As filed with the Securities and Exchange Commission on December 12, 2002 UNITED STATES
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|X| | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2002 |
|_| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to ____________ |
Commission File Number 001-16397 Agere Systems Inc. |
Delaware (State or other jurisdiction of incorporation or organization) |
22-3746606 (I.R.S. Employer Identification No.) |
1110 American Parkway N.E. Allentown, Pennsylvania (Address of principal executive offices) |
18109 (Zip Code) |
Registrants telephone number, including area code: 610-712-6011 Securities registered pursuant to Section 12(b) of the Act: |
Title of Each Class Class A Common Stock, $.01 par value Class B Common Stock, $.01 par value |
Name of Each Exchange on Which Registered New York Stock Exchange New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). |X| Yes |_| No The aggregate market value of voting common equity held by non-affiliates of the registrant as of December 1, 2002 was approximately $2.3 billion. As of December 1, 2002, 740,948,404 shares of Class A common stock and 907,995,677 shares of Class B common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCECertain information required by Part III of this report (Items 10, 11, 12 and 13) is incorporated by reference from the registrants proxy statement to be filed pursuant to Regulation 14A with respect to the registrants 2003 annual meeting of stockholders. Agere Systems Inc.
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Item 1. | Business |
Item 2. | Properties |
Item 3. | Legal Proceedings |
Item 4. | Submission of Matters to a Vote of Security Holders |
Executive Officers of the Registrant |
PART II |
PART III |
PART IV |
Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K |
| digital signal processors for speech compression and encoding and transmission of voice and data; |
| conversion signal processors to convert signals between frequencies used in digital signal processors and frequencies used for radio transmission; and |
| software that controls the communication process. |
We also license hardware and software designs for mobile telephones that use our integrated circuits. Most of our mobile terminal products support General Packet Radio Service, or GPRS, and operate on the Global Systems for Mobile Communications, or GSM, standard. GPRS provides enhanced data transmission capabilities for GSM mobile phones. Infrastructure SystemsThrough our Infrastructure Systems group, we offer solutions for high-speed communications systems that encompass integrated circuits, software and reference designs. Our products facilitate the transmission and switching of voice, video and data signals within communications networks, including optical, wireline and wireless networks. Our products are used primarily in the following types of equipment: |
| network communications equipment, which facilitate the transmission, switching and management of data and voice traffic within communications networks; |
| network access equipment, such as data communications equipment, which allow devices to connect with communications networks; and |
| wireless infrastructure equipment, such as cellular base stations, which transmit and receive data and voice communications through radio waves. |
Our ongoing infrastructure systems product offerings support three primary applications: |
| networking; |
| processing, aggregation and switching; and |
| transport. |
We sell integrated circuit solutions that include physical layer devices, integrated circuits supporting SONET/SDH communication standards, multi-service switching fabrics and network processing devices and broadband access devices, each of which is described below. In addition, we currently sell optoelectronic components that are utilized in optical networks, although we are selling or exiting this business. Optical networks transmit information as pulses of light, or optical signals, through optical fibers, which are hair-thin glass strands. We primarily offer active optical components, including lasers, modulators, transmitters and amplifiers. An active component is a device that has both optical and electronic properties. Networking Devices The majority of our revenue from networking devices is derived from the sale 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. Our systems-level knowledge and integrated circuit design methodologies allow 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. In fiscal 2002, we sold our field-programmable gate array, or FPGA, and field-programmable systems-on-a-chip, or FPSC, business to Lattice Semiconductor Corporation, and we sold our analog line card business to Legerity, Inc. The analog line card business provided integrated circuits to telecommunication equipment manufacturers for use in traditional voice telephone networks. Processing, Aggregation and Switching Devices Multi-Service Switching Fabrics and Network Processing Devices. Switching devices guide data to different local area networks and wide area networks based on the intended destination. Multi-service switching devices support the transmission of voice and video signals as well as data. We sell switch fabrics and programmable 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. We currently offer switching products for asynchronous transfer mode, or ATM, and Internet protocol, or IP. 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 that refers to high-speed data transmission. Our broadband access integrated circuits, or mappers, support data transport between central offices and enterprise sites by aggregation and termination. Aggregation refers to the combining of many low-speed, or tributary, data signals from enterprises into higher speed, or trunk, data signals for transmission to a central office. Termination refers to the separation of trunk data signals into lower-speed, tributary data signals. Our products support data transport for T-carrier data transport in North America. T-carrier is a digital transmission service from a common carrier. We support similar services worldwide which are referred to as J-carrier in Japan and E-carrier in Europe. T-carrier services such as T1 and T3 lines are widely used to create point-to-point networks for use by enterprises. T1 and T3 lines refer to different levels of T-carrier service that 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. Wireless Infrastructure Devices. We sell integrated circuit solutions used in wireless infrastructure products, which are primarily cellular base stations and cellular base transceiver stations. These devices include digital signal processors for speech compression and encoding and transmission of voice and data. We also are beginning to sample to some customers radio frequency devices to transmit signals. Transport Devices Physical Layer Devices. High-speed physical layer devices are key elements in the conversion between optical signals and electronic signals in communications networks. High-speed physical layer devices accept the output from an optical receiver and convert it into a digital data signal that can be used in communications switching and processing functions. Our products include integrated circuit components for physical layer devices that provide a complete product offering for transmission up to and including 10 gigabits per second. SONET/SDH Network Devices. Synchronous optical networks, which are typically referred to as SONET, and synchronous digital hierarchy standard networks, or SDH, carry data, voice and video traffic through a network by combining lines carrying traffic at slower speeds with lines carrying traffic at higher speeds. This process is known as multiplexing, and involves directing traffic from the individual lines into designated time slots in the higher speed lines, and those lines into still higher speed lines. The SONET/ SDH equipment that handles the directing of traffic into slower speed and faster speed lines is the add-drop multiplexor, or ADM. Add-drop multiplexors handle the addition and removal of traffic from a SONET/SDH communication transmission. We offer single-chip integrated circuit solutions, or framers, for add-drop multiplexing of data and voice traffic. In addition, our framers are used in high-speed routers within an optical network. A router is an interface, or link, between two networks. Optoelectronic Components We currently sell the optoelectronic components described below. We expect to transfer these product lines as part of the sale of a substantial portion of our optoelectronics business to TriQuint, except where noted. Lasers. We offer a variety of lasers for use in high-speed transport, metropolitan and submarine network applications. We also offer analog lasers for use in cable television applications. These lasers are not included in the TriQuint sale. Modulators. 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. 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 and metropolitan network applications, and tunable laser transmitters for high-speed transport network applications that are designed to enable flexible and reconfigurable optical networks. We offer uncooled laser transmitters for metropolitan network applications. Our positive intrinsic negative, or PIN, receivers are used for high-speed transport, metropolitan and cable television network applications. Our avalanche photo detector, or APD, receivers are used for high-speed transport and metropolitan network applications. We also offer combined transmitters and receivers, which are called transceivers. Analog receivers and transmitters related to cable television applications are not included in the sale to TriQuint. 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. Customers, Sales And DistributionCustomers We have a globally diverse base of customers, consisting primarily of manufacturers of computer and communications 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 2002, we sold our products directly to approximately 260 end customers and indirectly, through distributors, to approximately 800 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 2002, based on revenue, accounted for approximately 68% of our revenue and our top 10 end customers in fiscal 2002, based on revenue, accounted for approximately 53% of our revenue. Our top ten end customers in fiscal 2002 were: |
Apple Computer, Inc. Avaya Inc. Cisco Systems, Inc. Hewlett Packard Lucent Technologies Inc. |
Maxtor Corp. NEC Corporation Seagate Technology, Inc. Siemens AG Western Digital Corp. |
Our sales to Lucent represented 10%, 15% and 21% of our revenue in fiscal 2002, 2001 and 2000, respectively, and our sales to Maxtor represented 13% of our revenue in fiscal 2002. No other customer accounted for 10% or more of our revenue in fiscal 2002, 2001 or 2000. Sales and Distribution We have a worldwide sales organization with approximately 420 employees as of September 30, 2002, located in 9 domestic and 14 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 2002 represented approximately 10% of our revenue. We aim to have our customers incorporate our products into the end products they design and develop. Typically, manufacturers of computer and communications 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 its relationship with us 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 whom we have achieved a design win will have us sell that product to a distributor or trading company from whom the customer then buys our product. We recognize these transactions as indirect sales. ManufacturingOur operations support organization is responsible for the supply chain management and manufacturing activities of both integrated circuits devices and optoelectronics components. As of September 30, 2002, we had approximately 5,700 employees devoted to manufacturing and related support activities. Integrated Circuit Manufacturing We had 6 facilities located in 3 countries devoted to manufacturing integrated circuits as of September 30, 2002. These sites utilized approximately 2.3 million square feet of space dedicated to manufacturing. As of September 30, 2002, our company-owned and joint venture wafer fabrication operations were in the United States and Singapore, while our assembly and test operations were in the United States, Singapore and Thailand. Since January 2002, we have been consolidating our integrated circuit manufacturing operations and expect that by September 2003, all our manufacturing in the United States will be conducted at our facility in Orlando, Florida. We are seeking a buyer for that facility, but will continue to operate it at least through September 2004, as we reduce the amount of our owned manufacturing capacity to reduce our fixed costs. See note 5 to our financial statements in Item 8. We have a joint venture, called Silicon Manufacturing Partners, with Chartered Semiconductor Manufacturing Ltd., that operates an integrated circuit manufacturing facility in Singapore. We have agreed to purchase 51% of the ventures managed wafer capacity and Chartered Semiconductor has agreed to purchase the remaining 49% of the managed wafer capacity. Silicon Manufacturing Partners determines its managed wafer capacity each year based on forecasts provided by Agere and Chartered Semiconductor. If we do not purchase all the wafers allotted to us, we may be obligated to reimburse the joint venture for the portion of its 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 venture 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. 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 developing leading products. 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 relationships. 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, 2002. These sites utilized approximately 500,000 square feet. As part of the exit of our optoelectronics business we plan to sell or close all of our optoelectronics manufacturing facilities. CompetitionWe sell products designed for communications and computer equipment manufacturers. Our customers products are sold in market segments that are intensely competitive and characterized by: |
| rapid technological change; |
| evolving standards; |
| short product life cycles; and |
| price erosion. |
There are many competitors for our products. 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 our customers attempt to limit the number of suppliers from which they buy. 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. Our primary competitors within our client product areas are listed in the table below. |
Storage |
Wireless Local Area Networking |
Computing Connectivity |
Mobile Terminals | ||||
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Infineon Technologies AG |
Broadcom Corp. |
Broadcom Corp. |
Koninklijke Philips Electronics AG |
||||
LSI Logic Corp. |
Intersil Holding Corp. |
Conexant Systems, Inc. |
Motorola, Inc. |
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Marvell Communications Corp. |
Texas Instruments Incorporated |
Infineon Technologies AG |
QUALCOMM Inc. |
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STMicroelectronics N.V. |
Koninklijke Philips Electronics AG |
Skyworks Solutions, Inc. |
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Texas Instruments Incorporated |
Marvell Communications Corp. |
STMicroelectronics N.V. |
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PCTel, Inc. |
Texas Instuments Incorporated |
Our primary competitors within our infrastructure product areas are listed in the table below. |
Networking |
Processing, Aggregation And Switching |
Transport |
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Broadcom Corp. |
Applied Micro Circuits Corp. |
Applied Micro Circuits Corp. |
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IBM Corp. |
Conexant Systems, Inc. |
Intel Corp. |
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Infineon Technologies AG |
IBM Corp. |
PMC-Sierra, Inc. |
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LSI Logic Corp. |
Intel Corp. |
Vitesse Semiconductor Corporation |
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Motorola, Inc. |
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Texas Instruments Incorporated |
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 analog modems, 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 network processor 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 competition in our industry is based on the following factors: |
| performance and reliability; |
| price; |
| compatibility of products with other products and communications standards used in communications networks; |
| product size; |
| ability to offer integrated solutions; |
| time to market; |
| breadth of product line; |
| logistics and planning systems; and |
| quality of manufacturing processes. |
While we believe we are competitive on the basis of all the factors listed above, we believe some of our competitors compete more favorably on the basis of price and on delivering products to market more quickly. However, we feel we are particularly strong in offering integrated solutions, our broad product lines and our logistics and planning systems. Research and developmentOur 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. As of September 30, 2002, our product and process development team was comprised of approximately 2,500 development engineers and scientists. Approximately 80 percent of these development engineers and scientists design and implement product solutions. The remaining 20 percent work primarily on design and manufacturing technology, such as the technology for system-on-a-chip and integrated circuit design methodology. In addition to our internal research and development team, we work closely with universities around the world and have entered into joint research and development initiatives with other companies. Our research and development expenditures were $693 million, $951 million and $827 million for fiscal 2002, 2001 and 2000, 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 and technology. Patents, Trademarks And Other Intellectual PropertyWe 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. We have approximately 5,700 U.S. patents and patent applications and their corresponding foreign patents and patent applications. These patents include patents related to the following technologies: |
| integrated circuit and optoelectronic manufacturing processes; |
| integrated circuits for use in products such as modems, digital signal processors, wireless communications, network processors and communication protocols; and |
| optoelectronic products including lasers, optical modulators, optical receivers and optical amplifiers. |
Name |
Age |
Position |
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John T. Dickson | 56 | President, Chief Executive Officer | |||
Ronald D. Black | 38 | Executive Vice President, Client Systems | |||
Mark T. Greenquist | 44 | Executive Vice President and Chief Financial Officer | |||
Peter Kelly | 45 | Executive Vice President, Operations | |||
Sohail A. Khan | 48 | Executive Vice President, Infrastructure Systems | |||
Ahmed Nawaz | 53 | Executive Vice President, Worldwide Sales |
Fiscal 2001 |
High |
Low |
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Quarter Ended March 31, 2001 | $6.23 | $6.01 | |||
(trading began March 28, 2001) | |||||
Quarter Ended June 30, 2001 | $9.50 | $4.10 | |||
Quarter Ended September 30, 2001 | $7.50 | $3.10 |
Fiscal 2002 |
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Quarter Ended December 31, 2001 | $6.30 | $4.06 | |||
Quarter Ended March 31, 2002 | $6.10 | $3.60 | |||
Quarter Ended June 30, 2002 | $4.49 | $1.40 | |||
Quarter Ended September 30, 2002 | $2.70 | $0.95 |
All of our outstanding Class B common stock was held by Lucent until June 1, 2002, when Lucent completed our spin-off, distributing to its stockholders all of our Class A common stock and Class B common stock that it held on that date. Our Class B common stock has been traded on the New York Stock Exchange under the symbol AGR.B since June 3, 2002. The following table sets forth, for the indicated periods, the quarterly high and low sale prices of our Class B common stock, as reported in the consolidated transaction reporting system. |
Fiscal 2002 |
High |
Low |
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Quarter ended June 30, 2002 | $3.32 | $1.35 | |||
(trading began June 3, 2002) | |||||
Quarter ended September 30, 2002 | $2.72 | $0.94 |
Year Ended September 30, |
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2002 (1) |
2001 (2) |
2000 (3) |
1999 |
1998 |
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(dollars in millions except per share amounts) | |||||||||||||||||
Statement of operations information: |
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Revenue | $ | 2,177 | $ | 4,080 | $ | 4,708 | $ | 3,714 | $ | 3,101 | |||||||
Gross profit | 251 | 996 | 2,153 | 1,765 | 1,509 | ||||||||||||
Restructuring and other charges net |
978 | 662 | | | | ||||||||||||
Impairment of goodwill and other acquired intangibles |
220 | 2,762 | | | | ||||||||||||
Income (loss) before cumulative effect of accounting change |
(1,811 | ) | (4,612 | ) | (76 | ) | 319 | 303 | |||||||||
Net income (loss) | $ | (1,811 | ) | $ | (4,616 | ) | $ | (76 | ) | $ | 351 | $ | 303 | ||||
Basic and diluted earnings (loss) per share: (4) |
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Income (loss) before cumulative effect of accounting change |
$ | (1.11 | ) | $ | (3.46 | ) | $ | (.07 | ) | $ | .31 | $ | .29 | ||||
Net income (loss) | $ | (1.11 | ) | $ | (3.46 | ) | $ | (.07 | ) | $ | .34 | $ | .29 | ||||
Weighted average shares outstanding basic and diluted (millions) |
1,637 | 1,334 | 1,035 | 1,035 | 1,035 |
September 30, |
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2002 (1) |
2001 (2) |
2000 (3) |
1999 |
1998 |
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Balance sheet information: | |||||||||||||||||
Working capital | $ | 189 | $ | 156 | $ | 428 | $ | 219 | $ | 409 | |||||||
Total assets | 2,864 | 6,562 | 7,067 | 3,020 | 2,481 | ||||||||||||
Short-term debt | 197 | 2,516 | 14 | 14 | | ||||||||||||
Long-term debt | 486 | 33 | 46 | 64 | |
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(1) | During fiscal 2002, our short-term debt decreased significantly as we repaid $2.5 billion of borrowings under our credit facility. Also, our total assets decreased significantly as we used $1.6 billion of cash on hand to repay our credit facility and recorded significant impairments of plant and equipment, as well as goodwill and other acquired intangibles, in fiscal 2002. |
(2) | During fiscal 2001, we received approximately $3.4 billion of net proceeds from our initial public offering and recorded a $2.8 billion 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 $2.5 billion of debt from Lucent, 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. |
(3) | During fiscal 2000, goodwill and other acquired intangibles increased by $3.4 billion due to the acquisitions of Ortel, Herrmann, Agere, Inc. and substantially all the assets of VTC Inc., whose results of operations are included from their respective dates of acquisition. |
(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, 1997 of the 1,035,000,000 shares owned by Lucent prior to our initial public offering. |
Year Ended September 30, |
Change | |||||||||||||
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2002 |
2001 |
$ |
% | |||||||||||
(dollars in millions) | ||||||||||||||
Operating Segment: | ||||||||||||||
Client Systems | $ | 1,259 | $ | 1,406 | $ | (147 | ) | (10 | )% | |||||
Infrastructure Systems | 918 | 2,674 | (1,756 | ) | (66 | ) | ||||||||
Total Revenue | $ | 2,177 | $ | 4,080 | $ | (1,903 | ) | (47 | )% | |||||
Revenue. Revenue decreased 47%, or $1,903 million, to $2,177 million in fiscal 2002 from $4,080 million in fiscal 2001 due primarily to volume decreases. The decrease of $147 million within the Client segment was driven by price erosion across the entire segment, particularly in the wireless local area networking market, and volume decreases across the majority of the segment, except for the hard disk drive market which experienced substantial volume growth. The decrease of $1,756 million within the Infrastructure segment was due to depressed market conditions and reduced expenditures by communication service providers and communication equipment manufacturers, which drove volume decreases across the entire segment. These volume decreases were especially severe in our optoelectronics business, as revenues from this business, excluding intellectual property revenue, decreased approximately 80% from the prior fiscal year to $254 million in the current fiscal year. Costs and gross margin. Costs decreased 38%, or $1,158 million, to $1,926 million in fiscal 2002 from $3,084 million in fiscal 2001. Gross margin decreased to 11.5% in fiscal 2002 from 24.4% in fiscal 2001, a decrease of 12.9 percentage points. Gross margin for the Client segment increased to 27.8% in the current fiscal year from 23.8% in the prior fiscal year. This increase was primarily due to improved manufacturing capacity utilization as a result of actions taken under our restructuring and cost saving initiatives and lower inventory provisions of $22 million, partially offset by the effects of product price reductions. Gross margin for the Infrastructure segment decreased to (10.8)% in the current fiscal year from 24.8% in the prior fiscal year. The decrease was due to excess manufacturing capacity as a result of the decline in sales volume, which was partially offset by lower inventory provisions of $306 million. This excess manufacturing capacity was especially prevalent in our optoelectronics business that we are exiting, as the Infrastructure gross margin was approximately 14% in fiscal 2002, excluding this business. Selling, general and administrative. Selling, general and administrative expenses decreased 43%, or $256 million, from $597 million in fiscal 2001 to $341 million in the current fiscal year. The decrease was primarily due to reduced salary, benefit and other expenditures as a result of our restructuring and cost saving initiatives. Research and development. Research and development expenses decreased 27%, or $258 million, from $951 million in fiscal 2001 to $693 million in the current fiscal year. The decrease was primarily due to reduced expenditures as we focused our product development efforts and realized savings from our restructuring and cost saving initiatives. Amortization of goodwill and other acquired intangibles. Amortization expense decreased 86%, or $356 million, from $415 million in fiscal 2001 to $59 million in fiscal 2002. The decrease is due to impairments of goodwill and other acquired intangibles of $2,762 million recognized in the second half of fiscal 2001 and $220 million recognized during fiscal 2002. These impairments significantly reduced our goodwill and other acquired intangibles and therefore, our current fiscal year amortization. Restructuring and other charges net. Net restructuring and other charges increased 48%, or $316 million, to $978 million in fiscal 2002 from $662 million in fiscal 2001. Net restructuring and related expenses increased 72%, or $408 million, to $971 million in the current fiscal year from $563 million in the prior fiscal year. Expenses associated with the separation from Lucent decreased 93%, or $92 million, to $7 million in the current fiscal year from $99 million in the prior fiscal year, as the separation was mostly completed in fiscal 2001. Impairment of goodwill and other acquired intangibles. During fiscal 2002, we recorded a charge of $220 million to reduce goodwill and other acquired intangibles, consisting of $113 million and $107 million related to the acquisitions of Ortel and Herrmann, respectively. During fiscal 2001, we recorded a charge of $2,762 million to reduce goodwill and other acquired intangibles, consisting of $2,220 million, $275 million, $240 million and $27 million related to Ortel, Herrmann, Agere and Enable, respectively. (Gain) loss on sale of operating assets net. (Gain) loss on sale of operating assets net increased $299 million, to a gain of $294 million in fiscal 2002 from a loss of $5 million in fiscal 2001. The fiscal 2002 amount consists principally of a $243 million gain related to the sale of our field-programmable gate array business and a $58 million gain related to the sale of our wireless local area network equipment business. Operating loss. We reported an operating loss of $1,746 million for fiscal 2002 compared to an operating loss of $4,396 million for fiscal 2001. This lower loss was caused by a significant decrease in the impairment of goodwill and other acquired intangibles, expense reductions, gains on sale of operating assets and lower amortization of goodwill and other acquired intangibles, which were partially offset by a decrease in gross profit and higher net restructuring and other charges. Although performance measurement and resource allocation for the reportable segments are based on many factors, the primary financial measure used is operating income (loss) by segment, exclusive of amortization of goodwill and other acquired intangibles, restructuring and other charges net, the impairment of goodwill and other acquired intangibles, and (gain) loss on sale of operating assets net, which is shown in the following table: |
Year Ended September 30, |
Change | |||||||||||||
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2002 |
2001 |
$ |
% | |||||||||||
(dollars in millions) | ||||||||||||||
Operating Segment: | ||||||||||||||
Client Systems | $ | (64 | ) | $ | (175 | ) | $ | 111 | 63 | % | ||||
Infrastructure Systems | (719 | ) | (377 | ) | (342 | ) | (91 | ) | ||||||
Total Operating Loss by Segment | $ | (783 | ) | $ | (552 | ) | $ | (231 | ) | (42 | )% | |||
Other income net. Other income net increased $80 million, from income of $40 million in fiscal 2001 to income of $120 million in fiscal 2002. The major factors contributing to the increase include gains of $41 million from sales of investments in fiscal 2002, a $38 million decrease in impairments of non-consolidated investments, and a $17 million improvement in foreign currency gain (loss), all of which were partially offset by a $39 million reduction in interest income as a result of lower cash balances. Interest expense. Interest expense decreased 20%, or $30 million, from $151 million in fiscal 2001 to $121 million in fiscal 2002. During fiscal 2002, our interest expense is principally related to our credit facility, which we significantly reduced throughout the year and fully repaid by year-end. During fiscal 2001, our interest expense primarily reflects four months of allocations from Lucent and the interest on the $2,500 million credit facility we assumed from Lucent in April 2001. Provision for income taxes. For fiscal 2002 we recorded a provision for income taxes of $64 million on a pre-tax loss of $1,747 million, yielding an effective tax rate of (3.7)%. This rate differs from the U.S. statutory rate primarily due to the impact of recording a valuation allowance of $630 million against U.S. net deferred tax assets in fiscal 2002. For fiscal 2001 we recorded a provision for income taxes of $105 million on a pre-tax loss of $4,507 million, yielding an effective tax rate of (2.3)%. This rate differs from the U.S. statutory rate primarily due to the impact of recording a valuation allowance of $553 million against U.S. net deferred tax assets and non-tax deductible goodwill amortization in fiscal 2001. Fiscal Year Ended September 30, 2001 compared to Fiscal Year Ended September 30, 2000The following table shows the change in revenue, both in dollars and in percentage terms by segment: |
Year Ended September 30, |
Change | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2001 |
2000 |
$ |
% | |||||||||||
(dollars in millions) | ||||||||||||||
Operating Segment: | ||||||||||||||
Client Systems | $ | 1,406 | $ | 1,649 | $ | (243 | ) | (15 | )% | |||||
Infrastructure Systems | 2,674 | 3,059 | (385 | ) | (13 | )% | ||||||||
Total Revenue | $ | 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 both segments. The decrease of $243 million within the Client segment was due to volume decreases across the segment, which were partially offset by strength in the wireless local area networking market. The decrease of $385 million within the Infrastructure segment was primarily due to decreased sales of $395 million in integrated circuits, as system providers managed their orders and inventory in light of the reduced capital spending by service providers. This decrease in the Infrastructure segment was partially offset by an increase of $10 million in sales of optoelectronic components. During fiscal 2001 revenues decreased sequentially each quarter due to declining market conditions compared to sequential revenue growth each quarter in fiscal 2000. Client revenues declined $181 million, or 37%, to $302 million in the fourth quarter of fiscal 2001 from the peak quarterly revenue level of $483 million experienced in the fourth quarter of fiscal 2000. Infrastructure revenues declined $708 million, or 70%, to $298 million in the fourth quarter of fiscal 2001 from the peak quarterly revenue level of $1,006 million experienced in the fourth quarter of fiscal 2000. Costs and gross margin. Costs increased 21%, or $529 million, to $3,084 million in fiscal 2001 from $2,555 million in the prior fiscal year. Gross margin decreased 21.3 percentage points to 24.4% in fiscal 2001 from 45.7% in fiscal 2000, primarily due to lower manufacturing capacity utilization and the impact of inventory provisions of $409 million in fiscal 2001 compared to inventory provisions of $29 million in fiscal 2000. Gross margin for the Client segment decreased to 23.8% in fiscal 2001 from 38.3% in fiscal 2000 due to lower manufacturing capacity utilization. Gross margin for the Infrastructure segment declined to 24.8% in fiscal 2001 from 49.8% in fiscal 2000 primarily due to lower manufacturing capacity utilization, inventory provisions of $378 million in fiscal 2001 compared to inventory provisions of $20 million in fiscal 2000, and a change in product mix, from higher margin components to lower margin components. Selling, general and administrative. Selling, general and administrative expenses increased 12%, or $62 million, to $597 million in fiscal 2001 from $535 million in fiscal 2000. This was primarily due to increases in general and administrative expenses associated with being a stand-alone company, which were partially offset by lower bonus accruals of approximately $35 million. Research and development. Research and development expenses increased 15%, or $124 million, to $951 million in fiscal 2001 from $827 million in fiscal 2000. The increase was due to new and ongoing product development expenses, including a full year of expenses associated with acquisitions during fiscal 2000, partially offset by lower bonus accruals of approximately $40 million. Amortization of goodwill and other acquired intangibles. Amortization expense increased $226 million to $415 million in fiscal 2001 from $189 million in fiscal 2000 due to the recognition in fiscal 2001 of amortization associated with acquisitions completed during fiscal 2000. 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 was the result of no significant acquisitions being made in fiscal 2001, while a number of acquisitions were completed in fiscal 2000. Restructuring and other charges net. Restructuring and other charges of $662 million were incurred in fiscal 2001, which consisted of $563 million of restructuring and related expenses and $99 million of expenses in connection with our separation from Lucent. There were no such charges in fiscal 2000. Impairment of goodwill and other acquired intangibles. During fiscal 2001, we recorded a charge of $2,762 million to reduce goodwill and other acquired intangibles, primarily associated with Ortel. There were no such charges in fiscal 2000. (Gain) loss on sale of operating assets net. We realized a loss on the sale of operating assets of $5 million in fiscal to 2001 related to the sale of property, plant and equipment. There was no such gain or loss in the prior fiscal year. Operating income (loss). Operating loss was $4,396 million in fiscal 2001 compared to $156 million of operating income in fiscal 2000. This change was driven primarily by the impairment of goodwill and other acquired intangibles, a decline in gross profit, restructuring and other charges 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 amortization of goodwill and other acquired intangibles, purchased in-process research and development costs, restructuring and other charges net, the impairment of goodwill and other acquired intangibles, and (gain) loss on sale of operating assets net, which is shown in the following table: |
Year Ended September 30, |
Change | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2001 |
2000 |
$ |
% | |||||||||||
(dollars in millions) | ||||||||||||||
Operating Segment: | ||||||||||||||
Client Systems | $ | (175 | ) | $ | 133 | $ | (308 | ) | N/M | |||||
Infrastructure Systems | (377 | ) | 658 | (1,035 | ) | N/M | ||||||||
Total Operating Income (Loss) by Segment | $ | (552 | ) | $ | 791 | $ | (1,343 | ) | N/M | |||||
N/M = Not meaningful Other income net. Other income net increased 21%, or $7 million, to $40 million in fiscal 2001 from $33 million in fiscal 2000. The $40 million in fiscal 2001 was comprised primarily of interest income of $69 million from our investment of the proceeds from our initial public offering and income of $42 million from our equity investment in Silicon Manufacturing Partners Pte Ltd., partially offset by the impairment of $47 million for several non-consolidated investments and foreign exchange losses of $14 million. The $33 million in fiscal 2000 was comprised primarily of gains of $18 million on the sale of investments and foreign exchange gains of $6 million. Interest expense. Interest expense increased $93 million to $151 million in fiscal 2001 from $58 million in fiscal 2000. This increase is due to interest on the $2,500 million of short-term debt we assumed from Lucent in April 2001. Provision for income taxes. For fiscal 2001 we recorded a provision for income taxes of $105 million on a pre-tax loss of $4,507 million, yielding an effective tax rate of (2.3)%. This rate differs from the U.S. statutory rate primarily due to the impact of recording a valuation allowance of approximately $553 million against U.S. net deferred tax assets and non-tax deductible goodwill amortization in fiscal 2001. For fiscal 2000 we recorded a provision for income taxes of $207 million on a pre-tax income of $131 million, yielding an effective tax rate of 158%. This rate differs from the U.S. statutory rate primarily due to the impact of non-tax deductible goodwill amortization and non-tax deductible purchased in-process research and development in fiscal 2000. Liquidity and Capital ResourcesAs of September 30, 2002, our cash in excess of short-term debt was $694 million, which reflects $891 million in cash and cash equivalents less $163 million of borrowings under our accounts receivable securitization facility and $34 million from the current portion of our capitalized lease obligations. In addition, we have $16 million of cash held in trust that supports obligations of our captive insurance company and is not immediately available to fund on-going operations. As of September 30, 2002, our long-term debt is $486 million, which consists of $410 million of convertible subordinated notes due December 15, 2009 and $76 million from the non-current portion of our capitalized lease obligations. Net cash used in operating activities was $660 million in fiscal 2002 compared to $269 million of net cash provided by operating activities in fiscal 2001. Although cash used for costs and operating expenses decreased in the current year when compared to the prior year, this was more than offset by lower revenues in fiscal 2002 than fiscal 2001. 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 investing activities was $368 million in fiscal 2002 compared to net cash used in investing activities of $723 million and $829 million in fiscal 2001 and 2000, respectively. The increase in cash flow from investing activities in fiscal 2002 is primarily due to proceeds of $382 million from the sale of the field-programmable gate array, wireless local area networking equipment and analog line card businesses, proceeds of $142 million from the sale of property, plant and equipment, which includes the sale of the Madrid, Spain facility and proceeds from sale-leaseback transactions, proceeds of $55 million from the sale of investments and a reduced level of capital expenditures in the current period. Prior to fiscal 2002, capital expenditures had historically been the primary component of our investing activities. However, in response to adverse market conditions that began fiscal 2001, we significantly reduced our capital spending in fiscal 2002. Capital expenditures were $195 million, $723 million and $672 million in fiscal 2002, 2001 and 2000, respectively. The majority of our fiscal 2002 capital expenditures were related to the completion of a new office facility adjacent to our existing Allentown facility and facility consolidation activities. In fiscal 2003, we expect to continue to limit our capital expenditures. Net cash used in financing activities was $1,970 million in fiscal 2002 compared to net cash provided by financing activities of $3,607 million and $67 million in fiscal 2001 and 2000, respectively. The current year reflects the repayment of $2,500 million under our credit facility, offset in part by net proceeds of $396 million from the issuance of convertible notes and $163 million in net borrowings under our accounts receivable securitization facility. The fiscal 2001 amount is primarily from the receipt of $3,448 million of 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. On October 4, 2001, we amended our $2,500 million credit facility. In connection with the amendment, we repaid $1,000 million from cash on hand, thereby reducing the facility to $1,500 million, and extended the maturity of the facility to September 30, 2002. We also paid $21 million in fees in connection with the amendment, which were amortized over the life of the facility. The interest rate applicable to borrowings under the facility was based on a scale indexed to our credit rating. Subsequent to October 4, 2001, we repaid the remaining $1,500 million of borrowings under the credit facility and on September 30, 2002 the facility expired in accordance with its terms. The amounts used to make these repayments were from the following sources: $634 million from existing cash on hand, $250 million from the sale of our field-programmable gate array business, $198 million from our convertible subordinated notes offering, $179 million from our accounts receivables securitization, $67 million from the sale of our manufacturing facility and related equipment located in Spain, $64 million from the sale of our wireless local area networking equipment business, $55 million from the sale of investments and $53 million from sale-leaseback and various other transactions. Agere Systems Inc. and certain of its subsidiaries have entered into a securitization transaction relating to certain accounts receivable, which was amended on November 12, 2002. As part of the transaction, Agere Systems Inc. and certain of its subsidiaries irrevocably transfer accounts receivable on a daily basis to a wholly-owned, fully consolidated, bankruptcy-remote subsidiary. When we say that the subsidiary is bankruptcy remote, we mean that it is unlikely that it will be voluntarily placed into bankruptcy proceedings by us. In the event we were to be the subject of bankruptcy proceedings, it is unlikely that our creditors would have a claim on the subsidiarys assets, even though the subsidiary is wholly owned by us. This is because we have taken a number of steps, including the appointment of an independent director and the requirement of unanimous board approval to commence bankruptcy proceedings, that we believe under current law will result in the assets of this subsidiary not being available to our creditors until the claims of the subsidiarys creditors are satisfied. The subsidiary has entered into a loan agreement with certain financial institutions, pursuant to which the financial institutions agreed to make loans to the subsidiary secured by the accounts receivable. The financial institutions have commitments under the loan agreement of up to $200 million; however, the amount that the subsidiary can actually borrow at any time depends on the amount and nature of the accounts receivable that we have transferred to the subsidiary. The loan agreement expires on November 11, 2003. As of September 30, 2002, $163 million was outstanding under this agreement. The majority of our accounts receivable are required to be pledged as security for the outstanding loans even though some of those receivables may not qualify for borrowings. As of September 30, 2002, $217 million of gross receivables was pledged as security for the outstanding loans. We pay interest on amounts borrowed under the agreement based on one-month LIBOR. The weighted average annual interest rate on amounts borrowed as of September 30, 2002 was 1.8%. In addition, we pay an annual commitment fee, which varies depending on our credit rating, on the $200 million total loan commitment. As of September 30, 2002, the commitment fee was 1.5% per annum. If our credit rating were to decline one or two levels, the commitment fee will increase to 2% or 3% per annum, respectively. As of September 30, 2002, our credit ratings were BB- with a negative outlook from Standard & Poors and B1 from Moodys. The loan agreement has financial covenants which require us to (1) achieve a minimum level of earnings before interest, taxes, and depreciation and amortization each quarter, (2) maintain a minimum level of net worth each quarter, and (3) limit our annual capital expenditures. A violation of these covenants will end our ability to obtain further loans under the agreement, but will not accelerate payment or require an immediate cash outlay to cover amounts previously loaned under the accounts receivable securitization. On June 19, 2002, we issued $410 million of 6.5% Convertible Subordinated Notes due December 15, 2009 and received net proceeds of $396 million. Interest on the notes accrues at the rate of 6.5% per annum and is payable semi-annually on June 15 and December 15 of each year, beginning on December 15, 2002. The notes can be converted into shares of Class A common stock at an initial price of $3.3075 per share, subject to adjustment in certain events, at any time prior to maturity, unless previously redeemed or repurchased by us. We may redeem the notes in whole or in part at any time on or after June 20, 2007. In addition, upon a fundamental change in our company, which includes a change of control or our Class A common stock not listed for trading on the New York Stock Exchange nor approved for trading on the NASDAQ National Market, we may be required to repurchase the notes at a price equal to 100% of the principal amount of the notes plus any accrued and unpaid interest. On September 30, 2002, we completed the sale of certain assets and liabilities of our analog line card business to Legerity, Inc. for $70 million in cash and received $68 million of net proceeds. As a result of a significant decline in market demand for telecommunications infrastructure products, we have been experiencing losses and have been using cash in our operations for several quarters. In response to market conditions, we have announced a number of restructuring and consolidation actions to reduce our losses. We estimate that the cash requirements for these actions will be approximately $250 million in fiscal 2003. On October 21, 2002, we entered into an agreement to sell certain assets and liabilities of our optoelectronics business to TriQuint for $40 million in cash. We expect this transaction to close in the second quarter of fiscal 2003, subject to regulatory approval and other customary closing conditions. Our primary source of liquidity is our cash and cash equivalents. We believe our cash and cash equivalents on hand will be sufficient to meet our projected cash requirements for the next 12 months and for the foreseeable future thereafter, including the cash requirements of the announced restructuring activities and funding of on-going operations even if the accounts receivable securitization program is not extended past its current expiration in November 2003. Contractual Obligations and CommitmentsThe following table summarizes our contractual obligations and commitments with definitive payment terms that will require significant cash outlays in the future. These amounts are as of September 30, 2002, with the exception of the accounts receivable securitization, which has been adjusted to reflect the extension in November 2002 of the maturity of that facility to November 11, 2003. |
Year Ending September 30, |
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Total |
2003 |
2004 |
2005 |
2006 |
2007 |
Later Years |
|||||||||||||||||
(dollars in millions) | |||||||||||||||||||||||
Contractual obligations and commitments: | |||||||||||||||||||||||
Convertible subordinated notes | $ | 410 | $ | | $ | | $ | | $ | | $ | | $ | 410 | |||||||||
Accounts receivable securitization | 163 | | 163 | | | | | ||||||||||||||||
Capital leases | 132 | 46 | 45 | 28 | 13 | | | ||||||||||||||||
Operating leases | 221 | 76 | 57 | 26 | 14 | 13 | 35 | ||||||||||||||||
Unconditional purchase obligations (1) | 157 | 66 | 46 | 45 | | | | ||||||||||||||||
Total contractual cash obligations | $ | 1,083 | $ | 188 | $ | 311 | $ | 99 | $ | 27 | $ | 13 | $ | 445 | |||||||||
|
(1) | Our unconditional purchase obligations represent long-term contractual obligations that are non-cancelable. These obligations relate to software licenses and services, wafer production and equipment maintenance services. These amounts are based on our contractual commitments; however, it is possible we may be able to negotiate lower cash charges if we chose to exit these contracts earlier. These amounts are accrued as we use the related services, licenses or manufacturing activities. These accruals may not coincide with the timing of our cash commitments. |
Our material contractual obligations and commitments also include the following commitments: 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 managed wafer capacity and Chartered Semiconductor has agreed to purchase the remaining 49% of the managed wafer capacity. SMP determines its managed wafer capacity each year based on forecasts provided by Agere and Chartered Semiconductor. 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 also provides that Chartered Semiconductor will have the right to first refusal to purchase integrated circuits produced in excess of our requirements. The agreement may be terminated by either party upon two years written notice, but may not be terminated prior to February 2008. The agreement 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. As part of the sale of our analog line card business to Legerity, Inc., we are obligated to supply chips to Legerity through early 2003, through a transitional supply agreement, and estimate we will incur cash costs of approximately $40 million while fulfilling this obligation. We have deferred any gain that may be recognized on this sale until we have satisfied all of our obligations to Legerity. As of September 30, 2002, a deferred gain of $68 million has been recorded in other current liabilities. We have pension plans covering substantially all of our employees. The funding requirements related to our pension plans are dependent on many factors, including actuarial assumptions and the actual performance of our plan assets. The amount and timing of our future funding requirements cannot be determined at this time; however, there will be no funding requirements for the pension plan until fiscal 2004 at the earliest. AcquisitionsDuring fiscal 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 2002 and 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 also received 677,019 additional shares of Lucent common stock based on retention and the achievement of specified milestones. 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 also received additional cash consideration of $50 million as a result of meeting certain performance measures. The $50 million payment resulted in additional goodwill related to the acquisition. During fiscal 2002 and 2001, we performed impairment evaluations of the goodwill and other acquired intangibles from recent acquisitions because events and changes in circumstances occurred that indicated the carrying amount of the assets may not be fully recoverable. See Impairment of Goodwill and Other Acquired Intangibles. Purchased In-process Research and DevelopmentIn connection with the acquisitions of Agere, Inc., Herrmann and Ortel, 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 Lucents 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 Lucents 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 technologys 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. Set forth below are descriptions of the major acquired in-process research and development projects and our original assumptions in connection with these acquisitions, followed by a current status of the projects. Due to significant changes in economic, industry and market conditions, the original assumptions at the time of acquisition for these acquisitions vary materially from our current estimates as noted below. In addition, the Herrmann and Ortel operations are part of the optoelectronics business that we are exiting, and we do not expect to derive material revenues or cash flows from those operations in the future. Agere, Inc. On April 20, 2000, we completed the acquisition of Agere, Inc., which was a developer and supplier of integrated circuits solutions used in network processors, which control how data is sent over networks. At the acquisition date, Agere, Inc. was conducting development and qualification activities related to the development of a programmable network processor for various protocols for 2.5 gigabits per second transmission speeds. A protocol is a set of procedures for the formatting and timing of data transmission between two pieces of equipment. A gigabit is a unit of measurement of data and is equal to roughly one billion bits. The allocation to purchased in-process research and development of $94 million represented its estimated fair value using the methodology described above. Agere, Inc.s in-process research and development projects were approximately 65% complete at the time of acquisition. The projects were expected to be completed in November 2000 after approximately two years of research and development effort. Following completion, the projects were expected to begin generating economic benefits. At the time of acquisition, revenue attributable to the resulting products was estimated to be $21 million in fiscal 2001 and $65 million in fiscal 2002. Revenue was then expected to peak in fiscal 2007 and decline thereafter through the end of the products 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 Ageres in-process research and development efforts were expected to total approximately $3.4 million. Projected future net cash flows attributable to Ageres in-process research and development, assuming successful development, were discounted to net present value using a discount rate of 30%. Agere, Inc.s in-process research and development projects related to first generation network processors were completed in the fourth quarter of fiscal 2000. The second generation processors were completed in the first quarter of fiscal 2001. Actual costs related to completing these projects were $13 million. Changing market demand for these network processors led to revenues which were lower than originally anticipated. Actual revenues for fiscal 2001 were $4 million, consisting primarily of sales of development systems and models, which are used by customers for system evaluations and qualifications. Actual revenues for fiscal 2002 were $6.2 million. The long-term annual growth rate for these products is expected to be 8%. 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. Ortels in-process research and development projects ranged from 50% to 75% complete at the time of acquisition. Ortels in-process research and development projects were expected to be completed during the period from June 2000 to April 2001 after approximately two to three and a half years of research and development effort. Following completion, the projects were expected to begin generating economic benefits. The allocation to purchased in-process research and development of $307 million represented its estimated fair value using the methodology described above. The $307 million was allocated to the following projects, which are explained below. |
| 10G New Products - $61 million; |
| 10G OC-192 Receiver/Daytona Products $105 million; |
| 980 Products $95 million; |
| 1550 Products $27 million; and |
| CATV Products $19 million. |
Projected net cash flows attributable to Ortels in-process research and development, assuming successful development, were discounted to net present value using a discount rate of 25%. At the time of acquisition, revenue attributable to the 10G New Products was estimated to be $5 million in fiscal 2001 and $30 million in fiscal 2002. 10G New Products are receivers that incorporate new packaging technologies for high-speed transport and metropolitan network applications at speeds of 10 gigabits per second. Revenue was expected to peak in fiscal 2009 and decline thereafter through the end of the products life as new product technologies were expected to be introduced by us. Revenue growth was expected to decrease from 447% in fiscal 2002 to 8% in fiscal 2009, and be negative for the remainder of the projection period. At the acquisition date, costs to complete the research and development efforts related to the products were expected to be $3 million. Most of the 10G New Products were completed in fiscal 2001 as anticipated at a cost of $2 million. Development efforts on one remaining product ceased in fiscal 2002. There were no revenues attributable to the 10G New Products in fiscal 2001and fiscal 2002 revenues were less than $1 million. At the time of acquisition, 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. The 10G OC-192 Receiver/Daytona Products were completed in fiscal 2001. Actual revenues were $6 million and $40 million in fiscal 2002 and 2001, respectively. Actual project costs were materially consistent with managements original estimates. At the time of acquisition, revenue attributable to the 980 Products was estimated to be $44 million in fiscal 2001 and $108 million in fiscal 2002. 980 Products are pump lasers operating at 980 nanometers wavelength. A nanometer is a unit of measurement of distance and equals one billionth of a meter. Revenue was expected to peak in fiscal 2008 and decline thereafter through the end of the products life as new product technologies were expected to be introduced by us. Revenue growth was expected to decrease from 143% in fiscal 2002 to 17% in fiscal 2008, and be negative for the remainder of the projection period. At the acquisition date, costs to complete the research and development efforts related to the 980 Products were expected to be $1 million. The 980 Products were in development and therefore did not yield any revenues in fiscal 2001. All design efforts on the 980 products were discontinued in fiscal 2002. At the time of acquisition, revenue attributable to the 1550 Products was estimated to be $2 million in fiscal 2001 and $63 million in fiscal 2002. 1550 Products are transmitters and lasers operating at 1550 nanometers wavelength. Revenue was expected to peak in fiscal 2008 and decline thereafter through the end of the products life as new product technologies were expected to be introduced by us. Revenue growth was expected to decrease from 33% in fiscal 2003 to 17% in fiscal 2008, and be negative for the remainder of the projection period. At the acquisition date, costs to complete the research and development efforts related to the 1550 Products were expected to be $2 million. The 1550 Products had four distinct product lines. Of these product lines, one has been completed and three have been cancelled. Product development costs for the 1550 products since acquisition have been $1.5 million. There were no revenues attributable to these products in fiscal 2001. Actual revenues in fiscal 2002 were less than $1 million. At the time of acquisition, revenue attributable to the CATV Products was estimated to be $28 million in fiscal 2001 and $58 million in fiscal 2002. CATV Products are receivers and return path products for cable television network applications. The return path allows cable system operators to offer Internet and telephone services, in direct competition with network services providers. Revenue was expected to peak in fiscal 2004 and decline thereafter through the end of the products life as new product technologies were expected to be introduced by us. Revenue growth was expected to decrease from 107% in fiscal 2002 to 4% in fiscal 2004 and be negative for the remainder of the projection period. At the acquisition date, costs to complete the research and development efforts related to the CATV Products were expected to be $1 million. The CATV Products were completed in fiscal 2001 at a cost of $2 million. Actual revenues were $35 million and $44 million in fiscal 2002 and 2001, respectively. 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. At the time of acquisition, 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. Herrmanns in-process research and development projects ranged from 20% to 60% complete at the time of acquisition. Herrmanns 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 Herrmanns in-process research and development were expected to equal approximately $1.8 million. Projected future net cash flows attributable to Herrmanns in-process research and development, assuming successful development, were discounted to net present value using a discount rate of 27.5%. Hermanns in-process research and development projects were either completed by July of 2001 or discontinued due to market conditions. Actual costs to complete the projects were $1.3 million. Actual revenue attributable to these products was significantly lower than anticipated at $2 million and $3 million in fiscal 2002 and 2001, respectively. Recent PronouncementsIn July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Statement 142 provides guidance on the financial accounting and reporting for acquired goodwill and other intangible assets. Under Statement 142, goodwill and indefinite lived intangible assets will no longer be amortized. Intangible assets with finite lives will continue to be amortized over their useful lives, which will no longer be limited to a maximum life of forty years. The criteria for recognizing an intangible asset have also been revised. Statement 142 requires that goodwill be tested for impairment at least annually. The goodwill impairment test is a two-step process that requires goodwill to be allocated to reporting units. In the first step, the fair value of the reporting unit is compared to the carrying value of the reporting unit. If the fair value of the reporting unit is less than the carrying value of the reporting unit, a goodwill impairment may exist, and the second step of the test is performed. In the second step, the implied fair value of the goodwill is compared to the carrying value of the goodwill and an impairment loss is recognized to the extent that the carrying value of the goodwill exceeds the implied fair value of the goodwill. We adopted Statement 142 effective October 1, 2002. As a result, we have re-assessed the classification and useful lives of our previously acquired goodwill and other intangible assets. The assessment did not result in any adjustments to previously recorded amounts. In addition, we have completed the first step of the goodwill impairment test. Since the carrying value of each of our reporting units did not exceed their fair value, no goodwill impairment charges were recorded upon the adoption of Statement 142. At September 30, 2002, we had $84 of goodwill that will no longer be amortized and $17 of other acquired intangible assets that will continue to be amortized over their useful lives. Also in July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. Statement 143 provides the financial accounting and reporting for the cost of legal obligations associated with the retirement of tangible long-lived assets. In accordance with Statement 143, asset retirement obligations will be recorded at fair value in the period they are incurred. When the liability is initially recorded, the cost is capitalized as part of the related long-lived asset and subsequently depreciated over its remaining useful life. Changes in the liability resulting from the passage of time are recognized as operating expense. We adopted Statement 143 effective October 1, 2002 and will record a charge as a cumulative effect accounting adjustment of $5 million in our fiscal 2003 statement of operations. This adjustment represents the depreciation and other operating expenses that would have been recorded previously if Statement 143 had been in effect in prior years. 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. Statement 144 supersedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long Lived-Assets to be Disposed of, and the accounting and reporting provisions for the disposal of a segment of a business contained in APB Opinion No. 30 Reporting the Effects of a Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions. Statement 144 establishes a single accounting model for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations. Although we were not required to adopt Statement 144 until the first quarter of fiscal 2003, we elected to adopt this Statement effective October 1, 2001. Accordingly, our prior year consolidated financial statements have been reclassified for comparative purposes in accordance with the transition guidance in Statement 144. The early adoption of Statement 144 did not have a material effect on our financial condition or results of operations. In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Exit or Disposal Activities. Statement 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that currently are accounted for pursuant to the guidance that the Emerging Issues Task Force set forth in Issue No. 94-3. The scope of Statement 146 also includes (1) costs related to terminating a contract that is not a capital lease, (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract and (3) costs to consolidate facilities or relocate employees. Statement 146 is required to be effective for our exit or disposal activities initiated after December 31, 2002. However, in accordance with the transition provisions of Statement 146, we have elected to adopt this Statement effective October 1, 2002. This Statement has no effect on our previously announced restructuring initiatives. Environmental, Health and Safety MattersWe are subject to a wide range of laws and regulations relating to protection of the environment and employee safety and health. We are currently involved in investigations and/or cleanup of known contamination at eight sites either voluntarily or pursuant to government directives. There are established reserves for environmental liabilities where they are probable and reasonably estimable. Reserves for estimated losses from environmental remediation are, depending on the site, based primarily upon internal or third party environmental studies, estimates as to the number, participation level and financial viability of all potential responsible parties, the extent of contamination and the nature of required remedial actions. Although we believe that the reserves are adequate to cover known environmental liabilities, it is often difficult to estimate with certainty the future cost of such matters. Therefore, there is no assurance that expenditures that will be required relating to remedial actions and compliance with applicable environmental laws will not exceed the amount reflected in the reserves for such matters or will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows. Any possible loss or range of loss that may be incurred in excess of that provided for as of September 30, 2002, cannot be estimated. Legal ProceedingsAn 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 alleged 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. 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 Proxims wireless local area networking products. In connection with the sale of our wireless local area network equipment business to Proxim, both parties have entered into a cross license which resulted in the dismissal on September 6, 2002, of the International Trade Commission proceeding against our customers to the extent based on the use of our products as well as the Delaware proceeding against Proxim. On October 17, 2002, we filed a patent infringement lawsuit against Intersil Corporation in the United States District Court in Delaware. We alleged that Intersil had infringed six of our patents related to 802.11 wireless networking and are seeking monetary damages for Intersils infringement of these patents and an injunction prohibiting Intersil from using the patents in the future. On November 6, 2002, Intersil filed a counterclaim in this matter, alleging that ten patents of Intersil are infringed by unspecified Agere products. Two of the patents relate to system-level circuits, and eight patents relate to semiconductor processing. The complaint seeks an injunction and damages. We believe that Intersil's claims are without merit. On October 30, 2002, Choice-Intersil Microsystems, Inc. filed a lawsuit against us in the United States District Court for the Eastern District of Pennsylvania. The complaint alleges misappropriation of trade secrets that were jointly developed and jointly owned by Digital Ocean, Inc. (which, following several acquisitions and corporate reorganizations, is now Choice-Intersil) and Lucent. The trade secrets relate to media access controller technology for wireless local area networks. The complaint seeks an injunction and damages. We believe that Choice-Intersils claims are without merit. On November 19, 2002, we filed a lawsuit against Choice-Intersil, Intersil and Intersil Americas Inc. in state court in Delaware. We alleged, among other things, misappropriation of trade secrets and breach of contract relating to the trade secrets that were jointly developed and jointly-owned by Digital Ocean, Inc. and Lucent. We are seeking an injunction against further use and disclosure of the trade secrets and damages for past disclosure and misuse. We intend to vigorously defend ourself against the claims of the Intersil parties. Factors Affecting Our Future PerformanceSet forth below and elsewhere in this report and in other documents we file with the Securities and Exchange Commission are risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report and other public statements we make. Risks Related To Our BusinessIf we fail to keep pace with technological advances in our industry or if we pursue technologies that do not become commercially accepted, customers may not buy our products and our revenue may decline. The demand for our products can change quickly and in ways we may not anticipate because our industry is generally characterized by: |
| rapid, and sometimes disruptive, technological developments; |
| evolving industry standards; |
| changes in customer requirements; |
| limited ability to accurately forecast future customer orders; |
| frequent new product introductions and enhancements; and |
| short product life cycles with declining prices over the life cycle of the product. |
If we fail to make sufficient investments in research and development programs in order to develop new and enhanced products and solutions, or if we focus on technologies that do not become widely adopted, new technologies could render our current and planned products obsolete, resulting in the need to change the focus of our research and development and product strategies and disrupting our business significantly. The integrated circuit industry is intensely competitive, and our failure to compete effectively could hurt our revenue. The market for integrated circuits is intensely competitive and subject to rapid and disruptive technological change. We expect the intensity of competition to continue to increase 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 may not be able to compete successfully against existing or future competitors, which may hurt our revenue. The size and number of our competitors vary across our product areas, as do the resources we have allocated to the segments we target. Therefore, many of our competitors have greater financial, personnel, production capacity and other resources than we have in a particular market segment or overall. Competitors with greater financial resources may be able to offer lower prices, additional products or services or other incentives that we cannot match or offer. These competitors may be in a stronger position to respond quickly to new technologies and may be able to undertake more extensive marketing campaigns. They also may adopt more aggressive pricing policies and make more attractive offers to potential customers, employees and strategic partners. These competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties to increase their ability to gain market share. Further, some of our competitors are currently selling commercial quantities of products that we are sampling to our customers, that are still in the initial stages of development or that we may develop in the future. By being able to offer these products in commercial quantities before we do, our competitors can establish significant market share, acquire design wins in customer equipment programs and create a market position that we may be unable to overcome once we have completed development and testing of that product. Joint ventures and other third-parties manufacture some of our products for us. If these manufacturers are unable to fill our orders on a timely and reliable basis, our revenue may be adversely affected. We currently manufacture our integrated circuits through a combination of internal capability, joint ventures and external sourcing with contract manufacturers. In fiscal 2002, approximately 35% of our revenue was derived from integrated circuits manufactured at joint ventures or through other external sourcing arrangements. To the extent we rely on joint ventures and third-party manufacturing relationships, with respect to integrated circuits, we face the following risks: |
| their inability to develop manufacturing methods appropriate for our products; |
| that manufacturing costs will be higher than planned; |
| that reliability of our products will decline; |
| their unwillingness to devote adequate capacity to produce our products; |
| their inability to maintain continuing relationships with our suppliers; and |
| the reduction of our control over delivery schedules and costs of our products. |
If any of these risks were to be 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. We are in the process of reducing our owned manufacturing capacity. In the event of an increase in demand, failure to increase our manufacturing volumes or obtain capabilities from third parties may result in our not being able to meet customer demand for our products, which could hurt our relationships with our customers and result in our recording lower revenues than would be the case if we had greater manufacturing capacity. The demand for components in the communications equipment industry has recently declined, and we cannot predict the duration or extent of this trend. Our revenue will depend in part on demand for these types of components. We derive, and expect to continue to derive, a significant portion of our revenue from the sale of integrated circuits used in communications networks. Since early 2001, communications equipment makers have significantly reduced purchases of components for their products, including the components we sell. If demand for these components declines further, our revenues may be adversely affected. If we do not complete our announced restructuring and facility consolidation activities as expected, or even if we do so, we may not achieve all the benefits we anticipate. We are in the process of consolidating our manufacturing and office facilities, and exiting our optoelectronics business, in an effort to reduce our costs. The process of moving manufacturing lines from one facility to another can be complicated, involving initiating operations in a new facility and having customers qualify the new manufacturing lines before shutting down operations in the original facility. While we believe our restructuring and consolidation actions will reduce our cost structure, if we encounter delays in moving operations or completing the exit of our optoelectronics business, we may not achieve the cost reductions we are expecting. Because of the extensive nature of our restructuring activities, we may find that even if we complete these activities as planned, we may not realize all the benefits we expected. Our revenue and operating results may fluctuate because we expect to derive most of our revenue from semiconductor devices and the integrated circuits industry is highly cyclical, and because of other characteristics of our business, and these fluctuations may cause our stock price to fall. We expect to derive most of our revenue from the sale of integrated circuits. Because the integrated circuits market segment is highly cyclical, we may experience declines in our revenue that are primarily related to industry conditions and not our products. This industry 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. We focus primarily 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. Thus, we may never generate any revenue from our products after incurring significant design and development expenditures. If we are not selected by a customer to provide a product, we may experience 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. Fluctuations in our revenue or operating results could cause our stock price to decline, even if our results meet expectations. Further, stock prices in our industry have recently been highly volatile for reasons that sometimes are unrelated to the performance of the companies in the industry. These broad fluctuations could adversely affect our stock price. 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 applications, 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 applications 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: |
| cancellation of orders; |
| product returns, repairs or replacements; |
| diversion of our resources; |
| legal actions by our customers or our customers end-users; |
| increased insurance costs; and |
| other losses to us or to our customers or end users. |
Any of these occurrences could also result in the loss of or delay in market acceptance of our products and loss of sales, which would harm our business and adversely affect our revenue and results of operations. We have from time to time experienced defects and expect to experience defects in the future. Because the trend in our industry is moving toward even more complex products in the future, this risk will intensify over time and may result in increased expenses. Because our sales are concentrated on a limited number of key 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 2002. 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. 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 of our fields of operation, there are only a limited number of people in the job market who possess the requisite skills. In the past we have 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. Because we are subject to order and shipment uncertainties, any significant cancellations or deferrals could cause our revenue to decline or fluctuate. We generally sell products pursuant to purchase orders that customers may cancel or defer on short notice without incurring a significant penalty. Cancellations or deferrals could cause us to hold excess inventory, which could adversely affect our results of operations and restrict our ability to fund our operations. If a customer cancels or defers product shipments, we may incur unanticipated reductions or delays in our revenue. If a customer refuses to accept shipped products or does not timely pay for these products, we could incur significant charges against our income, which could materially and adversely affect our operating results. If we do not achieve adequate manufacturing utilization, yields, volumes or sufficient product reliability, our gross margins will be reduced. Because the manufacturing costs at our owned and joint venture manufacturing facilities 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 in recent periods, which has reduced our gross margins. Lower than expected manufacturing yields could impair our gross margins and delay product shipments. 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 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 products. Although we have derived less than 6% of our total revenue in recent years from the licensing of intellectual property, a decline in this licensing revenue would have a greater impact on our profitability than a similar decline in revenues from our integrated circuits products. If our customers do not qualify our products or manufacturing lines or the manufacturing lines of our third-party suppliers for volume shipments, our revenue may be delayed or reduced. Some 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 our products and result in a significant loss of revenue. Because we are consolidating our manufacturing operations into fewer facilities, the specific facility that manufacturers a customers product may change, resulting in the customer requiring us to requalify the product. 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 2002, we derived 69% of our revenue from sales of our products shipped to locations outside the United States. We also manufacture a significant portion of our products outside the United States and are dependent on international suppliers for many of our parts. We intend to continue to pursue growth opportunities in both sales and manufacturing internationally. International operations are subject to a number of risks and potential costs, which could adversely affect our revenue and results of operations, including: |
| our new brand will not be locally recognized, which will cause us to spend significant amounts of time and money to build a brand identity; |
| unexpected changes in regulatory requirements; |
| inadequate protection of intellectual property in some countries outside of the United States; |
| currency exchange rate fluctuations; |
| political and economic instability; and |
| disruptions in international air transport systems |
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. If additional contaminants are discovered or the additional cleanup obligations imposed at these or other sites, we could be adversely affected. 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 business and prospects may be harmed. Like other companies in the semiconductor industry, we are frequently involved in 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 which would harm our business and prospects. We believe that financing has recently been difficult to obtain for companies in our industry and if we need additional cash to fund our operations or to finance future strategic initiatives, we may not be able to obtain it on acceptable terms or at all. We believe that lenders have recently become less willing to extend credit to companies in the telecommunications and semiconductor industries, making debt financing difficult to obtain. As described below under Risks Associated with Our Separation from LucentWe are limited in the amount of stock that we can issue to raise capital because of potential adverse tax consequences, 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 not able to obtain sufficient funds on acceptable terms, we may not have sufficient funds to take advantage of market opportunities or to finance future strategic initiatives, such as to fill gaps in our product portfolio. We believe that our cash and cash equivalents will be sufficient to fund our operations until such time as we are able to generate sufficient cash internally to fund our operations. If, however, the market for our products is worse than we expect, we may need additional funds, without which we will have to reduce our expenditures, which may harm our business. Because of differences in voting power and liquidity between the Class A common stock and the Class B common stock, the market price of the Class A common stock may be less than the market price of the Class B common stock. There are more shares of Class B common stock than Class A common stock outstanding. Consequently, the Class B common stock may be more liquid than the Class A common stock. In addition, because the Class B common stock has greater voting power per share for the election and removal of directors than the Class A common stock, some investors may prefer the Class B common stock as a means of investing in our company. The greater potential voting power and liquidity of the Class B common stock may cause the Class B common stock to trade at a higher market price than the Class A common stock. The development and evolution of markets for our integrated circuits are dependent on factors over which we have no control. For example, if our customers adopt new or competing industry standards with which our products are not compatible or fail to adopt standards with which our products are compatible, our existing products would become less desirable to our customers and our sales would suffer. The emergence of markets for our integrated circuits is affected by a variety of factors beyond our control. In particular, our products are designed to conform to current specific industry standards. Our customers may not adopt or continue to follow these standards, which would make our products less desirable to our customers and reduce our sales. Also, competing standards may emerge that are preferred by our customers, which could also reduce our sales and require us to make significant expenditures to develop new products. To the extent that we are not able to effectively and expeditiously adapt to new standards our business will suffer. Class action litigation due to stock price volatility or other factors could cause us to incur substantial costs and divert our managements attention and resources. In the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of its securities. Companies in the integrated circuit industry and other technology industries are particularly vulnerable to this kind of litigation due to the high volatility of their stock prices. Accordingly, we may in the future be the target of securities litigation. Any securities litigation could result in substantial costs and could divert the attention and resources of our management. Our stock may be delisted from the New York Stock Exchange if our stock price does not meet the exchanges continued listing standards. Our common stock trades on the New York Stock Exchange. The exchange has a number of continued listing criteria, including a minimum share price requirement, that a company must satisfy in order for its securities to continue trading on the exchange. Under the minimum stock price requirement, the exchange will notify a company if the average closing price per share of the companys securities over a 30 consecutive trading-day period is less than $1.00 and will provide the company with a six-month period to cure the deficiency or the exchange will begin suspension and delisting proceedings. These proceedings would result in the companys securities no longer trading on the New York Stock Exchange. In order to cure the deficiency, at the expiration of the six-month cure period, both a $1.00 share price and a $1.00 average share price over the preceding 30 trading days must be attained. The exchange notified us in October 2002 that our common stock did not meet the minimum share price requirement and we are currently in the six-month cure period. If the deficiency is not cured, the exchange may delist our shares. Having our common stock delisted would likely result in our having to offer to repurchase $410 million of convertible debt that otherwise would not be due until 2009. Such a repurchase would significantly reduce the amount of cash available to us to fund our current operations. Delisting from the New York Stock Exchange could also result in a reduction in the liquidity of any investment in our common stock and an adverse effect on the trading price of our common stock. Delisting could also reduce the ability of holders of our common stock to purchase or sell shares as quickly and as inexpensively as they have done historically. This lack of liquidity could make it more difficult for us to raise capital in the future. We may effect a reverse stock split and if we do so, our stock price may decline after the reverse stock split. In response to the potential delisting of our common stock due to the failure to meet the New York Stock Exchanges minimum share price requirement discussed above, we expect to ask our stockholders to authorize a reverse stock split at our annual meeting in February 2003. If the reverse stock split is approved by our stockholders and we effect the reverse stock split, we would reduce the number of outstanding shares of both our Class A and Class B common stock. With fewer shares outstanding, we would expect our stock price to increase. While a reverse stock split may enable us to cure the minimum share price deficiency, share prices of companies effecting reverse stock splits often decline and we cannot assure you that our stock price would not decline after a reverse stock split. Risks Related to Our Separation From LucentWe are limited in the amount of stock that we can issue to raise capital because of potential adverse tax consequences. Under Section 355(e) of the Internal Revenue Code, Lucent will recognize a taxable gain on the distribution of our stock if there are one or more acquisitions of our stock representing 50% or more of our stock (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 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. If an 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 our tax sharing agreement with Lucent. The shares of our Class A common stock issued in our initial public offering are considered to be part of a plan that includes the distribution, and the shares of our Class A common stock issued upon the conversion of our 6.5% convertible subordinated notes may also be considered to be part of a plan that includes the distribution. Assuming that all of the convertible notes were converted, approximately 46% of our outstanding shares may be treated as acquired as part of such a plan. As a practical matter, this prevents us from effecting any significant issuance of our shares if such issuance might be treated as part of a plan that includes the distribution. Treasury Regulations issued on April 24, 2002 provide safe harbors that may be used to rebut the presumption that shares issued less than two years after the spin-off are part of a plan that includes the spin-off. However, the application of the safe harbors is not clear in many respects, and they might not be available to us for future share issuances. As a result, Section 355(e) may effectively prevent us from issuing shares to raise capital for at least two years after the spin-off. However, the safe harbors in these new Treasury Regulations generally provide that issuances of our stock to our employees pursuant to ordinary course employee compensation arrangements (such as employee stock purchase plans) will not be treated as acquisitions of our stock pursuant to a plan that includes the spin-off. 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 financial statements covering periods prior to February 1, 2001, may not be indicative of our future performance as a stand-alone company. This is primarily a result of the three factors described below. |
| First, those financial statements reflect allocations, primarily with respect to general corporate expenses, research expense and interest expense, which may be less than the expenses we incur as a stand-alone company. |
| Second, those financial statements do not reflect significant changes that have occurred as a result of our separation from Lucent, including changes in how we fund our operations, conduct research and handle tax and employee matters. |
| Third, those 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 had been a stand-alone company. |
Consolidated and Combined Financial Statements: |
Financial Statement Schedule: |
Year Ended September 30, |
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2002 |
2001 |
2000 |
|||||||||
REVENUE | $ | 2,177 | $ | 4,080 | $ | 4,708 | |||||
COSTS | 1,926 | 3,084 | 2,555 | ||||||||
GROSS PROFIT | 251 | 996 | 2,153 | ||||||||
OPERATING EXPENSES | |||||||||||
Selling, general and administrative |
341 | 597 | 535 | ||||||||
Research and development |
693 | 951 | 827 | ||||||||
Amortization of goodwill and other acquired intangibles |
59 | 415 | 189 | ||||||||
Purchased in-process research and development |
| | 446 | ||||||||
Restructuring and other charges - net |
978 | 662 | | ||||||||
Impairment of goodwill and other acquired intangibles |
220 | 2,762 | | ||||||||
(Gain) loss on sale of operating assets - net |
(294 | ) | 5 | | |||||||
TOTAL OPERATING EXPENSES |
1,997 | 5,392 | 1,997 | ||||||||
OPERATING INCOME (LOSS) | (1,746 | ) | (4,396 | ) | 156 | ||||||
Other income - net | 120 | 40 | 33 | ||||||||
Interest expense | 121 | 151 | 58 | ||||||||
Income (loss) before provision for income taxes |
(1,747 | ) | (4,507 | ) | 131 | ||||||
Provision for income taxes |
64 | 105 | 207 | ||||||||
Loss before cumulative effect of accounting change |
(1,811 | ) | (4,612 | ) | (76 | ) | |||||
Cumulative effect of accounting change (net of benefit for income taxes of $2 for the year ended September 30, 2001) |
| (4 | ) | | |||||||
NET LOSS | $ | (1,811 | ) | $ | (4,616 | ) | $ | (76 | ) | ||
Basic and diluted loss per share: |
|||||||||||
Loss before cumulative effect of accounting change |
$ | (1.11 | ) | $ | (3.46 | ) | $ | (.07 | ) | ||
Cumulative effect of accounting change |
| | | ||||||||
Net loss | $ | (1.11 | ) | $ | (3.46 | ) | $ | (.07 | ) | ||
Weighted average shares outstandingbasic and diluted (in millions) |
1,637 | 1,334 | 1,035 | ||||||||
See Notes to Consolidated and Combined Financial Statements. AGERE SYSTEMS INC. AND SUBSIDIARIESCONSOLIDATED
BALANCE SHEETS
|
September 30, |
||||||||
---|---|---|---|---|---|---|---|---|
2002 |
2001 |
|||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents |
$ | 891 | $ | 3,152 | ||||
Cash held in trust |
16 | | ||||||
Trade receivables, less allowances of $9 and $33 at September 30, 2002 and 2001, respectively |
256 | 389 | ||||||
Inventories |
190 | 304 | ||||||
Prepaid expense |
57 | 61 | ||||||
Other current assets |
46 | 154 | ||||||
TOTAL CURRENT ASSETS |
1,456 | 4,060 | ||||||
Assets held for sale | | 52 | ||||||
Property, plant and equipment - net | 1,028 | 1,799 | ||||||
Goodwill and other acquired intangibles - net of accumulated amortization of $93 and $93 at September 30, 2002 and 2001, respectively |
101 | 343 | ||||||
Deferred income taxes - net | | 4 | ||||||
Other assets | 279 | 304 | ||||||
TOTAL ASSETS |
$ | 2,864 | $ | 6,562 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable |
$ | 269 | $ | 514 | ||||
Payroll and related benefits |
111 | 138 | ||||||
Short-term debt |
197 | 2,516 | ||||||
Income taxes payable |
355 | 336 | ||||||
Restructuring reserve |
162 | 171 | ||||||
Other current liabilities |
173 | 229 | ||||||
TOTAL CURRENT LIABILITIES |
1,267 | 3,904 | ||||||
Postemployment benefits | 78 | 92 | ||||||
Pension and postretirement benefits | 267 | | ||||||
Long-term debt | 486 | 33 | ||||||
Other liabilities | 34 | 72 | ||||||
TOTAL LIABILITIES |
2,132 | 4,101 | ||||||
Commitments and contingencies | ||||||||
STOCKHOLDERS EQUITY | ||||||||
Preferred stock, par value $1.00 per share, 250,000,000 shares authorized and no shares issued and outstanding |
| | ||||||
Class A common stock, par value $0.01 per share, 5,000,000,000 shares authorized and 734,785,226 shares issued and outstanding after deducting 4,248 treasury shares issued as of September 30, 2002 and 727,000,107 shares issued and outstanding as of September 30, 2001 |
7 | 7 | ||||||
Class B common stock, par value $0.01 per share, 5,000,000,000 shares authorized and 907,995,677 shares issued and outstanding after deducting 104,323 treasury shares issued as of September 30, 2002 and 908,100,000 shares issued and outstanding as of September 30, 2001 |
9 | 9 | ||||||
Additional paid-in capital | 7,243 | 6,996 | ||||||
Accumulated deficit | (6,353 | ) | (4,542 | ) | ||||
Accumulated other comprehensive loss | (174 | ) | (9 | ) | ||||
TOTAL STOCKHOLDERS EQUITY |
732 | 2,461 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 2,864 | $ | 6,562 | ||||
Year Ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
2000 |
|||||||||
CLASS A COMMON STOCK | |||||||||||
Beginning balance | $ | 7 | $ | | $ | | |||||
Issuance of Class A common stock |
| 6 | | ||||||||
Conversion of Class B to Class A common stock |
| 1 | | ||||||||
Ending balance | 7 | 7 | | ||||||||
CLASS B COMMON STOCK | |||||||||||
Beginning balance | 9 | 10 | 10 | ||||||||
Conversion of Class B to Class A common stock |
| (1 | ) | | |||||||
Ending balance | 9 | 9 | 10 | ||||||||
OWNERS NET INVESTMENT | |||||||||||
Beginning balance | | 5,823 | 1,969 | ||||||||
Net loss prior to February 1, 2001 |
| (74 | ) | (76 | ) | ||||||
Transfers to Lucent Technologies Inc. |
| (1,405 | ) | (4,492 | ) | ||||||
Transfers from Lucent Technologies Inc. |
| 1,501 | 8,422 | ||||||||
Transfer to additional paid-in capital |
| (5,845 | ) | | |||||||
Ending balance | | | 5,823 | ||||||||
ADDITIONAL PAID-IN CAPITAL | |||||||||||
Beginning balance | 6,996 | | | ||||||||
Transfer from owners net investment |
| 5,845 | | ||||||||
Transfers to Lucent Technologies Inc. |
127 | (1,604 | ) | | |||||||
Transfers from Lucent Technologies Inc. |
100 | 1,813 | | ||||||||
Debt transferred from Lucent Technologies Inc. |
| (2,500 | ) | | |||||||
Issuance of common stock - net of expense |
11 | 3,442 | | ||||||||
Equity-based compensation |
9 | | | ||||||||
Ending balance | 7,243 | 6,996 | | ||||||||
ACCUMULATED DEFICIT | |||||||||||
Beginning balance | (4,542 | ) | | | |||||||
Net loss from February 1, 2001 |
(1,811 | ) | (4,542 | ) | | ||||||
Ending balance | (6,353 | ) | (4,542 | ) | | ||||||
ACCUMULATED OTHER COMPREHENSIVE LOSS | |||||||||||
Beginning balance | (9 | ) | (52 | ) | (17 | ) | |||||
Minimum pension liability adjustment |
(170 | ) | | | |||||||
Foreign currency translations |
(3 | ) | 26 | (35 | ) | ||||||
Reclassification adjustment for realized foreign currency translation losses |
35 | | | ||||||||
Unrealized gain (loss) on cash flow hedges |
3 | (13 | ) | | |||||||
Unrealized holding gains |
| 30 | | ||||||||
Reclassification adjustment for realized holding gains |
(30 | ) | | | |||||||
Ending balance | (174 | ) | (9 | ) | (52 | ) | |||||
TOTAL STOCKHOLDERS EQUITY/INVESTED EQUITY |
$ | 732 | $ | 2,461 | $ | 5,781 | |||||
TOTAL COMPREHENSIVE LOSS | |||||||||||
Net loss | $ | (1,811 | ) | $ | (4,616 | ) | $ | (76 | ) | ||
Other comprehensive income (loss) | (165 | ) | 43 | (35 | ) | ||||||
TOTAL COMPREHENSIVE LOSS |
$ | (1,976 | ) | $ | (4,573 | ) | $ | (111 | ) | ||
See Notes to Consolidated and Combined Financial Statements. AGERE SYSTEMS INC. AND SUBSIDIARIESCONSOLIDATED
AND COMBINED STATEMENTS OF CASH FLOWS
|
Year Ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
2000 |
|||||||||
OPERATING ACTIVITIES | |||||||||||
Net loss | $ | (1,811 | ) | $ | (4,616 | ) | $ | (76 | ) | ||
Adjustments to reconcile net loss to net cash (used) provided by operating activities, net of effects of acquisitions of businesses: | |||||||||||
Cumulative effect of accounting change |
| 4 | | ||||||||
Restructuring expense-net of cash payments |
788 | 492 | | ||||||||
Provision for inventory write-downs |
81 | 409 | 29 | ||||||||
Depreciation and amortization |
528 | 871 | 666 | ||||||||
(Benefit) provision for uncollectibles |
(4 | ) | 16 | 6 | |||||||
Provision (benefit) for deferred income taxes |
40 | 42 | (2 | ) | |||||||
Purchased in-process research and development |
| | 446 | ||||||||
Impairment of investments |
9 | 47 | | ||||||||
Impairment of goodwill and other acquired intangibles |
220 | 2,762 | | ||||||||
Equity earnings from investments |
(40 | ) | (42 | ) | (4 | ) | |||||
Gain on sales of investments |
(41 | ) | | (18 | ) | ||||||
Gain on disposition of businesses |
(301 | ) | | | |||||||
Amortization of debt issuance costs |
46 | 29 | | ||||||||
Decrease (increase) in receivables |
138 | 413 | (237 | ) | |||||||
Decrease (increase) in inventories |
25 | (333 | ) | (95 | ) | ||||||
(Decrease) increase in accounts payable |
(186 | ) | 243 | 37 | |||||||
Decrease in payroll and benefit liabilities |
(22 | ) | (51 | ) | (66 | ) | |||||
Changes in other operating assets and liabilities |
(111 | ) | (30 | ) | 77 | ||||||
Other adjustments for non-cash items - net |
(19 | ) | 13 | (1 | ) | ||||||
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES |
(660 | ) | 269 | 762 | |||||||
INVESTING ACTIVITIES | |||||||||||
Capital expenditures | (195 | ) | (723 | ) | (672 | ) | |||||
Proceeds from the sale or disposal of property, plant and equipment |
142 | 2 | | ||||||||
Purchases of investments | | | (65 | ) | |||||||
Sales of investments | 55 | | 18 | ||||||||
Proceeds from disposition of businesses |
382 | | | ||||||||
Acquisitions of businesses - net of cash acquired |
| (1 | ) | (104 | ) | ||||||
Cash held in trust | (16 | ) | | | |||||||
Other investing activities - net | | (1 | ) | (6 | ) | ||||||
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES |
368 | (723 | ) | (829 | ) | ||||||
FINANCING ACTIVITIES | |||||||||||
Transfers from Lucent Technologies Inc. |
| 171 | 85 | ||||||||
Payment of credit facility fees | (21 | ) | | | |||||||
Proceeds from the issuance of long-term debt - net of expenses |
396 | | | ||||||||
Net proceeds from the issuance of short-term debt |
163 | | | ||||||||
Principal repayments of credit facility |
(2,500 | ) | | | |||||||
Principal repayments on long-term debt |
(19 | ) | (12 | ) | (18 | ) | |||||
Proceeds from issuance of stock - net of expense |
11 | 3,448 | | ||||||||
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES |
(1,970 | ) | 3,607 | 67 | |||||||
Effect of exchange rate changes on cash |
1 | (1 | ) | | |||||||
Net (decrease) increase in cash and cash equivalents |
(2,261 | ) | 3,152 | | |||||||
Cash and cash equivalents at beginning of year |
3,152 | | | ||||||||
Cash and cash equivalents at end of period |
$ | 891 | $ | 3,152 | $ | | |||||
Year Ended September 30, 2002 |
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
September 30, 2001 |
Restructuring and Related |
Non-Cash |
September 30, 2002 | |||||||||||||||||||||||
Restructuring Reserve |
Charges |
Credits |
Charges |
Credits |
Cash Payments |
Restructuring Reserve | ||||||||||||||||||||
Workforce reduction |
$ 92 | $ 402 | $ (39 | ) | $ (316 | ) | $ 19 | $ (98 | ) | $ 60 | ||||||||||||||||
Rationalization of manufacturing capacity and other charges |
79 | 696 | (88 | ) | (569 | ) | 69 | (85 | ) | 102 | ||||||||||||||||
Total | $171 | $1,098 | $(127 | ) | $ (885 | ) | $ 88 | $(183 | ) | $162 | ||||||||||||||||
Workforce Reduction During fiscal 2002, the Company recorded restructuring charges of $402 related to workforce reductions of approximately 5,000 employees. Of the total workforce reduction charges, $316 represents non-cash charges that consist of the following: $16 for curtailment charges relating to an acceleration of the prior service cost of the Companys qualified pension plan as employees are retiring earlier than actuarially anticipated, $32 for increased charges to the postretirement medical liability as employees are eligible for retiree health benefits sooner than actuarially anticipated, and $268 for termination benefits to certain U. S. employees, including occupational employees covered under the terms of a collective bargaining agreement. Of the $268 termination benefits, $103 represents charges incurred as the result of actions of the Company prior to June 1, 2002 that will be paid from Lucents pension assets while $165 represents charges subsequent to June 1, 2002 that will be paid from the Companys pension assets. In fiscal 2002, the Company recorded workforce related restructuring credits of $39. Of this amount, $20 represents a reversal of the restructuring reserve associated with workforce reductions, resulting from severance and benefit cost estimates that exceeded amounts paid during the second half of calendar 2001. The original reserve included an estimate of termination pay and benefits for occupational employees that was based on the average rate of pay and years of service of the occupational employee pool at risk. The Companys collective bargaining agreements allow for a period when employees at risk can opt for positions filled by employees with less seniority. When that period ended, a series of personnel moves followed that ultimately resulted in lower severance and benefit payments than originally expected. This was due principally to the termination of occupational employees with fewer years of service and fewer weeks of severance entitlement. These personnel moves were substantially finished at the end of calendar 2001. The balance of $19 represents a non-cash credit for the decrease in the actuarially calculated severance liability due to the population decrease that was driven by the various restructuring initiatives. Severance costs and other exit costs were determined in accordance with EITF 94-3. The postretirement charge was determined in accordance with SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions and the actuarially calculated severance liability credit was determined in accordance with SFAS No. 112, Employers Accounting for Postemployment Benefits. The Company has completed the workforce reductions announced in fiscal 2001, with approximately 6,000 employees taken off-roll as of March 31, 2002 and has separated approximately 1,200 employees as of September 30, 2002 from initiatives announced in the first and second quarters of fiscal 2002, which are substantially complete. Moreover, continuing cost reduction initiatives, including the plans to exit the optoelectronics business and consolidate manufacturing operations in Orlando, are expected to reduce the Companys active workforce by approximately 4,000 additional employees by the end of December 2003. Rationalization of Manufacturing Capacity and Other Charges The Company recorded restructuring and related charges of $696 in fiscal 2002 relating to the rationalization of under-utilized manufacturing facilities, the exit of the optoelectronics business and other restructuring related activities. Of the charges recorded for fiscal 2002, $520 was for asset impairments, $76 for facility closings, $51 for contract terminations, $9 for additional depreciation, and $40 for other related costs. The additional depreciation charges were recognized due to the shortening of estimated useful lives of certain assets in connection with the planned closing of certain administrative facilities. The other related costs are for the implementation and integration of the initiatives and include costs for the relocation and training of employees and for relocation of equipment. Of the asset impairment charges of $520 in fiscal 2002, $353 resulted from actions associated with the Companys exit of the optoelectronics business of the Infrastructure Systems segment. Of the remaining $167, $75 was related to ceasing operations at Reading, $76 was for resizing Orlandos research and development and manufacturing operations, and $16 was for all other impairments related to the rationalization of underutilized manufacturing facilities. All affected assets were classified as held and used. In accordance with SFAS 144, the carrying amounts of all held and used asset groups were compared to their undiscounted future cash flows expected to be generated over their estimated remaining useful lives. Cash flows were projected based upon historical results and estimates of future performance. In cases where the expected future cash flows were less than the carrying amounts of the assets, those assets were considered impaired and were written down to fair value which was determined using the present value of estimated future cash flows. The impaired assets that were disposed of other than by sale were written-down to fair value, less costs of disposal. The facility closing charges of $76 in fiscal 2002 consist of $41 due to facility lease terminations, including non-cancelable leases, and facility restoration costs of which $20 is associated with the exiting of the optoelectronics business and $21 is associated with the consolidation of the Pennsylvania and New Jersey facilities and the consolidation of the majority of the U.S. integrated circuit manufacturing operations into Orlando, Florida. The balance of $35 is a non-cash charge for the realization of the cumulative translation adjustment resulting from the substantial liquidation of the Companys investment in the legal entity associated with its Madrid, Spain manufacturing operations, which were sold in fiscal 2002. This charge was recognized in accordance with EITF Issue No. 01-5, Issue Summary No. 1, Application of SFAS No. 52, and Foreign Currency Translation, to an Investment Being Evaluated for Impairment That Will Be Disposed Of. The contract termination charges of $51, including a non-cash charge of $5 for the write-off of prepaid operating lease costs, are principally due to operating lease termination fees and non-cancelable asset leases associated with the consolidation of the Pennsylvania and New Jersey facilities and the consolidation of the majority of the U.S. integrated circuit manufacturing operations into Orlando, Florida. The Company recorded restructuring credits of $88 in fiscal 2002. These credits consist of $69 for asset impairment adjustments, $6 for facility lease terminations and facility restoration, $7 for contract terminations and $6 for a reversal of a reserve that is not needed. The asset impairment adjustments were due to realizing $40 more proceeds than expected from asset dispositions, including $25 from the sale of assets associated with the Madrid, Spain facility. The impairment adjustment also includes $20 due to the redeployment of assets and $9 from the reversal of a reserve that is not needed. The facility lease and restoration reversals, as well as the contract termination reversals, resulted from favorable lease and contract termination negotiations and lower facility restoration costs than previously reserved. Restructuring Reserve Balances as of September 30, 2002 The Company anticipates that most of the $60 restructuring reserve as of September 30, 2002, relating to workforce reductions, will be paid by the third quarter of fiscal 2003. The Company also anticipates that the restructuring reserve balance of $102 relating to the rationalization of manufacturing capacity and other charges as of September 30, 2002 will be paid as follows: the majority of the contract terminations of $55 will be paid by the third quarter of fiscal 2003; facility termination fees and non-cancelable lease obligations of $17 will be paid over the respective lease terms through 2005; and most of the facility restoration costs and other costs of $30 will be paid by the end of fiscal 2003. The Company expects to fund these cash outlays with cash on hand. Year Ended September 30, 2001 The following table sets forth the Companys restructuring reserves as of September 30, 2001 and reflects the activity related to the workforce reductions and the rationalization of manufacturing capacity and other charges affecting the reserve for fiscal 2001: |
September 30, 2000 |
Year Ended September 30, 2001 |
September 30, 2001 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Restructuring Reserve |
Restructuring and Related Charges |
Non-Cash Charges |
Cash Payments |
Restructuring Reserve | |||||||||||||
Workforce reduction |
$ | $ 177 | $ (28 | ) | $ (57 | ) | $ 92 | ||||||||||
Rationalization of manufacturing capacity and other charges |
| 386 | (293 | ) | (14 | ) | 79 | ||||||||||
Total | $ | $ 563 | $(321 | ) | $ (71 | ) | $171 | ||||||||||
Workforce Reduction The restructuring initiatives announced in fiscal 2001 resulted in a workforce reduction of approximately 6,000 employees across various business functions, operating units and geographic regions, and included management and occupational employees. The Company recorded a restructuring charge of $177 for fiscal 2001 relating to the termination of approximately 5,500 employees, of which approximately 4,300 employees were taken off-roll as of September 30, 2001. Of the $177 charge, $28 represents termination benefits to certain U.S. management employees that were funded through Lucents pension assets. Severance costs and other exit costs noted above were determined in accordance with EITF 94-3. Rationalization of Manufacturing Capacity and Other Charges The Company recorded a restructuring charge of $386 in fiscal 2001 relating to the rationalization of underutilized manufacturing facilities and other restructuring related activities. As part of these efforts, the Company discontinued its manufacturing operations at its chip fabrication plant in Madrid, Spain and rationalized underutilized manufacturing capacity at its facilities in Orlando, Florida, and in Allentown, Breinigsville, and Reading, Pennsylvania. In addition, the Company has consolidated 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 asset impairment charges 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 121. The remaining restructuring charges of $62 for fiscal 2001 are related primarily to contract terminations. Separation ExpensesThe 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 Companys 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. The Company incurred $7 and $99 of separation expenses in fiscal 2002 and 2001, respectively, which are included in restructuring and other charges net. 6. Exit of Optoelectronics BusinessOn August 14, 2002, the Company announced that it will exit its optoelectronics business. The Company is seeking a buyer for all or parts of this business, but will discontinue optoelectronics operations no later than June 30, 2003. As a result of this exit, the Company will discontinue or sell operations in its facilities in Breinigsville, Pennsylvania; Dallas, Texas; Alhambra and Irwindale, California; and Matamoros, Mexico. See Note 24 Subsequent Events. The following unaudited pro forma consolidated statement of operations has been prepared as if the Companys exit from the optoelectronics business occurred on October 1, 2001. The adjustments included in the statement of operations reflect revenues, costs and expenses directly associated with the optoelectronics business, but excludes intellectual property revenues and allocations of corporate expenses such as general corporate overhead, interest and taxes. The unaudited pro forma consolidated statement of operations does not purport to represent the results of operations had the exit from the optoelectronics business occurred on October 1, 2001 or to project future financial performance for any future period. The unaudited pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable. An unaudited pro forma consolidated balance sheet is not provided since the exit of the optoelectronics business does not have a material impact to the Companys balance sheet as of September 30, 2002. Unaudited
Proforma Consolidated Statement of Operations
|
Historical |
Adjustments |
Pro Forma | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
REVENUE | $ 2,177 | $ 254 | $ 1,923 | ||||||||
COSTS | 1,926 | 445 | 1,481 | ||||||||
GROSS PROFIT (LOSS) | 251 | (191 | ) | 442 | |||||||
OPERATING EXPENSES | |||||||||||
Selling, general and administrative |
341 | 17 | 324 | ||||||||
Research and development |
693 | 134 | 559 | ||||||||
Amortization of goodwill and other acquired intangibles |
59 | 24 | 35 | ||||||||
Restructuring and other charges - net |
978 | 475 | 503 | ||||||||
Impairment of goodwill and other acquired intangibles |
220 | 220 | | ||||||||
(Gain) loss on sale of operating assets - net |
(294 | ) | 5 | (299 | ) | ||||||
TOTAL OPERATING EXPENSES |
1,997 | 875 | 1,122 | ||||||||
OPERATING LOSS | (1,746 | ) | (1,066 | ) | (680 | ) | |||||
Other income - net | 120 | 44 | 76 | ||||||||
Interest expense | 121 | | 121 | ||||||||
Loss before provision for income taxes | (1,747 | ) | (1,022 | ) | (725 | ) | |||||
Provision for income taxes | 64 | 1 | 63 | ||||||||
NET LOSS | $(1,811 | ) | $(1,023 | ) | $ (788 | ) | |||||
Basic and diluted loss per share | $ (1.11 | ) | $ (.48 | ) | |||||||
Weighted average shares outstandingbasic and diluted (in millions) |
1,637 | 1,637 | |||||||||
7. Impairment of Goodwill and Other Acquired IntangiblesThe 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. Goodwill and other acquired intangibles associated with acquisitions are evaluated for impairment in the period in which the Company becomes aware of events or occurrences that indicate an impairment may exist. Impairment assessments were performed 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 Companys products, as well as anticipated future demand. Discount rates used were based upon the Companys weighted average cost of capital adjusted for business risks. These amounts are based on managements best estimate of future results. As a result of these assessments, the Company determined that an impairment of goodwill and other acquired intangibles existed related to certain of the Companys acquisitions. During fiscal 2002, the Company recorded a charge to reduce goodwill and other acquired intangibles of $220, consisting of $113 and $107 related to Ortel Corporation and Herrmann Technology, Inc., respectively. During fiscal 2001, the Company recorded a charge to reduce goodwill and other acquired intangibles of $2,762, consisting of $2,220, $275, $240 and $27 related to Ortel, Herrmann, Agere, Inc. and Enable Semiconductor, respectively. 8. DebtConvertible Subordinated NotesOn June 19, 2002, the Company issued $410 of 6.5% Convertible Subordinated Notes due December 15, 2009 (the Notes). The Company received proceeds of $396 in connection with this offering, net of $14 in underwriting fees and other expenses, which have been deferred and will be amortized to interest expense over the term of the Notes. Interest on the Notes accrues at the rate of 6.5% per annum and is payable semi-annually on June 15 and December 15 of each year, beginning on December 15, 2002. The Notes can be converted into shares of Class A common stock at an initial price of $3.3075 per share, subject to adjustment in certain events, at any time prior to maturity, unless previously redeemed or repurchased by the Company. The Company may redeem the Notes in whole or in part at any time on or after June 20, 2007. In addition, upon a fundamental change in the Company, which includes a change of control or our Class A common stock not listed for trading on the New York Stock Exchange nor approved for trading on the NASDAQ National Market, the Company may be required to repurchase the Notes at a price equal to 100% of the principal amount of the Notes plus any accrued and unpaid interest. The Notes are unsecured subordinated obligations and will be subordinated in right of payment to all the Companys existing and future senior debt. Accounts Receivable SecuritizationOn January 22, 2002, Agere Systems Inc. and certain of its subsidiaries entered into a securitization transaction relating to certain accounts receivable. As part of the transaction, Agere Systems Inc. and certain of its subsidiaries irrevocably transfer accounts receivable on a daily basis to a wholly-owned, fully consolidated, bankruptcy-remote subsidiary, Agere Systems Receivables Funding LLC (ASRF). ASRF has entered into a loan agreement with certain financial institutions, pursuant to which the financial institutions agreed to make loans to ASRF secured by the accounts receivable. The financial institutions have commitments under the loan agreement of up to $200; however the amount the ASRF can actually borrow at any time depends on the amount and nature of the accounts receivable that the Company has transferred to ASRF. The loan agreement expires on January 21, 2003. See Note 24 Subsequent Events. As of September 30, 2002, ASRF had borrowings of $163 outstanding under this agreement. The majority of the Companys accounts receivable are required to be pledged as security for the outstanding loans even though some of those receivables may not qualify for borrowings. As of September 30, 2002, $217 of gross receivables was pledged as security for the outstanding loans. ASRF pays interest on amounts borrowed under the agreement based on one-month LIBOR. The weighted average annual interest rate on amounts borrowed at September 30, 2002 was 1.8%. In addition, ASRF pays an annual 1.5% commitment fee on the total loan commitment of $200. ASRF is a separate legal entity with its own separate creditors. Upon liquidation of ASRF, its assets will be applied to satisfy the claims of its creditors prior to any value in ASRF becoming available to the Company. The business of ASRF is limited to the acquisition of receivables from Agere Systems Inc. and certain of its subsidiaries and related activities. Credit FacilityOn April 2, 2001, in connection with the IPO, the Company assumed $2,500 of short-term borrowings from Lucent under a credit facility. The Company did not receive any of the proceeds of this short-term debt. On October 4, 2001, the Company amended this credit facility. In connection with the amendment, the Company repaid $1,000 of the $2,500 then outstanding, permanently reduced the size of the facility to $1,500, and extended the maturity date from February 22, 2002 to September 30, 2002. The Company also paid $21 in fees in connection with the amendment, which were amortized over the life of the facility. On September 30, 2002, the credit facility expired in accordance with its terms. Prior to its expiration, the Company had completely repaid all borrowings under the facility and had no amounts outstanding. Other DebtThe remainder of the Companys debt relates to obligations under capitalized leases. See Note 22 Commitments and Contingences Leases for information regarding the future minimum lease payments under non-cancelable leases. 9. Divestitures of BusinessesSale of FPGA BusinessOn January 18, 2002, the Company completed the sale of certain assets and liabilities related to the field-programmable gate array (FPGA) business of the Infrastructure Systems segment to Lattice Semiconductor Corporation (Lattice) for $250 in cash. The transaction included the Companys general-purpose ORCA® FPGA product portfolio, field-programmable system chip product portfolio and related software design tools. As part of the transaction, approximately 100 employees transferred to Lattice. The Company recognized a gain of $243 from the sale, which is included in (gain) loss on sale of operating assets net. Sale of Wireless Local Area Network Equipment BusinessOn August 5, 2002, the Company completed the sale of certain assets and liabilities of the 802.11 wireless local area network equipment business of the Client Systems segment, including its ORiNOCO® product family, to Proxim Corporation (Proxim) for $65 in cash. As part of the sale, approximately 150 employees transferred to Proxim. In addition, the Company and Proxim have entered into a three-year strategic supply agreement under which the Company will provide chips, modules and cards to Proxim as needed, a license agreement for Agere technology used in the ORiNOCO business and a patent cross-license agreement for their respective patent portfolios which resulted in the dismissal of patent-related litigation between the two companies. The Company recognized a gain of $58 from the sale, which is included in (gain) loss on sale of operating assets net. Sale of Analog Line Card BusinessOn September 30, 2002, the Company completed the sale of certain assets and liabilities of the analog line card business of the Infrastructure Systems segment to Legerity, Inc. (Legerity) for $70 in cash. The sale consists of certain products, technology, intellectual property and equipment related to the analog line card business, which provides integrated circuits used in telephone network equipment. As part of the transaction, approximately 40 employees transferred to Legerity. In addition, through a transitional supply agreement, the Company is obligated to supply chips for Legerity through early 2003. The Company will defer any gain that may be recognized on the sale until the Company has satisfied all of it obligations to Legerity. As of September 30, 2002, a deferred gain of $68 has been recorded in other current liabilities. 10. AcquisitionsThe following table presents information about certain acquisitions in fiscal 2000. No significant acquisitions occurred during fiscal 2002 and 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. |
Amortization Period (in years) | |||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Acquisition Date |
Purchase Price |
Goodwill |
Existing Technology |
Other Intangibles |
Purchased IPRD |
Goodwill |
Existing Technology |
Other Intangibles | |||||||||||||||||||||
Herrmann (1) | 6/00 | $ 432 | $ 384 | $ 52 | $ 16 | $ 34 | 8 | 7 | 7 | ||||||||||||||||||||
Ortel (2) | 4/00 | 2,998 | 2,554 | 171 | 24 | 307 | 9 | 7.5 | 4-9 | ||||||||||||||||||||
Agere, Inc. (3) | 4/00 | 377 | 303 | n/a | n/a | 94 | 7 | n/a | n/a | ||||||||||||||||||||
Assets of VTC (4) | 3/00 | 104 | 46 | 31 | 7 | 11 | 7 | 5 | 7 |
|
(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. |
In connection with the acquisition of Herrmann, certain former stockholders of Herrmann also received 677,019 additional shares of Lucent common stock based on retention and the achievement of specified milestones. In connection with the acquisition of substantially all the assets of VTC, stockholders of VTC also received additional cash consideration of $50 as a result of meeting certain performance measures. The $50 payment resulted in additional goodwill. Included in the purchase price for the above acquisitions was IPRD, which was a non-cash charge to earnings for technology that had not reached technological feasibility and had no future alternative use. The remaining purchase price was allocated to tangible assets and intangible assets, including goodwill and other acquired intangibles, less liabilities assumed. The value allocated to IPRD was determined utilizing an income approach that included an excess earnings analysis reflecting the appropriate cost of capital for the investment. Estimates of future cash flows related to the IPRD were made for each project based on Lucents 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. Management is primarily responsible for estimating the fair value of the assets and liabilities acquired. 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 2002 and 2001, the Company determined that there was an impairment to some of the goodwill and other acquired intangibles related to the acquisitions of Ortel, Herrmann, Agere and Enable. See Note 7 Impairment of Goodwill and Other Acquired Intangibles. If the acquisition of Ortel had occurred on October 1, 1999, the pro forma income statement would have reflected revenues of $4,760 and income before cumulative effect of accounting change of $48 for fiscal 2000. Pro forma adjustments to 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. These unaudited amounts are presented for information purposes only and are 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 fiscal 2000. 11. Investment in Silicon Manufacturing PartnersIn December 1997, the Company entered into a joint venture, called Silicon Manufacturing Partners Pte Ltd. (SMP), with Chartered Semiconductor Manufacturing Ltd. (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 Companys 51% interest in SMP is accounted for under the equity method due to Chartered Semiconductors 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, SMPs net income (loss) is not expected to be shared in the same ratio as equity ownership. The Company recognized equity earnings of $40, $54 and $0 in fiscal 2002, 2001 and 2000, respectively. The following table shows the condensed balance sheets and statements of operations of SMP: |
September 30, |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
|||||||||||||
Assets | ||||||||||||||
Current assets | $ | 146 | $ | 121 | ||||||||||
Noncurrent assets | 443 | 549 | ||||||||||||
Liabilities | ||||||||||||||
Current liabilities | $ | 161 | $ | 61 | ||||||||||
Noncurrent liabilities | 206 | 406 |
Year Ended September 30, |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
2000 |
|||||||||||||||
Revenue | $ | 198 | $ | 234 | $ | 169 | |||||||||||
Gross profit | 50 | 83 | 16 | ||||||||||||||
Income (loss) from continuing operations | 15 | 47 | (2 | ) | |||||||||||||
Net income (loss) | $ | 15 | $ | 47 | $ | (2 | ) |
Effective January 1, 2001, SMP adopted SFAS 133 and its corresponding amendments under SFAS 138. SMP has entered into interest rate swaps, which have been designated as cash flow hedges, to manage interest rate risk from its floating interest rate debt and has recorded the unrealized gain or loss from these hedges as a separate component of other comprehensive income (loss). The Company has a 51% equity interest in these transactions and, as a result, recorded an unrealized gain of $3 and an unrealized loss of $13 in other comprehensive income (loss) in fiscal 2002 and 2001, respectively. The Companys investment in SMP was $179 and $136 at September 30, 2002 and 2001, respectively, and is recorded in other assets. 12. Available-for-Sale SecuritiesThe Companys investments in marketable securities are classified as available-for-sale. The fair market value of available-for-sale securities included in the consolidated balance sheet was $41 as of September 30, 2001 and the Company had no available-for-sale securities as of September 30, 2002 and 2000. The unrealized gain recorded as a separate component of other comprehensive income (loss) for fiscal 2001 was $30. The Company sold its available-for-sale investment in fiscal 2002 for $49 and recognized a gain of $38. 13. Supplementary Financial InformationStatement of Operations InformationThe Company recorded inventory provisions classified within costs of $81, $409 and $29 in fiscal 2002, 2001 and 2000, respectively. These amounts are calculated in accordance with the Companys inventory valuation policy, which is based on a review of forecasted demand compared with existing inventory levels. The Company recorded increased depreciation of $69 in fiscal 2002, $60 of which is recorded in costs and $9 of which is recorded in restructuring and other charges net. The increased depreciation was due to a change in accounting estimate as a result of shortening the estimated useful lives of certain assets in connection with the Companys restructuring activities. This additional depreciation is reflected in net loss and resulted in a $.04 per share loss in fiscal 2002. |
Year Ended September 30, |
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---|---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
2000 |
|||||||||
INCLUDED IN COSTS AND OPERATING EXPENSES: | |||||||||||
Depreciation and amortization of property, plant and equipment | $ | 445 | $ | 445 | $ | 477 | |||||
OTHER INCOME - NET: | |||||||||||
Interest income | $ | 30 | $ | 69 | $ | | |||||
Gain (loss) on foreign currency transactions | 3 | (14 | ) | 6 | |||||||
Gain on sales of investments | 41 | | 18 | ||||||||
Impairment of investments | (9 | ) | (47 | ) | | ||||||
Equity earnings from investments | 40 | 42 | 4 | ||||||||
Other income (loss) | 15 | (10 | ) | 5 | |||||||
Other income - net | $ | 120 | $ | 40 | $ | 33 | |||||
Balance Sheet InformationAs of September 30, 2002, the Company has $16 of cash held in trust in support of obligations of the Companys captive insurance company. |
September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
||||||||||
INVENTORIES | |||||||||||
Completed goods | $ | 49 | $ | 87 | |||||||
Work in process | 119 | 170 | |||||||||
Raw materials | 22 | 47 | |||||||||
Inventories | $ | 190 | $ | 304 | |||||||
ASSETS HELD FOR SALE: | |||||||||||
Land and improvements | $ | | $ | 6 | |||||||
Buildings and improvements | | 57 | |||||||||
Machinery, electronic and other equipment | | 31 | |||||||||
Total assets held for sale | | 94 | |||||||||
Less: accumulated depreciation and amortization | | (42 | ) | ||||||||
Assets held for sale | $ | | $ | 52 | |||||||
PROPERTY, PLANT AND EQUIPMENTNET | |||||||||||
Held and Used: | |||||||||||
Land and improvements | $ | 35 | $ | 38 | |||||||
Buildings and improvements | 489 | 603 | |||||||||
Machinery, electronic and other equipment | 2,222 | 3,535 | |||||||||
Total property, plant and equipment | 2,746 | 4,176 | |||||||||
Less: accumulated depreciation and amortization | (1,718 | ) | (2,377 | ) | |||||||
Property, plant and equipmentnet | $ | 1,028 | $ | 1,799 | |||||||
At September 30, 2001, property, plant and equipment held for sale was related to the Companys manufacturing operations at its chip fabrication plant in Madrid, Spain. Cash Flow InformationPrior 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. Cash paid for interest was $71 and $84 for fiscal 2002 and 2001, respectively. Cash paid for income taxes was $38 and $52 for fiscal 2002 and 2001, respectively. Non-cash transactions in fiscal 2002 with Lucent resulted in a net increase to additional paid-in capital of $227. The increase is primarily the result of activity related to pension and postretirement benefits. In fiscal 2001, transfers from Lucent included 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. In fiscal 2000, a $3,807 increase in owners net investment was recorded to reflect the Ortel, Herrmann and Agere, Inc. acquisitions that were made with Lucent common stock and options. Capital lease obligations of $80 were entered into in fiscal 2002, for the lease of semiconductor manufacturing equipment and other assets. 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, |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
2000 |
|||||||||||||||
Fair value of assets acquired, net of cash acquired | $ | | $ | 1 | $ | 106 | |||||||||||
Less: fair value of liabilities assumed | | | 2 | ||||||||||||||
Acquisitions of businesses, net of cash acquired | $ | | $ | 1 | $ | 104 | |||||||||||
14. Income TaxesThe 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, |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
2000 |
|||||||||||||||
U.S. federal statutory income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | |||||||||||
State and local income taxes, net of federal income tax effect | 3.2 | 1.1 | 2.1 | ||||||||||||||
Effect of non-U.S. earnings | (5.6 | ) | (2.6 | ) | (5.1 | ) | |||||||||||
Research credits | 0.6 | 0.7 | (2.5 | ) | |||||||||||||
Foreign sales corporation | | 0.4 | (1.4 | ) | |||||||||||||
Valuation allowance | (36.1 | ) | (12.3 | ) | | ||||||||||||
Other differencesnet | (0.8 | ) | (0.6 | ) | (0.3 | ) | |||||||||||
Effective income tax rate excluding acquisition related costs (1) | (3.7 | ) | 21.7 | 27.8 | |||||||||||||
Acquisition related costs (1) | | (24.0 | ) | 130.2 | |||||||||||||
Effective income tax rate | (3.7 | )% | (2.3 | )% | 158.0 | % | |||||||||||
(1) Non-tax deductible IPRD and amortization of goodwill. The fiscal 2002 and 2001 rates include the impact of recording a charge of approximately $630 and $553, respectively, to increase the valuation allowance for deferred tax assets. A full valuation allowance has been recorded for fiscal 2002 and 2001. The following table presents the U.S. and foreign components of income (loss) before income taxes and the provision for income taxes. |
Year Ended September 30, |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
2000 |
|||||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES | |||||||||||||||||
United States | $ | (1,590 | ) | $ | (4,451 | ) | $ | (221 | ) | ||||||||
Non-U.S | (157 | ) | (56 | ) | 352 | ||||||||||||
Income (loss) before income taxes | $ | (1,747 | ) | $ | (4,507 | ) | $ | 131 | |||||||||
PROVISION FOR INCOME TAXES | |||||||||||||||||
Current | |||||||||||||||||
Federal | $ | 4 | $ | 7 | $ | 105 | |||||||||||
State and local | (1 | ) | 6 | 21 | |||||||||||||
Non-U.S | 21 | 50 | 83 | ||||||||||||||
Sub-total | 24 | 63 | 209 | ||||||||||||||
Deferred | |||||||||||||||||
Federal | 29 | 5 | 9 | ||||||||||||||
State and local | 4 | 3 | 1 | ||||||||||||||
Non-U.S | 7 | 34 | (12 | ) | |||||||||||||
Sub-total | 40 | 42 | (2 | ) | |||||||||||||
Provision for income taxes | $ | 64 | $ | 105 | $ | 207 | |||||||||||
As of September 30, 2002, the Company had total federal and state net operating loss carryforwards (tax-effected) of approximately $740, and federal research and development credit carryforwards of approximately $35, the majority of which expires in fiscal 2022. The components of deferred tax assets and liabilities at September 30, 2002 and 2001 are as follows: |
September 30, |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
||||||||||||||||
Deferred Tax Assets | |||||||||||||||||
Benefit obligations | $ | 141 | $ | 48 | |||||||||||||
Reserves and allowances | 178 | 132 | |||||||||||||||
Net operating loss/credit carryforwards | 775 | 519 | |||||||||||||||
Valuation allowance | (997 | ) | (537 | ) | |||||||||||||
Intangibles | 25 | | |||||||||||||||
Other | 6 | 9 | |||||||||||||||
Total deferred tax assets: | $ | 128 | $ | 171 | |||||||||||||
Deferred Tax Liabilities | |||||||||||||||||
Property, plant, and equipment | $ | 128 | $ | 98 | |||||||||||||
Investments | | 16 | |||||||||||||||
Intangibles | | 53 | |||||||||||||||
Total deferred tax liabilities: | $ | 128 | $ | 167 | |||||||||||||
The Company has not provided for U.S. deferred income taxes or foreign withholding taxes on $290 and $423 of undistributed earnings of its non-U.S. subsidiaries as of September 30, 2002 and 2001, respectively, because these earnings are intended to be reinvested indefinitely. 15. Comprehensive Income (Loss)Total comprehensive loss represents net loss plus the results of certain equity changes not reflected in the consolidated and combined statements of operations. The components of accumulated other comprehensive loss are shown below. |
Foreign Currency Translation |
Unrealized Holding Gains |
Unrealized Gains (Losses) on Cash Flow Hedges |
Minimum Pension Liability Adjustment |
Total Accumulated Other Comprehensive Income (Loss) | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Ending balance September 30, 1999 | $ (17 | ) | $ | $ | $ | $ (17 | ) | ||||||||||
Fiscal 2000 change | (35 | ) | | | | (35 | ) | ||||||||||
Ending balance September 30, 2000 | (52 | ) | | | | (52 | ) | ||||||||||
Fiscal 2001 change | 26 | 30 | (13 | ) | | 43 | |||||||||||
Ending balance September 30, 2001 | (26 | ) | 30 | (13 | ) | | (9 | ) | |||||||||
Fiscal 2002 change | 32 | (30 | ) | 3 | (170 | ) | (165 | ) | |||||||||
Ending balance September 30, 2002 | $ 6 | $ | $ (10 | ) | $ (170 | ) | $ (174 | ) | |||||||||
The foreign currency translation adjustments are not currently adjusted for income taxes because they relate to indefinite investments in non-U.S. subsidiaries. The unrealized gains (losses) on cash flow hedges are related to hedging activities by SMP and there are no income taxes provided as they relate to an equity method investee. There were also no income taxes provided for the unrealized holding gains on investments and the minimum pension liability adjustment due to the recording of a full valuation allowance against U.S. net deferred tax assets. 16. Stock Compensation PlansAgere has stock-based compensation plans under which employees and outside directors receive stock options and other equity-based awards. The plans provide for the granting of stock options, performance awards, restricted stock awards, cash awards, stock appreciation rights and other stock unit awards. The Company has authorized a total of 362 million shares for issuance under these plans. At September 30, 2002, awards relating to 127,092,621 shares were outstanding and 234,907,379 shares remain available for the grant of awards under these plans. These shares can be either Class A or Class B common stock. All awards granted through September 30, 2002 under the stock-based compensation plans were related to Class A common stock. During fiscal 2002 and 2001, employees of the Company were granted stock options and other equity-based awards under Ageres 2001 Long-Term Incentive Plan. 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. Employees of the Company were also granted stock options and other equity-based awards under Lucent stock-based compensation plans, generally before the IPO. In connection with certain of the Companys acquisitions, outstanding stock options held by employees of acquired companies became exercisable, according to their terms, for Lucents common stock effective at the acquisition date. On June 1, 2002, at the time of the Distribution, awards outstanding under Lucents stock-based compensation plans and held by Company employees were converted to Company stock-based awards. The pre-converted 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, had two to ten year terms and vested no later than four years from the date of grant. The Company stock options and other awards, as converted or adjusted, have the same vesting provisions, option periods, and other terms and conditions as the Lucent stock options and awards they replaced. The number of shares covered by, and the exercise prices of each stock option were adjusted so that immediately following conversion, each option had 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 immediately prior to the conversion. No new measurement date occurred upon conversion of the stock options. In connection with the Distribution, Lucent stock options held by Company employees were converted into Agere stock options for a total of 57,138,106 shares of Class A common stock. 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 on the number of shares and fair market value of shares that may be acquired each purchase period) deducted from their pay to purchase the Companys common stock. The per share purchase price is equal to 85% of the lower of either the market price on the employees entry date for the current offering period, or the last trading day of each purchase period. The amount that may be offered pursuant to this plan is 85 million shares. Through September 30, 2002, 4,553,052 shares had been purchased under the ESPP and 80,446,948 shares remained available for purchase. 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 $3, $4 and $1 for the years ended September 30, 2002, 2001 and 2000, 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 loss for the Company would have been changed to the pro forma amounts indicated below: |
Year Ended September 30, |
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2002 |
2001 |
2000 |
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NET LOSS | |||||||||||||||||
As reported | $ | (1,811 | ) | $ | (4,616 | ) | $ | (76 | ) | ||||||||
Pro forma (1) | $ | (2,008 | ) | $ | (4,830 | ) | $ | (131 | ) | ||||||||
LOSS PER SHARE - BASIC AND DILUTED | |||||||||||||||||
As reported | $ | (1.11 | ) | $ | (3.46 | ) | $ | (0.07 | ) | ||||||||
Pro forma (1) | $ | (1.23 | ) | $ | (3.62 | ) | $ | (0.13 | ) |
|
(1) | The pro forma amounts shown above include the fair values of all Agere stock options, including Lucent options that were converted to Agere options at the Distribution date. Also included is the fair value of the option embedded in the Agere shares under the ESPP. |
The fair value of each stock option grant is estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions: |
Year Ended September 30, |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
2000 |
|||||||||||||||
WEIGHTED AVERAGE ASSUMPTIONS (Agere) | |||||||||||||||||
Dividend Yield | 0.00 | % | 0.00 | % | n/a | ||||||||||||
Expected volatility | 79.4 | % | 66.8 | % | n/a | ||||||||||||
Risk-free interest rate | 3.59 | % | 4.16 | % | n/a | ||||||||||||
Expected holding period (in years) | 3.1 | 2.4 | n/a | ||||||||||||||
WEIGHTED AVERAGE ASSUMPTIONS (Lucent) | |||||||||||||||||
Dividend Yield | n/a | 0.58 | % | 0.22 | % | ||||||||||||
Expected volatility | n/a | 59.0 | % | 39.2 | % | ||||||||||||
Risk-free interest rate | n/a | 5.0 | % | 6.2 | % | ||||||||||||
Expected holding period (in years) | n/a | 3.0 | 2.8 |
n/a - not applicable Presented below is a summary of the status of the Lucent stock options held by Company employees prior to the Distribution and the related transactions for the eight months ended May 31, 2002 and the years ended September 30, 2001 and 2000. Also presented below is a summary of the status of Agere stock options and related transactions for fiscal years 2002 and 2001. The Lucent stock option activity is not necessarily indicative of what the activity would have been had Agere been a separate stand-alone company during the periods presented, or what the activity may be in the future. |
Shares (000s) |
Weighted Average Exercise Price |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
LUCENT OPTIONS OUTSTANDING AT SEPTEMBER 30, 1999 | 15,324 | $ | 27.13 | |||||||||||
Granted or Assumed (1) | 32,505 | 32.65 | ||||||||||||
Exercised | (4,339 | ) | 8.02 | |||||||||||
Forfeited or Expired | (1,723 | ) | 40.29 | |||||||||||
LUCENT OPTIONS OUTSTANDING AT SEPTEMBER 30, 2000 | 41,767 | 32.87 | ||||||||||||
Avaya Inc. spin-off adjustments (2) | 306 | (.25 | ) | |||||||||||
LUCENT OPTIONS OUTSTANDING AT SEPTEMBER 30, 2000 | 42,073 | 32.62 | ||||||||||||
Granted or Assumed (1) | 9,526 | 17.30 | ||||||||||||
Exercised | (2,033 | ) | 2.46 | |||||||||||
Forfeited or Expired | (4,086 | ) | 36.89 | |||||||||||
LUCENT OPTIONS OUTSTANDING AT SEPTEMBER 30, 2001 | 45,480 | 32.59 | ||||||||||||
Granted | | n/a | ||||||||||||
Exercised | (1,890 | ) | 1.97 | |||||||||||
Forfeited or Expired | (5,368 | ) | 6.47 | |||||||||||
LUCENT OPTIONS OUTSTANDING AT MAY 31, 2002 | 38,222 | 33.33 | ||||||||||||
Agere spin-off adjustments (3) | 18,916 | (11.04 | ) | |||||||||||
AGERE OPTIONS SUBSTITUTED FOR LUCENT OPTIONS, OUTSTANDING AT JUNE 1, 2002 |
57,138 | $ | 22.29 | |||||||||||
AGERE OPTIONS OUTSTANDING AT SEPTEMBER 30, 2000 | | | ||||||||||||
Granted | 151,763 | $ | 5.81 | |||||||||||
Exercised | | | ||||||||||||
Forfeited or Expired | (9,013 | ) | 5.87 | |||||||||||
AGERE OPTIONS OUTSTANDNG AT SEPTEMBER 30, 2001 | 142,750 | 5.81 | ||||||||||||
Granted | 5,649 | 5.11 | ||||||||||||
Agere options substituted for Lucent options | 57,138 | 22.29 | ||||||||||||
Exercised | (41 | ) | 1.18 | |||||||||||
Forfeited or Expired | (32,050 | ) | 13.06 | |||||||||||
AGERE OPTIONS OUTSTANDING AT SEPTEMBER 30, 2002 | 173,446 | $ | 9.87 | |||||||||||
|
(1) | Includes options converted in acquisitions. |
(2) | Effective with the spin-off of Avaya Inc. on September 30, 2000, the number of Lucent shares covered by each outstanding option was adjusted and all exercise prices were decreased to preserve the economic values of the options that existed prior to the spin-off. |
(3) | Effective with the Distribution on June 1, 2002, the outstanding Lucent options were converted to Agere options. The number of Agere shares covered by substituted options was adjusted and all exercise prices were decreased immediately following the Distribution date to preserve the economic values of the options that existed prior to the Distribution. |
The weighted average fair value of the Agere stock options, and Lucent stock options held by Agere employees prior to the Distribution, was calculated using the Black-Scholes option-pricing model. The weighted average fair value of Agere stock options granted during fiscal 2002 and 2001 was $2.17 and $2.43 per share, respectively. The weighted average fair value of stock options granted by Lucent during fiscal 2001 and 2000 was $7.36 and $15.88 per share, respectively. The following table summarizes the status of Agere stock options outstanding at September 30, 2002: |
Stock Options Outstanding |
Stock Options Exercisable |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Range of Exercise Prices |
Shares (000s) |
Weighted Average Remaining Contractual Life (Years) |
Weighted Average Exercise Price |
Shares (000s) |
Weighted Average Exercise Price |
|||||||||||||||
$0.08 to $5.15 | 11,640 | 6.1 | $ | 3.19 | 5,236 | $ | 2.41 | |||||||||||||
$5.16 to $5.85 | 57,302 | 5.8 | 5.59 | 15,827 | 5.60 | |||||||||||||||
$5.86 to $6.00 | 63,053 | 5.4 | 6.00 | 24,558 | 6.00 | |||||||||||||||
$6.01 to $10.30 | 6,649 | 5.2 | 7.78 | 4,998 | 7.85 | |||||||||||||||
$10.31 to $15.45 | 10,575 | 6.2 | 12.09 | 7,108 | 12.17 | |||||||||||||||
$15.46 to $25.75 | 7,790 | 6.2 | 21.74 | 6,677 | 22.59 | |||||||||||||||
$25.76 to $36.00 | 4,663 | 7.1 | 32.84 | 2,931 | 32.53 | |||||||||||||||
$36.01 to $41.25 | 9,318 | 7.3 | 39.34 | 5,185 | 39.35 | |||||||||||||||
$41.26 to $51.56 | 2,456 | 7.1 | 44.00 | 747 | 43.42 | |||||||||||||||
Total | 173,446 | 5.8 | $ | 9.87 | 73,267 | $ | 11.70 | |||||||||||||
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, |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
2000 |
||||||||||||
Agere other stock unit awards granted (000s) | | 75 | n/a | |||||||||||
Weighted average market value of shares granted during the period | n/a | $ | 5.43 | n/a | ||||||||||
Lucent other stock unit awards granted (000s) (1) | | 500 | 4 | |||||||||||
Weighted average market value of shares granted during the period (1) | n/a | $ | 16.21 | $ | 64.91 |
|
(1) | Following the Distribution, the remaining 434 Lucent other stock unit awards were converted to 649 Agere other stock unit awards, with a weighted average market value at grant date of $11.73. |
17. Loss Per Common ShareBasic and diluted loss per common share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. As a result of the net loss reported for the years ended September 30, 2002 and 2001, 35,076,790 potential common shares related to the convertible notes have been excluded from the fiscal 2002 calculation of diluted loss per share and 2,229 potential common shares related to other stock units have been excluded from the fiscal 2001 calculation of diluted loss per share because their effect would be anti-dilutive. For fiscal 2002 and 2001, 173,446,189 and 142,750,376 outstanding stock options, respectively, were excluded from the computation of loss per share because their effect would be anti-dilutive. 18. Benefit ObligationsThe Company has pension plans covering substantially all of it employees. Retirement benefits are based on a career average or flat dollar formula. A cash balance plan covers certain employees of companies acquired since 1996 and management employees hired after January 1, 1999. Participants in the cash balance plan are not entitled to benefits under the postretirement benefit plan. Prior to the Distribution, most of the Companys management and occupational employees participated in Lucents pension and postretirement plans. Effective June 1, 2002, the Company assumed responsibility for all pension and postretirement benefits covering active employees of the Company, as well as employees who retired or terminated subsequent to the IPO. During June 2002, Lucent transferred to the Company the pension and postretirement assets and obligations related to these employees based on then available census data. This census data is subject to revisions that may result in transfers of assets to or from the Lucent plans. The Company anticipates finalizing the amounts to be transferred by no later than June 2003. Obligations related to retired and terminated vested employees prior to the IPO are the responsibility of Lucent. Lucent managed its employee benefit plans on a consolidated basis and separate Company information is not available for the periods prior to June 1, 2002. The consolidated and combined statements of operations include an allocation of the costs (credits) of the employee pension and postretirement plans. These costs (credits) were allocated based on the Companys active employee population for each period presented prior to June 1, 2002. Net periodic benefit cost (credit) allocated from Lucent for the respective plans are as follows: |
Year Ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
2000 |
|||||||||
Net periodic benefit cost (credit) | |||||||||||
Pension benefits | $ | | $ | (2 | ) | $ | 27 | ||||
Postretirement benefits | 7 | 10 | 15 |
Net periodic benefit cost (credit) from the beginning of June 2002, when the pension and postretirement assets and obligations were transferred from Lucent, includes the following components: |
Pension Benefits |
Postretirement Benefits | |||||||
---|---|---|---|---|---|---|---|---|
Service cost | $ 12 | $ 1 | ||||||
Interest cost | 23 | 5 | ||||||
Expected return on plan assets | (41 | ) | (4 | ) | ||||
Amortization of prior service cost | 2 | | ||||||
Recognized net actuarial gain | (2 | ) | | |||||
Transition asset | (1 | ) | | |||||
Special termination benefits | 165 | 5 | ||||||
Curtailment charges | 16 | 27 | ||||||
Net periodic benefit cost (credit) | $ 174 | $ 34 | ||||||
The following table sets forth the combined status of the plans as recognized in the consolidated balance sheets at September 30, 2002: |
Pension Benefits |
Postretirement Benefits | |||||||
---|---|---|---|---|---|---|---|---|
Change in benefit obligation | ||||||||
Obligation transferred from Lucent in June 2002 | $ | 996 | $ | 217 | ||||
Service cost | 12 | 1 | ||||||
Interest cost | 23 | 5 | ||||||
Actuarial loss | 36 | 26 | ||||||
Benefits paid | (39 | ) | (3 | ) | ||||
Special termination benefits | 165 | 5 | ||||||
Curtailment charges | 5 | 27 | ||||||
Benefit obligation at September 30, 2002 | $ | 1,198 | $ | 278 | ||||
Change in plan assets | ||||||||
Fair value of plan assets transferred from Lucent in June 2002 | $ | 1,244 | $ | 97 | ||||
Actual loss on plan assets | (195 | ) | (20 | ) | ||||
Employer contributions | | 1 | ||||||
Benefits paid | (39 | ) | (3 | ) | ||||
Fair value of plan assets at September 30, 2002 | $ | 1,010 | $ | 75 | ||||
Funded status of the plan | $ | (188 | ) | $ | (203 | ) | ||
Unrecognized net actuarial loss | 213 | 80 | ||||||
Unrecognized prior service cost | 11 | 1 | ||||||
Net amount recognized | $ | 36 | $ | (122 | ) | |||
The special termination benefits are separation payments made to employees and are included in restructuring and other charges net. The curtailment charges reflect an increase in the liabilities on the plans as employees are retiring sooner than what was originally anticipated, primarily due to the restructuring activities. Amounts recognized in the consolidated balance sheet consist of: |
Pension Benefits |
Postretirement Benefits | |||||||
---|---|---|---|---|---|---|---|---|
Accrued benefit liability | $ | (145 | ) | $ | (122 | ) | ||
Intangible asset | 11 | | ||||||
Accumulated other comprehensive income | 170 | | ||||||
Net amount recognized | $ | 36 | $ | (122 | ) | |||
Actuarial assumptions used to determine costs and benefit obligations for the principal pension plans and the postretirement benefit obligations were as follow: |
June 1, 2002 |
September 30, 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Pension Benefits |
Postretirement Benefits |
Pension Benefits |
Postretirement Benefits | |||||||||||
Weighted average assumptions: | ||||||||||||||
Discount rate | 7.0 | % | 7.0 | % | 6.75 | % | 6.75 | % | ||||||
Expected return on plan assets | 9.0 | % | 9.0 | % | 8.0 | % | 8.0 | % | ||||||
Rate of compensation increase | 4.5 | % | | 4.0 | % | |
For fiscal 2002, the assumed health care cost trend rates are 10.0% for participants under age 65 and 11.1% for participants age 65 or older. For dental care, for all ages, the trend rate is 3.8%. The health care and dental care cost trend rates for participants under age 65 is assumed to decrease gradually to 5% and 3.5% respectively, in the year 2006. A one percent annual change in the assumed cost trend rate would have a minimal effect on the total service and interest cost components and on the postretirement benefit obligation. Savings PlansThe Company established savings plans for its employees effective January 1, 2002. The majority of the Companys employees are eligible to participate in these plans. Prior to January 1, 2002, the employees participated in similar 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. The Company matches a percentage of employee contributions up to certain limits. The Companys contribution to the savings plans was $17 in fiscal 2002. The Companys contribution related to the Lucent plans was $25 and $21 in fiscal 2001 and 2000, respectively. Effective April 1, 2002, the Company began funding the employer match for U.S. employees with newly issued Class A common stock. Through September 30, 2002, 3,130,588 shares had been issued to the savings plan to fund the employer match. 19. Operating SegmentsEffective October 1, 2001, the Company realigned its business operations into two market-focused groups, Client Systems and Infrastructure Systems, that target the consumer communications and network equipment markets respectively. These two groups comprise the Companys reportable operating segments. The segments each include revenue from the licensing of intellectual property assigned to that segment. There were no intersegment sales. The Client Systems segment delivers integrated circuit solutions for a variety of end-user applications such as hard disk drives and modems for computers, Internet-enabled cellular terminals, and wireless local area networking. The segment is comprised of the remainder of the former Integrated Circuits segment. The Infrastructure Systems segment delivers solutions to the high-speed communications systems market. The segment is comprised of the former Optoelectronics segment and portions of the former Integrated Circuits segment. On August 14, 2002, the Company announced that it will exit its optoelectronics business. See Note 6 Exit of Optoelectronics Business. Each segment is managed separately. Disclosure of segment information is on the same basis used internally for evaluating segment performance and allocating resources. Performance measurement and resource allocation for the segments are based on many factors. The primary financial measure used is operating income (loss), exclusive of amortization of goodwill and other acquired intangibles, IPRD, restructuring and other charges net, the impairment of goodwill and other acquired intangibles, and (gain) loss on the sale of operating assets net. The Company does not identify or allocate assets by operating segment. In addition, the Company does not allocate interest income or expense, other income or expense, or income taxes to the segments. Management does not evaluate segments based on these criteria. The Company has centralized corporate functions and uses shared service arrangements to realize economies of scale and efficient use of resources. The costs of shared services, and other corporate center operations managed on a common basis, are allocated to the segments based on usage or other factors based on the nature of the activity. Reportable Segments |
Year Ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
2000 |
|||||||||
Revenue | |||||||||||
Client Systems | $ | 1,259 | $ | 1,406 | $ | 1,649 | |||||
Infrastructure Systems | 918 | 2,674 | 3,059 | ||||||||
Total | $ | 2,177 | $ | 4,080 | $ | 4,708 | |||||
Operating income (loss) (excluding amortization of goodwill and other acquired intangibles, IPRD, restructuring and other charges net, impairment of goodwill and other acquired intangibles, and (gain) loss on the sale of operating assets net) | |||||||||||
Client Systems | $ | (64 | ) | $ | (175 | ) | $ | 133 | |||
Infrastructure Systems | (719 | ) | (377 | ) | 658 | ||||||
Total | $ | (783 | ) | $ | (552 | ) | $ | 791 | |||
Reconciling ItemsA reconciliation of the totals reported for the operating segments to the significant line items in the financial statements is shown below. |
Year Ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
2000 |
|||||||||
Reportable segment operating income (loss) | $ | (783 | ) | $ | (552 | ) | $ | 791 | |||
Less: | |||||||||||
Amortization of goodwill and other acquired intangibles | 59 | 415 |