stated interest."
The notes and put rights will constitute an "investment unit" for U.S.
Federal income tax purposes. The "issue price" of the notes is determined by
allocating the "issue price" of the investment unit between the notes and put
rights based on their relative fair market value. The issue price of the
investment unit is the first price at which a substantial amount of the
investment units are sold for money. Our allocation of
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the issue price of the investment unit to the notes and put rights is binding on
each U.S. holder unless the holder discloses that the holder's allocation
differs from our allocation on a statement attached to the U.S. holder's timely
filed federal income tax return for the year in which the holder acquires the
investment unit. This allocation, however, is not binding on the Internal
Revenue Service, and therefore, there can be no assurance that the Internal
Revenue Service will respect such allocation.
Regardless of a holder's accounting method, a U.S. holder of a note will be
required to include in ordinary income the sum of the "daily portions" of
original issue discount on the note for all days during the taxable year that
the U.S. holder owns the note. The daily portions of original issue discount for
a note are determined by allocating to each day in any accrual period a ratable
portion of the original issue discount allocable to that period. Accrual periods
may be any length and may vary in length over the term of a note, so long as no
accrual period is longer than one year and each scheduled payment of principal
or interest occurs on the first or last day of an accrual period. The amount of
original issue discount on a note allocable to each accrual period is determined
by (i) multiplying the "adjusted issue price" of the note at the beginning of
the accrual period by a fraction, the numerator of which is the yield to
maturity of the note and the denominator of which is the number of accrual
periods in a year and (ii) subtracting from that product the amount of the
semiannual current interest allocable to that accrual period. The "adjusted
issue price" of a note at the beginning of any accrual period will generally be
the sum of its issue price and the amount of original issue discount allocable
to all prior accrual periods.
Sale or Redemption
A U.S. holder generally will recognize taxable gain or loss on the sale or
redemption of a note equal to the difference between the amount realized from
such sale or redemption and the holder's adjusted tax basis for such note. Such
gain or loss generally will be capital gain or loss and will be long-term
capital gain or loss if the holding period for such note is more than one year.
A U.S. holder's adjusted tax basis in a note is generally equal to the amount
paid for the note, increased by accrued original issue discount previously
included in the holder's gross income with respect to the note, and decreased by
payments on the note other than payments of qualified stated interest.
TAX TREATMENT OF PUT RIGHTS
The put right premium allocated to a put right is a nondeductible capital
expenditure. The tax treatment of the sale, disposition, expiration or exercise
of a put right will vary depending on whether the put right is held as part of a
straddle for U.S. federal income tax purposes. A straddle exists for U.S.
federal income tax purposes if a taxpayer holds offsetting positions with
respect to personal property. We expect the put rights to be held as a position
in a straddle for U.S. federal income tax purposes as a result of the trust's
ownership of our common stock.
Put Right Not Held as a Position in a Straddle
If a put right is not held as a position in a straddle, any gain or loss
recognized on the sale or disposition of the put right will be capital gain or
loss and will be long-term capital gain or loss if the holding period for such
put right is more than one year. If the put right expires without having been
exercised, the expiration is treated as a sale or exchange of the put right on
the expiration date, and the holder will recognize capital loss in an amount
equal to the put right premium. Any cash received by a holder in respect of the
put right on its maturity date will give rise to capital gain or loss equal to
the difference (if any) between the amount of such cash and the amount of the
put right premium.
Put Right Held as a Position in a Straddle
If the put right is held as a position in a straddle, any gain or loss
recognized on the sale or disposition of the put right will be short-term
capital gain or loss. If the put right expires without having been exercised,
the expiration is treated as a sale or exchange of the put right, and the U.S.
holder will realize short-term capital loss in an amount equal to the put right
premium. Any cash received by a U.S.
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holder in respect of the put right on its maturity date will give rise to
short-term capital gain or loss equal to the difference (if any) between the
amount of such cash and the amount of the put right premium. All or a portion of
any loss realized upon the exercise or lapse of a put right will be deferred
until the U.S. holder that held the put right disposes of our common stock that
constitutes an offsetting position in the holder's straddle.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Under federal income tax law, a holder of notes or put rights may, under
certain circumstances, be subject to "backup withholding" unless such holder (i)
is a corporation, or is otherwise exempt and, when required, demonstrates this
fact or (ii) provides a correct taxpayer identification number, certifies as to
no loss of exemption from backup withholding and otherwise complies with
applicable requirements of the backup withholding rules. Backup withholding is
not an additional tax; any amounts withheld under the backup withholding rules
will be allowed as a credit against a holder's U.S. federal income tax liability
provided the required information is furnished to the Internal Revenue Service.
CONSEQUENCES TO NON-U.S. HOLDERS
INTEREST AND ORIGINAL ISSUE DISCOUNT ON THE NOTES
Generally, payments to a non-U.S. holder of principal, interest and
original issue discount on the notes will be exempt from U.S. withholding taxes
if (i) certain certification requirements are met and (ii) the non-U.S. holder
does not actually or constructively own 10% or more of the total voting power of
all our voting stock and is not a controlled foreign corporation that is related
to us. Otherwise, payments on the notes may be subject to a gross withholding
tax of 30% (or such lower rate as may be available to a non-U.S. holder under an
applicable treaty), unless such income is effectively connected with a U.S.
trade or business and appropriate documentation is filed, as described below.
SALE OR RETIREMENT OF THE NOTES OR PUT RIGHTS
Upon a sale or cash redemption of a note or put right, a non-U.S. holder
will not be subject to U.S. federal income tax on any gain unless (i) the gain
is effectively connected with a trade or business that the non-U.S. holder
conducts in the U.S., (ii) the non-U.S. holder is an individual who is present
in the U.S. for at least 183 days during the taxable year in which such holder
disposes of the note or put right, and certain other conditions are satisfied,
or (iii) with respect to a note, a portion of the gain represents accrued
interest or original issue discount, in which case the rules for interest would
apply. An individual non-U.S. holder described in clause (ii) above will be
subject to tax at a rate of 30% (or such reduced rate specified by an applicable
income tax treaty) on the gain derived from the sale.
U.S. TRADE OR BUSINESS
If a non-U.S. holder holds a note or put right in connection with a trade
or business that such holder is conducting in the U.S., any interest on the note
and any gain from disposing of the note or put right generally will be subject
to income tax as if such holder were a U.S. holder. In addition, a non-U.S.
holder that is a corporation may be subject to the "branch profits tax" on its
earnings that are connected with its U.S. trade or business. This tax is 30%,
but may be reduced or eliminated by an applicable income tax treaty.
ESTATE TAX
The estate of a non-U.S. holder that is an individual will not be subject
to U.S. federal estate tax on the notes owned by such holder at the time of
death provided that (i) such non-U.S. holder does not own 10% or more of the
total combined voting power of our voting stock and (ii) payments on the note
were not effectively connected to a trade or business such holder was conducting
in the U.S. A non-U.S. holder's estate may be subject to U.S. federal estate tax
on the put right owned by such holder at the time of death, subject to an
applicable estate tax treaty.
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INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, backup withholding and information reporting will not apply to
payments made to a non-U.S. holder on the notes or put rights if the holder has
provided the required certification that it is a non-U.S. holder and neither we
nor our paying agent has actual knowledge that the holder is a U.S. person. Some
shareholders, including all corporations, are exempt from these rules. Backup
withholding is not an additional tax; any amounts withheld under backup
withholding will be allowed as a credit against a holder's U.S. federal income
tax liability provided the required information is furnished to the Internal
Revenue Service.
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PLAN OF DISTRIBUTION
Pursuant to an underwriting agreement among SHARCS Trust I, J.P. Morgan
Securities Inc. and Salomon Smith Barney Inc., as representatives of the
underwriters, and us, SHARCS Trust I has agreed, subject to the terms and
conditions set forth therein, to purchase from us $ aggregate principal
amount of notes and put rights.
The underwriters of the SHARCS offering will not receive any compensation
for the sale of the notes and put rights. The underwriters of the SHARCS
offering will receive an underwriting discount in the sale of the SHARCS by the
trust to the public. Because proceeds of the sale of the SHARCS will be used by
the trust in part to purchase the notes and put rights, we have agreed to
reimburse the trust for the underwriting discount. In addition, we estimate that
expenses of this offering of the notes and put rights to the trust and of the
offering of the SHARCS to the public by the trust, exclusive of the underwriting
discount, will be $ and will be payable by us.
We have agreed to indemnify the underwriters of the SHARCS offering against
certain liabilities, including liabilities under the Securities Act of 1933, or
to contribute to payments the underwriters may be required to make in respect of
any of those liabilities.
The underwriters of the SHARCS offering have performed certain investment
banking and advisory services for us from time to time for which they have
received customary fees and expenses. The underwriters may, from time to time,
engage in transactions with and perform services for us in the ordinary course
of their business. Affiliates of the representatives are lenders under the
short-term credit facility and will receive their pro rata repayments of
principal thereunder from the proceeds of this offering. Specifically, we intend
to use approximately 50% of the net proceeds to repay debt under our credit
facility and, together, affiliates of the representatives committed 56.6% of the
total commitment under our credit facility. Accordingly, affiliates of the
representatives will receive, as repayments under our credit facility,
approximately $ million of the net proceeds. In addition, the underwriters
believe the fees and commissions payable in respect of participation in our
credit facility are customary for borrowers with a credit profile similar to
ours, for a financing of the size undertaken by us and for borrowers in our
industry. Finally, affiliates of the representatives have served as agents under
the credit facility and received customary fees and expenses in that capacity.
LEGAL MATTERS
The validity of the notes and put rights offered hereby will be passed upon
for us by Cravath, Swaine & Moore, New York, New York.
EXPERTS
The consolidated and combined financial statements of Agere Systems Inc.
and its subsidiaries as of September 30, 2001 and 2000 and for each of the three
years in the period ended September 30, 2001 have been included in this
prospectus in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
The prospectus constitutes a part of the registration statement on Form
S-1, together with all amendments, supplements, schedules and exhibits to the
registration statement, referred to as the registration statement, which we have
filed with the Securities and Exchange Commission with respect to the notes and
put rights offered in this prospectus. This prospectus does not contain all of
the information in the registration statement. For further information about us
and our securities, see the registration statement and its exhibits. This
prospectus contains a description of the material terms and features of some
material contracts, reports or exhibits to the registration statement required
to be disclosed. However, as the descriptions are summaries of the contracts,
reports or exhibits, we urge you to refer to the copy of
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each material contract, report and exhibit attached to the registration
statement. Copies of the registration statement and the exhibits to the
registration statement, as well as the periodic reports, proxy statements and
other information we file with the Securities and Exchange Commission, may be
examined without charge in the Public Reference Section of the Securities and
Exchange Commission, 450 Fifth Street, N.W. Room 1024, Washington, DC 20549 or
on the Internet at http://www.sec.gov. You can get information about the
operation of the Public Reference Section of the Securities and Exchange
Commission at 1-800-SEC-0330. Copies of all or a portion of the registration
statement can be obtained from the Public Reference Room of the Securities and
Exchange Commission upon payment of prescribed fees. In addition, the Securities
and Exchange Commission maintains a Web site which provides online access to
periodic reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission at the address http://www.sec.gov.
We also file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You can also
request copies of these documents, for a copying fee, by writing to the
Securities and Exchange Commission. We furnish to our stockholders annual
reports containing audited financial statements for each year.
170
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS FOR THE YEAR
ENDED SEPTEMBER 30, 2001:
Report of Independent Accountants......................... F-2
Consolidated and Combined Statements of Operations for the
years ended September 30, 2001, 2000 and 1999.......... F-3
Consolidated and Combined Balance Sheets as of September
30, 2001 and 2000...................................... F-4
Consolidated and Combined Statements of Changes in
Stockholders' Equity/Invested Equity and Total
Comprehensive Income (Loss) for the years ended
September 30, 2001, 2000 and 1999...................... F-5
Consolidated and Combined Statements of Cash Flows for the
years ended September 30, 2001, 2000 and 1999.......... F-6
Notes to Consolidated and Combined Financial Statements... F-7
CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS FOR
THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001 (UNAUDITED):
Condensed Consolidated and Combined Statements of
Operations for the three months ended December 31, 2001
and 2000............................................... F-43
Condensed Consolidated Balance Sheets as of December 31,
2001 and September 30, 2001............................ F-44
Condensed Consolidated and Combined Statements of Changes
in Stockholders' Equity/Invested Equity and Total
Comprehensive Income (Loss) for the three months ended
December 31, 2001 and 2000............................. F-45
Condensed Consolidated and Combined Statements of Cash
Flows for the three months ended December 31, 2001 and
2000................................................... F-46
Notes to Condensed Consolidated and Combined Financial
Statements............................................. F-47
FINANCIAL STATEMENT SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts for the
years ended September 30, 2001, 2000 and 1999.......... F-63
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Agere Systems Inc.:
In our opinion, the consolidated and combined financial statements listed
in the accompanying index present fairly, in all material respects, the
financial position of Agere Systems Inc. and its subsidiaries at September 30,
2001 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 2001 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated and
combined financial statements. These financial statements and the financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Prior to its separation from Lucent Technologies Inc. ("Lucent") on
February 1, 2001 the Company was comprised of businesses which were integrated
with the businesses of Lucent; consequently, as indicated in Note 1, the
financial statement amounts prior to this date have been derived from the
consolidated financial statements and accounting records of Lucent, and reflect
significant assumptions and allocations. Moreover, as indicated in Note 1, the
Company relied on Lucent and its other businesses for administrative,
management, research and other services. Accordingly, these financial statements
do not necessarily reflect the financial position, results of operations, and
cash flows of the Company had it been a stand-alone company.
As discussed in Note 4 to the consolidated and combined financial
statements, effective October 1, 2000, the Company changed its accounting method
for derivative instruments and hedging activity. As discussed in Note 2,
effective October 1, 1999, the Company changed its accounting method for
computer software developed or obtained for internal use. As discussed in Note
16, effective October 1, 1998, the Company changed its method for calculating
annual pension and postretirement benefit costs.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
October 23, 2001, except for the fifth
and sixth paragraphs of Note 22 as
to which the date is December 7, 2001
and Note 17 as to which the date is
February 22, 2002.
F-2
AGERE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED SEPTEMBER 30,
-------------------------
2001 2000 1999
------- ------ ------
REVENUE (includes $606, $1,002 and $955 for the years ended
September 30, 2001, 2000 and 1999, respectively, from
Lucent Technologies Inc.)................................. $ 4,080 $4,708 $3,714
COSTS....................................................... 3,084 2,555 1,949
------- ------ ------
GROSS PROFIT................................................ 996 2,153 1,765
------- ------ ------
OPERATING EXPENSES
Selling, general and administrative....................... 597 535 573
Research and development.................................. 951 827 683
Purchased in-process research and development............. -- 446 17
Amortization of goodwill and other acquired intangibles... 415 189 13
Restructuring and separation.............................. 662 -- --
Impairment of goodwill and other acquired intangibles..... 2,762 -- --
------- ------ ------
TOTAL OPERATING EXPENSES............................... 5,387 1,997 1,286
------- ------ ------
OPERATING INCOME (LOSS)..................................... (4,391) 156 479
Other income -- net......................................... 35 33 36
Interest expense............................................ 151 58 38
------- ------ ------
Income (loss) before provision for income taxes............. (4,507) 131 477
Provision for income taxes.................................. 105 207 158
------- ------ ------
Income (loss) before cumulative effect of accounting
change.................................................... (4,612) (76) 319
Cumulative effect of accounting change (net of provision
(benefit) for income taxes of $(2) and $21 for the years
ended September 30, 2001 and 1999, respectively).......... (4) -- 32
------- ------ ------
NET INCOME (LOSS)........................................... $(4,616) $ (76) $ 351
======= ====== ======
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) before cumulative effect of accounting
change.................................................... $ (3.46) $ (.07) $ .31
Cumulative effect of accounting change...................... -- -- .03
------- ------ ------
Net income (loss)........................................... $ (3.46) $ (.07) $ .34
======= ====== ======
Weighted average shares outstanding -- basic and diluted (in
millions)................................................. 1,334 1,035 1,035
======= ====== ======
See Notes to Consolidated and Combined Financial Statements.
F-3
AGERE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30,
--------------------
2001 2000
------- ------
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 3,152 $ --
Trade receivables, less allowances of $33 and $17 at
September 30, 2001 and 2000, respectively.............. 347 699
Receivables due from Lucent Technologies Inc.............. 42 122
Inventories............................................... 304 380
Deferred income taxes -- net.............................. -- 69
Prepaid expense........................................... 61 68
Other current assets...................................... 154 66
------- ------
TOTAL CURRENT ASSETS................................... 4,060 1,404
Property, plant and equipment -- net........................ 1,851 1,883
Goodwill and other acquired intangibles -- net of
accumulated amortization of $93 and $210 at September 30,
2001 and 2000, respectively............................... 343 3,491
Deferred income taxes -- net................................ 4 55
Other assets................................................ 304 234
------- ------
TOTAL ASSETS........................................... $ 6,562 $7,067
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY/INVESTED EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 514 $ 267
Payroll and benefit-related liabilities................... 138 193
Short-term debt........................................... 2,516 14
Income taxes payable...................................... 336 289
Restructuring reserve..................................... 171 --
Other current liabilities................................. 229 213
------- ------
TOTAL CURRENT LIABILITIES.............................. 3,904 976
Post-employment benefit liabilities......................... 92 95
Long-term debt.............................................. 33 46
Deferred income taxes -- net................................ -- 103
Other liabilities........................................... 72 66
------- ------
TOTAL LIABILITIES...................................... 4,101 1,286
------- ------
Commitments and contingencies
STOCKHOLDERS' EQUITY/INVESTED EQUITY
Preferred stock, par value $1.00 per share, 250,000,000
shares authorized and no shares issued and outstanding.... -- --
Class A common stock, par value $0.01 per share,
5,000,000,000 shares authorized and 727,000,107 shares
issued and outstanding at September 30, 2001 and no shares
issued and outstanding at September 30, 2000.............. 7 --
Class B common stock, par value $0.01 per share,
5,000,000,000 shares authorized and 908,100,000 shares
issued and outstanding at September 30, 2001 and
1,035,100,000 shares issued and outstanding at September
30, 2000.................................................. 9 10
Additional paid-in capital.................................. 6,996 --
Owner's net investment...................................... -- 5,823
Accumulated deficit......................................... (4,542) --
Accumulated other comprehensive loss........................ (9) (52)
------- ------
TOTAL STOCKHOLDERS' EQUITY/INVESTED EQUITY............. 2,461 5,781
------- ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY/INVESTED
EQUITY................................................ $ 6,562 $7,067
======= ======
See Notes to Consolidated and Combined Financial Statements.
F-4
AGERE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY/INVESTED EQUITY
AND TOTAL COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN MILLIONS)
YEAR ENDED SEPTEMBER 30,
---------------------------
2001 2000 1999
------- ------- -------
CLASS A COMMON STOCK
Beginning balance........................................... $ -- $ -- $ --
Issuance of Class A common stock............................ 6 -- --
Conversion of Class B to Class A common stock............... 1 -- --
------- ------- -------
Ending balance.............................................. 7 -- --
------- ------- -------
CLASS B COMMON STOCK
Beginning balance........................................... 10 10 10
Conversion of Class B to Class A common stock............... (1) -- --
------- ------- -------
Ending balance.............................................. 9 10 10
------- ------- -------
OWNER'S NET INVESTMENT
Beginning balance........................................... 5,823 1,969 1,649
Net loss prior to February 1, 2001.......................... (74) -- --
Net income (loss)........................................... -- (76) 351
Transfers to Lucent Technologies Inc. ...................... (1,405) (4,492) (3,777)
Transfers from Lucent Technologies Inc. .................... 1,501 8,422 3,746
Transfer to additional paid in capital...................... (5,845) -- --
------- ------- -------
Ending balance.............................................. -- 5,823 1,969
------- ------- -------
ADDITIONAL PAID IN CAPITAL
Beginning balance........................................... -- -- --
Transfer from owner's net investment........................ 5,845 -- --
Transfers to Lucent Technologies Inc. ...................... (1,604) -- --
Transfers from Lucent Technologies Inc. .................... 1,813 -- --
Debt transferred from Lucent Technologies Inc. ............. (2,500) -- --
Issuance of common stock -- net of expense.................. 3,442 -- --
------- ------- -------
Ending balance.............................................. 6,996 -- --
------- ------- -------
ACCUMULATED DEFICIT
Beginning balance........................................... -- -- --
Net loss from February 1, 2001.............................. (4,542) -- --
------- ------- -------
Ending balance.............................................. (4,542) -- --
------- ------- -------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Beginning balance........................................... (52) (17) (16)
Foreign currency translations............................... 26 (35) 1
Unrealized loss on cash flow hedges -- net of taxes of $0... (13) -- --
Unrealized holding gains (losses) -- net of taxes of $0 in
2001 and $1 in 1999....................................... 30 -- (2)
------- ------- -------
Ending balance.............................................. (9) (52) (17)
------- ------- -------
TOTAL STOCKHOLDERS' EQUITY/INVESTED EQUITY................ $ 2,461 $ 5,781 $ 1,962
======= ======= =======
TOTAL COMPREHENSIVE INCOME (LOSS)
Net income (loss)........................................... $(4,616) $ (76) $ 351
Other comprehensive income (loss)........................... 43 (35) (1)
------- ------- -------
TOTAL COMPREHENSIVE INCOME (LOSS)......................... $(4,573) $ (111) $ 350
======= ======= =======
See Notes to Consolidated and Combined Financial Statements.
F-5
AGERE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED SEPTEMBER 30,
--------------------------
2001 2000 1999
-------- ------ ------
OPERATING ACTIVITIES
Net income (loss)........................................... $(4,616) $ (76) $ 351
Adjustments to reconcile net income (loss) to net cash
provided by operating activities, net of effects of
acquisitions of businesses:
Cumulative effect of accounting change.................... 4 -- (32)
Restructuring and separation expense -- net of cash
payments............................................... 492 -- --
Provision for inventory write-downs....................... 409 29 11
Depreciation and amortization............................. 871 666 398
Provision for uncollectibles.............................. 16 6 3
Benefit (provision) for deferred income taxes............. 42 (2) (14)
Purchased in-process research and development............. -- 446 17
Impairment of investments................................. 47 -- --
Impairment of goodwill and other acquired intangibles..... 2,762 -- --
Equity (earnings) loss from investments................... (42) (4) 20
Gain on sales of investments.............................. -- (18) (32)
Amortization of debt issuance costs....................... 29 -- --
Decrease (increase) in receivables........................ 413 (237) 25
Increase in inventories................................... (333) (95) (37)
Increase in accounts payable.............................. 243 37 70
(Decrease) increase in payroll and benefit liabilities.... (51) (66) 39
Changes in other operating assets and liabilities......... (30) 77 (132)
Other adjustments for non-cash items -- net............... 13 (1) 3
------- ----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 269 762 690
------- ----- -----
INVESTING ACTIVITIES
Capital expenditures........................................ (723) (672) (656)
Proceeds from the sale or disposal of property, plant and
equipment................................................. 2 -- --
Purchases of investments.................................... -- (65) (48)
Sales of investments........................................ -- 18 36
Acquisitions of businesses -- net of cash acquired.......... (1) (104) (92)
Other investing activities -- net........................... (1) (6) 7
------- ----- -----
NET CASH USED IN INVESTING ACTIVITIES....................... (723) (829) (753)
------- ----- -----
FINANCING ACTIVITIES
Transfers from Lucent Technologies Inc. .................... 171 85 68
Principal payments of long-term debt........................ (12) (18) (5)
Proceeds from issuance of stock -- net of expenses.......... 3,448 -- --
------- ----- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 3,607 67 63
------- ----- -----
Effect of exchange rate changes on cash..................... (1) -- --
Net increase in cash and cash equivalents................... 3,152 -- --
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. -- -- --
------- ----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 3,152 $ -- $ --
======= ===== =====
See Notes to Consolidated and Combined Financial Statements.
F-6
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
On July 20, 2000, Lucent Technologies Inc. ("Lucent") announced its
intention to spin off its integrated circuits and optoelectronic components
businesses (collectively, the "Company's Businesses") that now comprise Agere
Systems Inc. (the "Company" or "Agere"). At that time, Lucent announced it
intended to distribute all shares of the Company's common stock it then owned to
its stockholders in a tax free distribution (the "Distribution") by the end of
Lucent's then current fiscal year, September 30, 2001, following the initial
public offering ("IPO") of the Company's Class A common stock, which was
completed in April 2001.
On August 1, 2000, the Company was incorporated in Delaware as a wholly
owned subsidiary of Lucent. On this date, 1,000 shares of the Company's common
stock, par value $0.01 per share, were issued, authorized and outstanding.
Effective February 1, 2001, Lucent transferred to the Company substantially all
of the assets and liabilities of the Company's Businesses (the "Separation")
except for short-term debt and related fees which were transferred at the IPO
closing date, and pension and postretirement plan assets and liabilities which
will be transferred at a later date.
On March 14, 2001, the Company amended its certificate of incorporation to
authorize shares of Class A and Class B common stock and changed and
reclassified its 1,000 outstanding shares of common stock into 1,035,100,000
shares of Class B common stock (the "Recapitalization"). The ownership rights of
Class A and Class B common stockholders are the same except that each share of
Class B common stock has four votes for the election and removal of directors
while each share of Class A common stock has one vote for such matters. All
Company share and per share data has been retroactively adjusted to reflect the
Recapitalization as if it had occurred at the beginning of the earliest period
presented. On April 2, 2001, the Company issued 600,000,000 shares of Class A
common stock in the IPO for $6 per share less underwriting discounts and
commissions of $.23 per share. On April 4, 2001, Lucent converted 90,000,000
shares of Class B common stock into Class A common stock and exchanged those
shares for outstanding Lucent debt with Morgan Stanley pursuant to the
overallotment option granted in connection with the IPO. After completion of the
IPO, inclusive of the overallotment option, Lucent owned approximately 58% of
the aggregate number of outstanding shares of Class A and B common stock. Also,
on April 2, 2001, the Company assumed from Lucent $2,500 of short-term debt. On
May 1, 2001, Lucent elected to convert 37,000,000 of its shares in the Company
from Class B common stock to Class A common stock.
Agere is currently a majority-owned subsidiary of Lucent. On August 16,
2001, Lucent announced that it had entered into amendments with the lenders
under its credit facilities that impose a number of conditions that Lucent must
satisfy in order to spin off Agere. Lucent has stated that it remains committed
to completing the process of separating Agere from Lucent, and that it intends
to move forward with the distribution of the Agere stock it holds in a tax-free
distribution. Because Lucent must meet a number of conditions before it can
complete the spin off and because Lucent alone will make the decision about
whether to complete the spin off, even if the conditions were met, we can not
assure you that Lucent will complete the spin off by a particular date or at
all.
The Company adopted a rights agreement prior to the completion of the IPO.
The delivery of a share of the Company's common stock currently constitutes the
delivery of a preferred stock purchase right associated with such share. These
rights may have anti-takeover effects in that the existence of the rights may
deter a potential acquiror from making a takeover proposal or a tender offer.
F-7
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
BASIS OF PRESENTATION
The consolidated and combined financial statements include amounts prior to
February 1, 2001 that have been derived from the consolidated financial
statements and accounting records of Lucent using the historical results of
operations and historical basis of the assets and liabilities of the Company's
Businesses. Management believes the assumptions underlying the consolidated and
combined financial statements are reasonable. However, the consolidated and
combined financial statements included herein may not necessarily reflect the
Company's results of operations, financial position and cash flows in the future
or what its results of operations, financial position and cash flows would have
been had the Company been a stand-alone company during the periods presented.
Because a direct ownership relationship did not exist among all the various
units comprising the Company, Lucent's net investment in the Company is shown in
lieu of stockholders' equity in the combined financial statements prior to the
Separation. The Company began accumulating retained earnings on February 1,
2001, the date on which Lucent began transferring to the Company the assets and
liabilities of the Company's Businesses. The formation of the Company and the
transfers of assets and liabilities from Lucent have been accounted for as a
reorganization of entities under common control in a manner similar to a pooling
of interests.
The consolidated and combined financial statements include allocations of
certain Lucent expenses, assets and liabilities, including the items described
below.
General Corporate Expenses
Lucent allocated general corporate expenses based on revenue prior to
February 1, 2001. These allocations were reflected in the selling, general and
administrative, costs and research and development line items in the
consolidated and combined statements of operations. The general corporate
expense allocations were primarily for cash management, legal, accounting, tax,
insurance, public relations, advertising, human resources and data services.
These allocations amounted to $60, $178 and $194 for fiscal 2001, 2000 and 1999,
respectively. Management believes the costs of these services charged to the
Company are a reasonable representation of the costs that would have been
incurred if the Company had performed these functions as a stand-alone company.
Since the Separation, the Company has performed these functions using its own
resources or through purchased services. The Company and Lucent entered into
agreements for Lucent to provide certain general corporate services on a
transition basis. See Note 19 "Transactions with Lucent."
Basic Research
Prior to February 1, 2001, research and development expenses included an
allocation from Lucent to fund a portion of the costs of basic research
conducted by Lucent's Bell Laboratories. This allocation was based on the number
of individuals conducting basic research who were transferred from Lucent's Bell
Laboratories to the Company as part of the Separation. This allocation amounted
to $23, $66 and $64 for fiscal 2001, 2000 and 1999, respectively. Management
believes the costs of this research charged to the Company are a reasonable
representation of the costs that would have been incurred if the Company had
performed this research as a stand-alone company. The expenses for basic
research currently conducted by the Company are included with all other research
and development expenses in the consolidated statements of operations.
Interest Expense
Prior to the Separation, Lucent provided financing to the Company and
incurred debt at the parent level. The combined balance sheets, prior to the
IPO, do not include debt other than capitalized lease obligations. As a result
of the Separation, there was no interest expense allocated to the Company from
Lucent after January 31, 2001. The consolidated and combined statements of
operations, however, include
F-8
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
an allocation of interest expense totaling $32, $52 and $38, for fiscal 2001,
2000 and 1999, respectively. This allocation was based on the ratio of the
Company's net assets, excluding debt, to Lucent's total net assets, excluding
debt. The Company's interest expense as a stand-alone company is higher than
that reflected in the combined statements of operations, primarily due to the
$2,500 credit facility assumed from Lucent following the IPO. Interest expense
for all periods presented also includes interest expense related to the
Company's capitalized lease obligation.
Pension and Postretirement Costs
The documents relating to the Separation provide that, until the
Distribution, the Company's United States ("U.S.") employees will be
participants in Lucent's pension plans. At the Distribution, the Company will
become responsible for pension benefits for the active U.S. employees of the
Company, as well as U.S. employees who retire or terminate after the IPO. Lucent
will transfer to the Company the pension and postretirement assets and
liabilities related to these employees at the Distribution. Obligations related
to retired and terminated vested U.S. employees prior to the IPO will remain the
responsibility of Lucent. Lucent has managed its U.S. pension and postretirement
benefit plans on a consolidated basis and separate Company information is not
readily available. The consolidated and combined statements of operations
include, however, an allocation of the costs (benefits) of the U.S. employee
pension and postretirement plans. These costs (benefits) were allocated based on
the Company's U.S. active employee population for each of the years presented.
In relation to the Lucent plans, the Company recorded pension (benefit) expense
of $(2), $27 and $38, for fiscal 2001, 2000 and 1999, respectively, and
postretirement expense of $10, $15 and $17, for fiscal 2001, 2000 and 1999,
respectively. The Company is responsible for the pension and postretirement
benefits of its non-U.S. employees. The liabilities of the various
country-specific plans for these employees are reflected in the consolidated and
combined financial statements and were not material for the periods presented.
There are estimated prepaid pension assets of $122 and postretirement
liabilities of $86 as of September 30, 2001 associated with various existing
Lucent pension and other employee benefit plans related to the Company's
employees. These assets and liabilities will not be reflected in the Company's
financial statements until the plan assets and liabilities are transferred. The
amounts transferred to the Company for prepaid pension assets and postretirement
liabilities could be materially different than these amounts at the
Distribution.
Income Taxes
The Company's income taxes have been calculated on a separate tax return
basis prior to the IPO. This reflects Lucent's tax strategies, and is not
necessarily reflective of the tax strategies that the Company would have
followed or will follow as a stand-alone company.
Cash and Receivables
Prior to the Separation, cash deposits from the Company's Businesses were
transferred to Lucent on a regular basis and were netted against the owner's net
investment account as Lucent used a centralized approach to cash management and
the financing of its operations. As a result, none of Lucent's cash, cash
equivalents or debt was allocated to the Company in the combined financial
statements. The receivable from Lucent reflected in the combined balance sheet
included both accounts receivable related to non-U.S. sales to Lucent as well as
an amount of receivables for sales to Lucent in the U.S. that were historically
settled through owner's net investment. In order to better reflect the historic
trends in working capital resulting from the sales to Lucent in the U.S. and
provide a more meaningful basis of comparison in future periods, the Company had
carved out of the owner's net investment account at September 30, 2000 an amount
of receivables related to the sales to Lucent in the U.S. calculated using the
Company's days sales outstanding for third party receivables. At September 30,
2000, such amounts included in receivables due from Lucent were $90. Changes in
invested equity represent any funding required from
F-9
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
Lucent for working capital, acquisition or capital expenditure requirements
after giving effect to the Company's transfers of cash to or from Lucent.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION AND CONSOLIDATION
Prior to the Separation, the combined financial statements included certain
majority owned subsidiaries and assets and liabilities of the Company's
Businesses not owned by the Company that were transferred to the Company from
Lucent on February 1, 2001. Following the Separation, the Company's consolidated
financial statements include the accounts of majority owned subsidiaries which
it controls and assets and liabilities of the Company. Investments in which the
Company exercises significant influence, but which it does not control are
accounted for under the equity method of accounting. Investments in which the
Company does not exercise significant influence are recorded at cost. All
material inter-company transactions and balances between and among the Company's
Businesses, subsidiaries and investees accounted for under the equity method of
accounting have been eliminated.
USE OF ESTIMATES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and revenue and expenses during the period
reported. Estimates and assumptions are reviewed periodically and the effects of
revisions are reflected in the period that they are determined to be necessary.
These estimates include an allocation of costs by Lucent, assessing the
collectability of accounts receivable, the use and recoverability of inventory,
the realization of deferred tax assets, employee benefits, restructuring
reserves, useful lives for depreciation and amortization periods of tangible and
intangible assets, and long-lived asset impairments among others. The markets
for the Company's products are characterized by intense competition, rapid
technological development, evolving standards, short product life cycles and
price erosion, all of which could impact the future realizability of the
Company's assets. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
Balance sheet accounts of the Company's foreign operations for which the
local currency is the functional currency are translated into U.S. dollars at
period-end exchange rates, while income, expenses and cash flows are translated
at average exchange rates during the period. Translation gains or losses related
to net assets of such operations are shown as a component of accumulated other
comprehensive income (loss) in stockholders' equity/invested equity. Gains and
losses resulting from foreign currency transactions, which are transactions
denominated in a currency other than the entity's functional currency, are
included in the consolidated and combined statements of operations.
REVENUE RECOGNITION
Revenue is derived from sales of products in the integrated circuits and
optoelectronic segments and from intellectual property licensing. Revenue is
recognized when contractual obligations have been satisfied, title and risk of
loss have been transferred to the customer and collection of the resulting
receivable is reasonably assured. The Company recognizes revenue from product
sales to distributors when all obligations have been satisfied. The Company's
distributor arrangements generally provide for limited product returns and price
protection. A provision for estimated sales returns and other allowances is
recognized as a reduction of revenue at the time of revenue recognition based
upon historical experience. The Company has not historically entered into
long-term contracts or service agreements. Revenue from
F-10
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
intellectual property licensing revenue is recognized over the license term.
Estimated sales allowances are provided as a reduction of revenue at the time of
revenue recognition.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. The Company
adopted SAB 101 in the fourth quarter of fiscal 2001. The impact of adoption was
not material to its consolidated financial position or results of operations.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
ninety days or less to be cash equivalents. Cash is reflected net of outstanding
checks.
INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization is determined using a combination of
either accelerated or straight-line methods over the estimated useful lives of
the various asset classes.
Estimated useful lives range from three to five years for machinery,
electronic and other equipment, and up to forty years for buildings. Major
renewals and improvements are capitalized and minor replacements, maintenance,
and repairs are charged to current operations as incurred. Upon retirement or
disposal of assets, the cost and related accumulated depreciation are removed
from the consolidated and combined balance sheets and any gain or loss is
reflected in the consolidated and combined statements of operations.
INTERNAL USE SOFTWARE
The Company adopted Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" on October 1,
1999. Certain costs of computer software developed or obtained for internal use,
that were previously expensed as incurred, are capitalized and amortized on a
straight-line basis over three years. Costs for general and administrative,
overhead, maintenance and training, as well as the cost of software that does
not add functionality to the existing system, are expensed as incurred.
GOODWILL AND OTHER ACQUIRED INTANGIBLES
Goodwill and other acquired intangibles are amortized on a straight-line
basis over the periods benefited, principally in the range of four to nine
years. Goodwill is the excess of the purchase price over the fair value of
identifiable net assets acquired in business combinations accounted for as
purchases.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, including goodwill and other acquired intangibles, are
reviewed for impairment whenever events such as a significant industry downturn,
product discontinuance, plant closures, product
F-11
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
dispositions, technological obsolescence or other changes in circumstances
indicate that the carrying amount may not be recoverable. When such events
occur, the Company compares the carrying amount of the assets to undiscounted
expected future cash flows. If this comparison indicates that there is an
impairment, the amount of the impairment is typically calculated using
discounted expected future cash flows.
FINANCIAL INSTRUMENTS
The Company uses various financial instruments, including foreign currency
exchange forward contracts, to manage and reduce risk to the Company by
generating cash flows which offset the cash flows of certain transactions in
foreign currencies or underlying financial instruments in relation to their
amount and timing. The Company's derivative financial instruments are for
purposes other than trading. The Company's non-derivative financial instruments
include letters of credit.
INVESTMENTS
Investments in marketable securities that are available for sale are
recorded at fair value. Unrealized gains and losses related to these securities
are excluded from earnings and are included as a separate component of
comprehensive income (loss) until such gains or losses are realized.
Minority equity investments in non-publicly traded companies are generally
carried at cost. The Company monitors these investments for impairment and makes
appropriate reductions in carrying values when necessary.
INCOME TAXES
Historically, certain of the Company's operations have been included in
Lucent's consolidated income tax returns. Income tax expense in the Company's
consolidated and combined statements of operations has been calculated on a
separate tax return basis prior to the IPO. The asset and liability approach is
used to recognize deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the carrying amounts and the
tax bases of assets and liabilities. A valuation allowance is established, as
needed, to reduce net deferred tax assets to the amount for which recovery is
probable.
EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per common share for all periods prior to
the IPO is calculated by dividing net income (loss) by 1,035,000,000, which is
the number of shares issued to Lucent on August 1, 2000 as retroactively
adjusted for the Recapitalization. For periods following the IPO, basic earnings
(loss) per common share is calculated by dividing net income (loss) by the
weighted average number of common shares outstanding during the period and
diluted earnings (loss) per common share is calculated by dividing net income
(loss) by the sum of the weighted average number of common shares outstanding,
plus all additional common shares that would have been outstanding if
potentially dilutive securities or common stock equivalents had been issued.
Because of the Company's net loss, the effect of dilutive securities for fiscal
2001 was not considered.
OTHER COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) includes, in addition to net income
(loss), unrealized gains and losses excluded from the consolidated and combined
statements of operations that are recorded directly into a separate section of
stockholders' equity/invested equity on the consolidated and combined balance
sheets. These unrealized gains and losses are referred to as other comprehensive
income (loss). The Company's accumulated other comprehensive income (loss) shown
on the consolidated and combined balance sheets consists of foreign currency
translation adjustments which are not adjusted for income taxes
F-12
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
because they relate to indefinite investments in non-U.S. subsidiaries,
unrealized investment holding gains and losses which also are not adjusted for
income taxes and unrealized losses on cash flow hedges which also are not
adjusted for income taxes.
3. ACQUISITIONS
The following table presents information about certain acquisitions in
fiscal 2000 and 1999. No significant acquisitions occurred during fiscal 2001.
All the acquisitions were accounted for under the purchase method of accounting,
and the acquired technology valuation included existing technology, purchased
in-process research and development ("IPRD") and other intangibles. IPRD charges
were recorded in the quarter in which the transaction was completed. The
consolidated and combined financial statements include the results of operations
and the estimated fair value of assets and liabilities assumed from the
respective dates of acquisitions. The acquired entities are 100% owned.
ACQUISITION PURCHASE EXISTING OTHER PURCHASED
DATE PRICE GOODWILL TECHNOLOGY INTANGIBLES IPRD
----------- -------- -------- ---------- ----------- ---------
2000
Herrmann(1).......... 6/00 $ 432 $ 384 $ 52 $ 16 $ 34
Ortel(2)............. 4/00 2,998 2,554 171 24 307
Agere, Inc.(3)....... 4/00 377 303 n/a n/a 94
Assets of VTC(4)..... 3/00 104 46 31 7 11
1999
Enable(5)............ 3/99 $ 51 $ 34 $ 8 n/a $ 9
Sybarus(6)........... 2/99 41 33 n/a n/a 8
AMORTIZATION PERIOD (IN YEARS)
-----------------------------------
EXISTING OTHER
GOODWILL TECHNOLOGY INTANGIBLES
-------- ---------- -----------
2000
Herrmann(1).......... 8 7 7
Ortel(2)............. 9 7.5 4-9
Agere, Inc.(3)....... 7 n/a n/a
Assets of VTC(4)..... 7 5 7
1999
Enable(5)............ 6 7 n/a
Sybarus(6)........... 4 n/a n/a
---------------
(1) Herrmann Technology, Inc. was a developer and manufacturer of passive
optical filters that could be used in conjunction with active optoelectronic
components. The purchase price was paid in Lucent common stock and options.
(2) Ortel Corporation was a developer and manufacturer of optoelectronic
components used in fiber optic systems for cable television and data
communications networks. The purchase price was paid in Lucent common stock
and options.
(3) Agere, Inc. was a developer of network processor integrated circuits. The
purchase price was paid in Lucent common stock and options.
(4) VTC Inc. was a supplier of integrated circuits to computer hard disk drive
manufacturers. The purchase price was paid in cash.
(5) Enable Semiconductor, Inc. was a developer of integrated circuits for local
area network equipment. The purchase price was paid in cash.
(6) Sybarus Technologies, ULC was a developer of integrated circuits for
communications networks. The purchase price was paid in cash.
In connection with the acquisition of Herrmann, certain former stockholders
of Herrmann were entitled to receive up to a total of 677,019 additional shares
of Lucent common stock. Of that amount, 150,000 shares are based on retention,
which is recorded as compensation expense over the two-year period following the
acquisition and 527,019 shares are based on the achievement of specified
milestones which require the production of two products at improved
manufacturing yields. As of September 30, 2001, 200,000 of the shares related to
the achievement of milestones have been issued, resulting in additional
goodwill. The remaining shares based on milestones, if distributed, will also be
treated as additional goodwill.
F-13
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
In connection with the acquisition of substantially all the assets of VTC,
stockholders of VTC are entitled to receive additional cash consideration of up
to $50 contingent on the delivery of product at specified manufacturing yields
and the transfer and qualification of process technology to the Company's
manufacturing facilities. As of September 30, 2001, $30 of the additional cash
consideration has been paid, resulting in additional goodwill. Any future cash
consideration, if paid, will also be recorded as additional goodwill.
Included in the purchase price for the above acquisitions was IPRD, which
was a non-cash charge to earnings for technology that had not reached
technological feasibility and had no future alternative use. The remaining
purchase price was allocated to tangible assets and intangible assets, including
goodwill and other acquired intangibles, less liabilities assumed.
The value allocated to IPRD was determined utilizing an income approach
that included an excess earnings analysis reflecting the appropriate cost of
capital for the investment. Estimates of future cash flows related to the IPRD
were made for each project based on Lucent's estimates of revenue, operating
expenses and income taxes from the project. These estimates were consistent with
historical pricing, gross margins and expense levels for similar products.
Revenue was estimated based on relevant market size and growth factors,
expected industry trends, individual product sales cycles and the estimated life
of each product's underlying technology. Estimated operating expenses, income
taxes, and charges for the use of contributory assets for each project were
deducted from estimated revenue to determine estimated after-tax cash flows for
each project. Estimated operating expenses include costs, selling, general and
administrative expenses and research and development expenses. The research and
development expenses include estimated costs to maintain the products once they
have been introduced into the market and generate revenue and costs to complete
the IPRD.
The discount rates utilized to discount the projected cash flows for each
project were based on consideration of Lucent's weighted average cost of
capital, as well as other factors including the useful life of each project, the
anticipated profitability of each project, the uncertainty of technology
advances that were known at the time and the stage of completion of each
project.
Management is primarily responsible for estimating the fair value of the
assets and liabilities acquired, and has conducted due diligence in determining
the fair value. Management has made estimates and assumptions that affect the
reported amounts of assets, liabilities and expenses resulting from such
acquisitions. Actual results could differ from those amounts.
During fiscal 2001, it was determined that there was an other than
temporary impairment to some of the goodwill and other acquired intangibles
related to the acquisitions of Ortel, Herrmann Technology, Agere, Inc. and
Enable Semiconductor. See Note 7 "Impairment of Goodwill and Other Acquired
Intangibles."
The following unaudited pro forma statement of income data for fiscal 2000
and 1999 give effect to the acquisition of Ortel as if it occurred on October 1,
1999 and 1998, respectively.
YEAR ENDED
SEPTEMBER 30,
---------------
2000 1999
------ ------
Revenue..................................................... $4,760 $3,783
Income (loss) before cumulative effect of accounting
change.................................................... $ 48 $ 7
Pro forma adjustments to income (loss) before cumulative effect of
accounting change include the impact of a full year of amortization of goodwill
and other acquired intangibles but exclude the effect of IPRD of $307 for fiscal
2000. This is presented for information purposes only and is not necessarily
F-14
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
indicative of the results of future operations or results that would have been
achieved had this acquisition taken place at the beginning of each fiscal year
presented.
4. ACCOUNTING CHANGES
Effective October 1, 2000, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), and its corresponding amendments under
SFAS No. 138. SFAS 133 requires the Company to measure all derivatives,
including certain derivatives embedded in other contracts, at fair value and to
recognize them in the balance sheet as an asset or liability, depending on the
Company's rights or obligations under the applicable derivative contract. For
derivatives designated as fair value hedges, the changes in the fair value of
both the derivative instrument and the hedged item are recorded in earnings. For
derivatives designated as cash flow hedges, the effective portions of changes in
fair value of the derivative are reported in other comprehensive income and are
subsequently reclassified into earnings when the hedged item affects earnings.
Changes in fair value of derivative instruments not designated as hedging
instruments and ineffective portions of hedges are recognized in earnings in the
current period. The adoption of SFAS 133 as of October 1, 2000, resulted in a
cumulative after-tax increase in net loss of $4 (net of a tax benefit of $2).
The increase in net loss is primarily due to derivatives not designated as
hedging instruments. For fiscal 2001, the change in fair market value of
derivative instruments was recorded in other income-net and was not material.
5. RECENT PRONOUNCEMENTS
SFAS 142
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 provides guidance
on the financial accounting and reporting for acquired goodwill and other
intangible assets. Under SFAS 142, goodwill and indefinite lived intangible
assets will no longer be amortized. Intangible assets with finite lives will
continue to be amortized over their useful lives, which will no longer be
limited to a maximum life of forty years. The criteria for recognizing an
intangible asset have also been revised. As a result, the Company will need to
re-assess the classification and useful lives of its previously acquired
goodwill and other intangible assets. SFAS 142 also requires that goodwill and
indefinite lived intangibles be tested for impairment at least annually. The
goodwill impairment test is a two step process that requires goodwill to be
allocated to reporting units. In the first step, the fair value of the reporting
unit is compared to the carrying value of the reporting unit. If the fair value
of the reporting unit is less than the carrying value of the reporting unit, a
goodwill impairment may exist, and the second step of the test is performed. In
the second step, the implied fair value of the goodwill is compared to the
carrying value of the goodwill and an impairment loss will be recognized to the
extent that the carrying value of the goodwill exceeds the implied fair value of
the goodwill. SFAS 142 is effective for Agere in fiscal year 2003, although
earlier application is permitted. The Company plans to adopt SFAS 142 effective
October 1, 2002 and is currently evaluating the potential effects of
implementing this standard on its financial condition and results of operations.
SFAS 143
Also in July 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143
addresses financial accounting and reporting for legal obligations associated
with the retirement of tangible long-lived assets and their associated
retirement costs. In accordance with SFAS 143, retirement obligations will be
recognized at fair value in the period they are incurred. When the liability is
initially recorded, the cost is capitalized by increasing the asset's carrying
value, which is subsequently depreciated over its useful life. SFAS 143 is
effective for Agere in fiscal year 2003, with earlier application encouraged.
The Company is currently evaluating the potential
F-15
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
effects, if any, on its financial condition and results of operations of
adopting SFAS 143, as well as the timing of its adoption.
SFAS 144
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 primarily addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and also affects certain aspects of
accounting for discontinued operations. SFAS 144 is effective for Agere in
fiscal year 2003, with earlier application encouraged. The Company is currently
evaluating the potential effects, if any, on its financial condition and results
of operations of adopting SFAS 144, as well as the timing of its adoption.
6. RESTRUCTURING AND SEPARATION EXPENSES AND INVENTORY PROVISION
RESTRUCTURING EXPENSES
In fiscal 2001, the Company announced a series of restructuring initiatives
to align the Company with market conditions. These initiatives were focused on
improving gross profit, reducing expenses and streamlining operations. The
Company recorded a restructuring charge of $563 for the year ended September 30,
2001 classified within restructuring and separation expenses. These
restructuring initiatives include a worldwide workforce reduction,
rationalization of manufacturing capacity, and other activities.
Worldwide Workforce Reduction
The restructuring initiatives announced in fiscal 2001 will result in a
workforce reduction of approximately 6,000 employees across various business
functions, operating units and geographic regions, and includes management and
occupational employees. The Company recorded a restructuring charge of $177 for
fiscal 2001 relating to approximately 5,500 employees, of which approximately
4,300 employees have been taken off-roll as of September 30, 2001. Of the $177
charge, $28 represents termination benefits to certain U.S. management employees
that will be funded through Lucent's pension assets. Severance costs and other
exit costs noted above were determined in accordance with Emerging Issues Task
Force No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity."
Rationalization of Manufacturing Capacity and Other Charges
The Company recorded a restructuring charge of $386 in fiscal 2001 relating
to the rationalization of under-utilized manufacturing facilities and other
restructuring-related activities. The Company has discontinued manufacturing
operations at its chip fabrication plant in Madrid, Spain. The Company is also
rationalizing under-utilized manufacturing capacity at our facilities in
Orlando, Florida, and in Allentown, Breinigsville and Reading, Pennsylvania. In
addition, the Company is consolidating several satellite-manufacturing sites as
well as leased corporate offices. The restructuring charge for fiscal 2001
includes $37 related to facility closings primarily for lease terminations,
non-cancelable leases and related costs. It also includes an asset impairment
charge of $287. All affected assets were classified as held for disposal, in
accordance with the guidance on impairment of assets in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," and depreciation was suspended. The $287 impairment charge
represents the write-down to fair value, less costs to sell, of property, plant
and equipment that was disposed of or removed from operations. The remaining
restructuring charge of $62 for fiscal 2001 relates primarily to contract
terminations.
F-16
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
A summary of restructuring costs is outlined as follows:
YEAR ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
----------------------------- ------------------
TOTAL NON CASH CASH RESTRUCTURING
CHARGES CHARGES PAYMENTS RESERVE
------- -------- -------- ------------------
Workforce reduction.................... $177 $ (28) $(57) $ 92
Rationalization of manufacturing
capacity and other charges........... 386 (293) (14) 79
---- ----- ---- ----
Total................................ $563 $(321) $(71) $171
==== ===== ==== ====
The Company anticipates that the majority of the remaining cash
expenditures relating to workforce reductions will be paid by the end of the
calendar year and the majority of the contract terminations will be paid by the
end of the second fiscal quarter of 2002. Amounts related to non-cancelable
lease obligations due to the consolidation of facilities will be paid over the
respective lease terms through fiscal 2005. The Company expects to substantially
complete implementation of the announced restructuring program by December 31,
2001.
SEPARATION EXPENSES
The Company incurred costs, fees and expenses relating to the Separation.
These costs, fees and expenses were primarily related to legal separation
matters, designing and constructing the Company's computer infrastructure,
information and data storage systems, marketing expenses relating to building a
company brand identity and implementing treasury, real estate, pension and
records retention management services. In fiscal 2001, the Company incurred $99
of separation expenses included in restructuring and separation expenses.
INVENTORY PROVISION
The Company recorded inventory provisions, classified within cost of sales,
of $409 in fiscal 2001 compared to inventory provisions of $29 in fiscal 2000.
The fiscal 2001 amount, which includes purchase order cancellation charges,
reflects a significant decrease in forecasted revenue and was calculated in
accordance with the Company's inventory valuation policy, which is based on a
review of forecasted demand compared with existing inventory levels.
7. IMPAIRMENT OF GOODWILL AND OTHER ACQUIRED INTANGIBLES
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances occur that indicate the carrying amount of the assets
may not be fully recoverable. During fiscal 2001, the Company evaluated goodwill
and other acquired intangibles associated with recent acquisitions for
impairment. The assessment was performed in accordance with SFAS 121 as a result
of weakening economic conditions and decreased current and expected future
demand for products in the markets in which the Company operates. Fair value of
the acquired entities was determined using a discounted cash flow model based on
growth rates and margins reflective of lower demand for the Company's products,
as well as anticipated future demand. Discount rates used were based upon the
Company's weighted average cost of capital adjusted for business risks. These
amounts are based on management's best estimate of future results.
As a result of the assessment, the Company determined that an other than
temporary impairment existed related to the Company's acquisitions of Ortel,
Herrmann Technology, Agere, Inc. and Enable Semiconductor. The Company recorded
a charge to reduce goodwill and other acquired intangibles of
F-17
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
$2,762 during fiscal 2001, consisting of $2,220, $275, $240 and $27 related to
Ortel, Herrmann Technology, Agere, Inc. and Enable Semiconductor, respectively.
8. SUPPLEMENTARY FINANCIAL INFORMATION
INCOME STATEMENT INFORMATION
YEAR ENDED SEPTEMBER 30,
--------------------------
2001 2000 1999
------ ------ ------
INCLUDED IN COSTS AND OPERATING EXPENSES
Depreciation and amortization of property, plant and
equipment................................................. $445 $477 $385
==== ==== ====
OTHER INCOME -- NET
Interest income............................................. $ 69 $ -- $ --
Loss on sales of fixed assets............................... (5) -- --
Gain (loss) on foreign currency transactions................ (14) 6 9
Gain on sales of investments................................ -- 18 32
Impairment of investments................................... (47) -- --
Equity earnings (loss) from investments..................... 42 4 (20)
Other income (loss)......................................... (10) 5 15
---- ---- ----
Other income -- net......................................... $ 35 $ 33 $ 36
==== ==== ====
BALANCE SHEET INFORMATION
SEPTEMBER 30,
------------------
2001 2000
------- -------
INVENTORIES
Completed goods............................................. $ 87 $ 119
Work in process and raw materials........................... 217 261
------- -------
Inventories................................................. $ 304 $ 380
======= =======
PROPERTY, PLANT AND EQUIPMENT -- NET
Land and improvements....................................... $ 44 $ 54
Buildings and improvements.................................. 660 640
Machinery, electronic and other equipment................... 3,566 3,746
------- -------
Total property, plant and equipment............... 4,270 4,440
Less: accumulated depreciation and amortization............. (2,419) (2,557)
------- -------
Property, plant and equipment -- net........................ $ 1,851 $ 1,883
======= =======
CASH FLOW INFORMATION
Prior to the Separation, interest and income taxes were paid by Lucent on
behalf of the Company and do not necessarily reflect what the Company would have
paid had it been a stand-alone company. Following the Separation, the Company
began to pay interest and income tax expenses. Interest for fiscal 2001 is
primarily related to the $2,500 credit facility assumed from Lucent in
connection with the IPO and the Company's capitalized lease obligation. The
interest and income tax payments were $84 and $52, respectively, for fiscal
2001.
F-18
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
Transfers from Lucent include the following non-cash transactions: (1) a
$2,500 decrease to additional paid in capital to reflect the transfer of the
credit facility; Agere did not receive any of the proceeds, (2) a $3,807
increase in owner's net investment, to reflect the Ortel, Herrmann and Agere,
Inc. acquisitions that were made with Lucent common stock and options in fiscal
2000, and (3) a $32 decrease in owner's net investment for a change in
accounting related to pension and postretirement benefit costs reflected in
fiscal 1999.
A capital lease obligation of $83 was entered into in fiscal 1999, for the
lease of semiconductor manufacturing equipment.
Acquisitions of Businesses
Shown below is the impact on cash flows related to the acquisition of
businesses for cash in the fiscal years presented.
YEAR ENDED SEPTEMBER 30,
-------------------------
2001 2000 1999
----- ----- -----
Fair value of assets acquired, net of cash acquired......... $ 1 $106 $99
Less: fair value of liabilities assumed..................... -- 2 7
--- ---- ---
Acquisitions of businesses, net of cash acquired............ $ 1 $104 $92
=== ==== ===
9. INCOME TAXES
The following table presents the principal reasons for the difference
between the effective tax rate and the U.S. federal statutory income tax rate.
YEAR ENDED SEPTEMBER 30,
--------------------------
2001 2000 1999
------- ------- ------
U.S. federal statutory income tax rate...................... 35.0% 35.0% 35.0%
State and local income taxes, net of federal income tax
effect.................................................... 1.1 2.1 1.1
Non U.S. earnings taxed at different rates.................. (2.6) (5.1) (0.7)
Research credits............................................ 0.7 (2.5) (1.8)
Foreign sales corporation................................... 0.4 (1.4) (1.6)
Valuation allowance......................................... (12.3) -- --
Other differences -- net.................................... (0.6) (0.3) 0.2
----- ----- ----
Effective income tax rate excluding acquisition related
costs..................................................... 21.7 27.8 32.2
Acquisition related costs(1)................................ (24.0) 130.2 0.9
----- ----- ----
Effective income tax rate................................... (2.3)% 158.0% 33.1%
===== ===== ====
---------------
(1) Non-tax deductible IPRD and amortization of goodwill.
The fiscal 2001 rate includes the impact of recording a full valuation
allowance of approximately $553 for deferred tax assets.
F-19
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
The following table presents the United States and foreign components of
income (loss) before income taxes and the provision for income taxes.
YEAR ENDED SEPTEMBER 30,
-------------------------
2001 2000 1999
-------- ------ -----
INCOME (LOSS) BEFORE INCOME TAXES
United States............................................... $(4,451) $(221) $332
Non-U.S. ................................................... (56) 352 145
------- ----- ----
Income (loss) before income taxes........................... $(4,507) $ 131 $477
======= ===== ====
PROVISION FOR INCOME TAXES
CURRENT
Federal..................................................... $ 7 $ 105 $ 86
State and local............................................. 6 21 9
Non-U.S. ................................................... 50 83 77
------- ----- ----
Sub-total................................................... 63 209 172
------- ----- ----
DEFERRED
Federal..................................................... 5 9 32
State and local............................................. 3 1 (2)
Non-U.S. ................................................... 34 (12) (44)
------- ----- ----
Sub-total................................................... 42 (2) (14)
------- ----- ----
Provision for income taxes.................................. $ 105 $ 207 $158
======= ===== ====
As of September 30, 2001, the Company had total federal and state net
operating loss carryforwards (tax-effected) of approximately $506, and federal
research and development credit carryforwards of approximately $13, the majority
of which expires in fiscal 2022.
The components of deferred tax assets and liabilities at September 30, 2001
and 2000 are as follows:
SEPTEMBER 30,
--------------
2001 2000
------ -----
DEFERRED TAX ASSETS
Benefit obligations......................................... $ 48 $ 66
Reserves and allowances..................................... 132 65
Net operating loss/credit carryforwards..................... 519 9
Valuation allowance......................................... (537) --
Other....................................................... 9 5
----- ----
Total deferred tax assets................................. $ 171 $145
===== ====
DEFERRED TAX LIABILITIES
Property, plant, and equipment.............................. $ 98 $ 87
Investments................................................. 16 --
Intangibles................................................. 53 37
----- ----
Total deferred tax liabilities............................ $ 167 $124
===== ====
F-20
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
The Company has not provided for U.S. deferred income taxes or foreign
withholding taxes on $423 undistributed earnings of its non-U.S. subsidiaries as
of September 30, 2001, because these earnings are intended to be reinvested
indefinitely.
10. AVAILABLE-FOR-SALE SECURITIES
The Company's investments in marketable securities are classified as
"available-for-sale" in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investment in Debt and Equity
Securities." These investments are carried at fair value with any unrealized
gains and losses recorded as a separate component of other comprehensive income
(loss). Fair value is based upon market prices quoted on the last day of the
fiscal year. The fair market value of available-for-sale securities included in
the consolidated and combined balance sheet was $41 as of September 30, 2001 and
the Company had no available-for-sale securities as of September 30, 2000. The
unrealized gain recorded as a separate component of other comprehensive income
(loss) for fiscal 2001 was $30.
11. INVESTMENT IN SILICON MANUFACTURING PARTNERS
In December 1997, the Company entered into a joint venture, called Silicon
Manufacturing Partners Pte Ltd. ("SMP"), with Chartered Semiconductor
Manufacturing Ltd.'s ("Chartered Semiconductor"), a leading manufacturing
foundry for integrated circuits, to operate a 54,000 square foot integrated
circuit manufacturing facility in Singapore. The Company owns a 51% equity
interest in this joint venture, and Chartered Semiconductor owns the remaining
49% equity interest. The Company's 51% interest in SMP is accounted for under
the equity method due to Chartered Semiconductor's participatory rights under
the joint venture agreement. Under the joint venture agreement, each partner is
entitled to the margins from sales to customers directed to SMP by that partner,
after deducting their respective share of the overhead costs of SMP.
Accordingly, SMP's net income (loss) is not expected to be shared in the same
ratio as equity ownership. The Company recognized equity earnings (losses) of
$54, $0 and $(24) in fiscal 2001, 2000 and 1999, respectively.
The following table shows the condensed balance sheets and statements of
operations of SMP:
SEPTEMBER 30,
-------------
2001 2000
----- -----
Assets
Current assets............................................ $121 $ 76
Noncurrent assets......................................... 549 553
Liabilities
Current liabilities....................................... $ 61 $ 92
Noncurrent liabilities.................................... 406 355
YEAR ENDED
SEPTEMBER 30,
------------------
2001 2000 1999
---- ---- ----
Revenue..................................................... $234 $169 $ 14
Gross profit (loss)......................................... 83 16 (23)
Income (loss) from continuing operations.................... 47 (2) (47)
Net income (loss)........................................... $ 47 $ (2) $(47)
Effective January 1, 2001, SMP adopted SFAS 133. During the nine months
ended September 30, 2001, SMP entered into cash flow hedges to manage interest
rate risk due to its floating interest rate debt and recorded an unrealized loss
of $25 from these hedges as a separate component of other comprehensive
F-21
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
income (loss) for the nine months ended September 30, 2001. As a result, the
Company recorded an unrealized loss of $13 in other comprehensive income (loss).
12. DEBT
On April 2, 2001, the Company assumed $2,500 of short-term borrowings under
a credit facility with financial institutions from Lucent. In addition, the
Company assumed $54 of prepaid financing fees, which will be amortized over the
life of facility. The facility is comprised of term loans and revolving credit
loans. The Company did not receive any of the proceeds of this short-term debt.
The credit facility is secured by the Company's principal domestic assets other
than the proceeds of the IPO and while Lucent remains a majority stockholder,
real estate. Upon the repayment of $1,500 of the debt, and if the Company has
credit ratings of BBB- or better with a stable outlook from Standard & Poor's
and Baa3 or better with a stable outlook from Moody's Investor Services, the
debt will become uncollateralized. At September 30, 2001, Agere's ratings were
BB- from Standard & Poor's with a stable outlook and Ba3 from Moody's Investor
Services with a stable outlook. Upon the repayment of $1,500, the remaining debt
outstanding under this facility would consist of revolving credit loans. The
credit facility will mature on February 21, 2002, which is 364 days from the
date Lucent initially entered into the facility. The debt is not convertible
into any other securities of the Company.
The only periodic debt service obligation under the credit facility is to
make quarterly interest payments. Interest rates on borrowings under the credit
facility are based on the applicable LIBOR rate, or at the Company's election
the prime rate, in each case plus a spread that will vary depending on the
Company's credit rating and whether or not $1,500 of the debt is repaid, as
described below. For ratings of BB- from Standard & Poor's and Ba3 from Moody's,
the applicable interest rate at September 30, 2001 would be the applicable LIBOR
rate plus 350 basis points. In addition, prior to any repayment of $1,500 of the
debt, the interest rate will increase 25 basis points every ninety days from
February 22, 2001. The weighted average interest rate at September 30, 2001 was
7.11%. Upon any repayment of $1,500 of the debt, the interest rates on the
borrowings, assuming the credit rating remains the same, would return to the
applicable LIBOR rate plus 350 basis points.
The credit facility contains customary restrictions, affirmative and
negative covenants and events of default for this type of collateralized
financing. These covenants include a maximum ratio of debt to earnings before
interest, taxes, depreciation and amortization and a minimum ratio of earnings
before interest, taxes, depreciation and amortization to interest expense.
On October 4, 2001, the Company amended its credit facility. See Note 22
"Subsequent Events."
13. TOTAL COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss), which is displayed in the consolidated
and combined statements of changes in stockholders' equity/invested equity and
total comprehensive income (loss), represents net income (loss) plus the results
of certain equity changes not reflected in the consolidated and combined
statements of operations.
F-22
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
The components of accumulated other comprehensive income (loss) are shown
below.
TOTAL
ACCUMULATED
UNREALIZED OTHER
FOREIGN HOLDING UNREALIZED COMPREHENSIVE
CURRENCY GAINS LOSS ON CASH INCOME
TRANSLATION (LOSSES) FLOW HEDGES (LOSS)
----------- ---------- ------------ -------------
Beginning balance October 1, 1998..... $(18) $ 2 $ -- $(16)
Current-period change................. 1 (2) -- (1)
---- --- ---- ----
Ending balance September 30, 1999..... (17) -- -- (17)
Current-period change................. (35) -- -- (35)
---- --- ---- ----
Ending balance September 30, 2000..... (52) -- -- (52)
Current-period change................. 26 30 (13) 43
---- --- ---- ----
Ending balance September 30, 2001..... $(26) $30 $(13) $ (9)
==== === ==== ====
The foreign currency translation adjustments are not currently adjusted for
income taxes because they relate to indefinite investments in non-US
subsidiaries. There were also no income taxes provided for the unrealized gain
on investments. The unrealized loss on cash flow hedges was related to the SFAS
133 hedging activities by SMP, a joint venture with Chartered Semiconductor in
Singapore and there were no income taxes provided for the unrealized loss.
14. STOCK COMPENSATION PLANS
Certain employees of the Company have been granted stock options and other
equity-based awards under Lucent stock based compensation plans. At the time of
the Distribution, awards outstanding under Lucent's stock-based compensation
plans and held by Company employees will be converted to Company stock-based
awards. The stock options and other awards, as converted or adjusted, will have
the same vesting provisions, option periods, and other terms and conditions as
the Lucent options and awards they replace. The number of shares and exercise
price of each stock option will be adjusted so that following conversion, each
option will have the same ratio of the exercise price per share to the market
value per share, and the same aggregate difference between market value and
exercise price as the Lucent stock options prior to the conversion. No new
measurement date is expected to occur upon conversion of the stock options.
Agere has stock-based compensation plans under which employees and outside
directors receive stock option and other equity-based awards. The plans provide
for the granting of stock options, performance awards, restricted stock awards
and other stock unit awards. During fiscal 2001, employees of the Company were
granted stock options and other equity-based awards under Agere's 2001 Long-Term
Incentive Plan. The Company has reserved 182 million shares for issuance under
these plans.
Lucent stock options generally were granted with an exercise price equal to
100% of the market value of a share of common stock on the date of grant, have
two to ten-year terms and vest no later than four years from the date of grant.
Agere stock options are granted with an exercise price equal to 100% of the
market value of a share of common stock on the date of the grant, have
seven-year terms, and generally vest no later than four years from the date of
grant.
In connection with certain of the Company's acquisitions, outstanding stock
options held by employees of acquired companies became exercisable, according to
their terms, for Lucent's common stock effective at the acquisition date. For
acquisitions accounted for as purchases, the fair value of these options was
included as part of the purchase price.
F-23
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
Agere maintains an Employee Stock Purchase Plan (the "ESPP") with
consecutive offering periods, each consisting of four purchase periods of
approximately six months in length. The first offering period commenced on March
27, 2001 and ends April 30, 2003. Subsequent offering periods will run generally
for 24 months beginning May 1 of every other year. Under the terms of the ESPP,
participating employees may have up to 10% of eligible compensation (subject to
certain limitations) deducted from their pay to purchase the Company's common
stock. The per share purchase price is equal to 85% of the lower of either the
market price on the employee's entry date for the current offering period, or
the last trading day of each purchase period. The amount that may be offered
pursuant to this plan is 85 million shares. As of September 30, 2001, no shares
were purchased under the ESPP.
Agere has adopted the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation" and, as permitted under SFAS No. 123, applies
Accounting Principles Board Opinion ("APB") No. 25 and related interpretations
in accounting for its plans. Compensation expense recorded under APB No. 25,
which uses the intrinsic value method, was $4, $1 and $1 for the years ended
September 30, 2001, 2000 and 1999, respectively. If Agere had elected to adopt
the optional recognition provisions of SFAS No. 123, which uses the fair
value-based method, for its stock option plans and ESPP, net income (loss) for
the Company would have been changed to the pro forma amounts indicated below:
YEAR ENDED SEPTEMBER 30,
-------------------------
2001 2000 1999
-------- ------ -----
NET INCOME (LOSS)
As reported................................................. $(4,616) $ (76) $351
Pro forma*.................................................. (4,752) (131) 326
EARNINGS (LOSS) PER SHARE -- BASIC AND DILUTED
As reported................................................. $ (3.46) $(.07) $.34
Pro forma*.................................................. (3.56) (.13) .32
---------------
* The pro forma amounts shown above include the fair values of both the Agere
and Lucent stock options held by Agere employees. Also included is the fair
value of Agere options under the ESPP.
The fair value of stock options used to compute pro forma net income (loss)
disclosures is the estimated fair value at grant date using the Black-Scholes
option-pricing model with the following assumptions:
YEAR ENDED SEPTEMBER 30,
------------------------
2001 2000 1999
------ ------ ------
WEIGHTED AVERAGE ASSUMPTIONS (Lucent)
Dividend yield.............................................. 0.58% 0.22% 0.14%
Expected volatility......................................... 59.0% 39.2% 33.3%
Risk free interest rate..................................... 5.0% 6.2% 4.8%
Expected holding period (in years).......................... 3.0 2.8 4.0
WEIGHTED AVERAGE ASSUMPTIONS (Agere)
Dividend yield.............................................. 0.00% n/a n/a
Expected volatility......................................... 66.8% n/a n/a
Risk free interest rate..................................... 4.16% n/a n/a
Expected holding period (in years).......................... 2.4 n/a n/a
Presented below is a summary of the status of the Lucent stock options held
by Company employees for which the Company estimates it will assume
responsibility, and the related transactions for the years ended September 30,
2001, 2000 and 1999, as well as a summary of the status of Agere stock options
and
F-24
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
related transactions for fiscal 2001. The Lucent stock option activity is not
necessarily indicative of what the activity would have been had Agere been a
separate stand-alone company during the periods presented, or what the activity
may be in the future.
WEIGHTED
SHARES AVERAGE
(000'S) EXERCISE PRICE
------- ----------------
LUCENT OPTIONS OUTSTANDING AT SEPTEMBER 30, 1998....... 12,379 $22.24
Granted/Assumed*....................................... 3,432 42.88
Exercised.............................................. (450) 12.22
Forfeited/Expired...................................... (37) 34.34
-------
LUCENT OPTIONS OUTSTANDING AT SEPTEMBER 30, 1999....... 15,324 27.13
Granted/Assumed*....................................... 32,505 32.65
Exercised.............................................. (4,339) 8.02
Forfeited/Expired...................................... (1,723) 40.29
-------
LUCENT OPTIONS OUTSTANDING AT SEPTEMBER 30, 2000....... 41,767 32.87
Avaya Inc. spin-off adjustments#....................... 306 (.25)
-------
LUCENT OPTIONS OUTSTANDING AT SEPTEMBER 30, 2000....... 42,073 32.62
Granted/Assumed*....................................... 9,526 17.30
Exercised.............................................. (2,033) 2.46
Forfeited/Expired...................................... (4,086) 36.89
-------
LUCENT OPTIONS OUTSTANDING AT SEPTEMBER 30, 2001....... 45,480 $32.59
=======
AGERE OPTIONS OUTSTANDING AT SEPTEMBER 30, 2000........ -- --
Granted................................................ 151,763 $ 5.81
Exercised.............................................. -- --
Forfeited/Expired...................................... (9,013) 5.87
-------
AGERE OPTIONS OUTSTANDING AT SEPTEMBER 30, 2001........ 142,750 $ 5.81
=======
---------------
* Includes options converted in acquisitions.
# Effective with the spin-off of Avaya Inc. on September 30, 2000, the number of
outstanding options was adjusted and all exercise prices were decreased
immediately following the spin-off date to preserve the economic values of the
options that existed prior to the spin-off.
The weighted average fair value of the Agere stock options and Lucent stock
options held by Agere employees, is calculated using the Black-Scholes
option-pricing model. The weighted average fair value of Agere stock options
granted during fiscal 2001 was $2.43 per share, and for those granted by Lucent
during fiscal 2001, 2000 and 1999 was $7.36, $15.88 and $14.46 per share,
respectively.
F-25
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
The following table summarizes the status of Lucent stock options, held by
the Agere employees, which were outstanding at September 30, 2001.
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
-------------------------------- --------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
SHARES LIFE EXERCISE SHARES EXERCISE
RANGE OF EXERCISE PRICES (000'S) (YEARS) PRICE (000'S) PRICE
------------------------ ------- ----------- -------- ----------- ------------
$0.12 to $11.05........ 5,322 7.17 $ 3.15 2,702 $ 3.31
$11.06 to $17.32....... 7,977 6.33 13.54 2,418 11.45
$17.33 to $27.01....... 7,229 8.00 19.79 1,811 20.83
$27.02 to $45.50....... 13,325 3.36 39.96 11,013 39.19
$45.51 to $59.73....... 8,565 8.30 56.82 1,930 57.50
$59.74 to $63.88....... 2,321 8.19 62.29 539 61.88
$63.89 to $77.09....... 741 8.21 68.02 82 69.76
------- ------
Total.................. 45,480 6.32 $32.59 20,495 $32.01
======= ======
The following table summarizes the status of Agere stock options
outstanding at September 30, 2001:
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
-------------------------------- --------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
SHARES LIFE EXERCISE SHARES EXERCISE
RANGE OF EXERCISE PRICES (000'S) (YEARS) PRICE (000'S) PRICE
------------------------ ------- ----------- -------- ----------- ------------
$5.15 to $5.70......... 68,134 6.83 $5.58 -- $ --
$5.71 to $6.48......... 73,814 6.48 6.00 404 5.96
$6.49 to $7.21......... 802 6.67 7.03 -- --
------- ---
Total.................. 142,750 6.65 $5.81 404 $5.96
======= ===
Other stock unit awards are granted under certain award plans. The
following table presents the total number of shares of common stock represented
by awards granted to Company employees.
YEAR ENDED SEPTEMBER 30,
------------------------
2001 2000 1999
------ ------ ------
Lucent other stock unit awards granted (000's)............. 500 4 40
Weighted average market value of shares granted during the
period................................................... $16.21 $64.91 $29.36
Agere other stock unit awards granted (000's).............. 75 n/a n/a
Weighted average market value of shares granted during the
period................................................... $ 5.43 n/a n/a
15. EARNINGS (LOSS) PER COMMON SHARE
Basic and diluted earnings (loss) per common share is calculated by
dividing net earnings (loss) by the weighted average number of common shares
outstanding during the period. As a result of the net loss reported for the year
ended September 30, 2001, 1,170,969 of potential common shares have been
excluded from the calculation of diluted loss per share because their effect
would be anti-dilutive.
In addition, at September 30, 2001, Agere employees held stock-based awards
covering approximately 46 million shares of Lucent common stock that may be
converted to Agere stock-based awards at the time of the Distribution, if the
Distribution occurs. The number of shares of Agere common stock subject to
F-26
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
substituted awards, if this conversion occurs, cannot be determined at this time
since the conversion ratio will be determined at the Distribution based on the
per share value of the Company's common stock in relation to that of Lucent's
common stock.
16. BENEFIT OBLIGATIONS
The Company's financial statements reflect the cost experienced for its
employees and retirees while included in the Lucent plans. Effective January 1,
2002, the Company will assume responsibility for all employee benefit plans
other than pension benefits. Following the Distribution, the Company will assume
responsibility for the pension benefits covering its active employees and
employees who retired subsequent to the IPO.
PENSION AND POSTRETIREMENT BENEFITS
Several pension plans cover substantially all full-time employees.
Retirement benefits under the plans are based on a career average or flat dollar
formula. The domestic plans are non-contributory. A cash balance program was
established for all companies acquired since October 1, 1996 that did not
participate in a defined benefit pension plan and all management employees hired
after January 1, 1999. The cash balance plan resembles a savings account.
Amounts are credited based on age and a percentage of earnings. Following
termination, the employee is entitled to receive the balance in the account in a
lump sum. Under the cash balance program, future increases in earnings will not
result in additional prior service costs. It is the Company's policy to fund the
plans on a current basis to the extent deductible under existing Federal tax
regulations. The employees in the cash balance pension plan are not eligible for
the postretirement benefit plan.
Until the Distribution, the Company's U.S. employees will be participants
in Lucent's pension plans. At the Distribution, the Company will become
responsible for pension benefits for the active U.S. employees of the Company,
as well as U.S. employees who retired or terminated employment subsequent to the
IPO. Obligations related to employees who retired or terminated employment prior
to the IPO will remain the responsibility of Lucent. Following the Distribution,
Lucent will transfer to the Company the pension and postretirement assets and
liabilities related to these employees. Lucent has managed its U.S. employee
benefit plans on a consolidated basis and separate company information is not
readily available. The consolidated and combined statements of operations
include an allocation of the costs (benefits) of the U.S. pension and
postretirement plans. These costs were allocated based on the Company's U.S.
active employee population for each of the years presented.
Effective October 1, 1998, Lucent changed its method for calculating the
market-related value of plan assets used in determining the expected
return-on-plan-assets component of annual net pension and postretirement benefit
costs. Under the previous accounting method, the calculation of the
market-related value of plan assets included only interest and dividends
immediately, while all other realized and unrealized gains and losses were
amortized on a straight-line basis over a five-year period. The new method used
to calculate market-related value includes recognizing immediately an amount
based on Lucent's historical asset returns and amortizes the difference between
that amount and the actual return on a straight-line basis over a five-year
period.
The cumulative effect of this accounting change for Agere related to
periods prior to fiscal 1999 of $53 ($32 after-tax) is a one-time, non-cash
credit to fiscal 1999 earnings. This accounting change also resulted in a
reduction in benefit costs in fiscal 1999 that increased income by $10 ($6
after-tax) as compared with the previous accounting method.
In fiscal 2001, Agere recorded non-cash charges totaling $28 for
termination benefits paid from pension assets to U.S. paid management employees
in connection with involuntary terminations as part of business restructuring.
See Note 6 "Restructuring and Separation Expenses and Inventory Provision."
F-27
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
In fiscal 2001, Lucent recorded final adjustments to the pension and
postretirement assets and obligation amounts that were transferred to Avaya Inc.
("Avaya"), the former enterprise networks group of Lucent that was spun off on
September 30, 2000.
The information that follows was provided by Lucent and relates to the
entire Lucent pension and postretirement plans, including discontinued
operations. The following table shows the funded status of the Lucent pension
and postretirement plans:
PENSION BENEFITS POSTRETIREMENT BENEFITS
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------------
2001 2000 2001 2000
------- -------- ---------- ----------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at October 1............. $26,113 $ 27,401 $ 8,242 $ 8,604
Service cost............................. 316 478 35 67
Interest cost............................ 1,926 1,915 604 601
Actuarial losses......................... 1,434 370 761 33
Amendments............................... 9 (1) (58) --
Benefits paid............................ (2,788) (2,294) (709) (651)
Settlements.............................. (3) -- (10) --
Termination benefits..................... 1,954 -- 197 --
Impact of curtailments................... 715 -- 288 --
Benefit obligation assumed by Avaya...... 174 (1,756) 48 (412)
------- -------- ------- -------
Benefit obligation at September 30.......... $29,850 $ 26,113 $ 9,398 $ 8,242
======= ======== ======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at October 1...... $45,262 $ 41,067 $ 4,557 $ 4,467
Actual (loss) return on plan assets...... (6,830) 9,791 (827) 654
Lucent contributions..................... 25 19 17 8
Benefits paid............................ (2,788) (2,294) (709) (651)
Assets transferred from (to) Avaya....... 259 (2,984) 36 (255)
Other (including transfer of assets from
pension to postretirement plans)....... (389) (337) 366 334
------- -------- ------- -------
Fair value of plan assets at September 30... $35,539 $ 45,262 $ 3,440 $ 4,557
======= ======== ======= =======
FUNDED (UNFUNDED) STATUS OF THE PLAN.......... $ 5,689 $ 19,149 $(5,958) $(3,685)
Unrecognized prior service cost (credit).... 1,228 2,086 (135) 49
Unrecognized transition asset............... (103) (322) -- --
Unrecognized net (gain) loss................ (1,790) (14,499) 1,035 (1,208)
------- -------- ------- -------
NET AMOUNT RECOGNIZED......................... $ 5,024 $ 6,414 $(5,058) $(4,844)
======= ======== ======= =======
F-28
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
PENSION BENEFITS POSTRETIREMENT BENEFITS
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------------
2001 2000 2001 2000
------- -------- ---------- ----------
AMOUNTS RECOGNIZED IN THE LUCENT CONSOLIDATED
BALANCE SHEETS CONSIST OF:
Prepaid pension costs....................... $ 4,958 $ 6,238 $ -- $ --
Prepaid pension costs allocated to
discontinued operations.................. 122 202 -- --
Accrued benefit liability................... (73) (37) (4,972) (4,786)
Accrued benefit liability allocated to
discontinued operations.................. (2) -- (86) (58)
Intangible asset............................ 5 5 -- --
Accumulated other comprehensive income...... 14 6 -- --
------- -------- ------- -------
Net amount recognized......................... $ 5,024 $ 6,414 $(5,058) $(4,844)
======= ======== ======= =======
Pension plan assets include $17 and $102 of Lucent common stock at
September 30, 2001 and 2000, respectively. Postretirement plan assets include $1
and $3 of Lucent common stock at September 30, 2001 and 2000, respectively.
COMPONENTS OF NET PERIODIC BENEFIT COST
YEAR ENDED SEPTEMBER 30,
---------------------------
2001 2000 1999
------- ------- -------
Pension Cost (Credit)
Service cost.......................................... $ 316 $ 478 $ 509
Interest cost on projected benefit obligation......... 1,926 1,915 1,671
Expected return on plan assets........................ (3,373) (3,229) (2,957)
Amortization of unrecognized prior service costs...... 326 362 461
Amortization of transition asset...................... (222) (300) (300)
Amortization of net (gain)/loss....................... (387) (197) 2
Termination benefits.................................. 1,954 -- --
Curtailments.......................................... 562 -- --
Settlements........................................... (12) -- --
------- ------- -------
NET PENSION COST (CREDIT)............................... $ 1,090 $ (971) $ (614)
======= ======= =======
Distribution of Net Pension Cost (Credit)
Continuing operations................................. $ 1,064 $(1,113) $ (779)
Discontinued operations............................... 26 142 165
------- ------- -------
NET PENSION COST (CREDIT)............................... $ 1,090 $ (971) $ (614)
======= ======= =======
F-29
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED SEPTEMBER 30,
---------------------------
2001 2000 1999
------- ------- -------
Postretirement Cost
Service Cost.......................................... $ 35 $ 67 $ 80
Interest cost on accumulated benefit obligation....... 604 601 537
Expected return on plan assets........................ (352) (338) (308)
Amortization of unrecognized prior service costs...... 22 37 53
Amortization of net (gain)/loss....................... (25) (12) 6
Termination benefits.................................. 197 -- --
Curtailments.......................................... 98 -- --
Settlements........................................... (5) -- --
------- ------- -------
NET POSTRETIREMENT BENEFIT COST......................... $ 574 $ 355 $ 368
======= ======= =======
Distribution of Net Postretirement Benefit Cost
Continuing operations................................. $ 564 $ 291 $ 298
Discontinued operations............................... 10 64 70
------- ------- -------
NET POSTRETIREMENT BENEFIT COST......................... $ 574 $ 355 $ 368
======= ======= =======
Pension and postretirement benefits weighted-average
assumptions as of September 30, 2001
Discount rate......................................... 7.0% 7.5% 7.25%
Expected return on plan assets........................ 9.0% 9.0% 9.0%
Rate of compensation increase......................... 4.5% 4.5% 4.5%
Lucent has several non-pension postretirement benefit plans. For
postretirement health care benefit plans, Lucent assumed an 8.6% weighted
average annual health care cost trend rate for 2002 gradually declining to 4.9%
(excluding postretirement dental benefits, the annual medical cost trend rate
would be 9.1% in 2002 gradually declining to 5.0%). The assumed health care cost
trend rate has a significant effect on the amounts reported. A one
percentage-point change in the assumed Lucent health care cost trend rate would
have the following effects, including discontinued operations:
1 PERCENTAGE POINT
-------------------
INCREASE DECREASE
-------- --------
Effect on total of service and interest cost components..... $ 25 $ 22
Effect on postretirement benefit obligation................. $360 $321
SAVINGS PLANS
The majority of the Company's employees are eligible to participate in
savings plans sponsored by Lucent. The plans allow employees to contribute a
portion of their compensation on a pre-tax and/or after-tax basis in accordance
with specified guidelines. Lucent matches a percentage of employee contributions
up to certain limits. The Company's expense related to the Lucent savings plans
was $25, $21 and $25 in fiscal 2001, 2000 and 1999, respectively. The Company
expects to establish corresponding plans effective January 1, 2002.
17. OPERATING SEGMENTS
Effective October 1, 2001, the Company realigned its business operations
into two market-focused groups, Infrastructure Systems and Client Systems, that
target the network equipment and consumer
F-30
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
communications markets respectively. These two groups comprise the Company's
only reportable operating segments. The segments each include revenue from the
licensing of intellectual property related to that segment. There were no
intersegment sales.
The Infrastructure Systems segment is comprised of the former
Optoelectronics segment and portions of the former Integrated Circuits segment
and facilitates the convergence of products from both businesses as the Company
addresses markets in high-speed communications systems. The Company has
consolidated research and development, as well as marketing, for both
optoelectronic and integrated circuit devices aimed at communications systems.
This allows the more efficient design, development and delivery of complete,
interoperable solutions to equipment manufacturers for advanced enterprise,
access, metropolitan, long-haul and undersea applications.
The Client Systems segment consists of the remainder of the former
Integrated Circuits segment and includes wireless data, computer communications,
storage and wireless terminal solutions products. This segment delivers
semiconductor solutions for a variety of end-user applications such as modems,
internet-enabled cellular terminals and hard-disk drives for computers as well
as software, systems and wireless local area network solutions through the
ORiNOCO(TM) product family.
Each segment is managed separately. Disclosure of segment information is on
the same basis as is used internally for evaluating segment performance and for
deciding how to allocate resources. Performance measurement and resource
allocation for the segments are based on many factors. The primary financial
measure used is operating income (loss), exclusive of amortization of goodwill
and other acquired intangibles, IPRD, the impairment of goodwill and other
acquired intangibles, and restructuring and separation expenses.
The Company does not identify or allocate assets by operating segment. In
addition, the Company does not allocate interest income or expense, other income
or expense, or income taxes to the segments. Management does not evaluate
segments based on these criteria. The Company has centralized corporate
functions and uses shared service arrangements to realize economies of scale and
efficient use of resources. The costs of shared services, and other corporate
center operations managed on a common basis, are allocated to the segments based
on usage or other factors based on the nature of the activity. The accounting
policies of the reportable operating segments are the same as those described in
Note 2 "Summary of Significant Accounting Policies."
The Company generates revenues from the sale of two products, integrated
circuits and optoelectronic components. These products are consistent with the
segments reported by the Company prior to October 1, 2001. Integrated circuits,
or chips, are made using semiconductor wafers imprinted with a network of
electronic components. They are designed to perform various functions such as
processing electronic signals, controlling electronic system functions and
processing and storing data. Optoelectronic components, including both active
and passive components, transmit, process, change, amplify and receive light
that carries data and voice traffic over optical networks.
F-31
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
REPORTABLE SEGMENTS
YEAR ENDED SEPTEMBER 30,
------------------------
2001 2000 1999
------ ------ ------
INFRASTRUCTURE SYSTEMS
Revenue................................................. $2,674 $3,059 $2,290
Operating income (loss) (excluding amortization of
goodwill and other acquired intangibles, IPRD,
restructuring and separation expenses and impairment
of goodwill and other acquired intangibles).......... (377) 658 478
Depreciation and amortization........................... 277 280 219
CLIENT SYSTEMS
Revenue................................................. $1,406 $1,649 $1,424
Operating income (loss) (excluding amortization of
goodwill and other acquired intangibles, IPRD,
restructuring and separation expenses and impairment
of goodwill and other acquired intangibles).......... (175) 133 31
Depreciation and amortization........................... 179 197 166
RECONCILING ITEMS
A reconciliation of the totals reported for the operating segments to the
significant line items in the consolidated and combined financial statements is
shown below.
YEAR ENDED SEPTEMBER 30,
-------------------------
2001 2000 1999
------- ------ ------
OPERATING INCOME (LOSS)
Total reportable segments.............................. $ (552) $ 791 $ 509
Amortization of goodwill and other acquired
intangibles......................................... (415) (189) (13)
IPRD................................................... -- (446) (17)
Restructuring and separation expenses.................. (662) -- --
Impairment of goodwill and other acquired
intangibles......................................... (2,762) -- --
------- ------ ------
Total operating income (loss)....................... $(4,391) $ 156 $ 479
======= ====== ======
REVENUE BY PRODUCT
Integrated circuits.................................... $ 2,869 $3,507 $3,055
Optoelectronic components.............................. $ 1,211 $1,201 $ 659
F-32
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
GEOGRAPHIC INFORMATION
REVENUE(1) LONG-LIVED ASSETS(2)
YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2001 2000 1999 2001 2000 1999
------ ------ ------ ------ ------ ------
U.S. ............................. $1,834 $2,404 $1,863 $1,802 $4,945 $1,333
Foreign Regions
Asia Pacific & PRC.............. 1,277 1,229 1,021 250 281 247
Europe, Middle East & Africa.... 739 867 713 128 146 214
Caribbean, Canada, Mexico &
Latin America................ 230 208 117 14 2 1
------ ------ ------ ------ ------ ------
Totals....................... $4,080 $4,708 $3,714 $2,194 $5,374 $1,795
====== ====== ====== ====== ====== ======
---------------
(1) Revenue is attributed to geographic areas based on the customer's shipped-to
location, except for intellectual property license revenue which is
attributed to the U.S. operations.
(2) Represents property, plant and equipment-net and goodwill and other acquired
intangibles.
CONCENTRATIONS
Historically, the Company has relied on a limited number of customers for a
substantial portion of its revenue. Lucent accounted for 14.9%, 21.3% and 25.7%
of the Company's consolidated and combined revenue for fiscal 2001, 2000 and
1999, respectively. The Company expects that a significant portion of its future
revenue will continue to be generated by current customers and a limited number
of other customers. The Company currently purchases some parts and processes
used for its integrated circuits and several different parts that are used in
its optoelectronic components, in each case for which there is only one
qualified manufacturer. While the Company is currently seeking alternative
internal or external sources of these parts and processes, disruption of its
sole source could have a material adverse effect on sales and shipments of the
affected products.
18. FINANCIAL INSTRUMENTS
FAIR VALUES
The carrying values and estimated fair values of cash and cash equivalents,
investments, receivables, payables and debt maturing within one year contained
in the consolidated and combined balance sheets approximate fair value.
The carrying values of foreign exchange forward contracts at September 30,
2001 equal their fair value. The carrying values and estimated fair values of
foreign exchange forward contracts at September 30, 2000 was $0 for assets, and
$5 and $6, respectively for liabilities. The fair values of foreign exchange
forward contracts are determined using quoted market rates.
CREDIT AND MARKET RISK
By their nature, all financial instruments involve risk, including credit
risk for non-performance by counterparties. The Company seeks to reduce credit
risk on financial instruments by dealing only with financially secure
counterparties and reserves for losses are established when deemed necessary.
The Company seeks to limit its exposure to credit risks in any single country or
region.
All financial instruments inherently expose the holders to market risk,
including changes in currency and interest rates. Agere manages its exposure to
these market risks through its regular operating and financing activities and
when appropriate, through the use of derivative financial instruments.
F-33
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
DERIVATIVE FINANCIAL INSTRUMENTS
The Company conducts its operations on a multinational basis in several
foreign currencies. Generally, foreign currency forward exchange contracts are
designated for firmly committed or forecasted sales and purchases that are
expected to occur in less than one year. Agere enters into various foreign
exchange forward contracts to manage its exposure to changes in those foreign
exchange rates. The Company's derivative financial instruments are used as risk
management tools and are not for trading purposes.
The notional amounts for foreign currency forward exchange contracts
represent the U.S. dollar equivalent of an amount exchanged. As of September 30,
2001, Agere had outstanding hedges for British Pounds Sterling and Singapore
Dollars. The notional amounts for these contracts were $12 and $6, respectively.
The asset and liability fair values of these instruments were $0.
Agere engages in foreign currency hedging activities as a defensive
strategy designed to protect the Company from adverse changes in foreign
currency exchange rates that may affect the eventual net cash flows resulting
from the sale of products to foreign customers and purchases from foreign
suppliers. Agere expects to continue to hedge foreign currency risk to preserve
the economic cash flows of the Company, but does not expect to designate related
derivative instruments as hedges for cost/benefit reasons. Accordingly, the
changes in fair value of these undesignated, freestanding foreign currency
derivative instruments are recorded in other income-net in the period of change
and have not been material to Agere.
Prior to the adoption of SFAS 133 on October 1, 2000, foreign exchange
forward contracts were designated for firmly committed or forecast sales and
purchases that were expected to occur in less than one year. Gains and losses on
all hedged contracts for firmly committed transactions were deferred in other
current assets and liabilities, were recognized in other income-net when the
transactions occurred or were no longer probable and were not material to the
combined financial statements at September 30, 2000. All other gains and losses
on foreign exchange forward contracts were recognized in other income-net as the
exchange rates changed.
LETTERS OF CREDIT
The Company is a party to letters of credit that represent purchased
guarantees ensuring the Company's performance or payment to third parties in
accordance with specified terms and conditions which amounted to approximately
$17 and $20 as of September 30, 2001 and 2000. The estimated fair value of these
letters of credit were $0 as of September 30, 2001 and 2000, which is based on
fees paid to obtain the obligations.
19. TRANSACTIONS WITH LUCENT
Revenue from products sold to Lucent was $606, $1,002 and $955, in fiscal
2001, 2000 and 1999, respectively. Included in these amounts are revenues of $65
and $82 in fiscal 2000 and 1999, respectively, from sales to Avaya, which was
the enterprise networks business of Lucent until its spin off from Lucent on
September 30, 2000. Sales to Avaya after that date are not considered
transactions with Lucent. Products purchased from Lucent were $22, $23 and $1
for fiscal 2001, 2000 and 1999, respectively. In addition, Lucent billed the
Company $23, $67 and $49 for fiscal 2001, 2000 and 1999, respectively, for
specific research and development projects related to the Company's businesses.
In connection with the Separation and Distribution, the Company and Lucent
entered into a Separation and Distribution Agreement (the "Separation and
Distribution Agreement") and related agreements, which are summarized below.
This summary is qualified in all respects by the terms of the Separation and
Distribution Agreement and the related agreements.
F-34
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
SEPARATION AND DISTRIBUTION AGREEMENT
The Separation and Distribution Agreement governs the transfer by Lucent to
the Company of all the assets, liabilities and operations associated with the
Company's Businesses.
The Separation and Distribution Agreement, among other things, provides
that the Company will indemnify Lucent for all liabilities relating to the
Company's Businesses and for all contingent liabilities primarily relating to
the Company's Businesses. In addition, the Separation and Distribution Agreement
provides that certain contingent liabilities will be shared by Lucent and the
Company based on agreed upon percentages.
EMPLOYEE BENEFITS AGREEMENT
The Company and Lucent entered into an Employee Benefits Agreement,
pursuant to which the Company will create independent pension and other employee
benefit plans that are substantially similar to Lucent's existing pension and
other employee benefit plans. This agreement provides that, from the Separation
until the Distribution, the Company will be a "Participating Company" in
Lucent's employee benefit plans, other than Lucent's employee stock purchase
plan (after June 30, 2001), and will bear its allocable share of costs for
benefits and administration under these plans. Under the agreement and effective
immediately after the Distribution, Lucent will transfer the assets and
liabilities of various existing Lucent pension and other employee benefit plans
related to Agere employees. Generally, following the Distribution, Lucent will
cease to have any liability or obligation to the Company's current employees and
their beneficiaries under any of Lucent's benefit plans, programs or practices.
FEDERAL, STATE AND LOCAL TAX ALLOCATION AGREEMENT
The State and Local Income Tax Allocation Agreement and the Federal Tax
Allocation Agreement govern the allocation of state, local and federal income
taxes for periods prior to and including the date of the IPO, except that the
state and local income tax allocation agreement will continue to apply in
certain states until Lucent no longer owns at least 50% of the Company's stock.
TAX SHARING AGREEMENT
The Company and Lucent entered into a Tax Sharing Agreement, which governs
the Company's and Lucent's respective rights, responsibilities and obligations
after the Distribution with respect to taxes for the periods ending on or before
the Distribution. Generally, pre-Distribution taxes that are clearly
attributable to the business of one party will be borne solely by that party,
and other pre-Distribution taxes will be shared by the parties based on a
formula set forth in the Tax Sharing Agreement. In addition, the Tax Sharing
Agreement addresses the allocation of liability for taxes that are incurred as a
result of restructuring activities undertaken to implement the Separation. If
the Distribution fails to qualify as a tax-free distribution under Section 355
of the Internal Revenue Code because of an acquisition of the Company's stock or
assets, or some other actions taken by the Company, then the Company will be
solely liable for any resulting corporate taxes.
FIBER, MICROELECTRONICS AND ORINOCO PRODUCT PURCHASE AGREEMENTS
The Company and Lucent entered into a Fiber Product Purchase Agreement, a
Microelectronics Product Purchase Agreement and an ORiNOCO Product Purchase
Agreement. The pricing terms for the products and services covered by these
commercial agreements reflect negotiated prices. Under the Fiber Product
Purchase Agreement the Company has an obligation to purchase all of its
requirements of specified specialty fiber, fiber apparatus and premises cable
products from Lucent.
F-35
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
The Microelectronics Product Purchase Agreement governs purchases of goods
and services by Lucent from the Company. Under the agreement, Lucent committed
to purchase at least $2,800 of products from the Company over a three-year
period beginning February 1, 2001. In limited circumstances, Lucent's purchase
commitment may be reduced or the term may be extended. For the period February
1, 2001 through September 30, 2001, Lucent's purchases under this agreement were
$325. In light of Lucent's purchases to date and adverse market conditions, the
Company is discussing with Lucent ways to restructure Lucent's obligations under
the agreement.
The ORiNOCO Product Purchase Agreement governs transactions in which the
Company furnishes ORiNOCO products to Lucent for resale. The agreement does not
grant to Lucent an exclusive right to resell the products, but does grant Lucent
a right of first opportunity or refusal for certain specified service provider
customers in exchange for a minimum purchase commitment. The pricing in the
agreement is based on the Company's list price in effect on the date of the
receipt of an order less any applicable discounts.
INTERIM SERVICES AND SYSTEMS REPLICATION AGREEMENT
The Company and Lucent entered into an Interim Service and Systems
Replication Agreement to provide each other, on an interim, transitional basis,
with various data processing services, telecommunications services and corporate
support services, including: accounting, financial management, information
systems management, tax, payroll, legal, human resources administration,
procurement and other general support. This agreement also provides for the
replication and transfer of designated computer systems used for administrative
support or used in the Company's Businesses or Lucent's other businesses. The
systems include specified hardware, software, data storage or maintenance and
support components. Costs and expenses of purchasing hardware or obtaining
software are borne by the party purchasing the hardware or licensing the
software. The costs associated with this agreement amounted to $73 for the year
ended September 30, 2001.
REAL ESTATE AGREEMENTS
Lucent and the Company entered into various leases and sublease
arrangements for the sharing of certain facilities for a transitional period on
commercial terms. The lease term for space in owned buildings was determined on
a case-by-case basis. In the case of subleases or sub-subleases of property, the
lease term generally coincides with the remaining term of the primary lease or
sublease, respectively.
TRADEMARK LICENSE AGREEMENT, TRADEMARK ASSIGNMENT AND TRADE DRESS ASSIGNMENT
The primary trademarks used in the sale of the Company's products and
services were transferred to the Company, except for Lucent's name and logo and
the Bell Laboratories name. The Company may use the Lucent name and logo, but
not the Bell Laboratories name, on a royalty-free basis, for a transitional
period. Lucent and the Company entered into a Trademark License Agreement,
Trademark Assignment and Trade Dress Assignment to effectuate the grant or
transfer, as applicable, of such rights.
PATENT ASSIGNMENTS
The Company and Lucent executed patent assignments and other agreements
related to patents owned or controlled by Lucent. The patent assignments divided
ownership of patents, patent applications and foreign counterparts between the
Company and Lucent. Lucent transferred to Agere ownership of or exclusive rights
in certain patents and patent applications held by Lucent before the Separation
that relate principally to the Company's Businesses. Lucent retained ownership
of all other patents and patent applications.
F-36
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
TECHNOLOGY ASSIGNMENT AND JOINT OWNERSHIP AGREEMENT
The Company and Lucent executed assignments and other agreements, including
the technology assignment, related to technology owned or controlled by Lucent
and its subsidiaries. Technology included copyrights, mask works and other
intellectual property other than trademarks, trade names, service marks and
patent rights. The technology assignment generally divided ownership of
technology between the Company and Lucent, with each owning technology that was
developed by or for, or purchased for the respective businesses of each company.
Certain specified technology is owned jointly by the Company and Lucent.
PATENT AND TECHNOLOGY LICENSE AGREEMENT
The Company and Lucent entered into a Patent and Technology License
Agreement related to patents and technology owned or controlled by the Company
and Lucent. The Patent and Technology License Agreement provides for
cross-licenses to each company. The Company and Lucent granted to each other,
under the patents that each company has, a nonexclusive, personal,
nontransferable license to make, have made, use, lease, import, offer to sell,
and sell any and all products and services of the businesses in which the
licensed company, including related companies, is now or hereafter engaged. The
cross-licenses also permit each company, subject to limitations, to have third
parties make items under the other company's patents, as well as to pass through
to customers limited rights under the other company's patents with respect to
products and services furnished to customers by the licensed company. Certain
patents are licensed exclusively to each party, including the right to grant
sublicenses, subject to retention of a right to use those patents by the
licensing party. Otherwise, the right to sublicense to unaffiliated third
parties was not granted under the cross-licenses, except for limited rights in
connection with establishing second source suppliers, performing joint
development activities and rights to sublicense a divested business. The
cross-licenses between the Company and Lucent cover all of each company's
patents, including patents issued on patent applications with a filing date
prior to February 1, 2003. The Patent and Technology License Agreement also
grants to the Company a joint ownership interest to a limited number of patents
and patent applications.
DEVELOPMENT PROJECT AGREEMENT
Lucent and the Company entered into a Development Project Agreement under
which Bell Laboratories performs certain research and development activities for
the Company on a contract basis. The Company also performs research and
development activities for Lucent on a contract basis.
JOINT DESIGN CENTER OPERATING AGREEMENT
Lucent and the Company entered into a Joint Design Center Operating
Agreement to develop technology for micro electro-mechanical systems, or MEMS.
20. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is involved in proceedings,
lawsuits and other claims, including proceedings under laws and government
regulations related to environmental, tax and other matters. The semiconductor
industry is characterized by substantial litigation concerning patents and other
intellectual property rights. From time to time, the Company may be party to
various inquiries or claims in connection with these rights. These matters are
subject to many uncertainties, and outcomes are not predictable with assurance.
Consequently, the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at September 30, 2001 cannot be
ascertained. While these matters could affect the operating results of any one
quarter when resolved in future periods and while there can be no assurance with
respect thereto, management believes that after final disposition, any monetary
F-37
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
liability or financial impact to the Company beyond that provided for at
September 30, 2001, would not be material to the annual consolidated financial
statements.
In December 1997, the Company entered into a joint venture, called SMP,
with Chartered Semiconductor, a leading manufacturing foundry for integrated
circuits, to operate a 54,000 square foot integrated circuit manufacturing
facility in Singapore. The Company owns a 51% equity interest in this joint
venture, and Chartered Semiconductor owns the remaining 49% equity interest. The
Company has an agreement with SMP under which it has agreed to purchase 51% of
the production output from this facility and Chartered Semiconductor agreed to
purchase the remaining 49% of the production output. If the Company fails to
purchase its required commitments, it will be required to pay SMP for the fixed
costs associated with the unpurchased wafers. Chartered Semiconductor is
similarly obligated with respect to the wafers allotted to it. The agreement
also provides that Chartered Semiconductor will have the right of first refusal
to purchase integrated circuits produced in excess of the Company's
requirements. The agreement may be terminated by either party upon two years
written notice, but may not be terminated prior to February 2008. The agreement
may also be terminated for material breach, bankruptcy or insolvency.
In July 2000, the Company and Chartered Semiconductor entered into an
agreement committing the Company and Chartered Semiconductor to jointly develop
manufacturing technologies for future generations of integrated circuits
targeted at high-growth communications markets. The Company has agreed to invest
up to $350 over a five-year period. As part of the joint development activities,
the two companies will staff a new research and development team at Chartered
Semiconductor's Woodlands campus in Singapore. These scientists and engineers
will work with Company teams in Murray Hill, New Jersey, and Orlando, Florida,
as well as with Chartered Semiconductor's technology development organization,
to create a 600-person research and development team. The agreement may be
terminated for breach of material terms upon 30 days notice or for convenience
upon six months notice prior to the planned successful completion of a
development project, in which case the agreement will terminate upon the actual
successful completion of that project.
RISKS AND UNCERTAINTIES
The Company has a limited history operating as a stand-alone company, and
it may be unable to make the changes necessary to operate as a stand-alone
company, or it may incur greater costs as a stand-alone company. Until early
2001, the Company's businesses were operated by Lucent as a segment of its
broader corporate organization rather than as a separate stand-alone company.
Lucent assisted the Company by performing various corporate functions, including
public relations, employee relations, investor relations, finance, legal and tax
functions. Lucent continues to provide some of these functions to the Company on
an interim basis pursuant to the Interim Services and Systems Replication
Agreement.
As of September 30, 2001, the Company's primary source of liquidity was its
cash and cash equivalents. The Company believes this cash, together with cash
flow from operations, will be sufficient to meet its cash requirements at least
through the end of fiscal 2002, including repayment of borrowings under the
credit facility if its maturity is not extended. If the Company's revenues are
materially lower than what is contemplated in its outlook, the Company will
further reduce expenditures in an effort to meet its cash requirements. The
Company also intends to seek additional funds from liquidity generating
transactions and capital markets financings, although it cannot provide any
assurance that any of these transactions or financings will be available to it
on acceptable terms or at all.
LEGAL PROCEEDINGS
From time to time, the Company is involved in legal proceedings arising in
the ordinary course of business, including unfair labor charges filed by its
unions with the National Labor Relations Board, claims
F-38
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
before the U.S. Equal Employment Opportunity Commission and other employee
grievances. The Company also may be subject to intellectual property litigation
and infringement claims, which could cause it to incur significant expenses or
prevent it from selling its products.
On October 3, 2000, a patent infringement lawsuit was filed against Lucent,
among other optoelectronic components manufacturers, by Litton Systems, Inc. and
The Board of Trustees of the Leland Stanford Junior University in the United
States District Court for the Central District of California (Western Division).
The Company anticipates that it may be named a defendant in the suit. The
complaint alleges that each of the defendants is infringing a patent related to
the manufacture of erbium-doped optical amplifiers. The patent is owned by
Stanford University and is exclusively licensed to Litton. The complaint seeks,
among other remedies, unspecified monetary damages, counsel fees and injunctive
relief. This matter is in its early stages.
An investigation was commenced on April 4, 2001, by the U.S. International
Trade Commission based on a request of Proxim, Inc. alleging patent infringement
by 14 companies, including some of the Company's customers for wireless local
area networking products. Proxim alleges infringement of three patents related
to spread-spectrum coding techniques. Spread-spectrum coding techniques refers
to a way of transmitting a signal for wireless communications by spreading the
signal over a wide frequency band. The Company believes that it has valid
defenses to Proxim's claims and has intervened in the investigation in order to
defend its customers. Proxim seeks relief in the form of an exclusion order
preventing the importation by the Company's customers of specified wireless
local area networking products, including some of the Company's products, into
the United States. If Proxim were able to obtain an exclusion order, the Company
believes that the order would likely apply to 802.11(b) card products and access
point products containing such cards for the Company's customers named in the
complaint, and possibly all 802.11(b) card products and access point products
containing such cards imported by the Company. The Company believes that any
order would not exclude importation of 802.11(b) chipsets, or impact any
potential 802.11(a) products. While it is possible that an exclusion order, if
granted, could affect products from which the Company derives a material amount
of revenue, the Company believes that it could restructure its operations to
minimize the impact of such an order on the Company's business. One of the
Company's subsidiaries, Agere Systems Guardian Corp., filed a lawsuit on May 23,
2001, in the U.S. District Court in Delaware against Proxim alleging
infringement of three patents used in Proxim's wireless local area networking
products.
If the Company is unsuccessful in resolving these proceedings, as they
relate to the Company, its operations may be disrupted or it may incur
additional costs. Other than as described above, the Company does not believe
there is any litigation pending that should have, individually or in the
aggregate, a material adverse effect on its financial position, results of
operations or cash flows.
ENVIRONMENTAL, HEALTH AND SAFETY
The Company is subject to a wide range of U.S. and non-U.S. governmental
requirements relating to employee safety and health and to the handling and
emission into the environment of various substances used in its operations. The
Company also is subject to environmental laws, including the Comprehensive
Environmental Response, Compensation and Liability Act, also known as Superfund,
that require the cleanup of soil and groundwater contamination at sites
currently or formerly owned or operated by the Company, or at sites where the
Company may have sent waste for disposal. These laws often require parties to
fund remedial action at sites regardless of fault. Lucent is a potentially
responsible party at numerous Superfund sites and sites otherwise requiring
cleanup action. With some limited exceptions, under the Separation and
Distribution Agreement with Lucent, the Company has assumed all environmental
liabilities resulting from the Company's Businesses, which include liabilities
for the costs associated with eight of these sites -- five Superfund sites, two
of the Company's former facilities and one of the Company's current
manufacturing facilities.
F-39
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. The Company has established financial
reserves to cover environmental liabilities where they are probable and
reasonably estimable. This practice is followed whether the claims are asserted
or unasserted. Management expects that the amounts reserved will be paid out
over the period of remediation for the applicable site, which typically ranges
from five to thirty years. Reserves for estimated losses from environmental
remediation are, depending upon the site, based primarily upon internal or third
party environmental studies, estimates as to the number, participation level and
financial viability of all potentially responsible parties, the extent of the
contamination and the nature of required remedial actions. Accruals will be
adjusted as further information develops or circumstances change. The amounts
provided for in the consolidated and combined financial statements for
environmental reserves are the gross undiscounted amount of such reserves,
without deductions for insurance or third party indemnity claims. Although the
Company believes that its reserves are adequate, including those covering the
Company's potential liabilities at Superfund sites, there can be no assurance
that expenditures which will be required relating to remedial actions and
compliance with applicable environmental laws will not exceed the amounts
reflected in these reserves or will not have a material adverse effect on the
Company's financial condition, results of operations or cash flows. Any possible
loss or range of possible loss that may be incurred in excess of that provided
for as of September 30, 2001, cannot be estimated.
LEASES
The Company leases land, buildings and equipment under agreements that
expire in various years through 2006. Rental expense under operating leases was
$133, $97 and $58 for the fiscal years ended September 30, 2001, 2000 and 1999,
respectively. The table below shows the future minimum lease payments due under
non-cancelable leases at September 30, 2001. Such payments total $331 for
operating leases. The net present value of such payments on the capital lease
obligation was $49 after deducting imputed interest of $6.
YEAR ENDED SEPTEMBER 30,
----------------------------------------
LATER
2002 2003 2004 2005 2006 YEARS
---- ---- ---- ---- ---- -----
Operating leases............................. $142 $106 $50 $29 $4 $--
Capital lease................................ 17 22 16 -- -- --
---- ---- --- --- -- --
Total...................................... $159 $128 $66 $29 $4 $--
==== ==== === === == ==
F-40
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
21. QUARTERLY INFORMATION (UNAUDITED)
FISCAL QUARTERS
---------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------ ------ ------- ------- -------
YEAR ENDED SEPTEMBER 30, 2001
Revenue........................................ $1,362 $1,191 $ 927 $ 600 $ 4,080
Gross profit (loss)............................ 580 441 (35) 10 996
Amortization of goodwill and other acquired
intangibles.................................. 111 112 112 80 415
Restructuring and separation................... 11 36 462 153 662
Impairment of goodwill and other acquired
intangibles.................................. -- -- 27 2,735 2,762
Loss before cumulative effect of accounting
change....................................... -- (148) (1,110) (3,354) (4,612)
Cumulative effect of accounting change......... (4) -- -- -- (4)
Net loss....................................... $ (4) $ (148) $(1,110) $(3,354) $(4,616)
Basic and diluted loss per share:
Loss before cumulative effect of accounting
change.................................... $ -- $ (.15) $ (.68) $ (2.05) $ (3.46)
Cumulative effect of accounting change....... -- -- -- -- --
Net loss..................................... $ -- $ (.15) $ (.68) $ (2.05) $ (3.46)
Average shares outstanding -- basic and diluted
(in millions)................................ 1,035 1,035 1,629 1,635 1,334
YEAR ENDED SEPTEMBER 30, 2000
Revenue........................................ $ 966 $1,067 $ 1,186 $ 1,489 $ 4,708
Gross profit................................... 464 454 520 715 2,153
Purchased in-process research & development.... -- 11 435 -- 446
Amortization of goodwill and other acquired
intangibles.................................. 5 5 67 112 189
Net income (loss).............................. $ 94 $ 65 $ (365) $ 130 $ (76)
Basic and diluted earnings (loss) per share.... $ .09 $ .06 $ (.35) $ .13 $ (.07)
Average shares outstanding -- basic and diluted
(in millions)................................ 1,035 1,035 1,035 1,035 1,035
22. SUBSEQUENT EVENTS
AMENDMENT OF CREDIT FACILITY
On October 4, 2001, the Company and its lenders amended its credit
facility. In connection with the amendment, the Company repaid $1,000 of the
$2,500 then outstanding, reducing the facility to $1,500. The facility is
comprised of term loans and revolving credit loans and is secured by the
Company's principal domestic assets other than the proceeds of the IPO and while
Lucent remains a majority stockholder, real estate. The maturity date of the
facility has been extended from February 22, 2002 to September 30, 2002. In
addition, if the Company raises at least $500 in equity or debt capital markets
transactions before September 30, 2002, the maturity date of the facility will
be extended to September 30, 2004, with the facility required to be reduced to
$750 on September 30, 2002 and $500 on September 30, 2003. The debt is not
convertible into any other securities of the Company.
The interest rates applicable to borrowings under the facility are based on
a scale indexed to the Company's credit rating. Based upon ratings of BB- from
Standard & Poor's and Ba3 from Moody's, the interest rate under the facility is
currently the applicable LIBOR rate plus 475 basis points. In addition,
F-41
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
until the Company permanently reduces the size of the facility to $1,000, the
applicable interest rate will increase by an additional 25 basis points every
ninety days, with the next increase taking effect on February 17, 2002. If the
Company permanently reduces the size of the facility to $1,000, the interest
rate for borrowings under the facility, assuming the Company's credit ratings
remain the same, would drop to the applicable LIBOR rate plus 400 basis points.
The only periodic debt service obligation under the amended credit facility is
to make quarterly interest payments.
Under the agreement, Agere must use proceeds of certain liquidity raising
transactions, asset sales outside the ordinary course of business and capital
markets transactions to reduce the size of the facility. If Agere completes the
liquidity raising transactions or sells assets outside the ordinary course of
business, it must apply 100% (50% if the size of the facility is $500 or less)
of the net cash proceeds it receives from the transaction to reduce the size of
the facility. The agreement also provides that 50% of the net cash proceeds of
the first $500 and 75% (50% if the size of the facility is $500 or less) of the
net cash proceeds greater than $500 from equity and debt capital markets
transactions be applied to reduce the credit facility. Notwithstanding the
foregoing, the Company must apply 100% of net cash proceeds over $1,000 from the
issuance of debt securities that are secured equally with the credit facility to
reduce the size of the credit facility.
The financial covenants in the original agreement have been replaced with
new covenants. The new covenants require Agere (1) to maintain a minimum level
of liquidity, (2) to achieve a minimum level of earnings before interest, taxes,
depreciation and amortization computed in accordance with the agreement each
quarter, (3) to maintain a minimum level of net worth and (4) to limit its
capital expenditures. Other covenants restrict the Company's ability to pay cash
dividends, incur indebtedness and invest cash in its subsidiaries and other
businesses.
BUSINESS RESTRUCTURING
On December 5, 2001, the Company announced its intention to further reduce
its workforce by approximately 950 employees. The workforce reduction was
undertaken to align the Company's business with current market conditions. The
positions affected are primarily management positions within the Company's
product groups, sales organizations and corporate support functions located in
New Jersey and Pennsylvania. The Company expects to complete the workforce
reduction and recognize a related charge by the end of fiscal 2002.
SALE OF FPGA BUSINESS
On December 7, 2001, the Company entered into an agreement to sell certain
assets and liabilities related to the field-programmable gate array ("FPGA")
business of the Integrated Circuits segment to Lattice Semiconductor Corporation
("Lattice") for $250 in cash. The Company's FPGA business consists of its
general-purpose ORCA(TM) FPGA product portfolio, field-programmable system chip
product portfolio and related software design tools. As part of the sale,
approximately 100 employees will transfer to Lattice. The sale is expected to
close in the second quarter of fiscal 2002, subject to regulatory approval and
other customary closing conditions.
F-42
AGERE SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS
ENDED
DECEMBER 31,
---------------
2001 2000
------ ------
Revenue (includes $78 and $231 for the three months ended
December 31, 2001 and 2000, respectively, from Lucent
Technologies Inc.)........................................ $ 537 $1,362
Costs....................................................... 521 782
------ ------
Gross profit................................................ 16 580
------ ------
Operating expenses
Selling, general and administrative....................... 109 157
Research and development.................................. 194 276
Amortization of goodwill and other acquired intangibles... 21 111
Restructuring and separation.............................. 72 11
------ ------
Total operating expenses............................... 396 555
------ ------
Operating income (loss)..................................... (380) 25
Other income -- net......................................... 75 21
Interest expense............................................ 50 24
------ ------
Income (loss) before provision for income taxes............. (355) 22
Provision for income taxes.................................. 20 22
------ ------
Loss before cumulative effect of accounting change.......... (375) --
Cumulative effect of accounting change (net of benefit for
income taxes of $2 for the three months ended December 31,
2000)..................................................... -- (4)
------ ------
Net loss.................................................... $ (375) $ (4)
====== ======
Basic and diluted loss per share:
Loss before cumulative effect of accounting change.......... $(0.23) $ --
Cumulative effect of accounting change...................... -- --
------ ------
Net loss.................................................... $(0.23) $ --
====== ======
Weighted average shares outstanding -- basic and diluted (in
millions)................................................. 1,635 1,035
====== ======
See Notes to Condensed Consolidated and Combined Financial Statements.
F-43
AGERE SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
2001 2001
------------ -------------
ASSETS
Current Assets
Cash and cash equivalents................................... $ 1,781 $ 3,152
Trade receivables, less allowances of $26 at December 31,
2001 and $33 at September 30, 2001........................ 255 347
Receivables due from Lucent Technologies Inc. .............. 44 42
Inventories................................................. 270 304
Prepaid expense............................................. 74 61
Other current assets........................................ 146 154
------- -------
Total current assets.................................... 2,570 4,060
Property, plant and equipment -- net of accumulated
depreciation and amortization of $2,456 at December 31,
2001 and $2,419 at September 30, 2001..................... 1,666 1,851
Goodwill and other acquired intangibles -- net of
accumulated amortization of $89 at December 31, 2001 and
$93 at September 30, 2001................................. 330 343
Deferred income taxes -- net................................ 3 4
Other assets................................................ 278 304
------- -------
Total assets............................................ $ 4,847 $ 6,562
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable............................................ $ 327 $ 514
Payroll and benefit-related liabilities..................... 153 138
Short-term debt............................................. 1,393 2,516
Income taxes payable........................................ 342 336
Restructuring reserve....................................... 105 171
Other current liabilities................................... 229 229
------- -------
Total current liabilities............................... 2,549 3,904
Post-employment benefit liabilities......................... 93 92
Long-term debt.............................................. 33 33
Other liabilities........................................... 65 72
------- -------
Total liabilities....................................... 2,740 4,101
------- -------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00 per share, 250,000,000
shares authorized and no shares issued and outstanding.... -- --
Class A common stock, par value $0.01 per share,
5,000,000,000 shares authorized and 727,429,667 and
727,000,107 shares issued and outstanding at December 31,
2001 and September 30, 2001, respectively................. 7 7
Class B common stock, par value $0.01 per share,
5,000,000,000 shares authorized and 908,100,000 shares
issued and outstanding at December 31, 2001 and September
30, 2001.................................................. 9 9
Additional paid-in capital.................................. 7,012 6,996
Accumulated deficit......................................... (4,917) (4,542)
Accumulated other comprehensive loss........................ (4) (9)
------- -------
Total stockholders' equity.............................. 2,107 2,461
------- -------
Total liabilities and stockholders' equity.............. $ 4,847 $ 6,562
======= =======
See Notes to Condensed Consolidated and Combined Financial Statements.
F-44
AGERE SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY/INVESTED EQUITY AND
TOTAL COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
-------------------
2001 2000
-------- --------
Class A Common Stock -- beginning and ending balance........ $ 7 $ --
------- -------
Class B Common Stock -- beginning and ending balance........ 9 10
------- -------
Owner's net investment
Beginning balance........................................... -- 5,823
Net loss prior to February 1, 2001.......................... -- (4)
Transfers to Lucent Technologies Inc........................ -- (1,405)
Transfers from Lucent Technologies Inc...................... -- 1,501
------- -------
Ending balance.............................................. -- 5,915
------- -------
Additional paid in capital
Beginning balance........................................... 6,996 --
Transfers from Lucent Technologies Inc...................... 15 --
Compensation on equity-based awards......................... 1 --
------- -------
Ending balance.............................................. 7,012 --
------- -------
Accumulated deficit
Beginning balance........................................... (4,542) --
Net loss from February 1, 2001.............................. (375) --
------- -------
Ending balance.............................................. (4,917) --
------- -------
Accumulated other comprehensive income (loss)
Beginning balance........................................... (9) (52)
Foreign currency translations............................... (2) 19
Unrealized gain on cash flow hedges......................... 2 --
Reclassification adjustments to net loss.................... 5 --
------- -------
Ending balance.............................................. (4) (33)
------- -------
Total stockholders' equity/invested equity............. $ 2,107 $ 5,892
======= =======
Total comprehensive income (loss)
Net loss.................................................... $ (375) $ (4)
Other comprehensive income.................................. 5 19
------- -------
Total comprehensive income (loss)...................... $ (370) $ 15
======= =======
See Notes to Condensed Consolidated and Combined Financial Statements.
F-45
AGERE SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS
ENDED DECEMBER 31,
-------------------
2001 2000
--------- -------
OPERATING ACTIVITIES
Net loss.................................................. $ (375) $ (4)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Cumulative effect of accounting change................. -- 4
Restructuring expense (reversal) -- net of cash
payments.............................................. (10) --
Provision for inventory write-downs.................... 55 40
Depreciation and amortization.......................... 126 216
Provision for uncollectibles........................... 5 --
Provision for deferred income taxes.................... 2 (6)
Impairment of investments.............................. 5 5
Equity earnings from investments....................... (21) (20)
Gain on sales of investments........................... (40) --
Amortization of debt issuance costs.................... 19 --
Decrease in receivables................................ 85 42
Increase in inventories................................ (21) (156)
Increase (decrease) in accounts payable................ (171) 60
Increase (decrease) in payroll and benefit
liabilities........................................... 15 (58)
Changes in other operating assets and liabilities...... (23) (21)
Other adjustments for non-cash items -- net............ 5 --
------- -----
Net cash provided (used) by operating activities.......... (344) 102
------- -----
INVESTING ACTIVITIES
Capital expenditures...................................... (43) (201)
Proceeds from the sale or disposal of property, plant and
equipment.............................................. 107 --
Proceeds from sales of investments........................ 53 --
Other investing activities -- net......................... -- 4
------- -----
Net cash provided (used) by investing activities.......... 117 (197)
------- -----
FINANCING ACTIVITIES
Transfers from Lucent Technologies Inc.................... -- 95
Payment of credit facility fees........................... (21) --
Principal repayments on short-term debt................... (1,123) --
------- -----
Net cash provided (used) by financing activities.......... (1,144) 95
------- -----
Effect of exchange rate changes on cash................... -- --
Net decrease in cash and cash equivalents................. (1,371) --
Cash and cash equivalents at beginning of period.......... 3,152 --
------- -----
Cash and cash equivalents at end of period................ $ 1,781 $ --
======= =====
See Notes to Condensed Consolidated and Combined Financial Statements.
F-46
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
On July 20, 2000, Lucent Technologies Inc. ("Lucent") announced its
intention to spin off its integrated circuits and optoelectronic components
businesses (collectively, the "Company's Businesses") as a separate company,
which is now Agere Systems Inc. (the "Company" or "Agere"). At that time, Lucent
announced it intended to distribute all shares of the Company's common stock it
then owned to its stockholders in a tax free distribution by the end of Lucent's
then current fiscal year, September 30, 2001, following the initial public
offering ("IPO") of the Company's Class A common stock, which was completed in
April 2001.
On August 1, 2000, the Company was incorporated in Delaware as a wholly
owned subsidiary of Lucent. On this date, 1,000 shares of the Company's common
stock, par value $0.01 per share, were issued, authorized and outstanding.
Effective February 1, 2001, Lucent transferred to the Company substantially all
of the assets and liabilities of the Company's Businesses (the "Separation")
except for short-term debt and related fees which were transferred at the IPO
closing date, and pension and postretirement plan assets and liabilities which
will be transferred at a later date.
On March 14, 2001, the Company amended its certificate of incorporation to
authorize shares of Class A and Class B common stock and changed and
reclassified its 1,000 outstanding shares of common stock into 1,035,100,000
shares of Class B common stock (the "Recapitalization"). The ownership rights of
Class A and Class B common stockholders are the same except that each share of
Class B common stock has four votes for the election and removal of directors
while each share of Class A common stock has one vote for such matters. All
Company share and per share data has been retroactively adjusted to reflect the
Recapitalization as if it had occurred at the beginning of the earliest period
presented. On April 2, 2001, the Company issued 600,000,000 shares of Class A
common stock in the IPO for $6 per share less underwriting discounts and
commissions of $.23 per share. On April 4, 2001, Lucent converted 90,000,000
shares of Class B common stock into Class A common stock and exchanged those
shares for outstanding Lucent debt with Morgan Stanley pursuant to the
overallotment option granted in connection with the IPO. After completion of the
IPO, inclusive of the overallotment option, Lucent owned approximately 58% of
the aggregate number of outstanding shares of Class A and B common stock. Also,
on April 2, 2001, the Company assumed from Lucent $2,500 of short-term debt. On
May 1, 2001, Lucent elected to convert 37,000,000 of its shares in the Company
from Class B common stock to Class A common stock.
Agere is currently a majority-owned subsidiary of Lucent. On August 16,
2001, Lucent announced that it had entered into amendments with the lenders
under its credit facilities that impose a number of conditions that Lucent must
satisfy in order to spin off Agere. Lucent has stated that it remains committed
to completing the process of separating Agere from Lucent, and that it intends
to move forward with the distribution of the Agere stock it holds in a tax-free
distribution (the "Distribution"). Because Lucent must meet a number of
conditions before it can complete the spin off and because Lucent alone will
make the decision about whether to complete the spin off, even if the conditions
were met, Agere can not assure you that Lucent will complete the spin off by a
particular date or at all.
BASIS OF PRESENTATION
The condensed consolidated and combined financial statements include
amounts prior to February 1, 2001 that have been derived from the consolidated
financial statements and accounting records of Lucent
F-47
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
using the historical results of operations and historical basis of the assets
and liabilities of the Company's Businesses. Management believes the assumptions
underlying the consolidated and combined financial statements are reasonable.
However, the consolidated and combined financial statements that were derived
from Lucent's financial records may not necessarily reflect the Company's
results of operations, financial position and cash flows in the future or what
its results of operations, financial position and cash flows would have been had
the Company been a stand-alone company. Because a direct ownership relationship
did not exist among all the various units comprising the Company, Lucent's net
investment in the Company is shown in lieu of stockholders' equity in the
combined financial statements prior to the Separation. The Company began
accumulating retained earnings (losses) on February 1, 2001, the date on which
Lucent transferred substantially all of the assets and liabilities of the
Company's Businesses to the Company. The formation of the Company and the
transfers of assets and liabilities from Lucent have been accounted for as a
reorganization of entities under common control, in a manner similar to a
pooling of interests.
Beginning February 1, 2001, the Company's consolidated financial statements
include certain majority owned subsidiaries and assets and liabilities of the
Company. Investments in which the Company exercises significant influence, but
which it does not control are accounted for under the equity method of
accounting. Investments in which the Company does not exercise significant
influence are recorded at cost. All material intercompany transactions and
balances between and among the Company's Businesses, subsidiaries and investees
accounted for under the equity method have been eliminated. In addition, certain
amounts in the prior year's condensed consolidated and combined financial
statements have been reclassified to conform to the fiscal 2002 presentation.
GENERAL CORPORATE EXPENSES
Prior to February 1, 2001, general corporate expenses were allocated from
Lucent based on revenue. These allocations were reflected in the selling,
general and administrative, costs and research and development line items in the
consolidated and combined statements of operations. The general corporate
expense allocations were primarily for cash management, legal, accounting, tax,
insurance, public relations, advertising, human resources and data services.
These allocations amounted to $45 for the three months ended December 31, 2000.
Management believes the costs of these services charged to the Company are a
reasonable representation of the costs that would have been incurred if the
Company had performed these functions as a stand-alone company. Since the
Separation, the Company has performed these functions using its own resources or
through purchased services. The Company and Lucent entered into agreements for
Lucent to provide certain general corporate services on a transition basis. See
Note 11 "Transactions with Lucent."
BASIC RESEARCH
Prior to February 1, 2001, research and development expenses included an
allocation from Lucent to fund a portion of the costs of basic research
conducted by Lucent's Bell Laboratories. This allocation was based on the number
of individuals conducting basic research who were transferred from Lucent's Bell
Laboratories to the Company as part of the Separation. The allocation amounted
to $17 for the three months ended December 31, 2000. Management believes the
costs of this research charged to the Company are a reasonable representation of
the costs that would have been incurred if the Company had performed this
research as a stand-alone company. Since the Separation, expenses for basic
research conducted by the Company are included with all other research and
development expenses in the consolidated statements of operations.
F-48
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
INTEREST EXPENSE
Prior to February 1, 2001, interest expense was allocated from Lucent as
Lucent provided financing to the Company and incurred debt at the parent level.
This allocation was based on the ratio of the Company's net assets, excluding
debt, to Lucent's total net assets, excluding debt. The allocation amounted to
$23 for the three months ended December 31, 2000. The Company's interest expense
as a stand-alone company is higher than that reflected in the combined
statements of operations for the three months ended December 31, 2000, primarily
due to the $2,500 credit facility assumed from Lucent at the completion of the
IPO. Interest expense for all periods presented includes interest expense
related to the Company's capitalized lease obligation.
PENSION AND POSTRETIREMENT COSTS
The documents relating to the Separation provide that, until the
Distribution, the Company's United States ("U.S.") employees will be
participants in Lucent's pension plans. At the Distribution, the Company will
become responsible for pension benefits for the active U.S. employees of the
Company, as well as U.S. employees who retire or terminate after the IPO. Lucent
will transfer to the Company the pension and postretirement assets and
liabilities related to these employees at the Distribution. Obligations related
to retired and terminated vested U.S. employees prior to the IPO will remain the
responsibility of Lucent. Lucent has managed its U.S. pension and postretirement
benefit plans on a consolidated basis and separate Company information is not
readily available. The consolidated and combined statements of operations
include, however, an allocation of the costs of the U.S. employee pension and
postretirement plans. These costs were allocated based on the Company's U.S.
active employee population for each of the periods presented. In relation to the
Lucent plans, the Company recorded pension expense of $0 and $2 for the three
months ended December 31, 2001 and 2000, respectively, and postretirement
expense of $2 and $3 for the three months ended December 31, 2001 and 2000,
respectively. The Company is responsible for the pension and postretirement
benefits of its non-U.S. employees. The liabilities of the various country-
specific plans for these employees are reflected in the consolidated and
combined financial statements and were not material for the periods presented.
There are estimated prepaid pension assets of $121 and postretirement
liabilities of $102 as of December 31, 2001 associated with various existing
Lucent pension and other employee benefit plans related to the Company
employees. The amounts transferred to the Company for prepaid pension assets and
postretirement liabilities at the Distribution and the pension and
postretirement expenses recognized in future periods could be materially
different than these amounts.
INCOME TAXES
The Company's income taxes were calculated on a separate tax return basis
prior to the IPO. This reflects Lucent's tax strategies and is not necessarily
reflective of the tax strategies that the Company would have followed or will
follow as a stand-alone company. For the three months ended December 31, 2001,
the Company recorded a provision for income taxes of $20 on a pre-tax loss of
$355, yielding an effective tax rate of negative 5.6%, due to the provision for
taxes in foreign jurisdictions and the recording of a full valuation allowance
of approximately $124 against U.S. net deferred tax assets. For the three months
ended December 31, 2000, the Company recorded a provision for income taxes of
$22 on pre-tax income of $22, yielding an effective tax rate of 100.0%, due to
the impact of non-tax deductible goodwill amortization and separation costs.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
ninety days or less to be cash equivalents. Cash is reflected net of outstanding
checks.
F-49
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
INTERIM FINANCIAL INFORMATION
These condensed financial statements have been prepared in accordance with
the rules of the Securities and Exchange Commission for interim financial
statements and do not include all annual disclosures required by accounting
principles generally accepted in the U.S. These financial statements should be
read in conjunction with the audited consolidated and combined financial
statements and notes thereto included in the Company's Form 10-K for the fiscal
year ended September 30, 2001. The condensed financial information as of
December 31, 2001 and for the three months ended December 31, 2001 and 2000 is
unaudited, but includes all adjustments that management considers necessary for
a fair presentation of the Company's consolidated and combined results of
operations, financial position and cash flows. Results for the three months
ended December 31, 2001 are not necessarily indicative of results to be expected
for the full fiscal year 2002 or any other future periods.
2. RECENT PRONOUNCEMENTS
SFAS 142
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS 142 provides guidance on the
financial accounting and reporting for acquired goodwill and other intangible
assets. Under SFAS 142, goodwill and indefinite lived intangible assets will no
longer be amortized. Intangible assets with finite lives will continue to be
amortized over their useful lives, which will no longer be limited to a maximum
life of forty years. The criteria for recognizing an intangible asset have also
been revised. As a result, the Company will need to re-assess the classification
and useful lives of its previously acquired goodwill and other intangible
assets. SFAS 142 also requires that goodwill and indefinite lived intangibles be
tested for impairment at least annually. The goodwill impairment test is a two
step process that requires goodwill to be allocated to reporting units. In the
first step, the fair value of the reporting unit is compared to the carrying
value of the reporting unit. If the fair value of the reporting unit is less
than the carrying value of the reporting unit, a goodwill impairment may exist,
and the second step of the test is performed. In the second step, the implied
fair value of the goodwill is compared to the carrying value of the goodwill and
an impairment loss will be recognized to the extent that the carrying value of
the goodwill exceeds the implied fair value of the goodwill. SFAS 142 is
effective for Agere in fiscal 2003, although earlier application is permitted.
The Company plans to adopt SFAS 142 effective October 1, 2002 and is currently
evaluating the potential effects of implementing this standard on its financial
condition and results of operations.
SFAS 143
Also in July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting
and reporting for legal obligations associated with the retirement of tangible
long-lived assets and their associated retirement costs. In accordance with SFAS
143, retirement obligations will be recorded at fair value in the period they
are incurred. When the liability is initially recorded, the cost is capitalized
by increasing the asset's carrying value, which is subsequently depreciated over
its useful life. SFAS 143 is effective for Agere in fiscal 2003, with earlier
application encouraged. The Company is currently evaluating the potential
effects on its financial condition and results of operations of adopting SFAS
143, as well as the timing of its adoption.
F-50
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SFAS 144
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 primarily
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and also affects certain aspects of accounting for
discontinued operations. SFAS 144 is effective for Agere in fiscal 2003, with
earlier application encouraged. The Company is currently evaluating the
potential effects on its financial condition and results of operations of
adopting SFAS 144, as well as the timing of its adoption.
3. ACCOUNTING CHANGE
Effective October 1, 2000, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"), and its
corresponding amendments under SFAS No. 138. SFAS 133 requires the Company to
measure all derivatives, including certain derivatives embedded in other
contracts, at fair value and to recognize them in the balance sheet as an asset
or liability, depending on the Company's rights or obligations under the
applicable derivative contract. For derivatives designated as fair value hedges,
the changes in the fair value both the derivative instrument and the hedged item
are recorded in earnings. For derivatives designated as cash flow hedges, the
effective portions of changes in fair value of the derivative reported in other
comprehensive income and are subsequently reclassified into earnings when the
hedged item affects earnings. Changes in fair value of derivative instruments
not designated as hedging instruments and ineffective portions of hedges are
recognized in earnings in the current period. The adoption of SFAS 133 as of
October 1, 2000, resulted in a cumulative after-tax increase in net loss of $4
(net of a tax benefit of $2). The increase in net loss is primarily due
derivatives not designated as hedging instruments. For both the three months
ended December 2001 and 2000 the change in fair market value of derivative
instruments was recorded in other income-net and was not material.
4. RESTRUCTURING AND SEPARATION EXPENSES
RESTRUCTURING EXPENSES
In the first quarter of fiscal 2002, the Company recorded a net
restructuring charge of $70 classified within restructuring and separation
expenses. This net restructuring charge is comprised of a charge of $121, offset
by a reversal of $51. This net charge is related to a series of initiatives that
were announced in fiscal 2001 and in the first quarter of fiscal 2002 to align
the Company's cost structure with market conditions. These initiatives were
focused on improving gross profit, reducing expenses and streamlining
operations, and include a worldwide workforce reduction, rationalization of
manufacturing capacity and other activities. There were no restructuring charges
recorded in the first quarter of fiscal 2001.
Worldwide Workforce Reduction
During the first quarter of fiscal 2002, workforce reductions resulted in a
restructuring charge of $40. This charge includes $23 for approximately 500
remaining employees associated with the workforce reduction of 6,000 positions
announced in fiscal 2001. It also includes $17 for approximately 500 employees
impacted by the December 5, 2001 announcement of an additional workforce
reduction of 950 positions. This new initiative affects primarily management
positions within the Company's product groups, sales organizations and corporate
support functions located in New Jersey and Pennsylvania. Of the total charge,
$13 represents a non-cash charge for termination benefits to certain U.S.
management employees that will be funded through Lucent's pension assets.
F-51
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The Company also recorded a $20 reversal of the restructuring reserve
associated with the worldwide workforce reductions due to the revision of an
estimate reflecting lower severance and benefit costs. Severance costs and other
exit costs were determined in accordance with Emerging Issues Task Force
("EITF") No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity."
The Company has substantially completed the workforce reductions announced
in fiscal 2001 with approximately 5,600 employees taken off-roll as of December
31, 2001. The remaining 400 employees associated with this action are expected
to be off-roll by the end of the second quarter of fiscal 2002. The Company
expects to complete the workforce reduction announced on December 5, 2001 by
September 30, 2002.
Rationalization of Manufacturing Capacity and Other Charges
During the first quarter of fiscal 2002, the Company recognized a
restructuring charge of $81 for rationalization of manufacturing capacity and
other charges. This charge includes $40 relating to facility closings, $33 for
asset impairments and $8 primarily for contract terminations.
The facility closing charge consists principally of a non-cash charge of
$35 for the realization of the cumulative translation adjustment resulting from
the Company's decision to substantially liquidate its investment in the legal
entity associated with the Madrid, Spain manufacturing operations. This charge
was recognized in accordance with EITF No. 01-5, Issue Summary No. 1,
"Application of SFAS No. 52, and Foreign Currency Translation, to an Investment
Being Evaluated for Impairment That Will Be Disposed Of." The $5 balance of the
charge related to the facility closings is primarily for lease terminations and
non-cancelable leases and related costs.
The $33 of asset impairment charges was recognized for property, plant, and
equipment associated with the consolidation of manufacturing and other corporate
facilities. All affected assets were classified as held for disposal, in
accordance with the guidance on impairment of assets in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," and depreciation was suspended. The $33 impairment charge
represents the write-down to fair value, less costs to sell, of property, plant
and equipment that was disposed of or removed from operations.
The Company also recorded a restructuring charge reversal of $31 during the
first quarter of fiscal 2002 associated with the rationalization of
manufacturing capacity and other charges. The majority of this reversal occurred
because the Company received $25 more from the sale of the assets associated
with the Company's Madrid, Spain manufacturing operations than originally
estimated. It also includes a $6 reversal of a restructuring reserve deemed no
longer necessary.
F-52
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The following table sets forth the Company's restructuring reserve as of
September 30, 2001 and reflects the activity regarding the worldwide workforce
reductions and the rationalization of manufacturing capacity and other charges
affecting the reserve for the three months ended December 31, 2001:
SEPTEMBER 30, THREE MONTHS ENDED DECEMBER 31,
2001 DECEMBER 31, 2001 2001
------------- --------------------------------------------------- -------------
RESTRUCTURING RESTRUCTURING RESTRUCTURING NON-CASH CASH RESTRUCTURING
RESERVE CHARGE REVERSAL ITEMS PAYMENTS RESERVE
------------- ------------- ------------- -------- -------- -------------
Workforce reduction.... $ 92 $ 40 $(20) $(13) $(61) $ 38
Rationalization of
manufacturing
capacity and other
charges.............. 79 81 (31) (43) (19) 67
---- ---- ---- ---- ---- ----
Total............. $171 $121 $(51) $(56) $(80) $105
==== ==== ==== ==== ==== ====
The Company anticipates that substantially all of the $38 restructuring
reserve balance as of December 31, 2001 relating to workforce reductions will be
paid by the end of fiscal year 2002. The restructuring reserve balance of $67 as
of December 31, 2001, relating to the rationalization of manufacturing capacity
and other charges will be paid as follows: the majority of the contract
terminations of $42 will be paid by the end of the third quarter of fiscal 2002;
non-cancelable lease obligations of $14, due to the consolidation of facilities,
will be paid over the respective lease terms through fiscal 2005; and other
related costs of $11 will be paid by the end of fiscal 2002. These cash outlays
will be funded through cash and cash equivalents on hand.
SEPARATION EXPENSES
The Company incurred costs, fees and expenses relating to the Separation.
These fees and expenses were primarily related to legal separation matters,
designing and constructing the Company's computer infrastructure, information
and data storage systems, marketing expenses relating to building a company
brand identity and implementing treasury, real estate, pension and records
retention management services. For the three months ended December 31, 2001 and
2000, the Company incurred separation expenses of $2 and $11, respectively.
5. DEBT
On April 2, 2001, in connection with the IPO, the Company assumed $2,500 of
short-term borrowings from Lucent under a credit facility. The Company did not
receive any of the proceeds of this short-term debt.
On October 4, 2001, the Company amended this credit facility. In connection
with the amendment, the Company repaid $1,000 of the $2,500 then outstanding,
reducing the facility to $1,500. The Company also paid $21 of fees associated
with the amendment, which will be amortized over the life of the facility. The
facility is comprised of term loans and revolving credit loans and is secured by
the Company's principal domestic assets other than the proceeds of the IPO and,
while Lucent remains a majority stockholder, real estate. The maturity date of
the facility was extended from February 22, 2002 to September 30, 2002. In
addition, if the Company raises at least $500 in equity or debt capital markets
transactions before September 30, 2002, the maturity date of the facility will
be extended to September 30, 2004, with the facility required to be reduced to
$750 on September 30, 2002 and $500 on September 30, 2003. The debt is not
convertible into any other securities of the Company. The amended credit
facility contains financial covenants, including restrictions on the Company's
ability to pay cash dividends.
F-53
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The only periodic debt service obligation under the credit facility is to
make quarterly interest payments. The interest rates on borrowings under the
facility are based on a scale indexed to the Company's credit rating. At
December 31, 2001, the interest rate under the facility was the applicable LIBOR
rate plus 475 basis points, based upon the ratings on that date of BB- from
Standard & Poor's and Ba3 from Moody's. In addition, the agreement provided that
until the Company permanently reduced the size of the facility to $1,000 or
less, the applicable interest rate would increase by an additional 25 basis
points every ninety days. If the Company permanently reduces the size of the
facility to $1,000 or less, the interest rate for borrowings under the facility,
assuming the Company's credit ratings remain the same, would drop to the
applicable LIBOR rate plus 400 basis points. The weighted average interest rate
at December 31, 2001 was 6.7%.
Under the agreement, Agere must use proceeds of certain liquidity raising
transactions, asset sales outside the ordinary course of business and capital
markets transactions to reduce the size of the facility. If Agere completes the
liquidity raising transactions or sells assets outside the ordinary course of
business, it must apply 100% (50% if the size of the facility is $500 or less)
of the net cash proceeds it receives from the transaction to reduce the size of
the facility. The agreement also provides that 50% of the net cash proceeds of
the first $500 and 75% (50% if the size of the facility is $500 or less) of the
net cash proceeds greater than $500 from equity and debt capital markets
transactions be applied to reduce the credit facility. Notwithstanding the
foregoing, the Company must apply 100% of net cash proceeds over $1,000 from the
issuance of debt securities that are secured equally with the credit facility to
reduce the size of the credit facility. As required, the Company used the
proceeds of certain liquidity raising transactions to reduce the size of the
facility to $1,377 at December 31, 2001. Subsequent to December 31, 2001, the
Company reduced the outstanding balance under the facility to less than $1,000.
See Note 14 "Subsequent Events."
6. SUPPLEMENTARY FINANCIAL INFORMATION
BALANCE SHEET INFORMATION
DECEMBER 31, SEPTEMBER 30,
2001 2001
------------ -------------
INVENTORIES
Completed goods............................................. $ 62 $ 87
Work in process and raw materials........................... 208 217
---- ----
Inventories............................................... $270 $304
==== ====
INCOME STATEMENT INFORMATION
The Company recorded inventory provisions classified within costs of $55
and $40 for the three months ended December 31, 2001 and 2000, respectively.
These amounts are calculated in accordance with the Company's inventory
valuation policy, which is based on a review of forecasted demand compared with
existing inventory levels.
7. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) represents net loss plus the results of
certain equity changes not reflected in the consolidated and combined statements
of operations. The components of other comprehensive income (loss) are shown
below.
F-54
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS
ENDED
DECEMBER 31,
------------
2001 2000
----- ----
Net loss.................................................... $(375) $(4)
Other comprehensive income (loss):
Foreign currency translation adjustments.................. (2) 19
Unrealized gain on cash flow hedges....................... 2 --
Reclassification adjustment to net loss................... 5 --
----- ---
Total comprehensive income (loss)...................... $(370) $15
===== ===
The foreign currency translation adjustments are not currently adjusted for
income taxes because they relate to indefinite investments in non-U.S.
subsidiaries. The unrealized gain on cash flow hedges was related to hedging
activities by Silicon Manufacturing Partners ("SMP"), a joint venture accounted
for under the equity method with Chartered Semiconductor in Singapore, and there
were no income taxes provided for the unrealized gain. The reclassification
adjustment is comprised of a reversal of a $30 unrealized gain due to the
realization of this gain from the sale of an available-for-sale investment and a
$35 unrealized foreign currency translation loss due to the realization of the
cumulative translation adjustment resulting from the Company's decision to
substantially liquidate its investment in the legal entity associated with the
Madrid, Spain manufacturing operations.
8. LOSS PER COMMON SHARE
Basic and diluted loss per common share is calculated by dividing net loss
by the weighted average number of common shares outstanding during the period.
As a result of the net loss reported for the three months ended December 31,
2001, 239,270 potential common shares have been excluded from the calculation of
diluted loss per share because their effect would be anti-dilutive.
In addition, at December 31, 2001, Agere employees held stock-based awards
covering approximately 43 million shares of Lucent common stock that will be
converted to Agere stock-based awards at the time of the Distribution, if the
Distribution occurs. The number of shares of Agere common stock subject to
substituted awards, if this conversion occurs, cannot be determined at this time
since the conversion ratio will be determined at the Distribution based on the
per share value of the Company's common stock in relation to that of Lucent's
common stock.
9. OPERATING SEGMENTS
Effective October 1, 2001, the Company realigned its business operations
into two market-focused groups, Infrastructure Systems and Client Systems, that
target the network equipment and consumer communications markets respectively.
These two groups comprise the Company's only reportable operating segments. The
segments each include revenue from the licensing of intellectual property
related to that segment. There were no intersegment sales.
The Infrastructure Systems segment is comprised of the former
Optoelectronics segment and portions of the former Integrated Circuits segment
and facilitates the convergence of products from both businesses as the Company
addresses markets in high-speed communications systems. The Company has
consolidated research and development, as well as marketing, for both
optoelectronic and integrated circuit devices aimed at communications systems.
This allows the more efficient design, development and delivery of complete,
interoperable solutions to equipment manufacturers for advanced enterprise,
access, metropolitan, long-haul and undersea applications.
The Client Systems segment consists of the remainder of the former
Integrated Circuits segment and includes wireless data, computer communications,
storage and wireless terminal solutions products. This
F-55
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
segment delivers semiconductor solutions for a variety of end-user applications
such as modems, Internet-enabled cellular terminals and hard-disk drives for
computers as well as software, systems and wireless local area network solutions
through the ORiNOCO(TM) product family.
Each segment is managed separately. Disclosure of segment information is on
the same basis as is used internally for evaluating segment performance and for
deciding how to allocate resources. Performance measurement and resource
allocation for the segments are based on many factors. The primary financial
measure used is operating income (loss), exclusive of amortization of goodwill
and other acquired intangibles, the impairment of goodwill and other acquired
intangibles, and restructuring and separation expenses.
The Company does not identify or allocate assets by operating segment. In
addition, the Company does not allocate interest income or expense, other income
or expense, or income taxes to the segments. Management does not evaluate
segments based on these criteria. The Company has centralized corporate
functions and uses shared service arrangements to realize economies of scale and
efficient use of resources. The costs of shared services, and other corporate
center operations managed on a common basis, are allocated to the segments based
on usage or other factors based on the nature of the activity.
The Company generates revenues from the sale of two products, integrated
circuits and optoelectronic components. These products are consistent with the
segments reported by the Company prior to October 1, 2001. Integrated circuits,
or chips, are made using semiconductor wafers imprinted with a network of
electronic components. They are designed to perform various functions such as
processing electronic signals, controlling electronic system functions and
processing and storing data. Optoelectronic components, including both active
and passive components, transmit, process, change, amplify and receive light
that carries data and voice traffic over optical networks.
REPORTABLE SEGMENTS
THREE MONTHS
ENDED
DECEMBER 31,
--------------
2001 2000
----- ------
REVENUE
Infrastructure Systems...................................... $ 263 $ 929
Client Systems.............................................. 274 433
----- ------
Total.................................................. $ 537 $1,362
===== ======
OPERATING INCOME (LOSS) (excluding amortization of goodwill
and other acquired intangibles and restructuring and
separation expenses)
Infrastructure Systems...................................... $(201) $ 140
Client Systems.............................................. (86) 7
----- ------
Total.................................................. $(287) $ 147
===== ======
RECONCILING ITEMS
A reconciliation of the totals reported for the operating segments to the
significant line items in the condensed financial statements is shown below.
F-56
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS
ENDED
DECEMBER 31,
------------
2001 2000
----- ----
Reportable segment operating income (loss).................. $(287) $147
Amortization of goodwill and other acquired intangibles..... (21) (111)
Restructuring and separation expenses....................... (72) (11)
----- ----
Total operating income (loss).......................... $(380) $ 25
===== ====
10. STOCK COMPENSATION PLANS
Agere maintains an Employee Stock Purchase Plan (the "ESPP") with
consecutive offering periods, each consisting of four purchase periods of
approximately six months in length. The first offering period commenced on March
27, 2001 and ends April 30, 2003. Subsequent offering periods will run generally
for 24 months beginning May 1 of every other year. Under the terms of the ESPP,
participating employees may have up to 10% of eligible compensation (subject to
certain limitations) deducted from their pay to purchase the Company's common
stock. The per share purchase price is equal to 85% of the lower of either the
market price on the employee's entry date for the current offering period, or
the last trading day of each purchase period. The amount that may be offered
pursuant to this plan is 85 million shares. Through December 31, 2001, 2,214,003
shares had been purchased under the ESPP.
11. TRANSACTIONS WITH LUCENT
Revenue from products sold to Lucent was $78 and $231 for the three months
ended December 31, 2001 and 2000, respectively. Products purchased from Lucent
were $9 for the three months ended December 31, 2000. There were no products
purchased from Lucent for the three months ended December 31, 2001.
In connection with the Separation, the Company and Lucent entered into an
Interim Service and Systems Replication Agreement to provide each other, on an
interim, transitional basis, with various data processing services,
telecommunications services and corporate support services, including:
accounting, financial management, information systems management, tax, payroll,
legal, human resources administration, procurement and other general support.
The costs associated with this agreement amounted to $1 for the three months
ended December 31, 2001.
In connection with the Separation, the Company and Lucent entered into the
Microelectronics Product Purchase Agreement. Under the agreement, Lucent
committed to purchase at least $2,800 of products from the Company over a
three-year period beginning February 1, 2001. In limited circumstances, Lucent's
purchase commitment may be reduced or the term may be extended. For the period
February 1, 2001 through December 31, 2001, Lucent's purchases under this
agreement were $402. In light of Lucent's purchases to date and adverse market
conditions, the Company is discussing with Lucent ways to restructure Lucent's
obligations under the agreement.
12. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is involved in proceedings,
lawsuits and other claims, including proceedings under laws and government
regulations related to environmental, tax and other matters. The semiconductor
industry is characterized by substantial litigation concerning patents and other
intellectual property rights. From time to time, the Company may be party to
various inquiries or claims in connection with these rights. These matters are
subject to many uncertainties, and outcomes are not
F-57
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
predictable with assurance. Consequently, the ultimate aggregate amount of
monetary liability or financial impact with respect to these matters at December
31, 2001 cannot be ascertained. While these matters could affect the operating
results of any one quarter when resolved in future periods and while there can
be no assurance with respect thereto, management believes that after final
disposition, any monetary liability or financial impact to the Company beyond
that provided for at December 31, 2001, would not be material to the annual
consolidated financial statements.
In December 1997, the Company entered into a joint venture, called SMP,
with Chartered Semiconductor, a leading manufacturing foundry for integrated
circuits, to operate a 54,000 square foot integrated circuit manufacturing
facility in Singapore. The Company owns a 51% equity interest in this joint
venture, and Chartered Semiconductor owns the remaining 49% equity interest. The
Company has an agreement with SMP under which it has agreed to purchase 51% of
the production output from this facility and Chartered Semiconductor agreed to
purchase the remaining 49% of the production output. If the Company fails to
purchase its required commitments, it will be required to pay SMP for the fixed
costs associated with the unpurchased wafers. Chartered Semiconductor is
similarly obligated with respect to the wafers allotted to it. The agreement
also provides that Chartered Semiconductor will have the right of first refusal
to purchase integrated circuits produced in excess of the Company's
requirements. The agreement may be terminated by either party upon two years
written notice, but may not be terminated prior to February 2008. The agreement
may also be terminated for material breach, bankruptcy or insolvency.
In July 2000, the Company and Chartered Semiconductor entered into an
agreement committing the Company and Chartered Semiconductor to jointly develop
manufacturing technologies for future generations of integrated circuits
targeted at high-growth communications markets. The Company has agreed to invest
up to $350 over a five-year period. As part of the joint development activities,
the two companies are staffing a new research and development team at Chartered
Semiconductor's Woodlands campus in Singapore. These scientists and engineers
are working with Company teams currently located in the U.S., as well as with
Chartered Semiconductor's technology development organization. The agreement may
be terminated for breach of material terms upon 30 days notice or for
convenience upon six months notice prior to the planned successful completion of
a development project, in which case the agreement will terminate upon the
actual successful completion of that project.
The Company has also entered into an agreement with Chartered Semiconductor
whereby Chartered Semiconductor will provide integrated circuit wafer
manufacturing services. Under the agreement, the Company provides a demand
forecast to Chartered Semiconductor for future periods and Chartered
Semiconductor commits to have manufacturing capacity available for the Company's
use. If the Company uses less than a certain percent of the forecasted
manufacturing capacity, the Company may be obligated to pay penalties to
Chartered Semiconductor. The Company does not expect any penalties under this
agreement to have a material impact on its results of operations or financial
condition.
RISKS AND UNCERTAINTIES
The Company has a limited history operating as a stand-alone company, and
it may be unable to make the changes necessary to operate as a stand-alone
company, or it may incur greater costs as a stand-alone company. Until early
2001, the Company's businesses were operated by Lucent as a segment of its
broader corporate organization rather than as a separate stand-alone company.
Lucent assisted the Company by performing various corporate functions, including
public relations, employee relations, investor relations, finance, legal and tax
functions.
F-58
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The Company's primary source of liquidity is its cash and cash equivalents.
The Company believes its cash and cash equivalents, together with additional
amounts that may be borrowed under the receivables securitization facility
described in Note 14, are sufficient to meet cash requirements at least through
the end of calendar year 2002, including repayment of borrowings under the
credit facility if its maturity is not extended, the cash requirements of the
facilities consolidation and the other announced restructuring activities. If
the Company's revenues are lower than what plans contemplate and as a result
less cash is generated, or if the Company no longer has access to the
receivables securitization facility, the Company would consider further cash
conserving actions to enable it to meet its cash requirements through the end of
calendar year 2002. These actions would include the elimination of employee
bonuses, the acceleration of already planned expense reductions, further limits
on capital spending and the retiming of certain restructuring initiatives. The
Company cannot assure you that these actions will be feasible at the time or
prove adequate. Currently, the Company is attempting to obtain additional
financing in a debt capital markets transaction. The Company cannot assure you
when it might complete this transaction, if at all, or how much it might be able
to raise from this transaction. The Company also intends to pursue other
financing transactions and will consider asset sales, although no committed
transactions exist at this time. Also, in connection with the spin-off from
Lucent, the Company is significantly restricted in its ability to issue stock in
order to raise capital. The Company's plan does not take into account any funds
that it may receive as a result of selling the Orlando, Florida or Reading and
Breinigsville, Pennsylvania facilities.
LEGAL PROCEEDINGS
From time to time, the Company is involved in legal proceedings arising in
the ordinary course of business, including unfair labor charges filed by its
unions with the National Labor Relations Board, claims before the U.S. Equal
Employment Opportunity Commission and other employee grievances. The Company
also may be subject to intellectual property litigation and infringement claims,
which could cause it to incur significant expenses or prevent it from selling
its products.
On October 3, 2000, a patent infringement lawsuit was filed against Lucent,
among other optoelectronic components manufacturers, by Litton Systems, Inc. and
The Board of Trustees of the Leland Stanford Junior University in the United
States District Court for the Central District of California (Western Division).
The Company anticipates that it may be named a defendant in the suit. The
complaint alleges that each of the defendants is infringing a patent related to
the manufacture of erbium-doped optical amplifiers. The patent is owned by
Stanford University and is exclusively licensed to Litton. The complaint seeks,
among other remedies, unspecified monetary damages, counsel fees and injunctive
relief. This matter is in its early stages.
An investigation was commenced on April 4, 2001, by the U.S. International
Trade Commission based on a request of Proxim, Inc. alleging patent infringement
by 14 companies, including some of the Company's customers for wireless local
area networking products. Proxim alleges infringement of three patents related
to spread-spectrum coding techniques. Spread-spectrum coding techniques refers
to a way of transmitting a signal for wireless communications by spreading the
signal over a wide frequency band. The Company believes that it has valid
defenses to Proxim's claims and has intervened in the investigation in order to
defend its customers. Proxim seeks relief in the form of an exclusion order
preventing the importation by the Company's customers of specified wireless
local area networking products, including some of the Company's products, into
the United States. If Proxim were able to obtain an exclusion order, the Company
believes that the order would likely apply to 802.11(b) card products and access
point products containing such cards for the Company's customers named in the
complaint, and possibly all 802.11(b) card products and access point products
containing such cards imported by the Company. The Company believes that any
order would not exclude importation of 802.11(b) chipsets, or impact any
F-59
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
potential 802.11(a) products. While it is possible that an exclusion order, if
granted, could affect products from which the Company derives a material amount
of revenue, the Company believes that it could restructure its operations to
minimize the impact of such an order on the Company's business. One of the
Company's subsidiaries, Agere Systems Guardian Corp., filed a lawsuit on May 23,
2001, in the U.S. District Court in Delaware against Proxim alleging
infringement of three patents used in Proxim's wireless local area networking
products.
If the Company is unsuccessful in resolving these proceedings, as they
relate to the Company, its operations may be disrupted or it may incur
additional costs. Other than as described above, the Company does not believe
there is any litigation pending that should have, individually or in the
aggregate, a material adverse effect on its financial position, results of
operations or cash flows.
ENVIRONMENTAL, HEALTH AND SAFETY
The Company is subject to a wide range of U.S. and non-U.S. governmental
requirements relating to employee safety and health and to the handling and
emission into the environment of various substances used in its operations. The
Company also is subject to environmental laws, including the Comprehensive
Environmental Response, Compensation and Liability Act, also known as Superfund,
that require the cleanup of soil and groundwater contamination at sites
currently or formerly owned or operated by the Company, or at sites where the
Company may have sent waste for disposal. These laws often require parties to
fund remedial action at sites regardless of fault. Lucent is a potentially
responsible party at numerous Superfund sites and sites otherwise requiring
cleanup action. With some limited exceptions, under the Separation and
Distribution Agreement with Lucent, the Company has assumed all environmental
liabilities resulting from the Company's Businesses, which include liabilities
for the costs associated with eight of these sites -- five Superfund sites, two
of the Company's former facilities and one of the Company's current
manufacturing facilities.
It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. The Company has established financial
reserves to cover environmental liabilities where they are probable and
reasonably estimable. This practice is followed whether the claims are asserted
or unasserted. Management expects that the amounts reserved will be paid out
over the period of remediation for the applicable site, which typically ranges
from five to thirty years. Reserves for estimated losses from environmental
remediation are, depending upon the site, based primarily upon internal or third
party environmental studies, estimates as to the number, participation level and
financial viability of all potentially responsible parties, the extent of the
contamination and the nature of required remedial actions. Accruals will be
adjusted as further information develops or circumstances change. The amounts
provided for in the consolidated and combined financial statements for
environmental reserves are the gross undiscounted amount of such reserves,
without deductions for insurance or third party indemnity claims. Although the
Company believes that its reserves are adequate, including those covering the
Company's potential liabilities at Superfund sites, there can be no assurance
that expenditures which will be required relating to remedial actions and
compliance with applicable environmental laws will not exceed the amounts
reflected in these reserves or will not have a material adverse effect on the
Company's financial condition, results of operations or cash flows. Any possible
loss or range of possible loss that may be incurred in excess of that provided
for as of December 31, 2001, cannot be estimated.
13. INVESTMENT IN SILICON MANUFACTURING PARTNERS PTE LTD.
The Company owns a 51% interest in SMP, a joint venture with Chartered
Semiconductor, which operates a 54,000 square foot integrated circuit
manufacturing facility in Singapore. The investment is accounted for under the
equity method due to Chartered Semiconductor's participatory rights under the
F-60
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
joint venture agreement. Under the joint venture agreement, each partner is
entitled to the margins from sales to customers directed to SMP by that partner,
after deducting their respective share of the overhead costs of SMP.
Accordingly, SMP's net income (loss) is not expected to be shared in the same
ratio as equity ownership. For the three months ended December 31, 2001 and 2000
the Company recognized equity income of $21 and $20 from SMP, respectively. SMP
reported net income of $30 and $28 for the three months ended December 31, 2001
and 2000, respectively. As of December 31, 2001, SMP reported total assets of
$679 and total liabilities of $442 compared to total assets of $670 and total
liabilities of $467 as of September 30, 2001.
14. SUBSEQUENT EVENTS
SALE OF FPGA BUSINESS
On January 18, 2002, the Company completed the sale of certain assets and
liabilities related to the field-programmable gate array ("FPGA") business of
the Infrastructure Systems segment to Lattice Semiconductor Corporation
("Lattice") for $250 in cash. The transaction included the Company's
general-purpose ORCA(R) FPGA product portfolio, field-programmable system chip
product portfolio and related software design tools. As part of the transaction,
approximately 100 product development, marketing and technical sales employees
transferred to Lattice. The net cash proceeds from the sale were used to
permanently reduce the credit facility in accordance with the terms of the
credit agreement.
FACILITIES CONSOLIDATION
On January 23, 2002, the Company announced plans to further improve its
operating efficiency. The Company plans to seek a buyer for its wafer
fabrication operation in Orlando, Florida. This site has approximately 1,100
employees. Additionally, over the next twelve to eighteen months, the Company
will consolidate nine existing manufacturing, research and development, business
management and administrative facilities in Pennsylvania and New Jersey into its
Allentown, Pennsylvania campus and two new research and development facilities
in New Jersey.
The Company will move the majority of its integrated circuits and
optoelectronics operations from the Company's sites in Reading and
Breinigsville, Pa., into the Allentown, Pa. campus. In addition, the majority of
its assembly and test operations located in these three sites will move to the
Company's assembly and test facilities in Bangkok, Thailand; Matamoras, Mexico;
and Singapore. Subsequently, the Company will discontinue operations at the
Reading and Breinigsville facilities and will seek buyers for those properties.
The Company expects that its plans to combine operations from these facilities
into Allentown will result in a net headcount reduction of approximately 300
positions.
The Company will also transfer approximately 350 corporate support and
product development positions from multiple locations in New Jersey to
Allentown. The remaining research and development positions in New Jersey will
move to two new research and development facilities in New Jersey.
The Company expects to incur cash expenditures associated with moving
manufacturing operations and consolidating facilities of approximately $250 to
$350. The Company does not anticipate any significant charges until the latter
half of fiscal 2002. There will also be additional non-cash impacts associated
with accelerated depreciation and asset impairments that the Company is still
evaluating, and such impacts could be material.
F-61
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
ACCOUNTS RECEIVABLE SECURITIZATION
On January 24, 2002, the Company and certain of its subsidiaries entered
into a securitization transaction relating to certain accounts receivable. As
part of the transaction, the Company and certain of its subsidiaries irrevocably
transfer accounts receivable on a daily basis to a wholly-owned, fully
consolidated, bankruptcy-remote subsidiary, Agere Systems Receivables Funding
LLC ("ASRF"). ASRF has entered into a loan agreement with certain financial
institutions, pursuant to which the financial institutions agreed to make loans
to ASRF secured by the accounts receivable. The financial institutions have
commitments under the loan agreement of up to $200; however the amount the
Company can actually borrow at any time depends on the amount and nature of the
accounts receivable that the Company has transferred to ASRF. The loan agreement
expires on January 21, 2003. On February 1, 2002, the Company borrowed $104
under this agreement. The proceeds were used to repay amounts outstanding under
the credit facility in accordance with the terms of the credit facility
agreement.
ASRF is a separate legal entity with its own separate creditors. Upon
liquidation of ASRF, its assets will be applied to satisfy the claims of its
creditors prior to any value in ASRF becoming available to Agere. The business
of ASRF is limited to the acquisition of receivables from the Company and
certain of its subsidiaries and related activities.
REDUCTION OF THE CREDIT FACILITY
On February 4, 2002, the outstanding balance under the Company's credit
facility was reduced to $999. This is $378 lower than the balance outstanding on
December 31, 2001. The amounts used to make the repayments resulted from the
following transactions: $24 from sale and leaseback transactions, $250 from the
FPGA sale and $104 from the accounts receivable securitization. Reducing the
facility below $1,000 resulted in a reduction in the interest rate for
borrowings under the facility to the applicable LIBOR rate plus 400 basis
points. Assuming the Company's credit ratings remain the same, this rate will
remain in effect for the life of the facility. Following these repayments, $500
of the facility is now a revolving credit facility with the remainder considered
a term loan.
F-62
AGERE SYSTEMS INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------------------------------------- ------------ --------------------- ---------- -------------
ADDITIONS
---------------------
BALANCE AT CHARGED CHARGED
BEGINNING OF TO COSTS & TO OTHER BALANCE AT
PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
------------ ---------- -------- ---------- -------------
(DOLLARS IN MILLIONS)
Year 2001
Allowance for doubtful accounts..... 17 26 -- 10(a) 33
Deferred tax asset valuation
allowance........................ -- 553 (16)(b) -- 537
Year 2000
Allowance for doubtful accounts..... 11 10 -- 4(a) 17
Deferred tax asset valuation
allowance........................ -- -- -- -- --
Year 1999
Allowance for doubtful accounts..... 9 4 -- 2(a) 11
Deferred tax asset valuation
allowance........................ -- -- -- -- --
---------------
(a) Amounts written off as uncollectible, payments or recoveries.
(b) Amount offsets deferred tax liability associated with the potential future
gain on the sale of available-for-sale securities.
F-63
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[AGERE LOGO]
$200,000,000 % Senior Subordinated Notes due 2007
and
Put Rights
------------------------
PROSPECTUS
, 2002
------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses to be paid in
connection with the issuance and distribution for the securities being
registered hereunder. Except for the Securities and Exchange Commission
registration fee and the National Association of Securities Dealers fee, all
amounts are estimates.
DESCRIPTION AMOUNT
----------- -------
Securities and Exchange Commission registration fee......... $18,400
NASD Fee.................................................... 20,500
Legal fees and expenses.....................................
Accounting fees and expenses................................
Printing and engraving fees and expenses....................
Blue Sky fees and expenses..................................
Trustee fees and expenses...................................
Miscellaneous expenses......................................
-------
Total....................................................... $
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware
provides that a corporation may indemnify directors and officers as well as
other employees and individuals against expenses including attorneys' fees,
judgments, fines and amounts paid in settlement in connection with various
actions, suits or proceedings, whether civil, criminal, administrative or
investigative other than an action by or in the right of the corporation, a
derivative action if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, if they had no reasonable
cause to believe their conduct was unlawful. A similar standard is applicable in
the case of derivative actions, except that indemnification only extends to
expenses including attorneys' fees incurred in connection with the defense or
settlement of such actions, and the statute requires court approval before there
can be any indemnification where the person seeking indemnification has been
found liable to the corporation. The statute provides that it is not exclusive
of other indemnification that may be granted by a corporation's by-laws,
disinterested director vote, stockholder vote, agreement or otherwise.
Our certificate of incorporation provides that each person who was or is
made a party or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person, or a person of whom such
person is the legal representative, is or was a director or officer of us or is
or was serving at our request as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is the alleged action of such person in an official
capacity as a director, officer, employee or agent or in any other capacity
while serving as a director, officer, employee or agent, will be indemnified and
held harmless by us to the fullest extent authorized by the General Corporation
Law of the State of Delaware, as the same exists or may hereafter be amended
against all expense, liability and loss reasonably incurred or suffered by such
person in connection therewith. Our certificate of incorporation also provides
that we will pay the expenses incurred in defending any such proceeding in
advance of its final disposition, subject to the provisions of the General
Corporation Law of the State of Delaware. Such rights are not exclusive of any
other right which any person may have or thereafter acquire under any statute,
provision of the certificate, by-law, agreement, vote of stockholders or
disinterested directors or otherwise. No repeal or
II-1
modification of such provision will in any way diminish or adversely affect the
rights of any director, officer, employee or agent of us thereunder in respect
of any occurrence or matter arising prior to any such repeal or modification.
Our certificate of incorporation also specifically authorizes us to maintain
insurance and to grant similar indemnification rights to our employees or
agents.
The General Corporation Law of the State of Delaware permits a corporation
to provide in its certificate of incorporation that a director of the
corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability for:
- any breach of the director's duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- payments of unlawful dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation provides that none of our directors will
be personally liable to us or our stockholders for monetary damages for breach
of fiduciary duty as a director, except, if required by the General Corporation
Law of the State of Delaware as amended from time to time, for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the General Corporation Law of the State of
Delaware, which concerns unlawful payments of dividends, stock purchases
or redemptions; or
- for any transaction from which the director derived an improper personal
benefit.
Neither the amendment nor repeal of such provision will eliminate or reduce
the effect of such provision in respect of any matter occurring, or any cause of
action, suit or claim that, but for such provision, would accrue or arise prior
to such amendment or repeal.
The separation and distribution agreement by and between us and Lucent
dated as of February 1, 2001, provides for indemnification by us of Lucent and
its directors, officers and employees for some liabilities, including
liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
We were incorporated under the laws of the State of Delaware under the name
Lucent ME Corp. on August 1, 2000 and changed our name to Agere Systems Inc. on
December 5, 2000. We issued 1,000 shares of our common stock, par value $0.01
per share, to Lucent in consideration of a capital contribution of $10.00 by
Lucent. That issuance was exempt from registration under the Securities Act of
1933, as amended, pursuant to Section 4(2) thereof because such issuance did not
involve any public offering of securities.
II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
The following exhibits are filed pursuant to Item 601 of Regulation S-K.
EXHIBIT
NO. DESCRIPTION
------- -----------
1.1 Form of Underwriting Agreement(3)
2 Separation and Distribution Agreement (filed as Exhibit 2 to
the Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
3.1 Restated Certificate of Incorporation of Agere Systems Inc.
(filed as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 (Registration No. 333-58324))(1)
3.2 Amended and Restated By-laws of Agere Systems Inc. (filed as
Exhibit 3.2 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-51594))(1)
4.1 Form of Indenture(3)
4.2 Form of Put Option Agreement(3)
4.3 Restated Certificate of Incorporation of Agere Systems Inc.
(filed as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 (Registration No. 333-58324))(1)
4.4 Amended and Restated By-laws of Agere Systems Inc. (filed as
Exhibit 3.2 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-51594))(1)
4.5 Rights Agreement between Agere Systems Inc. and The Bank of
New York, as Rights Agent (filed as Exhibit 4.2 to the
Registrant's Registration Statement on Form S-8
(Registration No. 333-58324))(1)
4.6 Form of Rights Certificate (attached as Exhibit B to the
Rights Agreement filed as Exhibit 4.6 hereto)(1)
5 Opinion of Cravath, Swaine & Moore as to legality of the
notes and put rights being registered(3)
8 Opinion of Cravath, Swaine & Moore regarding tax matters(3)
10.1 Separation and Distribution Agreement (filed as Exhibit 2 to
the Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
10.2 Interim Services and Systems Replication Agreement (filed as
Exhibit 10.2 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-51594))(1)
10.3 Employee Benefits Agreement (filed as Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
10.4 Tax Sharing Agreement (filed as Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
10.5 Agere Systems Inc. Short Term Incentive Plan(2)+
10.6 Agere Systems Inc. 2001 Long Term Incentive Plan(2)+
10.7 Agere Systems Inc. 2001 Long Term Incentive Plan Restricted
Stock Unit Award Agreement (filed as Exhibit 10.7 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)+
10.8 Agere Systems Inc. 2001 Long Term Incentive Plan
Nonstatutory Stock Option Agreement (filed as Exhibit 10.8
to the Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)+
10.9 Agere Systems Inc. Deferred Compensation Plan (filed as
Exhibit 10.9 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-51594))(1)+
10.10 Agere Systems Inc. Supplemental Pension Plan (filed as
Exhibit 10.10 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-51594))(1)+
10.11 Agere Systems Inc. Officer Severance Policy (filed as
Exhibit 10.11 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-51594))(1)+
10.12 Trademark License Agreement (filed as Exhibit 10.12 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
10.13 Patent and Technology License Agreement (filed as Exhibit
10.13 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
II-3
EXHIBIT
NO. DESCRIPTION
------- -----------
10.14 Technology Assignment and Joint Ownership Agreement (filed
as Exhibit 10.14 to the Registrant's Registration Statement
on Form S-1 (Registration No. 333-51594))(1)
10.15 Joint Design Center Operating Agreement (filed as Exhibit
10.15 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
10.16 Fiber Product Purchase Agreement (filed as Exhibit 10.16 to
the Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
10.17 Microelectronics Product Purchase Agreement (filed as
Exhibit 10.17 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-51594))(1)
10.18 ORiNOCO Product Purchase Agreement (filed as Exhibit 10.18
to the Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
10.19 Joint Venture Agreement with Chartered Semiconductor
Manufacturing Ltd. (filed as Exhibit 10.19 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
10.20 Agere Systems Inc. Non-Employee Director Stock Plan (filed
as Exhibit 10.20 to the Registrant's Registration Statement
on Form S-1 (Registration No. 333-51594))(1)+
10.21 Agere Systems Inc. 2001 Employee Stock Purchase Plan (filed
as Exhibit 10.21 to the Registrant's Registration Statement
on Form S-1 (Registration No. 333-51594))(1)+
10.22 $1,500,000,000 Amended and Restated Revolving Credit and
Term Loan Facility Agreement (filed as Exhibit 99.1 to the
Registrant's Current Report on Form 8-K filed October 5,
2001)(1)
10.23 Letter Agreement with Mark Greenquist (filed as Exhibit
10.23 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 2001)(1)+
10.24 Letter Agreement with Ronald Black (filed as Exhibit 10.24
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 2001)(1)+
10.25 Letter Agreement with Daniel A. DiLeo(4)+
10.26 Agere Systems Inc. Retention Plan(4)+
10.27 Letter Agreement with Ronald Black(2)+
10.28 Letter Agreement with Mark Greenquist(2)+
10.29 Letter Agreement amending the Tax Sharing Agreement(2)
12 Statement regarding computation of ratios(2)
21 List of Subsidiaries of Agere Systems Inc. (filed as Exhibit
21 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 2001)(1)
23.1 Consent of PricewaterhouseCoopers LLP(2)
23.2 Consent of Cravath, Swaine & Moore (contained in Exhibit
5)(3)
24.1 Power of Attorney(4)
24.2 Certified copy of a resolution adopted by the Registrant's
Board of Directors authorizing execution of the registration
statement by power of attorney(4)
25 Statement of Eligibility on Form T-1 of The Bank of New
York(2)
---------------
(1) Incorporated by reference.
(2) Filed herewith.
(3) To be filed by amendment.
(4)Previously filed.
+ Management contract or compensatory plan or arrangement.
(b) Financial statement schedules:
Schedule II -- Valuation and Qualification Accounts and Reserves
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
II-4
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purpose of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the city of Allentown, State of
Pennsylvania, on March 8, 2002.
AGERE SYSTEMS INC.
/s/ MARK T. GREENQUIST
By:
--------------------------------------
Mark T. Greenquist
Title: Executive Vice
President and
Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on March 8, 2002.
SIGNATURE TITLE
--------- -----
* President, Chief Executive Officer and Director
--------------------------------------------------- (Principal Executive Officer)
John T. Dickson
* Executive Vice President and Chief Financial
--------------------------------------------------- Officer
Mark T. Greenquist (Principal Financial Officer and
Principal Accounting Officer)
* Director
---------------------------------------------------
Rajiv L. Gupta
* Director
---------------------------------------------------
Rae R. Sedel
* Director
---------------------------------------------------
Frank A. D'Amelio
* Director
---------------------------------------------------
Harold A. Wagner
* Director
---------------------------------------------------
John A. Young
II-6
SIGNATURE TITLE
--------- -----
* Director
---------------------------------------------------
Henry B. Schacht
* By
/s/ MARK T. GREENQUIST
---------------------------------------------------
Mark T. Greenquist
ATTORNEY-IN-FACT
II-7
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
1.1 Form of Underwriting Agreement(3)
2 Separation and Distribution Agreement (filed as Exhibit 2 to
the Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
3.1 Restated Certificate of Incorporation of Agere Systems Inc.
(filed as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 (Registration No. 333-58324))(1)
3.2 Amended and Restated By-laws of Agere Systems Inc. (filed as
3.2 Exhibit to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-51594))(1)
4.1 Form of Indenture(3)
4.2 Form of Put Option Agreement(3)
4.3 Restated Certificate of Incorporation of Agere Systems Inc.
(filed as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 (Registration No. 333-58324))(1)
4.4 Amended and Restated By-laws of Agere Systems Inc. (filed as
Exhibit 3.2 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-51594))(1)
4.5 Rights Agreement between Agere Systems Inc. and The Bank of
New York, as Rights Agent (filed as Exhibit 4.2 to the
Registrant's Registration Statement on Form S-8
(Registration No. 333-58324))(1)
4.6 Form of Rights Certificate (attached as Exhibit B to the
Rights Agreement filed as Exhibit 4.6 hereto)(1)
5 Opinion of Cravath, Swaine & Moore as to legality of the
notes and put rights being registered(3)
8 Opinion of Cravath, Swaine & Moore regarding tax matters(3)
10.1 Separation and Distribution Agreement (filed as Exhibit 2 to
the Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
10.2 Interim Services and Systems Replication Agreement (filed as
Exhibit 10.2 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-51594))(1)
10.3 Employee Benefits Agreement (filed as Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
10.4 Tax Sharing Agreement (filed as Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
10.5 Agere Systems Inc. Short Term Incentive Plan(2)+
10.6 Agere Systems Inc. 2001 Long Term Incentive Plan(2)+
10.7 Agere Systems Inc. 2001 Long Term Incentive Plan Restricted
Stock Unit Award Agreement (filed as Exhibit 10.7 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)+
10.8 Agere Systems Inc. 2001 Long Term Incentive Plan
Nonstatutory Stock Option Agreement (filed as Exhibit 10.8
to the Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)+
10.9 Agere Systems Inc. Deferred Compensation Plan (filed as
Exhibit 10.9 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-51594))(1)+
10.10 Agere Systems Inc. Supplemental Pension Plan (filed as
Exhibit 10.10 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-51594))(1)+
10.11 Agere Systems Inc. Officer Severance Policy (filed as
Exhibit 10.11 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-51594))(1)+
10.12 Trademark License Agreement (filed as Exhibit 10.12 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
10.13 Patent and Technology License Agreement (filed as Exhibit
10.13 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
EXHIBIT
NO. DESCRIPTION
------- -----------
10.14 Technology Assignment and Joint Ownership Agreement (filed
as Exhibit 10.14 to the Registrant's Registration Statement
on Form S-1 (Registration No. 333-51594))(1)
10.15 Joint Design Center Operating Agreement (filed as Exhibit
10.15 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
10.16 Fiber Product Purchase Agreement (filed as Exhibit 10.16 to
the Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
10.17 Microelectronics Product Purchase Agreement (filed as
Exhibit 10.17 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-51594))(1)
10.18 ORiNOCO Product Purchase Agreement (filed as Exhibit 10.18
to the Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
10.19 Joint Venture Agreement with Chartered Semiconductor
Manufacturing Ltd. (filed as Exhibit 10.19 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)
10.20 Agere Systems Inc. Non-Employee Director Stock Plan (filed
as Exhibit 10.20 to the Registrant's Registration Statement
on Form S-1 (Registration No. 333-51594))(1)+
10.21 Agere Systems Inc. 2001 Employee Stock Purchase Plan (filed
as Exhibit 10.21 to the Registrant's Registration Statement
on Form S-1 (Registration No. 333-51594))(1)+
10.22 $1,500,000,000 Amended and Restated Revolving Credit and
Term Loan Facility Agreement (filed as Exhibit 99.1 to the
Registrant's Current Report on Form 8-K filed October 5,
2001)(1)
10.23 Letter Agreement with Mark Greenquist (filed as Exhibit
10.23 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 2001)(1)+
10.24 Letter Agreement with Ronald Black (filed as Exhibit 10.24
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 2001)(1)+
10.25 Letter Agreement with Daniel A. DiLeo(4)+
10.26 Agere Systems Inc. Retention Plan(4)+
10.27 Letter Agreement with Ronald Black(2)+
10.28 Letter Agreement with Mark Greenquist(2)+
10.29 Letter Agreement amending the Tax Sharing Agreement(2)
12 Statement regarding computation of ratios(2)
21 List of Subsidiaries of Agere Systems Inc. (filed as Exhibit
21 to the Registrant's Annual Report on Form 10- K for the
fiscal year ended September 30, 2001)(1)
23.1 Consent of PricewaterhouseCoopers LLP(2)
23.2 Consent of Cravath, Swaine & Moore (contained in Exhibit
5)(3)
24.1 Power of Attorney(4)
24.2 Certified copy of a resolution adopted by the Registrant's
Board of Directors authorizing execution of the registration
statement by power of attorney(4)
25 Statement of Eligibility on Form T-1 of The Bank of New
York(2)
---------------
(1) Incorporated by reference.
(2) Filed herewith.
(3) To be filed by amendment.
(4)Previously filed.
+ Management contract or compensatory plan or arrangement.