As filed with the Securities and Exchange Commission on January 30, 2002
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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
Proposed Maximum
Title of Each Class of Aggregate Offering Amount of
Securities to be Registered Price(1) Registration Fee
Investment Units Consisting of %
Senior Subordinated Notes $200,000,000 $18,400
due 2007 and Put Rights .....
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act.
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.
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 JANUARY 30, 2002
PROSPECTUS
[logo]
400,000 Investment Units
Consisting of
$200,000,000 Principal Amount of
% Senior Subordinated Notes due 2007
and
Put Rights
------------
Agere Systems Inc. is offering 400,000 investment units at a price of
$ per investment unit. Each investment unit consists of a % senior
subordinated note in the principal amount of $500 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 $
exceeds the average closing or sale price of a share of Agere common stock
during the 20-trading day period preceding such date.
------------
Investing in the investment units involves risks. See "Risk Factors"
beginning on page 13.
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 Investment Unit Total
Public Offering Price $ $
Purchaser Discount $ $
Proceeds to Agere Systems Inc. $ $
Interest on the notes will accrue from , 2002 to date of delivery.
------------
We expect to deliver the investment units to the purchaser on or about , 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
Forward-Looking Statements...................................................1
Summary......................................................................2
Risk Factors................................................................13
Use of Proceeds.............................................................22
Capitalization..............................................................23
Selected Financial Information..............................................24
Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................26
Business....................................................................41
Recent Developments.........................................................57
Management..................................................................61
Arrangements Between Lucent and Our Company.................................78
Principal Stockholders......................................................89
Certain Indebtedness........................................................90
Description of Investment Units.............................................92
Description of Notes........................................................93
Description of Put Rights..................................................133
Certain Federal Income Tax Consequences....................................138
Plan of Distribution.......................................................141
Legal Matters..............................................................142
Experts ...................................................................142
Where You Can Find More Information........................................142
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 Gartner Dataquest
Alert: Communications Semiconductor and Optical Component Market Share in
2000, issued on June 11, 2001, analyst reports and 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", "Business" and
"Recent Developments." 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."
1
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. We had revenue of $4,080 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. As
of September 30, 2001, we employed approximately 14,400 people worldwide. We
have major research and development and manufacturing sites in the United
States, Mexico, Singapore and Thailand.
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. In
fiscal 2001, we derived $2,869 million, or 70% of our revenue, from sales of our
integrated circuits segment.
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. In fiscal 2001, we
derived $1,211 million, or 30% of our revenue, from sales of our optoelectronic
components.
Competitive Strengths
Integrated Circuits
Our integrated circuits combine a number of functions into a single
unit or chip. Because of this integration, we have the ability to deliver
products that interact more effectively and enhance performance. This allows our
customers to meet the requirements of their end customers faster and more cost
effectively than if they purchase a number of separate integrated circuits.
We have dedicated engineering groups that develop core manufacturing
technology, common design methodology and commonly used integrated circuit
design elements for use across our Integrated Circuits segment. By using common
core technologies, we simplify our design methods, create reusable intellectual
property and achieve manufacturing efficiencies.
We believe the primary considerations for customers selecting
integrated circuit products are:
o design capabilities, including the ability to deliver integrated
solutions;
2
o performance, as measured by speed, power requirements and reliability;
o feature set;
o price;
o flexibility, which refers to the ability to design products using the
manufacturer's own intellectual property, the manufacturer's
customers' intellectual property or a combination of both; and
o 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, price may be one of the most important considerations
for a customer selecting many of our client access and network connectivity
integrated circuits because these integrated circuits are used in price
sensitive products sold to consumers. On the other hand, a customer selecting
our network communications integrated circuits typically will be more focused on
design and performance rather than price because these customers often have
specialized demands that require customized solutions.
Optoelectronic Components
Our optoelectronic components are engineered to work together in an
optical network. We 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 optical 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.
We believe the primary considerations for customers selecting
optoelectronic components are:
o performance, as measured by speed, power requirements and reliability;
o price;
o breadth of product line and ability to offer integrated solutions;
o quality and automation of manufacturing processes;
o manufacturing capacity, as measured by ability to satisfy orders; and
o compatibility of products 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.
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.
o 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 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.
o 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.
o 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 improving gross profit,
reducing expenses and streamlining operations within these segments.
3
o 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 products more
quickly. We also support customers with technical
product and systems understanding to help them use our
products effectively.
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.
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 continues to move forward with its intention to distribute
all shares of our common stock that it owns to its stockholders in a tax-free
distribution. However, Lucent's credit facilities include 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. 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.
4
RECENT DEVELOPMENTS
Earnings
On January 23, 2002, we reported that revenues for the first quarter
of fiscal 2002, ending December 31, 2001, were $537 million, down
approximately 10% from the September quarter. Reported net loss for the
December quarter was $375 million, or $0.23 per share. Reported net loss for
the September quarter was $3,354 million, or $2.05 per share, which included
$2,735 million in impairment of goodwill and other acquired intangibles.
Facility Consolidation
On January 23, 2002, we announced a number of initiatives to
accelerate the implementation of our operating model. First, we announced our
intention to sell our Orlando, Florida wafer fabrication facility. Second, we
announced plans to consolidate nine existing manufacturing, research and
development, business management and administrative facilities in Pennsylvania
and New Jersey into our Allentown, Pennsylvania campus and one new R&D
facility in central New Jersey. The Pennsylvania and New Jersey plans include
the consolidation of:
o all integrated circuit and optoelectronic wafer fabrication activities
(currently located in Allentown, Breinigsville and Reading,
Pennsylvania and Murray Hill, New Jersey) into our Allentown campus;
o the majority of integrated circuit and optoelectronic assembly and
test operations (currently located in Allentown, Breinigsville and
Reading) to our facilities in Bangkok, Thailand; Matamoras, Mexico;
and Singapore; all remaining assembly and test operations, primarily
development operations, will be consolidated into our Allentown
campus;
o all research and development functions currently located in
Pennsylvania into our Allentown campus; approximately one quarter of
all research and development functions currently located in New Jersey
will also be consolidated into our Allentown campus with the remaining
New Jersey functions being consolidated into a new research and
development facility in central New Jersey; and
o all sales, administrative and other functions currently located in
Pennsylvania and New Jersey into our Allentown campus.
The consolidation is expected to be completed in 12 to 18 months.
When completed, the Pennsylvania and New Jersey consolidation actions will
reduce floor space in the region by 50%, or approximately 2.0 million square
feet, saving approximately $100 million annually in cash. Total cash required
for the consolidation actions is estimated to be between $250 million and $350
million. Non-cash charges associated with these activities have not yet been
determined. Operations at our owned facilities in Breinigsville and Reading
will be terminated and those facilities closed, and we will seek buyers for
those properties. Five leased facilities will be vacated.
FPGA Sale
On January 18, 2002, we completed the sale of our Field-Programmable
Gate Array, or FPGA, business to Lattice Semiconductor Corporation for $250
million in cash. The transaction included our general-purpose ORCA(R) FPGA
product portfolio, our field programmable system chip, or FPSC, product
portfolio and all related software design tools. As part of the transaction,
approximately 100 of our product development, marketing and technical sales
employees joined Lattice.
Accounts Receivable Securitization
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
transfer accounts receivable on a daily basis to a wholly-owned,
bankruptcy-remote special purpose subsidiary which will be consolidated in our
results. The special purpose subsidiary has entered into a loan agreement with
certain financial institutions, pursuant to which the financial institutions
agreed to make loans to the special purpose 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 special purpose subsidiary. The loan agreement
expires on January 21, 2003.
Realignment
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.
5
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 sold for use in 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.
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.
6
THE OFFERING
We are offering 400,000 investment units at a price of $ per
investment unit. Each investment unit consists of a % senior subordinated note
in the principal amount of $500 and put rights.
Issuer.............................................. Agere Systems Inc.
Purchaser........................................... SHARCS Trust I, a newly created Delaware business trust, will
purchase all the investment units from us. The trust has advised us
that:
o it will also purchase shares of our common stock in private
transactions or in the open market;
o it will issue "SHARCS(sm) (Shared Appreciation Redeemable
Convertible Securities)," which are securities that
represent all of the beneficial interest in the trust; and
o holders of SHARCS will have the right upon the occurrence of
certain events to exchange their SHARCS 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.
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:
o 100% of their principal amount plus accrued interest to the date
of redemption; and
o 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:
o subordinate in right of payment to all existing and future senior
indebtedness, including our credit facility;
o equal with any future senior subordinated indebtedness; and
o senior to any future junior subordinated indebtedness.
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 balance sheet liabilities of our
subsidiaries were $ million at , 2002.
7
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. A holder of SHARCS who wishes to
exercise the right to require us 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. 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:
o incur additional debt;
o pay dividends on stock, repurchase stock or redeem subordinated
debt;
o make investments;
o create liens on the collateral;
o sell assets;
o sell capital stock of subsidiaries;
o guarantee other indebtedness;
o enter into agreements that restrict dividends or distributions from
subsidiaries;
o merge or consolidate or sell all or substantially all of our assets;
and
o enter into transactions with affiliates.
These covenants are subject to a number of important exceptions
and qualifications. See "Description of Notes--Certain
Covenants."
U.S. federal income tax considerations.............. The notes will be issued with original issue discount for U.S.
federal income tax purposes. See "Certain 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.
Trustee for 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 $ 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 shares
8
of our common stock 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 by either party). Upon the
occurrence of certain events, the put rights will be accelerated. See
"Description of Put Rights."
9
RISK FACTORS
See "Risk Factors," which begins on page 13, for a discussion of
certain factors that you should consider in evaluating an investment in the
investment units.
------------------
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.
10
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following table sets forth our summary historical financial
information derived from our audited consolidated and combined 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 consolidated and combined financial statements and the notes
to our consolidated and combined financial statements included elsewhere in
this prospectus.
Year ended
September 30,
----------------------------------
2001 2000 1999
--------- --------- ---------
(dollars in millions)
Statement of operations information:
Revenue:
Integrated circuits.......................................................... $ 2,869 $ 3,507 $ 3,055
Optoelectronics.............................................................. 1,211 1,201 659
Total revenue................................................................ 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
Cumulative effect of accounting change (net of provision (benefit) for
income taxes)............................................................... (4) -- 32
Net income (loss)............................................................... (4,616) (76) 351
Other financial data:
Ratio of earnings to fixed charges(1)........................................... n/a 2.4 8.7
Deficiency(1)................................................................... $ 4,553 n/a n/a
Supplemental financial data:
EBITDA(2)....................................................................... $ (3,520) $ 822 $ 877
Adjusted EBITDA(3).............................................................. (96) 1,268 894
The "as adjusted" information is derived from data contained in our historical financial statements which has been adjusted to
give pro forma effect to (1) the amendment of the credit facility, and the repayment of $1,000 million of short-term debt under the
credit facility, on October 4, 2001 and (2) the issuance and sale of the investment units and the application of the net proceeds
therefrom as described under "Use of Proceeds" as if such transactions had occurred as of September 30, 2001.
September 30, 2001
------------------------------
Historical As adjusted
(dollars in millions)
Balance sheet information:
Cash....................................... $ 3,152 $
Working capital............................ 156
Total assets............................... 6,562
Short-term debt............................ 2,516
Long-term debt............................. 33
Total stockholders' equity................. 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.
11
(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:
Historical
Year Ended
September 30,
-------------------------
2001 2000 1999
------- ------ ------
(dollars in millions)
EBITDA................................................$(3,520) $ 822 $ 877
Purchased in-process research and development......... -- 446 17
Restructuring and separation.......................... 662 -- --
Impairment of goodwill and other acquired intangibles. 2,762 -- --
-------- ------ ------
Adjusted EBITDA.......................................$ (96) $1,268 $ 894
======== ====== ======
12
RISK FACTORS
An investment in the investment units 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 investment
units.
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 MAY NOT
OCCUR, AND WE MAY NOT ACHIEVE MANY OF THE EXPECTED BENEFITS OF OUR SEPARATION,
SO WE MAY LOSE MANY OF OUR EMPLOYEES AND OUR BUSINESS MAY SUFFER.
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. If the distribution of all shares of our common stock that
Lucent owns to its stockholders does not occur, then these customers may not
increase or commence purchases of our products. Many of our existing employees
are anticipating our spin-off from Lucent and may be more susceptible to
competitive job offers if the distribution does not occur or is delayed. We also
may not obtain some of the other benefits we expect as a result of this
distribution, including greater strategic focus and increased agility and speed.
Further, even if the distribution occurs, we may not achieve the benefits of our
separation. In addition, until the distribution occurs, the risks relating to
Lucent's control of us and the potential business conflicts of interest between
Lucent and us will continue to be relevant to our stockholders.
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:
o 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;
o labor, tax, employee benefit, indemnification and other matters
arising from our separation from Lucent;
o intellectual property matters;
o employee recruiting and retention;
o 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
o 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.
13
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.
o 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.
o 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.
o 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.
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
14
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.
IF WE DO NOT COMPLETE OUR ANNOUNCED 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 business has been experiencing lower revenues due to decreased and
canceled customer orders. Revenue has declined over the past five quarters.
During calendar 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:
o rapid, and sometimes disruptive, technological developments;
o evolving industry standards;
o changes in customer requirements;
o limited ability to accurately forecast future customer orders;
o frequent new product introductions and enhancements; and
o short product life cycles with declining prices over the life cycle of
the product.
15
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 equipment. Consequently, our
customers may discover errors after the products have been deployed. The
occurrence of any defects, errors or failures could result in:
o cancelation of orders;
o product returns, repairs or replacements;
o diversion of our resources;
o legal actions by our customers or our customers' end-users;
o increased insurance costs; and
o 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 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.
16
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.
WE DEPEND ON SOME SINGLE SOURCES OF SUPPLY, PARTICULARLY FOR OUR OPTOELECTRONIC
COMPONENTS, AND INTERRUPTIONS AFFECTING THESE AND OTHER SUPPLIERS COULD DISRUPT
OUR PRODUCTION, COMPROMISE OUR PRODUCT QUALITY AND CAUSE OUR REVENUE TO DECLINE.
We depend on a single source supplier for several different parts used
to make some of our optoelectronic components. Some of these single source
suppliers also are competitors of ours. In some of these cases, there is no
qualified alternative supplier for these parts or processes and qualifying new
suppliers could require a substantial lead time. The loss of any of these or
other significant suppliers or the inability of a supplier to meet performance
and quality specifications or delivery schedules could cause our revenue to
significantly decline.
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. 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. To the extent we rely on joint
ventures and third-party manufacturing relationships, especially with respect to
integrated circuits, we face the following risks:
o their inability to develop manufacturing methods appropriate for our
products;
o that the manufacturing costs will be higher than planned;
o that the reliability of our products will decline;
o their unwillingness to devote adequate capacity to produce our
products;
o their inability to maintain continuing relationships with our
suppliers; and
o the reduction of our control over delivery schedules and costs of our
products.
17
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 INTEGRATED CIRCUIT AND OPTOELECTRONIC COMPONENT AVERAGE SELLING PRICES
IN PARTICULAR PRODUCT AREAS ARE DECLINING AND SOME OF OUR OLDER PRODUCTS ARE
BECOMING OBSOLETE, 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 becoming obsolete.
We may experience substantial decreases in sales of these products in subsequent
years.
If we do not offset these decreases by increases in our sales of other
products, including new products, that can be sold at higher prices, our revenue
will decline, which will have a material adverse effect on our results of
operations.
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:
o 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;
o unexpected changes in regulatory requirements;
o inadequate protection of intellectual property in some countries
outside of the United States;
o currency exchange rate fluctuations; and
o political and economic instability.
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.
18
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.
WE MAY NOT HAVE FINANCING FOR FUTURE STRATEGIC INITIATIVES, WHICH MAY PREVENT US
FROM ADDRESSING GAPS IN OUR PRODUCT OFFERINGS, 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.
Also, in connection with our spin-off from Lucent, we are significantly
restricted in our ability to issue stock in order to raise capital.
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, TO FUND OUR OPERATIONS OR TO SERVICE OUR DEBT.
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, AND WE MAY SUBSTANTIALLY INCREASE OUR DEBT IN THE FUTURE.
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 January 24,
2002, $1,103 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 investment units to further
repay this short-term debt. After giving pro forma effect to the issuance and
sale of the investment units 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
19
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.
We may substantially increase our debt in the future. If our cash flow
from operations is less than we expect, we will require more financing. We will
from time to time issue additional debt, borrow funds under revolving credit
facilities or issue other long- or short-term debt.
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:
o incur indebtedness at the subsidiary or parent level;
o incur or permit to exist liens or security interests on our
assets;
o merge or consolidate with another entity or sell all or
substantially all of our assets;
o make investments in non-affiliates and certain of our
subsidiaries;
o make or declare dividends on our capital stock;
o consummate certain transactions with our affiliates; and
o 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 investment units and the application of the net proceeds therefrom as
described under "Use of Proceeds," as of , 2002, 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. 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 investment units 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.
20
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. EVEN IF A TRANSACTION DOES TRIGGER THAT OBLIGATION, WE MAY NOT BE ABLE 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.
However, certain important corporate events, such as leveraged recapitalizations
that would increase the level of our indebtedness, would not constitute a change
of control under the indenture. Moreover, even if a transaction triggers a
repurchase obligation, it is possible that we will not have sufficient funds at
the time of the change of control to make the required repurchase of notes. In
addition, restrictions in our credit facility will not allow such repurchases.
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 "Certain 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:
o the liquidity of any market that may develop for the notes;
o your ability to sell the notes; or
o 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 will be
outstanding at maturity, a 10% decline in the price of our common stock would
result in an obligation to pay $ million. We cannot assure you that we will have
sufficient funds to satisfy this obligation.
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 currently
the applicable LIBOR rate plus 475 basis points. In addition, until we
permanently reduce the size of the facility to $1,000 million, 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. The weighted average
interest rate at September 30, 2001 was 7.11%. If we permanently reduce the size
of the facility to $1,000 million the interest rate for borrowings under the
facility, assuming our 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.
22
CAPITALIZATION
The following table sets forth our consolidated capitalization as of
September 30, 2001, on an actual basis and on an as adjusted basis to give
effect to the amendment of the credit facility and the related repayment of
$1,000 million of short-term debt under the credit facility, this offering and
the use of approximately 50% of the net proceeds 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
combined and consolidated financial statements and the notes to our combined and
consolidated financial statements included elsewhere in this prospectus.
September 30, 2001
-----------------------------------
Historical As adjusted
(unaudited)
(dollars in millions)
Cash and cash equivalents......................................................... $ 3,152 $
========= =========
Put rights liability.............................................................. $ -- $
========= =========
Debt
Credit facility................................................................ $ 2,500 $
% Senior Subordinated Notes due 2007......................................... --
Capitalized lease obligation................................................... 49
--------- ---------
Total debt.................................................................. $ 2,549 $
========= =========
Stockholders' equity:
Class A common stock, par value $0.01 per share, 5,000,000,000 shares
authorized and 727,000,107 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..................................................... 6,996
Accumulated deficit............................................................ (4,542)
Accumulated other comprehensive loss........................................... (9)
--------- ---------
Total stockholders' equity.................................................. 2,461
--------- ---------
Total capitalization........................................................ $ 5,010 $
========= =========
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 years ended September 30, 2001, 2000 and 1999 and
as of September 30, 2001 and 2000 has been derived from our audited consolidated
and combined 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 consolidated
and combined financial statements and the related notes included elsewhere in
this prospectus.
Year Ended September 30,
----------------------------------------------------
2001(1) 2000(2) 1999 1998 1997
-------- -------- -------- -------- --------
(Dollars in millions, except per share amounts)
Statement of operations information:
Revenue.............................................................. $ 4,080 $ 4,708 $ 3,714 $ 3,101 $ 2,769
Gross profit......................................................... 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.............. 415 189 13 3 1
Restructuring and separation......................................... 662 -- -- -- --
Impairment of goodwill and other acquired intangibles................ 2,762 -- -- -- --
Income (loss) before cumulative effect of accounting change.......... (4,612) (76) 319 303 (275)
Cumulative effect of accounting change (net of provision (benefit)
for income taxes of $(2) in 2001 and $21 in 1999)(3)................. (4) -- 32 -- -
Net income (loss).................................................... $(4,616) $ (76) $ 351 $ 303 $ 275
Basic and diluted earnings (loss) per share:(4)
Income (loss) before cumulative effect of accounting change.......... $ (3.46) $ (.07) $ .31 $ .29 $ .27
Cumulative effect of accounting change(3)............................ -- - .03 -- --
Net income (loss).................................................... $ (3.46) $ (.07) $ .31 $ .29 $ .27
Weighted average shares outstanding - basic and diluted (millions)... 1,334 1,035 1,035 1,035 1,035
Other Financial Data:
Ratio of earnings to fixed charges (5)............................... n/a 2.4 8.7 12.5 14.7
Deficiency(5)........................................................ $ 4,553 n/a n/a n/a n/a
Supplemental Financial Data:
EBITDA(6)............................................................ $(3,520) $ 822 $ 877 n/a n/a
Adjusted EBITDA(7)................................................... (96) 1,268 894 n/a n/a
At September 30,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(Dollars in millions)
Balance sheet information:
Working capital...................................................... $ 156 $ 428 $ 219 $ 409 $ 331
Total assets......................................................... 6,562 7,067 3,020 2,481 2,197
Short-term debt...................................................... 2,516 14 14 -- --
Long-term debt....................................................... 33 46 64 -- --
Stockholders' equity/invested equity................................. 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 andto 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
24
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:
Year Ended September 30,
-------------------------------
2001 2000 1999
--------- --------- ---------
(Dollars in millions)
EBITDA.......................................................... $ (3,520) $ 822 $ 877
Purchased in-process research and development................... -- 446 17
Restructuring and separation.................................... 662 -- --
Impairment of goodwill and other acquired intangibles........... 2,762 -- --
--------- ------ -------
Adjusted EBITDA................................................. $ (96) $1,268 $ 894
========= ====== =======
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 consolidated and combined
financial statements 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 leader in sales of communication components, which
include integrated circuits and optical components. Communication components are
the basic building blocks of electronic and photonic products and systems for
terrestrial and submarine, or undersea, communications networks and for
communications equipment. We sell our integrated circuits and optoelectronic
components globally to manufacturers of communications and computer equipment.
We report our operations in two segments: Integrated Circuits and
Optoelectronics. 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. The Integrated
Circuits segment includes our wireless local area networking products, which
facilitate the transmission of data and voice signals within a localized area
without cables or wires. The Optoelectronics segment represents our
optoelectronic components operations, including both our active optoelectronic
and our passive optical components. Optoelectronic components transmit, process,
change, amplify and receive light that carries data and voice traffic over
optical networks. The Integrated Circuits and Optoelectronics segments each
include revenue from the licensing of intellectual property related to that
segment.
REORGANIZATION
Effective October 1, 2001, we have aligned our products under two new
market-focused groups, Infrastructure Systems and Client Systems, that target
the network equipment and consumer communications markets respectively. The
Infrastructure Systems group includes our optoelectronics components business
and portions of our integrated circuits business and will facilitate the
convergence of products from both businesses as we address markets in high-speed
communications systems. The Client Systems group includes our wireless data,
computer communications, storage and wireless terminal solutions products that
address end-user applications markets.
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
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 prepaid pension costs and postretirement liabilities, which have yet
to be transferred, when we completed our initial public offering in April 2001.
As of December 1, 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. Lucent has announced
that the distribution of Agere stock can occur at Lucent's request if all the
following terms and conditions as defined under its credit facilities are met:
o no event of default exists under the credit facilities;
o Lucent has generated positive EBITDA for the fiscal quarter
immediately preceding the distribution;
o Lucent meets a minimum current asset ratio;
o Lucent has received $5,000 million in cash from certain non-operating
sources; and
o Lucent's 364-day $2,000 million credit facility has been terminated
and its $2,000 million credit facility, expiring in February 2003, has
beenH reduced to $1,750 million or less.
26
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 the Agere stock it held in a tax-free spin-off to its
stockholders. 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 cannot
assure you that Lucent will complete the spin-off by a particular date or at
all.
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
financial statements included elsewhere in this prospectus.
Lucent is our largest customer with purchases 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 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.
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
27
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 declined significantly in the latter half of
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 experienced a higher than normal level of
order cancellations and reschedules during the second half of 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.
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.
RESTRUCTURING AND SEPARATION EXPENSES AND INVENTORY PROVISION
In fiscal 2001, we announced a series of restructuring initiatives to
reduce our cost structure in light of declining revenues. We recorded a
restructuring charge of $563 million in fiscal 2001 classified within
restructuring and separation expenses. These restructuring initiatives include a
worldwide workforce reduction, rationalization of manufacturing capacity and
other activities.
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, and expect to
record a restructuring charge of approximately $20 million related to the
additional 500 employees by the end of the first quarter of fiscal 2002. Of the
$177 million charge, $28 million represents termination benefits to 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." In addition,
on December 5, 2001, we announced our intention to further reduce our workforce
by approximately 950 positions. See note 22 to our financial statements included
elsewhere in this prospectus for further information about this reduction.
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 agreed to
sell the 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 related to
property, plant and equipment associated with the consolidation of manufacturing
and other corporate facilities. This charge was recognized in accordance with
the guidance on impairment of assets in Statement 121. The remaining
restructuring charge of $62 million relates primarily to contract terminations.
28
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
========== ========== ========== ==========
The majority of the remaining cash expenditures relating to workforce
reductions were paid by the end of the first quarter of fiscal 2002 and we
anticipate that the majority of the contract termination payments will be paid
by the end of the second quarter of fiscal 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. We substantially
completed implementation of the restructuring program announced in fiscal 2001
as of December 31, 2001 and estimate the related future annualized pre-tax
savings to be approximately $550 million, of which $440 million are cash
savings. The full benefit of these savings will begin to be recognized in the
second quarter of fiscal 2002.
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 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 the form and timing
in which we achieve our full independence from Lucent.
We recorded inventory provisions, classified within cost of sales, of
$409 million in fiscal 2001 compared to inventory provisions of $29 million in
fiscal 2000. The fiscal 2001 amount, which includes purchase order cancelation
charges, reflects 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
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.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization are 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.
GOODWILL AND OTHER ACQUIRED INTANGIBLES
Goodwill and other acquired intangibles are amortized on a
straight-line basis over the periods benefitted, 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 dispositions,
technological obsolescence or other changes in circumstances indicate that the
carrying amount may not be recoverable. When such
29
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
prematurely impair the value of a long lived asset or we may underestimate the
value of an asset's impairment.
INCOME TAXES
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 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 consolidated and combined financial statements
for a summary of our significant accounting policies.
RESULTS OF OPERATIONS
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:
Integrated Circuits............ $2,869 $3,507 $(638) (18)%
Optoelectronics................ 1,211 1,201 10 1
------ ------ ------
Total....................... $4,080 $4,708 $(628) (13)%
====== ====== ======
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 the Integrated Circuits segment. The decrease of $638 million
within the Integrated Circuits segment was driven by volume decreases across the
segment, which were partially offset by increased revenues from our wireless
local area networking product offerings. The increase of $10 million within the
Optoelectronics segment was due to increased sales of components used in
submarine network, transponder and access applications, offset by a decrease in
sales of components used in high-speed long haul applications.
During fiscal 2001 revenues decreased sequentially each quarter due to
declining market conditions compared to sequential revenue growth each quarter
in fiscal 2000. Integrated Circuits revenues declined $627 million or 57% to
$469 million in the fourth quarter of fiscal 2001 from the peak quarterly
revenue level of $1,096 million experienced in the fourth quarter of fiscal
2000. Optoelectronic revenues declined $293 million or 69% to $131 million in
the fourth quarter of fiscal 2001 from the peak quarterly revenue level of $424
million experienced in the first quarter of fiscal 2001.
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
increased inventory provisions. Gross margin for the Integrated Circuits segment
declined to 30.0% in fiscal 2001 from 44.7% in fiscal 2000 primarily due to
lower manufacturing capacity utilization and increased inventory provisions.
Gross margin for the Optoelectronics segment decreased to 11.1% in fiscal 2001
from 48.7% in fiscal 2000 due to increased inventory provisions, lower
manufacturing capacity utilization and a change in product mix, particularly
from higher margin components of high-speed long haul applications to lower
margin components.
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.
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.
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
30
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 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. The following table shows the change in
operating income by segment:
Year Ended
September 30, Change
------------------- ---------------------
2001 2000 $ %
-------- -------- -------- --------
(Dollars in millions)
Operating Segment:
Integrated Circuits...... $(282) $434 $ (716) (165)%
Optoelectronics.......... (270) 357 (627) (176)
-------- -------- --------
Total................. $(552) $791 $(1,343) (170)%
======== ======== ========
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 of interest income from our
investment of the proceeds from our initial public offering, income from our
equity investment in Silicon Manufacturing Partners Pte Ltd., the impairment of
several non-consolidated investments and foreign exchange losses. The $33
million in fiscal 2000 was comprised primarily of gains on sale of investments
and foreign exchange gains.
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
------------------- ---------------------
2001 2000 $ %
-------- -------- -------- --------
(Dollars in millions)
Operating Segment
Integrated Circuits.......... $ 3,507 $3,055 $452 15%
Optoelectronics.............. 1,201 659 542 82
-------- -------- --------
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 the Integrated Circuits and Optoelectronics segments. The
increase of $452 million in the Integrated Circuits segment was driven by
increases across our integrated circuits product offerings except for a decrease
in fiscal 2000 sales of our integrated circuits for wireless terminal devices
due to a missed design win with a large customer in 1999, which resulted in our
not generating sales from a generation of that customer's mobile telephones. The
increase of $542 million in the Optoelectronics segment was driven by increased
sales primarily to existing customers of many of our key optoelectronic
components for high-speed transport and submarine network applications.
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 points to 45.7% in
fiscal 2000 from 47.5% in fiscal 1999. Gross margin for the Integrated Circuits
segment was 44.7% in fiscal 2000 and 48.6% in fiscal 1999. The decrease in
Integrated Circuits gross margin was primarily due to lower average revenues per
unit. Gross margin for the Optoelectronics segment increased to 48.7% in fiscal
2000 from 42.5% in fiscal 1999. The
31
increase in Optoelectronics gross margin was due primarily to the volume growth
in the business, which resulted in a more efficient utilization of manufacturing
capacity.
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 within the Integrated Circuits and Optoelectronics segments, 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 acquisitions of
Ortel, Agere, Inc., Herrmann and substantially all the assets of VTC during
fiscal 2000.
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.
The following table shows the change in operating income by segment:
Year Ended
September 30, Change
--------------- ---------------
2000 1999 $ %
------ ------ ------ ------
(Dollars in millions)
Operating Segment
Integrated Circuits................. $434 $383 $ 51 13%
Optoelectronics..................... 357 126 231 183
----- ----- -----
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.
LIQUIDITY AND CAPITAL RESOURCES
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.
32
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.
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 of the $2,500 million
debt, thereby reducing the facility to $1,500 million. 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. Based upon our current credit
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, until we permanently reduce the size of the facility to $1,000
million 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 we permanently reduce the size of the facility to $1,000 million the
interest rate for borrowings under the facility, assuming our 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, we 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 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.
In addition to the repayment made in connection with the October 4,
2001 amendment and restatement of our credit facility, during the three months
ended December 31, 2001, we completed transactions as a result of which we
permanently reduced our credit facility by $123 million. The proceeds for the
repayments were generated as follows: $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. These payments reduced the balance
outstanding under the credit facility on December 31, 2001 to $1,377 million.
As of December 31, 2001, our net cash position, or the amount by which our
cash and cash equivalents exceeded our short term debt, was $388 million.
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, as described in "Recent Developments--FPGA Sale." The
net cash
33
proceeds from the sale were used to permanently reduce our credit facility in
accordance with the terms of the credit facility agreement. As of January 24,
2002, following this repayment and the repayment of $24 million from
additional sale and leaseback transactions, $1,103 million was outstanding
under our credit facility.
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 into our Allentown, Pennsylvania
campus and one new research and development facility in central New Jersey. The
consolidation is expected to be completed in 12 to 18 months. We anticipate the
cash required for this consolidation to be between $250 and $350 million. We
plan to discontinue operations and seek buyers for our Reading and Breinigsville
facilities.
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
transfer accounts receivable on a daily basis to a wholly owned,
bankruptcy-remote special purpose subsidiary which will be consolidated in our
results. The special purpose subsidiary has entered into a loan agreement with
certain financial institutions, pursuant to which the financial institutions
agreed to make loans to the special purpose 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 special purpose subsidiary. The loan
agreements expire on January 21, 2003. When we borrow under the loan
agreement, we will use the proceeds to repay our credit facility in accordance
with its terms.
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, 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.
Our primary source of liquidity is our cash and cash equivalents. We
believe our cash and cash equivalents, together with the net proceeds from
this offering and amounts that may be borrowed under the receivables
securitization facility, are sufficient to meet our 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 described above and the other restructuring
activities announced by us through December 31, 2001. If our revenues are
materially lower than what our plans contemplate and as a result we use more
cash, and 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 calendar year 2002, including
repayment of our credit facility if it is not extended. These actions would
include the elimination of employee bonuses, the acceleration of already
planned expense reductions and further limits on capital spending. We also
intend to pursue additional financing transactions and will consider asset
sales, although we have no committed transactions at this time. We cannot
assure you that these actions will be feasible at the time or prove adequate.
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.
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 in the three months ended December 31, 2001, as discussed above.
Year Ending September 30,
----------------------------------------------------------------------------------------
(dollars in millions)
Contractual obligations Total 2002 2003 2004 2005 2006 Later years
and commitments ------ ------- ------ ------ ----- ----- -----------
Credit facility $1,356 $ 1,356 - - - - -
Capital leases 55 17 $ 22 $ 16 - - -
Operating leases 331 142 106 50 $ 29 $ 4 $ -
------ ------- ------ ------ ----- ----- -----------
Total $1,742 $ 1,515 $ 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.
34
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 will staff a new research and development team at Chartered
Semiconductor's Woodlands campus in Singapore. 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.
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
35
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. 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%.
Most of Agere, Inc.'s in-process research and development projects
were completed in fiscal 2001. Due to significant changes in economic,
industry and market conditions, demand for these products has decreased and
revenues generated from these products are expected to be significantly lower
than originally anticipated.
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.
o 10G New Products-- $61 million;
o 10G OC-192 Receiver/Daytona Products-- $105 million;
o 980 Products-- $95 million;
o 1550 Products -- $27 million; and
o 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 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.
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 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.
36
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 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 2002 to 17% in 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.
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 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 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.
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.
Development of Ortel's most significant products was completed in
fiscal 2001. Certain other Ortel products remain under development, with
completion anticipated during fiscal 2002. Due to significant changes in
economic, industry and market conditions, demand for Ortel's products has
decreased and revenues generated from these products are expected to be
significantly lower than originally anticipated.
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 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%.
Herrmann's in process research and development processes were either
completed or discontinued due to market conditions during fiscal 2001. Due to
significant changes in economic, industry and market conditions, demand for
products which use these processes has decreased and revenues generated from
these products are expected to be significantly lower than originally
anticipated.
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
37
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.
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 of specified wireless
local area networking products, including some of our products, into the
United States. 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 but will be reviewed for impairment at least annually and
subject to new impairment tests. Intangible assets with finite lives will
continue to be amortized over their useful lives but will no longer be limited
to a maximum life of forty years. 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
Agere 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." This Statement 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 Agere 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 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 existing 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.
38
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, interest rates and equity prices 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.
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 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 September 30, 2001, we had $2,500 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
fiscal 2001 or fiscal 2000. As of September 30, 2001, a variation of 1% in the
interest rate charged on the short-term debt would result in a change of
approximately $25 million in annual interest expense. Following the repayment
of $1,000 million of loans under the credit facility on October 4, 2001, a
variation of 1% in the interest rate charged would result in a change of
approximately $15 million in annual interest expense.
Our investment portfolio consists of equity investments accounted
for under the cost and equity methods as well as an investment in a publicly
held company that is classified as available-for-sale. At September 30, 2001,
the fair value of
39
this available for sale security totaled $41 million. We do not hedge equity
price risk. As of September 30, 2001, a 20% adverse change in equity prices
would result in an approximate $8 million decrease in the fair value of our
available-for-sale security.
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. A 10% decline in the price of our Class A common stock would
result in a $ million decrease in our pre-tax earnings and an increase in the
value of the put obligation.
40
BUSINESS
General
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.
In fiscal 2001, we had two principal businesses: Integrated Circuits
and Optoelectronics. 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. Our Integrated Circuits business also includes our wireless local area
networking products, which facilitate the transmission of data and voice
signals within a localized area without cables or wires. Our Optoelectronics
business includes our optoelectronic components operations, including both our
active optoelectronic and our passive optical components. Optoelectronic
components transmit, process, change, amplify and receive light that carries
data and voice traffic over optical networks. The Integrated Circuits and
Optoelectronics businesses each include revenue from the licensing of
intellectual property related to that business.
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 continues to move forward with its intention to distribute
all shares of our common stock that it owns to its stockholders in a tax-free
distribution. However, Lucent's credit facilities include 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. 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.
We sell our products primarily through our direct sales force, but
we also utilize distributors, resellers and electronic commerce. Of our total
net revenue of $4,080 million in the fiscal year ended September 30, 2001,
$2,869 million or 70% was generated by our Integrated Circuits segment and
$1,211 million or 30% was generated by our Optoelectronics segment.
Approximately 45% of our revenue was generated in the United States and 55%
internationally. See note 17 to our financial statements included elsewhere in
this prospectus for further information about our Integrated Circuits and
Optoelectronics segments.
As of September 30, 2001 we employed approximately 14,400 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.
o 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 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.
o 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.
o 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
41
a series of announced restructuring initiatives focused on improving
gross profit, reducing expenses and streamlining operations within
these segments.
o 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 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.
Integrated Circuits
We offer integrated circuits for use in a broad range of
communications networks and computer systems. Our integrated circuits are used
primarily in the following types of equipment:
o network communications equipment, which facilitates the transmission,
switching and management of data and voice traffic within
communications networks;
o client access and network connectivity devices, such as modems and
analog line cards, which allow computers, servers and other equipment
to connect to communications networks;
o wireless terminals and infrastructure, such as mobile telephones and
cellular base stations, which transmit and receive data and voice
communications through radio waves; and
o hard disk drives, which store data and are found in products such as
personal computers, servers and new consumer devices.
We also sell wireless local area networking products, which
facilitate the transmission of data and voice signals within a localized area
without cables or wires.
Competitive Strengths
Our integrated solutions combine a number of functions into a single
unit. Because of this integration, we have the ability to deliver products
that interact more effectively and enhance performance. This allows our
customers to meet the requirements of their end customers faster and more cost
effectively than if they purchase a number of separate integrated circuits.
We have dedicated engineering groups that develop core manufacturing
technology, common design methodology and commonly used integrated circuit
design elements for use across our Integrated Circuits business. By using
common core technologies, we simplify our design methods, create reusable
intellectual property and achieve manufacturing efficiencies.
We believe the primary considerations for customers selecting
integrated circuit products are:
o design capabilities, including the ability to deliver integrated
solutions;
o performance, as measured by speed, power requirements and reliability;
o feature set;
o price;
o flexibility, which refers to the ability to design products using the
manufacturer's own intellectual property, the manufacturer's
customers' intellectual property or a combination of both; and
42
o 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, price may be one of the most important
considerations for a customer selecting many of our client access and network
connectivity integrated circuits because these integrated circuits are used in
price sensitive products sold to consumers. On the other hand, a customer
selecting our network communications integrated circuits typically will be
more focused on design and performance rather than price because these
customers often have specialized demands that require customized solutions.
Products and Applications
Our integrated circuits support five primary applications: network
communications equipment, client access and network connectivity devices,
wireless products, wireless local area networking products, and storage and
analog products.
Network Communications Equipment
We offer integrated circuits that facilitate the transmission and
switching of data and voice signals within communications networks. Our
integrated circuits process signals and transmit the signals to deliver
information throughout the network. Our integrated circuits are key building
blocks in both optical and wireline communications networks.
We sell a complete integrated circuit solution that supports speeds
up to 2.5 gigabits per second. This solution consists of 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. We have, in various stages
of development, 10 gigabits per second products that have either recently been
introduced in commercial quantities or are currently being sampled by one or
more customers.
Physical Layer Devices. High-speed physical layer devices are key
elements in the conversion between optical signals and electronic signals, as
required by 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 product.
SONET/SDH Network Devices. Synchronous optical networks, which are
typically referred to as SONET, and synchronous digital hierarchy standard, 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.
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 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
43
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
approximately one million bits.
Customized Solutions. The majority of our revenue from our network
communications products 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 described
above in order to meet our customers' specific requirements.
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.
Client Access and Network Connectivity Devices
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.
Many of our products convert analog signals into digital signals and
digital signals into analog ones. Analog refers to a transmission technique
employing a continuous signal that varies in amplitude, frequency or phase of
the transmission. Digital, on the other hand, refers to a method of storing,
processing and transmitting data that uses distinct electronic or optical
pulses to represent the binary digits 0 and 1.
We sell integrated circuits as part of the following client access
and network connectivity products:
Modem Products. We primarily sell our integrated circuits for modem
products directly to leading manufacturers of personal computers and other
electronic equipment as well as to manufacturers who sell modem solutions
directly to consumers and to manufacturers of personal computers.
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.
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.
Newly Introduced Products. We have started to sell products in areas
for which, if sufficient demand emerges, we expect to expand our offerings. We
have started to offer integrated circuits and software for use in digital
telephony products. Digital telephony products are solutions that access and
interface with merged voice and data networks. We also have introduced a
series of asynchronous transfer mode interconnect products for use in
infrastructure equipment for digital telephony services. Asynchronous transfer
mode, or ATM, refers to a specific set of procedures for the formatting and
timing of data transmission between two pieces of equipment. We sell our
digital telephony solutions to manufacturers of
44
business telephone equipment.
Wireless Products
We sell integrated circuits for use in digital mobile telephones,
cellular base stations 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:
o digital signal processors for speech compression and encoding and
transmission of voice and data;
o radio frequency integrated circuits to transmit and receive signals;
o conversion signal processors to convert signals between frequencies
used in digital signal processors and frequencies used for radio
transmission; and
o 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.
Wireless Infrastructure Products. We sell integrated circuit
solutions used in wireless infrastructure products, which are primarily
cellular base stations and cellular base transceiver stations. These products
are primarily digital signal processors that process data and voice signals
that are transmitted and received through wireless networks.
Wireless Local Area Networking Products
We sell integrated circuits, software and equipment for wireless
networks. We offer our ORiNOCO(TM) products for wireless local area networking
and Bluetooth(TM) products for personal 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. Our primary indirect
channel into the enterprise market is Avaya Inc., formerly the enterprise
networks group of Lucent.
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
data and voice that facilitates a wireless personal area network. The
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.
Storage and Analog Products
We sell integrated circuits for use in storage devices, commonly
referred to as hard disk drives. As applications used on computers and
communications equipment become more complex, we expect an increased demand
for greater storage capability. We also sell integrated circuits for use in
analog signal processing and control functions within various products. Analog
integrated circuits shape or condition electronic signals and amplify
electronic signal strength. They also regulate voltage levels and provide
interfaces between products within an analog environment. We currently focus
on development opportunities in the hard disk drive product area, the analog
communications product area and in the product area for analog power products,
which regulate power.
45
Optoelectronic Components
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 optoelectronic components,
including:
o lasers, which are devices that produce light suitable for optical
networks;
o modulators, which are devices that turn optical signals on and off to
encode information that travels through a network;
o amplifiers, which are devices that regenerate optical signals after
they suffer loss as a result of traveling long distances within the
network;
o transmitters, which are devices that convert electronic signals into
optical signals for transmission;
o receivers, which are devices that convert optical signals back into
electronic form on the receiving end of a communications network;
o transponders, which are devices that combine both integrated circuits
and optoelectronic components in one unit that transmits and receives
optical signals; and
o micro electro-mechanical systems, or MEMS, which are small mechanical
products that perform a variety of optical functions without
converting an optical signal into electronic form. Our MEMS products
are being sampled by some customers but further design and
manufacturing process development will be required before these
products will be available for sale in commercial quantities.
In addition to our broad portfolio of active optoelectronic components, we
have started to sell passive optical filters and silicon waveguides. Passive
optical filters are devices used in conjunction with active optoelectronic
components in products such as amplifiers. Silicon waveguides are passive
optical components that manipulate optical signals to perform a variety of
functions.
We sell our optoelectronic components for use in submarine and
terrestrial optical networks. Submarine networks transmit optical signals
undersea, usually at high speeds and over long distances. Terrestrial networks
include high-speed transport networks, which transmit optical signals at high
speeds over long distances, and metropolitan networks, which transmit optical
signals between central offices of network services providers or between
enterprises and central offices. Terrestrial networks also include cable
television networks, which transmit optical signals between cable system
operators and homes, and data communication networks, which transmit optical
signals within a local area network. 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.
Competitive Strengths
Our optoelectronic components are engineered to work together in an
optical network. We 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 optical 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.
We believe the primary considerations for customers selecting
optoelectronic components are:
o performance, as measured by speed, power requirements and reliability;
o price;
o breadth of product line and ability to offer integrated solutions;
o quality and automation of manufacturing processes;
o manufacturing capacity, as measured by ability to satisfy orders; and
o compatibility of products with other products and communications
standards used in communications networks.
46
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.
Products and Applications
We have described below our key optoelectronic components and the
network applications for these products.
Key Optoelectronic Components
Lasers. We offer a variety of types of lasers for use in high-speed
transport, metropolitan, cable television 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 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.
Transmitters, Receivers and Transceivers. We offer cooled laser
transmitters for high-speed transport, metropolitan and cable television
network applications, uncooled laser transmitters for metropolitan network
applications, and tunable laser transmitters for high-speed transport network
applications. Our positive intrinsic negative, or PIN, receivers are used for
high-speed transport, metropolitan and cable television network applications,
and our avalanche photo detector, or APD, receivers are used for high-speed
transport and metropolitan network applications. Transmitters and receivers
are also sometimes combined into one module, which is called a transceiver.
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 have
recently begun shipping our 2.5 gigabits per second transponders in commercial
quantities to our customers and we are sampling 10 gigabits per second
transponders.
MEMS Devices. We recently 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 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. Our thin film optical filters are generally
sold to optical component manufacturers which package and combine them with
active optoelectronic components.
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.
Network Applications
47
Submarine. We offer a variety of highly reliable, ultrastable
components designed to withstand the rigors of long- distance undersea
transmission. Customers for our submarine products are manufacturers of
undersea communications equipment.
High-Speed Transport. Our products support 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.
Metropolitan. 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.
Cable Television. Over the past ten years, cable system operators
have upgraded their networks 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.
Data Communication. 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.
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 sold our products directly 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 14.9%,
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 September 30, 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 sales in fiscal 2001 represented
approximately 8% of our revenue. During fiscal 2001, we discontinued our prior
practice of using manufacturers' representatives as part of our selling
effort.
When selling both our integrated circuits and optoelectronic
components, we aim to have our customers
48
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.
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
Our manufacturing operations are organized in two distinct groups:
integrated circuit and optoelectronic component manufacturing. Due to
increasing overlap of our products and manufacturing processes, we have
started to integrate our manufacturing operations, where appropriate, to
improve operational efficiencies. As of September 30, 2001, we had
approximately 7,600 employees devoted to manufacturing.
Integrated Circuit Manufacturing
We had seven facilities located in four countries devoted to
manufacturing integrated circuits as of September 30, 2001. These sites
utilized approximately 2.3 million square feet of space dedicated to
manufacturing. During fiscal 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. Since
September 30, 2001, we have announced certain facilities consolidations as
described in "Recent Developments--Facility 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 Relationship." 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 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 industry-leading cycle time.
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
September 30, 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. Since September 30, 2001, we have announced certain
facilities consolidations as described in "Recent Developments--Facility
Consolidation."
We have started to manufacture some of our silicon-wafer-based
optoelectronic components in our integrated
49
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:
o greater volume;
o improved quality and reliability;
o reduced costs; and
o 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 could not 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.
Competition
We compete in the integrated circuit and optoelectronic component
market segments within the communications component industry. These market
segments are intensely competitive, and are characterized by:
o rapid technological change;
o evolving standards;
o short product life cycles; and
o 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, 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
50
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 various product areas are listed
in the table below.
Client Access
and Wireless
Optoelectronic Network Network Local Area
Components Communications Connectivity Wireless Products Networking Storage and Analog
-------------- -------------- -------------- ----------------- --------------- ------------------
Agilent Technologies, Applied Micro Broadcom Corp. Fujitsu Ltd. BreezeCOM Ltd. Analog Devices,
Inc. Circuits Corp. Inc.
Alcatel Broadcom Corp. Conexant Infineon Cisco Systems, Infineon
Systems, Inc. Technologies AG Inc. Technologies AG
Corning Inc. Conexant Infineon Koninklijke Intel Corp. LSI Logic Corp.
Systems, Inc. Technologies Philips
AG Electronics AG
Fujitsu Ltd. IBM Corp. LSI Logic Motorola, Inc. Intersil Marvel
Corp. Holding Corp. Communications Corp.
Infineon Technologies Infineon Koninklijke NEC Corp. Nokia Corp. STMicroelectronics
AG Technologies Philips N.V.
AG Electronics AG
JDS Uniphase Corp. PMC-Sierra, NEC Corp. QUALCOMM Inc. Nortel Texas Instruments
Inc. Networks Corp. Incorporated
NEC Corp. TranSwitch Texas STMicroelectronics Proxim, Inc.
Corp. Instruments N.V.
Incorporated
Nortel Networks Corp. Vitesse Texas Instruments Symbol
Semiconductor Incorporated Technologies,
Inc.
3Com Corp.
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:
o performance and reliability;
o price;
o compatibility of products with other products and communications
standards used in communications networks;
o product size;
o ability to offer integrated solutions;
o time to market;
o breadth of product line;
o logistics and planning systems; and
51
o quality of manufacturing processes.
While we believe we are competitive on the basis of all the above
listed factors, 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 work directly in our
business units to design and implement product solutions. The remaining
one-third work primarily on manufacturing and design technology that spans
large segments of our business, such as the technology for system-on-a-chip
and high-performance optical modules.
Our basic research effort is organized into three areas:
o optoelectronics;
o electronic devices; and
o circuits and systems.
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 also
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 $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 Relationship
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 joint manufacturing venture is currently operational.
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.
Technology Relationships
Our most important technology relationships are described below.
Integrated Circuit Manufacturing Process Technology
52
In July 2000, we entered into an agreement with Chartered
Semiconductor committing us and Chartered Semiconductor to jointly develop
manufacturing technologies for future generations of integrated circuits
targeted at communications markets. We have agreed to invest up to $350
million over a five year period. As part of the joint development activities,
our 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 our teams in Murray Hill, New Jersey, and Orlando, Florida, as
well as with Chartered Semiconductor's technology development organization.
During the term of the agreement and for five years thereafter, we
and Chartered Semiconductor will be required to update each other, without
compensation, with technical information relating to any corrections or
improvements made to the processes which we have jointly developed. All
intellectual property jointly developed, other than patents, will be jointly
owned by us and Chartered Semiconductor. Jointly made inventions and patents
which issue from these inventions will be equally divided between us and
Chartered Semiconductor, and the non-owning party will receive a nonexclusive,
royalty- free and nontransferable license for each invention or patent. 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 such project.
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 will determine, 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 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.
MEMS
We have entered into a joint design center agreement with Lucent to
develop technology for micro electro- mechanical systems, or MEMS, which are
small mechanical devices that perform a variety of functions. The primary
focus of the joint design center will be the development of optical MEMS. We
and Lucent have both agreed to jointly fund, manage and staff the joint design
center over the following three years to develop this technology. 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 prior written notice of either
party for convenience.
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:
53
o integrated circuit and optoelectronic manufacturing processes;
o lasers;
o optical modulators;
o lithium niobate devices;
o optoelectronic receivers; and
o 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.
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
54
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 September 30, 2001, we employed approximately 14,400 full-time
employees, including approximately 2,700 research and development employees
and 7,600 manufacturing employees. During fiscal 2001, we announced a series
of restructuring initiatives that included closing our Madrid manufacturing
location by the end of the calendar year and reducing employment worldwide by
approximately 6,000 positions, of which 4,300 had been eliminated by September
30, 2001. On January 23, 2002, we announced a number of additional initiatives
that will result in further workforce reductions. See "Recent
Developments--Facility Consolidation." Of our 14,400 employees at September
30, 2001, approximately 7,650 were management and non union-represented
employees, and approximately 3,450 were U.S. union- represented employees
covered by collective bargaining agreements. In addition, approximately 200
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 on January 10, 2000. 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 $769 million and $1,900 million on September 30, 2001 and
September 30, 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, orders may generally be canceled by
the customer without penalty. We also may elect to permit cancelation 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
55
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 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 September 30, 2001, we operated 13 manufacturing facilities
and four warehouse locations in the United States and five other countries. We
also operated an additional 65 facilities, including research and development
facilities and design centers. We operate facilities in a total of 19
countries. Our principal owned manufacturing facilities were located in the
United States, Mexico, Singapore, Spain and Thailand, although we have since
closed our facility in Spain. We also have a 51% interest in our Silicon
Manufacturing Partners joint venture located in Singapore which is
predominantly used as a manufacturing site. As of September 30, 2001, our
facilities had an aggregate floor space of approximately 8.3 million square
feet, of which approximately 5.5 million square feet was owned and
approximately 2.8 million square feet was 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. Since September 30, 2001, we have announced certain facilities
consolidations as described in "Recent Developments--Facility Consolidation."
56
RECENT DEVELOPMENTS
Earnings
On January 23, 2002, we reported that revenues for the first quarter
of fiscal 2002, ending December 31, 2001, were $537 million, down
approximately 10% from the September quarter. Reported net loss for the
December quarter was $375 million, or $0.23 per share. Reported net loss for
the September quarter was $3,354 million, or $2.05 per share, which included
$2,735 million in impairment of goodwill and other acquired intangibles.
Results by Segment
The following is based on our new segments, Infrastructure Systems
and Client Systems, which are described below.
Infrastructure Systems Group
The Infrastructure Systems Group reported revenues of $263 million
during the December quarter, down from $298 million in the September quarter.
The decline was due primarily to the continuing weakness in the optical
networking market.
In the December quarter, the Infrastructure Systems Group:
o introduced the industry's first single-chip 10 Gigabit Ethernet
physical layer IC for devices compliant with the XENPAK industry
standard;
o announced a XENPAK-compliant 10 Gigabit Ethernet serial transceiver
for metro access networks;
o provided Astral Point with programmable 6.8 gigabit-per-second
backplane transceiver chips and SONET overhead path processors for
Astral Point's optical transport nodes;
o announced that LG Electronics is using our switching and network
processor chips to deliver a high-performance multi-service router for
networking service providers in the Asia Pacific region; and
o introduced a 10 gigabit software development environment for OC-192C
PayloadPlus(TM) network processors.
Client Systems Group
The Client Systems Group reported revenues of $274 million during
the December quarter, down from $302 million in the September quarter. The
decline was across the business, except for the Storage product offerings,
which posted sequential growth in revenues.
In the December quarter, the Client Systems Group:
o expanded its motor controller product offerings with two new chips for
PCs and consumer electronics hard-disk drives and high-end data
storage applications;
o announced that China's 9th National Games selected ORiNOCO(TM)
products to provide wireless networking and Internet access;
o provided its Sceptre(R) wireless platform to PTIC-Capitel in China,
enabling the world's smallest and lightest commercially available GSM
handsets; and
o signed agreements with Compaq Computer, Actiontec Electronics,
Multi-Tech Systems and Zoom Telephonics for enhanced modem chips.
Facility Consolidation
In the past year, we have implemented a number of actions to improve
operating efficiency and accelerate time-to- market, while reducing fixed
costs and lowering our cash flow breakeven level. Continuing these
initiatives, on January 23, 2002, we announced a number of initiatives to
create an operating model that will help us attain our targeted breakeven
level. First, we announced our intention to sell our Orlando, Florida wafer
fabrication facility. Second, we announced plans to consolidate nine existing
manufacturing, research and development, business management and
administrative facilities in Pennsylvania and New Jersey into our Allentown,
Pennsylvania campus and one new research and development facility in central
New Jersey. The Pennsylvania and New Jersey plans include the consolidation
of:
57
o all integrated circuit and optoelectronic wafer fabrication activities
(currently located in Allentown, Breinigsville and Reading,
Pennsylvania and Murray Hill, New Jersey) into our Allentown campus;
o the majority of integrated circuit and optoelectronic assembly and
test operations (currently located in Allentown, Breinigsville and
Reading) to our facilities in Bangkok, Thailand; Matamoras, Mexico;
and Singapore; all remaining assembly and test operations, primarily
development operations, will be consolidated into our Allentown
campus;
o all research and development functions currently located in
Pennsylvania into our Allentown campus; approximately one quarter of
all research and development functions currently located in New Jersey
will also be consolidated into our Allentown campus with the remaining
New Jersey functions being consolidated into a new research and
development facility in central New Jersey; and
o all sales, administrative and other functions currently located in
Pennsylvania and New Jersey into our Allentown campus.
The consolidation is expected to be completed in 12 to 18 months.
When completed, the Pennsylvania and New Jersey consolidation actions will
reduce floor space in the region by 50%, or approximately 2.0 million square
feet, saving approximately $100 million annually in cash. Total cash required
for the consolidation actions is estimated to be between $250 million and $350
million. Non-cash charges associated with these activities have not yet been
determined. Operations at our owned facilities in Breinigsville and Reading
will be discontinued, and we will seek buyers for those properties. Five
leased facilities will be vacated.
The Reading facility has 1,600 employees and manufactures a broad
range of optoelectronics components as well as integrated circuits for
communications systems. The Breinigsville plant has 1,100 employees and
focuses on automated optoelectronic components manufacturing and
optoelectronic research and development. We expect that our plans to combine
operations from these facilities into Allentown will result in a net reduction
of approximately 300 employees.
Our Orlando facility manufactures advanced CMOS-based integrated
circuits for use in a variety of applications, ranging from computer disk
drives to network communications systems. The site has a workforce of
approximately 1,100 employees.
We expect that our facility consolidation initiatives, combined with
the realignment of our business into the Infrastructure Systems and Client
Systems segments, our exits from Test and Measurement and Infiniband product
offerings, the sale of our FPGA business, the sale of our manufacturing
facility and related equipment in Madrid, Spain and our workforce reductions,
will allow us to reach our target cost and expense structure and achieve
operating income breakeven at $700 million of quarterly revenue by the end of
the calendar year.
FPGA SALE
On January 18, 2002, we completed the sale of our Field-Programmable
Gate Array, or FPGA, business to Lattice Semiconductor Corporation for $250
million in cash. The transaction included our general-purpose ORCA(R) FPGA
product portfolio, our field programmable system chip, or FPSC, product
portfolio and all related software design tools. As part of the transaction,
approximately 100 of our product development, marketing and technical sales
employees joined Lattice.
ACCOUNTS RECEIVABLE SECURITIZATION
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,
special purpose bankruptcy-remote subsidiary which will be consolidated in our
results. The special purpose subsidiary has entered into a loan agreement with
certain financial institutions, pursuant to which the financial institutions
agreed to make loans to the special purpose 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 special purpose subsidiary. The loan agreement
expires on January 21, 2003.
REALIGNMENT
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 sold for use in communications systems. This more
effectively allows us to design, develop
58
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 product family.
The Infrastructure Systems and Client Systems segments each include
revenue from the licensing of intellectual property related to that segment.
There were no intersegment sales.
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 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.
We do not identify or allocate assets by segment. In addition, we do
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. We have centralized corporate functions and use 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.
59
Unaudited Segment Information
On January 16, 2002, we filed a Form 8-K with the Securities and
Exchange Commission reporting unaudited segment information for fiscal 2001,
2000 and 1999 and each of the quarters in fiscal 2001, in each case restated
for the new segments: Client Systems and Infrastructure Systems.
Unaudited Segment Information
(dollars in millions)
Quarter Ended
------------------------------------------
Fiscal Yr Sep 30 June 30 Mar 31 Dec 31 Fiscal Yr Fiscal Yr
2001 2001 2001 2001 2000 2000 1999
--------- --------- --------- --------- --------- --------- ---------
Revenue:
Client......................................... $ 1,406 $ 302 $ 335 $ 336 $ 433 $ 1,649 $ 1,541
Infrastructure................................. 2,674 298 592 855 929 3,059 2,173
------- ------- ------ ------ ------ ------- -------
Total revenue....................................... 4,080 600 927 1,191 1,362 4,708 3,714
Gross profit (loss) - $:
Client......................................... 334 65 48 71 150 631 668
Infrastructure................................. 662 (55) (83) 370 430 1,522 1,097
------- ------- ------ ------ ------ ------- -------
Total gross profit (loss) - $ ...................... 996 10 (35) 441 580 2,153 1,765
Gross profit (loss) - %:
Client......................................... 23.8% 21.5% 14.3% 21.1% 34.6% 38.3% 43.3%
Infrastructure................................. 24.8% (18.5)% (14.0)% 43.3% 46.3% 49.8% 50.5%
------- ------- ------ ------ ------ ------- -------
Total gross profit (loss) - %....................... 24.4% 1.7% (3.8)% 37.0% 42.6% 45.7% 47.5%
Other costs and expenses:
Selling, general and administrative............ 597 116 145 179 157 535 573
Research and development....................... 951 197 217 261 276 827 683
Segment operating income (loss):
Client......................................... (175) (50) (60) (72) 7 133 110
Infrastructure................................. (377) (253) (337) 73 140 658 399
------- ------- ------ ------ ------ ------- -------
Total segment operating income (loss)............... $ (552) $ (303) $ (397) $ 1 $ 147 $ 791 $ 509
======= ======= ====== ====== ====== ======= =======
Reconciliation of segment operating income (loss) to
reported operating income (loss):
Segment operating income (loss)................ $ (552) $ (303) $ (397) $ 1 $ 147 $ 791 $ 509
Purchased in-process research and
development costs.......................... -- -- -- -- -- 446 17
Amortization of goodwill and other acquired
intangibles................................ 415 80 112 112 111 189 13
Restructuring and separation expenses.......... 662 153 462 36 11 -- --
Impairment of goodwill and other acquired
intangibles................................ 2,762 2,735 27 -- -- -- --
------- ------- ------ ------ ------ ------- -------
Reported operating income (loss).................... $(4,391) $(3,271) $ (998) $ (147) $ 25 $ 156 $ 479
======= ======= ====== ====== ====== ======= =======
60
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 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..................... 55 President, Chief Executive Officer and Director
Rajiv L. Gupta...................... 56 Director
Henry B. Schacht.................... 67 Director
Rae F. Sedel........................ 52 Director
John A. Young....................... 69 Director
Ronald D. Black..................... 37 Executive Vice President, Client Systems
Mark T. Greenquist.................. 43 Executive Vice President and Chief Financial Officer
Peter Kelly......................... 44 Executive Vice President, Operations
Sohail A. Khan...................... 47 Executive Vice President, Infrastructure Systems
Ahmed Nawaz......................... 52 Executive Vice President, Worldwide Sales
Jean F. Rankin...................... 42 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 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.
61
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 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.
Annual Meeting
Our first annual meeting of stockholders will be held on February
21, 2002. This will be an annual meeting of stockholders to elect one member
of the board of directors, to approve an amendment to our Short Term Incentive
Plan, as further discussed below under the caption "Agere Systems Inc. Short
Term Incentive Plan," and to approve an
62
amendment to our Long Term Incentive Plan, as further discussed below under
the caption "Agere Systems Inc. 2001 Long Term Incentive Plan."
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:
o the adequacy of our internal controls and financial reporting process
and the reliability of our financial statements;
o the independence and performance of our internal auditors and
independent auditors; and
o 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 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:
o recommending to our full board of directors nominees for election as
directors;
o making recommendations to our board of directors from time to time as
to matters of corporate governance;
o administering management incentive compensation plans;
o establishing the compensation of executive officers; and
o 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
63
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.
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
64
or family members had sole voting and investment power with respect to these
securities.
Name Agere Class A
---- Common Stock Lucent Common
(a) Beneficially Stock Beneficially
Owned (1) Owned(1)
------------- ------------------
Rajiv L. Gupta.............................................. 2,000 --
Rae F. Sedel................................................ 6,900 750
Harold A. Wagner............................................ 5,000 --
(b)
Frank A. D'Amelio(3)........................................ -- 717,683
Henry B. Schacht(3)......................................... -- 2,395,563
John A. Young (3)........................................... 5,000 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 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 Agere's outstanding Class A common stock or of Lucent's
outstanding common stock or any shares of Agere's Class B common stock as of November 1, 2001.
(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 shares of Agere's Class A common stock and Class B common stock
beneficially owned by Lucent have not been included in the table as
beneficially owned by these individuals. Messrs. D'Amelio, Schacht and
Young all disclaim any beneficial ownership of such shares.
Executive Compensation
65
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 years ended
September 30, 1999 and 1998.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
----------------------
Annual Compensation Awards Payouts
--------------------------------------------- ---------------------- --------
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Name and Fiscal Salary Bonus Compensation Award(s) Options Payouts Compensation
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 Nawas................. 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 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) $57,739
of relocation expenses for Mr. Greenquist.
(5) This amount was a hiring bonus paid to Mr. Greenquist when he joined us.
66
Grants of Stock Options
The following table shows all grants of options to acquire shares of
our and Lucent's common stock granted to the executive officers named in the
Summary Compensation Table in the "--Executive Compensation" section above for
the fiscal year ended September 30, 2001. Pursuant to the employee benefits
agreement, Lucent stock options and restricted stock units held by our
employees, including these executive officers, will be converted to our stock
options and restricted stock units.
OPTION GRANTS IN LAST FISCAL YEAR
Number of % of Total
Shares Options Grant
Underlying Granted to Exercise Date
Options Employees in Price Expiration Present
Name Granted (#) Fiscal Year ($/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)
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.
67
(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%.
(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
Shares Underlying Unexercised Value of Unexercised
Acquired Value Options at Fiscal Year-End In-The-Money Options at
on Exercise Realized (#) Fiscal Year-End ($)
-------------------------- ------------------------
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.
68
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:
o 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;
o pay subsequent to December 31, 1998; and
o 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 pensions, are available. Mr.
Greenquist's estimated balance in the account
69
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 incorporated by reference. In order to ensure that compensation paid
pursuant to the Agere Systems Inc. Short Term Incentive Plan can qualify as
"performance-based compensation" not subject to the limitation on
deductibility of executive compensation in excess of $1 million, we are
seeking stockholder approval of an amendment, as described below, to the Agere
Systems Inc. Short Term Incentive Plan at the 2002 annual meeting of
stockholders.
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. 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 (as defined) 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) 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.
Other Provisions
The Board may modify or terminate the Short Term Incentive Plan at
any time.
Material Changes in the Amendment
Prior to the amendment of the plan, participants were selected and
performance targets were established for each fiscal year. Under the plan as
amended, the Corporate Governance and Compensation Committee will select the
periods that are used to measure performance and net income for purposes of
the plan. We expect that, at least initially, the committee will select
participants and performance targets for each fiscal quarter. The amendment
also modifies the definition of net income that is used in determining whether
"covered employees" are eligible to receive awards under the plan. Under the
amendment, 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.
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.
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
70
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 incorporated by reference. In order to ensure that compensation paid
pursuant to the Agere Systems Inc. 2001 Long Term Incentive Plan can qualify
as "performance-based compensation" not subject to the limitation on
deductibility of executive compensation in excess of $1 million, we are
seeking stockholder approval of the Agere Systems Inc. 2001 Long Term
Incentive Plan at the 2002 annual meeting of stockholders.
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 will be
180,000,000 shares. During the two-year term of the plan, no more than
40,000,000 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 10,000,000 shares of our common stock over the two-year 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.
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. 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.
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. 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
71
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 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
72
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.
Change in Control
The Agere Systems Inc. 2001 Long Term Incentive Plan generally
provides that, 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:
o 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;
o the restrictions and deferral limitations applicable to any restricted
stock awards will lapse;
o 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
o 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.
The Agere Systems Inc. 2001 Long Term Incentive Plan defines change in control
to mean, generally:
o 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;
o a change in the composition of a majority of our board of directors
which is not supported by the incumbent board of directors;
o 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;
o the approval of the stockholders of our complete liquidation or
dissolution; or
o 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.
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.
73
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, excluding
specified nonrecurring items, determined by the committee. 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.
Material Changes in the Amendment
The amendment of the plan to be voted upon at the 2002 annual
meeting will:
o increase the total number of shares of our common stock available for
awards granted under the plan by 180 million shares;
o in addition to the existing circumstances under which shares subject
to awards under the plan may become available again for awards, cause
shares of our common stock that are:
o subject to an award granted under the plan that are
not issued because of the tender 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, or
o purchased by us with cash received upon the exercise
of options granted under the plan, to again be
available for awards under the plan;
o modify the treatment of awards granted under the plan after February
21, 2002 in the event of a change in control, so that awards will not
always vest or accelerate upon a change in control;
o change the term of the plan so that, rather than expiring at the end
of a fixed term, the plan will expire, unless terminated earlier by
the board, when no shares are available for grant, exercise or
settlement of awards; and
o modify the definition of net income that is used in determining
whether "covered employees" are eligible to receive certain types of
award payouts under the plan; the definition will specify that 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; and provide that the Corporate
Governance and Compensation Committee will select the periods that are
used to measure net income.
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. We
believe that, had the amendment been in effect in fiscal 2001, the amount of
awards granted under the plan would not have been materially different.
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 amount realized in excess of the purchase price will be taxed to
the optionee as long-term capital gain and
74
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 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.
75
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:
o a stock option covering 300,000 shares of our stock granted at the
time of our initial public offering;
o an award of 15,000 Lucent restricted stock units that would vest over
a five-year period; and
o 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 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 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.
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 85,000,000 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
76
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.
77
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 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 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.
Lucent has announced that the distribution of Agere stock can occur at
Lucent's request if all the following terms and conditions as defined under
its credit facilities are met:
o no event of default exists under the credit facilities;
o Lucent has generated positive EBITDA for the fiscal quarter
immediately preceding the distribution;
o Lucent meets a minimum current asset ratio;
o Lucent has received $5,000 million in cash from certain non-operating
sources; and
o Lucent's 364-day $2,000 million credit facility has been terminated
and its $2,000 million credit facility, expiring in February 2003, has
been reduced to $1,750 million or less.
The current terms of Lucent's credit facilities will not allow the
distribution unless, at the time of the distribution, it has generated $5,000
million of additional funds or reduction in debt from specified non-operating
sources. Lucent has announced that, as of November 16, 2001, it had generated
$4,800 million of funds to satisfy this requirement.
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 the Agere stock it held in a tax-free spin-off to its
stockholders. 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 cannot
assure you that Lucent will complete the spin-off by a particular date or at
all.
Lucent has informed us that it 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 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,
78
represent 50% or more, measured by vote or value, of our common stock
outstanding after completion of that offering and such acquisitions. 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:
o Interim Services and Systems Replication Agreement;
o Fiber Product Purchase Agreement;
o Microelectronics Product Purchase Agreement;
o ORiNOCO Product Purchase Agreement;
o Employee Benefits Agreement;
o Trademark License Agreement;
o Trademark Assignment;
o Trade Dress Assignment;
o Patent and Technology License Agreement;
o Patent Assignments;
o Technology Assignment and Joint Ownership Agreement;
o Development Project Agreement;
o Joint Design Center Operating Agreement;
o Tax Sharing Agreement; and
o 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
79
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:
o the assets, businesses or liabilities transferred or assumed as part
of the separation;
o any consents or approvals required in connection with the transfers;
o the value or freedom from any security interests of any assets
transferred;
o the absence of any defenses or freedom from counterclaim with respect
to any claim of either us or Lucent; or
o 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 is obligated to consummate the distribution
if the following conditions are met, any of which may be waived by Lucent:
o 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;
o any material governmental approvals and consents necessary to
consummate the distribution shall have been obtained and be in full
force and effect; and
o 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
80
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:
o 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;
o the contributed businesses, liabilities or contracts;
o any material breach by us or any of our affiliates, of the agreement
or any of the other ancillary agreements; and
o 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 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:
o 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;
o the Lucent businesses or any liability of Lucent or its affiliates
other than liabilities associated with the separation of the
businesses; and
o 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:
o 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;
o some specifically identified liabilities, other than taxes; and
o 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.
81
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.
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.
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:
o accounting;
o financial management;
o information systems management;
o tax;
o payroll;
82
o legal;
o human resources administration;
o procurement; and
o 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.
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.
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
83
products.
The Fiber Product Purchase Agreement, the Microelectronics Product
Purchase Agreement and the ORiNOCO Product Purchase Agreement also contain
provisions governing:
o orders and delivery;
o payment terms;
o intellectual property matters;
o product warranties;
o product support and documentation;
o engineering, installation, maintenance and other services;
o dispute resolution; and
o 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.
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.
Savings Plans
We have established defined contribution savings/401(k) plans. Our
savings/401(k) plans include all active employees who immediately prior to our
initial public offering were participants in Lucent's savings/401(k) plans.
Each employee who participates in savings/401(k) plans 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 savings/401(k) plans.
Welfare Plans
We will adopt appropriate 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.
84
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 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
------ --------------------------------- --------------------------------- --------------------------------
Price of 53,084,019 stock options 74,317,626 stock options 95,551,234 options
Agere $4 1,023,030 restricted stock units 1,432,242 restricted stock units 1,841,454 restricted shares
common stock 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
$5 818,424 restricted stock units 1,145,794 restricted stock units 1,473,163 restricted stock units
183,360 restricted shares 256,704 restricted shares 330,048 restricted shares
------ --------------------------------- --------------------------------- --------------------------------
$6 35,389,346 stock options 49,545,084 stock options 63,700,823 options
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:
o products and packaging through April 1, 2002; and
o 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:
o products and packaging through September 30, 2002; and
o 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
85
event of a change in control of our company.
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.
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
86
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 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.
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.
87
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.
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:
o 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
o 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 $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. 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.
88
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the
beneficial ownership of our common stock as of November 1, 2001 for:
o each owner of more than 5% of any class of our common stock;
o each of our directors and the named executive officers; and
o all directors and executive officers as a group.
To our knowledge, each person, along with his or her spouse, has
sole voting and investment power over the shares unless otherwise noted.
Information in the table is as of the latest reports by those entities
received by us. Each director and executive officer's address is c/o Agere
Systems Inc., 555 Union Boulevard, Allentown, PA 18109, except the address
for Lucent Technologies Inc., Mr. D'Amelio, Mr. Schacht, and Mr. Young is
c/o Lucent Technologies Inc., 600 Mountain Avenue, Murray Hill, NJ 07974.
Class A Common Stock(1)(2) 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
---------------------------------------------- ----------- ------------ --------- ---------- ---------- ----------
Five Percent Stockholders:
Lucent Technologies Inc. (3).................. 37,000,000(4) 5.1% 908,100,000 100% 945,100,000 57.8%(5)
Security ownership of management(6):
Harold A. Wagner.............................. 5,000 * 0 * 5,000 *
Frank A. D'Amelio(7).......................... 0 * 0 * 0 *
John T. Dickson............................... 100 * 0 * 100 *
Rajiv L. Gupta................................ 2,000 * 0 * 2,000 *
Henry B. Schacht(7)........................... 0 * 0 * 0 *
Rae F. Sedel.................................. 6,900 * 0 * 6,900 *
John A. Young(7).............................. 5,000 * 0 * 5,000 *
Daniel A. DiLeo............................... 0 * 0 * 0 *
Mark T. Greenquist............................ 1,250 * 0 * 1,250 *
Sohail A. Khan................................ 0 * 0 * 0 *
Ahmed Nawaz................................... 1,250 * 0 * 1,250 *
All directors and executive officers as
a group (12 persons)..................... 30,250 * 0 * 30,250 *
____________
* Represents less than one percent.
(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. Shares of common stock
subject to options that are exercisable or will become exercisable
within 60 days of November 1, 2001 into shares of our common stock are
deemed to be outstanding and to be beneficially owned by the person
holding the options for the purpose of computing the percentage
ownership of the person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
(2) Excludes an equal amount of Class A common stock into which Class B
common stock are convertible. The Class B common stock held by Lucent
represented on a converted basis 55.5% of the Class A common stock.
(3) 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.
(4) 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.
(5) 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.
(6) Please see "Management--Lucent Stock Ownership of Directors and
Executive Officers" for discussion of Lucent common stock and options
beneficially owned by our executive officers and directors. We expect
that stock options, restricted stock units and deferred shares of
common stock will be converted to awards based on our common stock at
the time of the distribution.
(7) The shares of our Class A common stock and Class B common stock
beneficially owned by Lucent have not been included in the table as
beneficially owned by these individuals. Messrs. D'Amelio, Schacht and
Young all disclaim any beneficial ownership of such shares.
89
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.
In addition to the repayment made in connection with the October 4,
2001 amendment and restatement of our credit facility, during the three months
ended December 31, 2001, we completed transactions as a result of which we
permanently reduced our credit facility by $123 million. The proceeds for the
repayments were generated as follows: $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. These payments reduced the balance
outstanding under the credit facility on December 31, 2001 to $1,377 million.
As of December 31, 2001, our net cash position, or the amount by which our
cash and cash equivalents exceeded our short term debt, was $388 million.
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, as described in "Recent Developments--FPGA Sale."
The net cash proceeds from the sale were used to permanently reduce our credit
facility in accordance with the terms of the credit facility agreement. As of
January 24, 2002, following this repayment and the repayment of $24 million
from additional sale and leaseback transactions, $1,103 million was
outstanding under our credit 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. 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 and
whether we make the additional $ million repayment of the debt, as
described below. 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 rating 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. In addition, prior to the
repayment and reduction of the facility to $1,000 million (requiring an
incremental repayment of $ million after giving effect to the repayment
described above), the interest rate increases 25 basis points every ninety
days from February 22, 2001. Therefore, the current interest rate is the
applicable LIBOR rate plus 475 basis points, with the next increase to take
effect on February 17, 2002. The weighted average interest rate at
September 30, 2001 was 7.11%. Upon repayment of and reduction of the
facility to $1,000 million, the interest rates on the borrowings, assuming
our credit ratings remain the same, would return to the applicable LIBOR
rate plus 400 basis points.
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:
o incur indebtedness at the subsidiary or parent level;
o incur or permit to exist liens or security interests on our
assets;
o merge or consolidate with another entity or sell all or
substantially all of our assets;
90
o make investments in non-affiliates and certain of our
subsidiaries;
o make or declare dividends on our capital stock;
o consummate certain transactions with our affiliates; and
o 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, minimum consolidated EBITDA, minimum consolidated net
worth and maximum capital expenditures at given points in time.
91
DESCRIPTION OF INVESTMENT UNITS
Each investment unit consists of one note in the principal amount of
$500 and put rights. SHARCS Trust I, a newly created Delaware business
trust, will purchase all the investment units from us. On July 15, 2007, or on
an earlier date if accelerated, we will pay the trust for each put right it then
holds the amount, if any, by which $ exceeds the average closing or sale price
of a share of Agere common stock during the 20-trading day period preceding
such date. The put rights are not transferable and cannot be held or exercised
by anyone other than SHARCS Trust I.
The trust has advised us that:
o it will also purchase shares of our common stock in private
transactions or in the open market;
o it will issue "SHARCS," which are securities that represent
all of the beneficial interest in the trust; and
o holders of SHARCS will have the right upon the occurrence of
certain events to exchange their SHARCS 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 SEC relating to the SHARCS.
92
DESCRIPTION OF NOTES
The following description sets forth certain terms of the notes.
The notes, which form a part of the investment units, will be initially
owned by SHARCS Trust I. In the event a SHARCS holder exchanges one or more
SHARCS, the notes to be distributed to the holder of the SHARCS will be
separated from the put rights. The notes will be issued under an indenture
to be dated as of , 2002 between Agere and , 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.
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:
o be general unsecured, senior subordinated obligations of
Agere;
o constitute a series of notes issued under the indenture and
will be initially limited to an aggregate principal amount
of $200 million;
o mature on July 15, 2007;
o be issued in denominations of $500 and whole multiples of
$500; and
o be subordinate in right of payment to all existing and
future Senior Indebtedness of Agere.
Interest
Interest on the notes will:
o accrue at the rate of % per year;
o accrue from the date of issuance or the most recent interest
payment date;
o be payable in cash semi-annually in arrears on January 15
and July 15, commencing on July 15, 2002;
o be payable to the holders of record on the January 1 and
July 1 immediately preceding the related interest payment
dates; and
o 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:
o 100% of the principal amount of the notes to be redeemed;
and
o 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
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. The notice of
redemption for the notes will state the amount to be redeemed. On
93
and after the redemption date, interest will cease to accrue on any notes
that are redeemed. If less than all the notes are redeemed at any time, the
indenture trustee will select notes on a pro rata basis or by any other
method the indenture trustee deems fair and appropriate.
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:
o 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
o 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. 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.
94
As of , 2002, after giving effect to this offering:
o Agere would have had $ in Senior Indebtedness, including the
Indebtedness under the Existing Credit Facility;
o Agere would have had no Senior Subordinated Indebtedness
other than the notes; and
o 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.
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
95
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 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).
96
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
(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.
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
97
described above.
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:
o "--Limitation on Indebtedness;"
o "--Limitation on Restricted Payments;"
o "--Limitation on Restrictions on Distributions from
Restricted Subsidiaries;"
o "--Limitation on Sales of Assets and Subsidiary Stock;"
o "--clause (3) of the first paragraph under "-Merger and
Consolidation;"
o "--Limitation on Affiliate Transactions;"
o "--Limitation on Lines of Business;"
o "--Future Subsidiary Guarantors;" and
o "--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.
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
98
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 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;
99
(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
(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
100
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 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
101
(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);
(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
102
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
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.
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
103
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;
(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
104
(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
(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
105
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 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.
106
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, 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
107
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 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 convey,
transfer or lease all or substantially all 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, conveyance,
assignment, 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 transfer 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 its assets, Agere
will not be released from the obligation to pay the principal of and
interest on the notes.
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.
108
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:
(i) 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
(ii) 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";
(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
109
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 consecutive 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.
In the event of a declaration of acceleration of the notes
because an Event of Default described in clause (6) above has occurred and
is continuing, the declaration of acceleration of the notes 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 of the notes 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.
110
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 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
111
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 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
112
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 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.
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.
113
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, (i) 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, (ii)
all unpaid rights of such Person (including rescission, replevin,
reclamation and stopping in transit) relating to the foregoing or arising
therefrom, (iii) all rights to any goods represented by any of the
foregoing, including returned or repossessed goods, (iv) all reserves and
credit balances held by such Person with respect to any such accounts
receivable or any obligors thereon, (v) all letters of credit, guarantees
or collateral for any of the foregoing, (vi) all rights to any Intellectual
Property related to any of the foregoing clauses (i) through (v) and (vii)
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.
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";
114
(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.
"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
115
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.
"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 (other than by way of merger or consolidation), 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 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
116
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 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;
117
(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 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
118
retention expenses related to the deferral of such
distribution and facility consolidation).
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.
"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:
119
(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.
"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
120
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 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
121
(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 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 (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
122
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 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).
123
"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 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;
(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
124
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 (11), 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 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
125
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
(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;
126
(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 Receivable 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 Sale 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 Sale 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
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.
"Put Option Agreement" means the put option agreement entered
into on the date of the indenture between Agere and SHARCS Trust I.
"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.
"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
127
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;
(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:
128
(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 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 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.
"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.
"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
129
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 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.
130
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.
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.
131
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.
132
DESCRIPTION OF PUT RIGHTS
The following description sets forth certain 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").
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
prepaid "cash-settled" rights, whereby Agere will settle its obligations on
the Exercise Date (as defined below) in cash rather than in securities. The
put rights will be deemed to be automatically exercised on the Exercise
Date of the put rights.
The put rights constitute senior subordinated and unsecured
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 holder of the put rights
an aggregate amount equal to the sum of:
o The number of Cash Delivery Shares times the amount, if any,
by which (A) the Put Price exceeds (B) the Average Sale
Price; plus
o The number of Physical Delivery Shares times the amount, if
any, by which (A) the Put Price exceeds (B) the Average
Closing Price.
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 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 a share of the Common Stock on any date of
determination means:
133
(1) the closing sale price (or, if no closing price is reported,
the last reported sale price) of the Common Stock (regular
way) on the New York Stock Exchange on such date,
(2) if the Common Stock 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 the Common Stock on the principal United States
national or regional securities exchange on which the Common
Stock is so listed or traded,
(3) if the Common Stock 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 the Common Stock as reported by
NASDAQ,
(4) if the Common Stock is not so reported, the last quoted bid
price for the Common Stock in the over- the-counter market
as reported by the National Quotation Bureau or similar
organization, or
(5) if the Common Stock is not so quoted, the average of the
mid-point of the last bid and ask prices for the Common
Stock obtained from at least three nationally recognized
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 of the put rights (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 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 Day
immediately preceding the Exercise Date, of the amount of the settlement
value of the put right 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 Certain Cash Offers
In the event of a Change of Control (as described in the
"Description of Notes") 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 sale and Agere's obligations, if any, under the Put
Option will become due and payable. Within two Business Days after such
Cash Offer Acceleration, the calculation agent will calculate the
settlement value of the put rights for all of the Common Stock then held by
the trust treating the date of the Cash Offer Acceleration as the Exercise
Date and using the Average Closing Price based on such Exercise Date.
134
Acceleration Upon Default
Upon Acceleration as a result of a Payment Default with respect
to the notes held by the trust, the Exercise Date will be accelerated to
the date of such Acceleration and Agere's obligations, if any, under the
put rights will become due and payable. Within two Business Days after such
Acceleration, the calculation agent will calculate the settlement value of
the put rights for all of the Common Stock then held by the trust treating
the date of the occurrence of such Payment Default as the Exercise Date and
using the Average Closing Price based on such 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.
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:
o an Event of Default, other than a Payment Default;
o an Asset Disposition Offer;
o a Change of Control; or
o 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 July 15, 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 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 by any party)
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
as determination agent 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 stock,
2. subdivides or splits all of its outstanding shares of Common
Stock into a greater number of shares of such stock,
3. combines all of its outstanding shares of Common Stock into a
smaller number of shares of such 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 to subscribe for or purchase shares of Common Stock at a price per
share less than the Market Price (as defined below), or
135
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 subject 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
referred to in clause (2) or (3) above, the date upon which the
subdivision or combination becomes effective.
In the case of an event referred to in clauses (4), (5)
or (6):
(i) the number of shares subject 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 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.
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
136
(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 investment banking, accounting or appraisal
firms.
"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 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 subject 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 subject 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 investment banking firm that the calculation agent
retains for such purpose.
All adjustments to the put right will be calculated to the
nearest 1/1,000th. 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.
137
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain 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 "issue price" of the notes is determined by allocating the
"issue price" of the investment unit (i.e., the notes and put rights)
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 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
138
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. 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. 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
139
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.
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.
140
PLAN OF DISTRIBUTION
Pursuant to a purchase agreement, SHARCS Trust I has agreed, subject
to the terms and conditions set forth therein, to purchase from us a number of
investment units equal to the total number of SHARCS to be purchased by the
underwriters from the trust pursuant to an underwriting agreement among J.P.
Morgan Securities Inc. and Salomon Smith Barney Inc., as representatives of
the underwriters, the trust, and Agere.
In connection with the SHARCS offering, the underwriters may
engage in syndicate covering transactions, stabilizing transactions and
penalty bids. Syndicate covering transactions involve purchases of the
SHARCS in the open market after the distribution has been completed in
order to cover syndicate short positions. Stabilizing transactions consist
of certain bids or purchases of SHARCS made for the purpose of preventing
or retarding a decline in the market price of the SHARCS while the offering
is in progress. Penalty bids permit the underwriters to reclaim a selling
concession from a syndicate member when the representatives, in covering
syndicate short positions or making stabilizing purchases, repurchase
SHARCS originally sold by the syndicate member. These activities may cause
the price of SHARCS to be higher than the price that otherwise would exist
in the open market in the absence of such transactions. These transactions,
if commenced, may be discontinued at any time.
The underwriters of the SHARCS 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 its 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.
In addition, one or more of the representatives have served as agents under
the credit facility and received customary fees and expenses in that
capacity.
We have agreed to indemnify the underwriters in 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.
141
LEGAL MATTERS
The validity of our investment units 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, 2000 and 2001 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 investment units 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 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, and the
Securities and Exchange Commission's regional offices located at 500 West
Madison Street, Suite 1400, Chicago, IL 60661, and 223 Broadway, New York,
NY 10279 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 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.
142
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS:
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
FINANCIAL STATEMENT SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts for the years ended
September 30, 2001, 2000 and 1999.......... F-42
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.
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.
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.
F-7
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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 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.
F-8
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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 Lucent for working capital, acquisition or capital
expenditure requirements after giving effect to the Company's transfers of
cash to or from Lucent.
F-9
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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 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.
F-10
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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 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.
F-11
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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 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.
F-12
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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.
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.
F-13
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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 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
F-14
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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 but will be reviewed for
impairment at least annually and subject to new impairment tests. Intangible
assets with finite lives will continue to be amortized over their useful lives
but will no longer be limited to a maximum life of forty years. 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 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
F-15
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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, and expects to record a restructuring charge related to the additional
500 employees by the end of the first quarter of fiscal 2002. 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 its
manufacturing operations at its chip fabrication plant in Madrid, Spain. The
Company is also rationalizing under-utilized manufacturing capacity at its
facilities in Orlando, Florida, and in Allentown, Breiningsville, 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 for fiscal 2001
related to property, plant, and equipment associated with the consolidation of
manufacturing and other corporate facilities. This charge was recognized 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." The remaining restructuring charge of $62 for fiscal 2001
relates primarily to contract terminations.
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
==== ===== ==== ====
We anticipate 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. We expect to substantially
complete implementation of the announced restructuring program by December 31,
2001.
F-16
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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 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 $2,762
during fiscal 2001, consisting of $2,220, $275, $240 and $27 related to Ortel,
Herrmann Technology, Agere, Inc. and Enable Semiconductor, respectively.
F-17
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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.
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
F-18
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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 profits (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
income
F-21
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(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 related transactions for fiscal 2001. The Lucent stock option activity is
not necessarily indicative of what the activity
F-24
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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
F-26
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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.
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.
F-27
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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."
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
The Company has two reportable segments: Integrated Circuits and
Optoelectronics. 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
F-30
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
functions and processing and storing data. The Integrated Circuits segment
includes the Company's wireless local area networking products, which
facilitate the transmission of data and voice signals within a localized area
without cables or wires. The Optoelectronics segment represents the Company's
optoelectronic components operations, including both active optoelectronic
components and passive components. Optoelectronic components transmit,
process, change, amplify and receive light that carries data and voice traffic
over optical networks. Each of the Integrated Circuits and Optoelectronics
segments include revenue from the licensing of intellectual property related
to that segment. There were no inter-segment sales during the periods
presented.
Each segment is managed separately. Disclosure of segment information is
on the same basis used internally for evaluating segment performance and for
deciding how to allocate resources.
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."
Performance measurement and resource allocation for the segments are
based on many factors. The primary financial measure used is operating income
(loss), exclusive of the amortization of goodwill and other acquired
intangibles, IPRD, restructuring and separation expenses, and impairment of
goodwill and other acquired intangibles.
REPORTABLE SEGMENTS
YEAR ENDED SEPTEMBER 30,
--------------------------
2001 2000 1999
-------- ------- -----
INTEGRATED CIRCUITS
Revenue................................................... $ 2,869 $3,507 $3,055
Operating income (loss) (excluding amortization of
goodwill and other acquired intangibles, IPRD,
restructuring and separation expenses and impairment of
goodwill and other acquired intangibles)............... (282) 434 383
Capital expenditures...................................... 400 447 572
Depreciation and amortization............................. 392 438 354
OPTOELECTRONICS
Revenue................................................... $ 1,211 $1,201 $659
Operating income (loss) (excluding amortization of
goodwill and other acquired intangibles, IPRD,
restructuring and separation expenses and impairment of
goodwill and other acquired intangibles)............... (270) 357 126
Capital expenditures...................................... 323 225 84
Depreciation and amortization............................. 64 39 31
F-31
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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
======= ===== ====
SEPTEMBER 30,
------------------------
2001 2000 1999
------ ------ ------
ASSETS
Integrated Circuits....................................... $2,281 $3,045 $2,360
Optoelectronics........................................... 953 3,775 329
Cash and cash equivalents, deferred taxes and other
corporate assets....................................... 3,328 247 331
------ ------ ------
Total assets........................................... $6,562 $7,067 $3,020
====== ====== ======
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
F-32
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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.
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
F-33
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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.
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.
F-34
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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.
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.
F-35
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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.
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.
F-36
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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 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
F-37
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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 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 of specified wireless
local area networking products, including some of the Company's products, into
the United States. 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
F-38
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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.
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-39
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 (UNAUDITED)
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, until
F-40
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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-41
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 0 10(a) 33
Deferred tax asset valuation
allowance........................ -- 553 (16)(b) -- 537
Year 2000
Allowance for doubtful accounts..... 11 10 0 4(a) 17
Deferred tax asset valuation
allowance........................ -- -- -- -- --
Year 1999
Allowance for doubtful accounts..... 9 4 0 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-42
==============================================================================
[logo]
400,000 Investment Units
Consisting of
$200,000,000 Principal Amount of
% Senior Subordinated Notes due 2007
and
Put Rights
-------------------------
PROSPECTUS
, 2002
-------------------------
==============================================================================
Until , 2002, all dealers that buy, sell or trade the
investment units, whether or not participating in this offering, may be
required to deliver a prospectus.
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 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
II-1
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability for:
o any breach of the director's duty of loyalty to the corporation
or its stockholders;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o payments of unlawful dividends or unlawful stock repurchases or
redemptions; or
o 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:
o for any breach of the director's duty of loyalty to us or our
stockholders;
o for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
o under Section 174 of the General Corporation Law of the State of
Delaware, which concerns unlawful payments of dividends, stock
purchases or redemptions; or
o 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 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
investment unit being registered(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 (filed as Exhibit
10.5 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)+
10.6 Agere Systems Inc. 2001 Long Term Incentive Plan (filed as
Exhibit 10.6 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-51594))(1)+
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
II-3
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)
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(2)+
10.26 Agere Systems Inc. Retention Plan(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)
II-4
23.2 Consent of Cravath, Swaine & Moore (contained in Exhibit 5)(3)
24.1 Power of Attorney(2)
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(2)
(1) Incorporated by reference.
(2) Filed herewith.
(3) To be filed by amendment.
+ 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.
(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 January 30, 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 January , 2002.
Signature Title
*
_______________________________________
John T. Dickson President, Chief Executive Officer
and Director (Principal Executive
Officer)
*
_______________________________________
Mark T. Greenquist Executive Vice President and Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
*
_______________________________________
Rajiv L. Gupta Director
*
_______________________________________
Rae R. Sedel Director
*
_______________________________________
Frank A. D'Amelio Director
*
_______________________________________
Harold A. Wagner Director
*
_______________________________________
John A. Young Director
*
_______________________________________
Henry B. Schacht Director
* By ATTORNEY-IN-FACT
/s/ Mark T. Greenquist
_______________________________________
Mark T. Greenquist
II-6
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
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 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
investment unit being registered(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 (filed as Exhibit
10.5 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-51594))(1)+
10.6 Agere Systems Inc. 2001 Long Term Incentive Plan (filed as
Exhibit 10.6 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-51594))(1)+
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)
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(2)+
10.26 Agere Systems Inc. Retention Plan(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(2)
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(2)
(1) Incorporated by reference.
(2) Filed herewith.
(3) To be filed by amendment.
+ Management contract or compensatory plan or arrangement.
Exhibit 10.25
CONFIDENTIAL SETTLEMENT AGREEMENT AND GENERAL RELEASE
THIS CONFIDENTIAL SETTLEMENT AGREEMENT AND GENERAL RELEASE (the
"AGREEMENT") is entered into as of November 14, 2001 (the "EFFECTIVE DATE"),
by and between Agere Systems Inc., a Delaware corporation (together with its
predecessors, including Lucent Technologies Inc., and its successors and
assigns, the "COMPANY" or "AGERE"), and Daniel A. DiLeo (the "EMPLOYEE").
W I T N E S S E T H:
WHEREAS, the Employee is currently employed by the Company;
WHEREAS, the Employee and the Company have decided (a) that beginning on
April 1, 2002 the Employee will be placed on a paid leave of absence for 24
months as set forth in Section 1 below and (b) to terminate their employment
relationship effective after such leave of absence;
WHEREAS, the Employee and the Company (the "PARTIES") have negotiated and
agreed to a final confidential settlement of their respective rights,
obligations and liabilities; and
WHEREAS, the Parties have agreed that the Company's Officer Severance
Policy attached hereto as Exhibit A (the "OFFICER SEVERANCE POLICY") shall be
applicable to the Employee.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Employee and the Company
hereby agree as follows:
1. Employment; Leave of Absence and Payments. (a) Subject to the terms
and conditions of this Agreement and in exchange for the Employee executing
this Agreement on the Effective Date,
(i) From the date hereof until March 31, 2002, the Employee will
continue his employment with the Company subject to all applicable
Company rules and regulations governing employment;
(ii) From April 1, 2002 until April 1, 2004, the Company agrees to
place the Employee on a leave of absence at the conclusion of which time
the Employee will terminate from the Company's payroll; and
(iii) While on leave of absence, the Company shall pay the Employee
a leave of absence payment based on the Employee's base salary (which
commencing on April 1, 2002 shall be an amount equal to the Employee's
monthly base salary as of September 30, 2001 plus a monthly amount of
$16,041.67) and target bonus as of September 30, 2001 (not taking into
account the April 1, 2002 increase in base salary) (the "PAYMENTS") in
accordance with the provisions set forth in the Officer Severance Policy.
The Payments shall commence on the following regularly scheduled pay
cycle after the commencement of the leave of absence.
(b) The Employee acknowledges and agrees that the Payments (i)
represent the gross amount before all applicable federal, state and local
withholding taxes that are required to, and will, be deducted by the Company,
and (ii) except as set forth in Sections 2, 3 and 4 below, are in
consideration of all amounts owed by the Company to the Employee, including
without limitation any amounts that may be due to the Employee under any
Company benefit or welfare plan or policies. The Employee will not accrue any
vacation days while on leave of absence. Payment for accrued and
unused vacation (including prior year carry over of up to 25 days) and
personal days will be paid concurrent with the first LOA Payment hereunder.
(c) In the event of the death of the Employee while on leave of
absence, then all of the remaining unpaid amounts of any cash Payments not yet
paid will be paid, in a lump sum, to the Employee's estate. Any unvested stock
options and restricted stock units that would have otherwise vested during the
remaining term of the leave of absence will vest immediately upon the death of
the Employee and become exercisable by the Employee's estate. Company provided
medical coverage will end upon the death of the Employee at which time any
dependents covered at that time can continue coverage under the Consolidated
Omnibus Budget Reconciliation Act (Cobra) of 1986.
2. Equity. All of the Employees vested and unvested stock options and
restricted stock units will be treated as set forth in the Officer Severance
Policy. Except for the vesting provisions set forth in the Officer Severance
Policy, nothing herein shall be deemed to supercede or replace any provision
of any applicable plan or agreement pursuant to which any stock option was
granted to the Employee.
3. Health and Welfare Benefits; Retirement Benefits. The Employee's
health and welfare benefits will be treated as set forth in the Officer
Severance Policy. Except for the continuation of coverage set forth in the
Officer Severance Policy, nothing herein shall be deemed to supercede or
replace any provision of any health or welfare plan applicable to the
Employee. The Employee's retirement benefits will be treated as set forth in
the Officer Severance Policy. Except as set forth in the Officer Severance
Policy, nothing herein shall be deemed to supercede or replace any provision
of any retirement plan applicable to the Employee.
4. Home Office. The Company shall provide the Employee with a one-time
allowance in an amount of up to $10,000 to furnish and equip a home office.
Any furnishings or equipment shall be purchased by the Employee who shall
submit any expenses to the Company for reimbursement.
5. Non-Solicitation; Non-Compete and Cooperation.
(a) Until April 1, 2004, the Employee shall not, without the prior
written consent of the Company's Chief Executive Officer, (i) directly or
indirectly solicit or employ (or encourage any company or business
organization in which he is an officer, employee, partner, director,
consultant or member of a technical advisory board to solicit or employ) or
(ii) refer to any employee search firms, any person who was employed by the
Company on the Effective Date.
(b) Until April 1, 2004, the Employee shall not, without the prior
written consent of the Company's Chief Executive Officer, at any time or for
any reason, anywhere in the world, directly or indirectly (i) engage in any
business or activity, whether as an employee, consultant, partner, principal,
agent, representative, stockholder (except as a holder of less than 5% of the
combined voting power of the outstanding stock of a publicly held company) or
in any other individual, corporate or representative capacity, or render any
services or provide any advice to any entity listed on Exhibit B or their
affiliates, or (ii) meaningfully assist, help or otherwise support any person,
business, corporation, partnership or other entity or activity, whether as an
employee, consultant, partner, principal, agent, representative, stockholder
(other than in the capacity as a stockholder of less than 5% of the combined
voting power of the outstanding shares of stock of a publicly held company) or
in any other individual, corporate or representative capacity, to create,
commence or otherwise initiate, or to develop, enhance or otherwise further,
any business or activity of any entity listed on Exhibit B or their
affiliates.
(c) If at any time the Employee violates the provisions of Sections
5(a) in any material manner or the provisions of Section 5(b) above, any
amounts remaining unpaid under the terms of this Agreement as well as any
benefits provided for in the Agreement (other than those from qualified
retirement or welfare plans) and any continuing vesting of stock options or
restricted stock units, if any, shall immediately be forfeited and terminated,
and any amounts already paid by the Company to the Employee in accordance
herewith, except for the sum of One Thousand Dollars ($1,000) shall, at the
sole discretion of the Company, be required to be repaid by the Employee to
the Company within ten business days of the Company's request in writing
therefore. This provision shall not affect the Company's right to otherwise
specifically enforce any provision relating to non-solicitation or
non-competition that is in this Agreement or in any other agreement, document
or plan applicable to the Employee.
(d) Until April 1, 2004, the Employee hereby agrees that, from time
to time upon the reasonable request of the Company, the Employee shall assist
the Company in connection with any pending or future dispute, litigation,
arbitration or similar proceeding or investigation or any regulatory requests
or filings involving the Company, any of its employees or directors or the
employees and directors of any subsidiary.
6. Publicity and Non-Disparagement.
(a) The Employee agrees that this Agreement and its terms are
confidential, and he shall neither discuss the terms of this Agreement with,
nor disclose this Agreement to, any person or organization, except as required
by law or lawful court order. Notwithstanding the foregoing, the Employee may
in any event discuss this Agreement with, and disclose all or any portion of
this Agreement to, his spouse, and his legal and financial advisors. The
Employee agrees to advise these individuals of the confidential nature of this
Agreement and the facts giving rise to it as well as their obligation to
maintain the confidentiality of this Agreement or the facts giving rise to it.
If disclosure of this Agreement is requested or required (by oral question,
interrogatory, request for information or documents, subpoena, civil
investigative demand or similar process), the Employee will promptly notify
the Company of such request or requirement and will cooperate with the Company
such that the Company may seek an appropriate protective order or other
appropriate remedy. Employee affirms that as of the Effective Date, he has not
disclosed the nature or terms of this Agreement except as otherwise permitted
hereby.
(b) The Employee agrees that he shall not (i) testify or otherwise
provide testimony in any form at or for any legal or administrative
proceeding, including testimony related to any matter involving the Company,
unless legally compelled to do so or (ii) make statements to third parties,
the public, the press or the media or any administrative agency, in either
case that would portray the Company in an adverse light or disparage the
Company, or cause material injury to the Company with respect to events
occurring prior to or after the Effective Date.
7. Confidentiality. Employee hereby agrees and covenants, that:
(a) he shall not divulge to any person or entity other than the
Company, without express written authorization of the Company's Chief
Executive Officer, any proprietary or confidential information, whether
written or oral, received or gained by him in the course of his employment by
the Company or of his duties with the Company ("Confidential Information"),
nor shall he make use of any such Confidential Information on his own behalf
or on behalf of any other person or entity, for so long as such Confidential
Information is not known to the general public; and
(b) he shall return or cause to be returned to the Company's Chief
Executive Officer any and all property of the Company of any kind or description
whatsoever, including, but not limited to, any Confidential Information, which
has been furnished to him or is held by him, at his residence or elsewhere, and
shall not retain any copies, duplicates, reproductions or excerpts thereof.
8. Release. In consideration of the Company's entering into this Agreement
and the payments and benefits set forth herein, the Employee, on behalf of
himself and his heirs, executors, administrators, successors and assigns,
knowingly and voluntarily waives, releases and forever discharges the Company,
each of its subsidiaries or affiliated companies, their respective current and
former officers, employees, agents and directors, and any successor or assign of
any of the foregoing, from any claim, charge, action or cause of action any of
them may have against any such released person, whether known or unknown, from
the beginning of time through the date of this Agreement based upon any matter,
cause or thing whatsoever related to or arising out of his employment by the
Company or his termination other than claims arising out of a breach of this
Agreement or any claim that cannot be waived by law. All such claims are forever
barred by this Agreement.
This release and waiver includes, but is not limited to, any rights or
claims under United States federal, state or local law, for wrongful or abusive
discharge, for breach of any contract, or for discrimination based upon race,
color, ethnicity, sex, age, national origin, religion, disability, sexual
orientation, or any unlawful criterion or circumstance, including, but not
limited to, rights or claims under the Family and Medical Leave Act, claims of
discrimination under the Employee Retirement Income Security Act, the Equal Pay
Act, the Occupational Safety and Health Act, the Workforce Adjustment Retraining
Notification Act, Title VII of the Civil Rights Act of 1964, the Americans with
Disabilities Act, Section 1981 through 1988 of the Civil Rights Act of 1866, the
Civil Rights Act of 1991, the Age Discrimination in Employment Act, the Older
Workers Benefit Protection Act, the Rehabilitation Act of 1973, Executive Order
11246 and any other executive order, the Fair Labor Standards Act and its state
and local counterparts, the Uniform Services Employment and Reemployment Rights
Act, and the Immigration Reform Control Act, all as amended. The Employee
confirms that he has no claim or basis for a claim whatsoever against the
Company with respect to any such matters related to or arising out of his
employment by the Company or his termination.
The Employee affirms that he has been given at least 21 days within
which to consider this release and its consequences, that he has seven days
following his signing of this Agreement (the seventh day being the "Expiration
Date") to revoke and cancel the terms and conditions contained herein and the
terms and conditions of this Agreement shall not become effective or enforceable
until the seven-day revocation and cancellation period has expired, and that,
prior to the execution of this Agreement, he has been advised by the Company to
consult with an attorney of his choice concerning the terms and conditions set
forth herein. Any revocation or cancellation of this Agreement by the Employee
pursuant to this paragraph shall be in writing delivered to the Company.
In consideration for the Payments, the Employee agrees to execute
another release on March 31, 2002 in the form set forth in this Section 8.
9. Entire Agreement. This Agreement contains the entire agreement between
the Parties concerning the subject matter hereof and supersedes all prior
agreements, understandings, discussions, negotiations, and undertakings, whether
written or oral, between the Parties with respect thereto. This Agreement may
not be modified or amended except by a writing signed by both Parties.
10. No Admission. This Agreement is entered into in compromise of disputed
claims. The parties acknowledge and agree that this Agreement does not
constitute and should not be construed in any way as an admission by any other
party of (a) any wrongdoing or liability whatsoever, (b) any
violation of the Employee's rights or those of any other person, or (c) any
violation of any order, law, statute, duty or contract. The Company specifically
disclaims any liability for any alleged wrongdoing or liability, for any alleged
violation of my rights or those of any other person, or for any alleged
violation of any order, law, statute, duty or contract.
11. Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions or portions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.
12. Survival; Termination. The respective rights and obligations of the
Parties hereunder shall survive any termination of this Agreement to the extent
necessary for the intended preservation of such rights and obligations. This
Agreement may be terminated by the Company if the Employee breaches any
provision hereof. In addition, the termination provisions set forth in the
Officer Severance Policy shall apply.
13. Interpretation; Governing Law. This Agreement shall be interpreted in
accordance with the plain meaning of its terms and not strictly for or against
any person or entity. To the extent that federal law controls the interpretation
or enforceability of any provision of this Agreement, this Agreement shall be
construed and enforced in accordance with federal law. Otherwise, this Agreement
shall be governed by and construed and interpreted in accordance with the laws
of the State of Pennsylvania without reference to the principles of conflicts of
law.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument. Signatures delivered by
facsimile shall be effective for all purposes.
BY SIGNING AND DELIVERING THIS AGREEMENT, THE EMPLOYEE STATES:
(A) HE HAS READ IT AND UNDERSTANDS IT AND HAS AT LEAST 21 DAYS TO
CONSIDER IT AND A PERIOD OF SEVEN DAYS AFTER EXECUTING IT TO REVOKE IT;
(B) HE AGREES WITH IT AND IS AWARE THAT HE IS GIVING UP IMPORTANT
RIGHTS, INCLUDING RIGHTS PROVIDED BY THE OLDER WORKERS BENEFIT PROTECTION ACT,
FOR CONSIDERATION TO WHICH HE WAS NOT ALREADY OTHERWISE ENTITLED;
(C) HE WAS ADVISED TO, AND IS AWARE OF HIS RIGHT TO CONSULT WITH AN
ATTORNEY BEFORE SIGNING IT; AND
(D) HE HAS SIGNED IT KNOWINGLY AND VOLUNTARILY.
AGERE SYSTEMS INC.
By: /s/ John T. Dickson
----------------------------
John T. Dickson
President and Chief Executive Officer
/s/ Daniel A. DiLeo
----------------------------
Daniel A. DiLeo
Exhibit 10.26
Agere Retention Program
Rationale o To retain senior managers whose contributions to
Agere's business are believed to be critical to the
company's success, and
o To retain critical senior managers who are at risk of
leaving the company if the spin-off of the company from
Lucent Technologies is delayed or abandoned.
Eligibility o Executive Committee members, Executives and selected
other employees of Agere deemed critical to Agere are
eligible to participate in the Program.
o Executive Committee members will be selected for
participation and assigned to a payment tier by the
Corporate Governance and Compensation Committee of
Agere's Board of Directors (the "Compensation
Committee").
o Employees below Executive Committee level will be
selected for participation and assigned to a payment
tier by Agere's Chief Executive Officer (the "CEO").
Summary o A participant selected to participate in the Program
of Benefits will be eligible for a payment if he or she remains
employed by Agere during the period beginning on
December 1, 2001 and ending on a "Payment Date."
o Payment Dates: April 1, 2003 and October 1, 2003.
o Fifty percent of the total payment shown below for each
participant will be paid on each Payment Date if (i)
the participant is an employee of Agere on such date
and (ii) if the Spin-Off has not occurred prior to such
date.
o Payments will not be benefits bearing.
Payment Tiers o Payment amounts will be determined in accordance with
the participant's payment tier and base salary plus
annual incentive payment at target ("Pay") as in
effect on October 1, 2001:
Payment Tier Payment
Tier 1 5.0 X Pay
Tier 2 4.0 X Pay
Tier 3 3.0 X Pay
Tier 4 1.5 X Pay
o Payments will be made in cash on or about the Payment
Date, less any applicable withholding.
Certain o If the employment of a participant is terminated before
Terminations a Payment Date
o by Agere without Cause,
o by reason of the participant's death or disability,
or
o by the participant within three months of an event
constituting Good Reason, and, in each case, if a
Spin-Off of Agere has not occurred by such Payment
Date, the participant will be entitled to a pro rata
payment based on the length of his or her service
from December 1, 2001 to the date of termination.
If the participant terminates his or her employment
for anyreason other than Good Reason before a
Payment Date, the participant will not be entitled
to any payment.
o Notwithstanding the foregoing, if, following a Change
in Control, (a) the Spin-Off has not occurred and (b)
the employment of a participant is terminated by Agere
without Cause or by the participant within three months
of an event constituting Good Reason, then the
participant shall be entitled all unpaid payments,
which amounts shall be paid within 30 days of the date
of termination.
o If the employment of a participant is terminated by
Agere for Cause (or if Cause exists) at any time before
payments are made under the Program, the participant
will not be entitled to any such payments.
Impact on Pension Plans
Retirement o Payments under the Program will not count toward
Benefits service pensions or towards the cash balance plan.
401(k)
o Payroll deduction elections will not apply to payments
under the Program.
Impact on o Participation in the Program will not have any impact
Other Awards on any pre-existing bonus awards, grants of restricted
stock or stock options, or other compensation-related
agreements.
Administration o The Compensation Committee will administer the Program
as it applies to participants who are Executive
Committee members.
o The CEO will administer the Program as it applies to
participants who are below Executive Committee level.
o The Compensation Committee and the CEO, as applicable,
will have the authority to interpret and construe the
Program and to make all determinations with respect to
participants.
Change in Control The Program will remain in effect upon and after a
Change in Control (as defined below).
Definitions For purposes of the Program:
o "Cause" means any:
o violation of Agere's code of conduct;
o conviction of (or plea of guilty or nolo contendere
to) a felony or any crime of theft, dishonesty or
moral turpitude; or
o gross omission or gross dereliction of any statutory
or common law duty of loyalty to Agere.
o "Change in Control" means:
o any Change in Control as defined in the 2001 Long
Term Incentive Plan or its successor plan as in
effect immediately before the Change in Control; or
o prior to the Spin-Off of Agere by Lucent, any
Change in Control as defined in the Lucent
Technologies Inc. 1996 Long Term Incentive Plan.
o "Good Reason" means any:
o assignment to a participant by the Board of
Directors or another representative of Agere of
duties which represent a material decrease in
responsibility and are materially inconsistent with
the duties associated with the participant's
position, any reduction in the participant's job
title, or a material negative change in the level of
Officer to whom the participant reports; or
o a material negative change in the terms and
conditions of a participant's employment, including a
reduction by Agere of the participant's annual base
salary or a material decrease in the participant's
target opportunity for a Short Term Incentive Award.
o "Spin-Off" means (a) a tax-free distribution by Lucent
to its stockholders of all Agere stock held by Lucent
on December 1, 2001, or (b) an exchange offer by Lucent
in which holders of Lucent's common stock would be
invited to tender those shares to Lucent in exchange
for all Agere stock held by Lucent on December 1, 2001.
Exhibit 12
Statement Regarding Computation of Ratios
(dollars in millions)
Year Ended September 30,
-------------------------------------------------------
2001 2000 1999 1998 1997
---------- -------- -------- -------- --------
Earnings (loss) available for fixed charges:
Income (loss) before provision for income taxes....... $ (4,507) $ 131 $ 477 $ 513 $ 424
Less undistributed equity earnings (loss) from
investments....................................... 42 4 (20) (22) (115)
Less interest capitalized during the period........... 4 0 7 7 6
Add fixed charges..................................... 199 90 64 46 39
Total earnings (loss) available for fixed charges. $ (4,354) $ 217 $ 544 $ 574 $ 572
Fixed charges:
Interest expense including capitalized interest....... $ 155 $ 58 $ 45 $ 28 $ 33
Interest portion of rental expense.................... 44 32 19 18 6
Total fixed charges............................... $ 199 $ 90 $ 64 $ 46 $ 39
Ratio of earnings to fixed charges......................... n/a 2.4 8.7 12.5 14.7
Deficiency................................................. $ 4,553 n/a n/a n/a n/a
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated October 23, 2001, except for the fifth and sixth paragraphs of Note
22 as to which the date is December 7, 2001, relating to the financial
statements and financial statement schedule of Agere Systems Inc., which appears
in such Registration Statement. We also consent to the reference to us under
the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
January 28, 2002
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Agere Systems Inc., a Delaware corporation (the "Company"), proposes to
file with the Securities and Exchange Commission, under the provisions of the
Securities Act of 1933, as amended, a registration statement or registration
statements on Form S-1 or other appropriate form, with respect to the issuance
of investment units consisting of (a) senior, senior subordinated and/or
subordinated notes and (b) put rights in respect of common stock of the Company;
and
WHEREAS, the undersigned is a director and/or officer of the Company, as
indicated below his or her signature:
NOW, THEREFORE, the undersigned hereby constitutes and appoints Mark. T.
Greenquist as attorney for and in the name, place and stead of the undersigned,
and in the capacity of the undersigned as a director and/or officer of the
Company, to execute and file any such registration statement with respect to the
above-described investment units and thereafter to execute and file any amended
registration statement or statements with respect thereto or amendments or
supplements to any of the foregoing, hereby giving and granting to said
attorney, full power and authority to do and perform each and every act and
thing whatsoever requisite and necessary to be done in and about the premises,
as fully, to all intents and purposes, as the undersigned might or could do if
personally present at the doing thereof, hereby ratifying and confirming all
that said attorney may or shall lawfully do, or cause to be done, by virtue
hereof.
IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney this
15th day of January, 2002.
By: /s/ John T. Dickson By: /s/ Harold A. Wagner
----------------------- --------------------------
Name: John T. Dickson Name: Harold A. Wagner
Title: President, Chief Executive Title: Director
Officer and Director
By: /s/ Rajiv L. Gupta By: /s/ John A. Young
----------------------- --------------------------
Name: Rajiv L. Gupta Name: John A. Young
Title: Director Title: Director
By: /s/ Rae F. Sedel By: /s/ Mark T. Greenquist
----------------------- --------------------------
Name: Rae F. Sedel Name: Mark T. Greenquist
Title: Director Title: Executive Vice President
and Chief Financial Officer
By: /s/ Frank A. D'Amelio By: /s/ Henry B. Schacht
----------------------- --------------------------
Name: Frank A. D'Amelio Name: Henry B. Schacht
Title: Director Title: Director
Exhibit 24.2
SECRETARY'S CERTIFICATE
The undersigned, Jean F. Rankin, does hereby certify that she is the
Secretary of Agere Systems Inc., a Delaware corporation (the "Company"), and in
her capacity as Secretary of the Company, does hereby certify, on behalf of the
Company, that:
1. Attached hereto as Exhibit A is a true and complete copy of the
resolution authorizing the officers of the Company to execute a power of
attorney for purposes of the execution and filing of, among other things, a
registration statement and amendments thereto under the Securities Act of 1933
for the registration of investment units consisting of senior subordinated notes
and put rights, duly adopted by the board of directors of the Company on January
15, 2002; such resolution has not been amended, rescinded, annulled, revoked or
modified since its adoption and remains in full force and effect as of the date
hereof.
WITNESS my hand this 18th day of January 2002.
/s/ Jean F. Rankin
-----------------------
Name: Jean F. Rankin
Title: Secretary
Exhibit A
RESOLVED FURTHER, that for purposes of a Registration Statement with
respect to either the initial sale of the Notes or the resale of the Notes by
the Initial Purchaser or its assigns, the officers of the Corporation be, and
each of them acting alone hereby is, authorized and empowered in the name and on
behalf of the Corporation to execute powers of attorney, in such form as they
shall deem appropriate, constituting and appointing the Chief Executive Officer,
the Chief Financial Officer and the Treasurer, with full power to each of them
to act alone, as the true and lawful attorneys and agents of the Corporation's
officers and of the Corporation, with full power of substitution, to execute and
file with the Securities and Exchange Commission, in the name and on behalf of
the Corporation and its officers or any of them, any and all amendments
(including post-effective amendments) to the Registration Statement, with all
exhibits thereto, and other documents in connection therewith;