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<SEC-DOCUMENT>0000912057-01-544556.txt : 20020413
<SEC-HEADER>0000912057-01-544556.hdr.sgml : 20020413
ACCESSION NUMBER: 0000912057-01-544556
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 20010930
FILED AS OF DATE: 20011226
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AVAYA INC
CENTRAL INDEX KEY: 0001116521
STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661]
IRS NUMBER: 223713430
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-15951
FILM NUMBER: 1822431
BUSINESS ADDRESS:
STREET 1: 211 MOUNT AIRY RD
CITY: BASKING RIDGE
STATE: NJ
ZIP: 07920
BUSINESS PHONE: 9089536000
MAIL ADDRESS:
STREET 1: 211 MOUNT AIRY ROAD
CITY: BASKING RIDGE
STATE: NJ
ZIP: 07920
FORMER COMPANY:
FORMER CONFORMED NAME: LUCENT EN CORP
DATE OF NAME CHANGE: 20000612
</SEC-HEADER>
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<TYPE>10-K405
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<FILENAME>a2066518z10-k405.txt
<DESCRIPTION>10-K405
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-15951
AVAYA INC.
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<S> <C>
A DELAWARE I.R.S. EMPLOYER
CORPORATION NO. 22-3713430
211 MOUNT AIRY ROAD, BASKING RIDGE, NEW JERSEY 07920
TELEPHONE NUMBER 908-953-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
Common Stock, par value $0.01 per share New York Stock Exchange
Series A Junior Participating Preferred Stock New York Stock Exchange
Purchase Rights New York Stock Exchange
Liquid Yield Option-TM- Notes due 2021
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
</Table>
------------------------
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. Yes /X/ 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 registrant's 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. /X/
At November 30, 2001, the aggregate market value of the voting common equity
held by non-affiliates was approximately $3.3 billion.
At November 30, 2001, 287,347,940 common shares were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
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<S> <C>
Portions of the 2001 Annual Report to Shareholders.......... Parts I, II and IV
Portions of the Proxy Statement for the 2002 Annual Meeting
of Shareholders........................................... Part III
</Table>
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TABLE OF CONTENTS
<Table>
<Caption>
ITEM DESCRIPTION PAGE
- ---- ----------- --------
<C> <S> <C>
PART I
1. Business.................................................... 4
2. Properties.................................................. 24
3. Legal Proceedings........................................... 24
4. Submission of Matters to a Vote of Security-Holders......... 25
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 26
6. Selected Financial Data..................................... 26
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 26
7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 26
8. Financial Statements and Supplementary Data................. 26
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 26
PART III
10. Directors and Executive Officers of the Registrant.......... 26
11. Executive Compensation...................................... 27
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 27
13. Certain Relationships and Related Transactions.............. 28
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 28
</Table>
This Annual Report on Form 10-K contains trademarks, service marks and
registered marks of Avaya and its subsidiaries and other companies, as
indicated. Unless otherwise provided in this Annual Report on Form 10-K,
trademarks identified by -Registered Trademark- and -TM- are registered
trademarks or trademarks, respectively, of Avaya Inc. or its subsidiaries. All
other trademarks are the properties of their respective owners. Liquid Yield
Option-TM- Notes is a trademark of Merrill, Lynch & Co., Inc.
Microsoft-Registered Trademark- is a registered trademark of Microsoft
Corporation. Lotus Notes-Registered Trademark- is a registered trademark of
Lotus Development Corporation and/or IBM Corporation.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Avaya Inc. is a leading provider of communications systems and software for
enterprises, including businesses, government agencies and other organizations.
We offer voice, converged voice and data, customer relationship management,
messaging, multi-service networking and structured cabling products and
services. Multi-service networking products are those products that support
network infrastructures which carry voice, video and data traffic over any of
the protocols, or set of procedures, supported by the Internet on local area and
wide area data networks. A structured cabling system is a flexible cabling
system designed to connect phones, workstations, personal computers, local area
networks and other communications devices through a building or across one or
more campuses. We are a worldwide leader in sales of messaging and structured
cabling systems and a U.S. leader in sales of enterprise voice communications
and call center systems. We are not a leader in multi-service networking
products and our product portfolio in this area is less complete than the
portfolios of some of our competitors. In addition, we are not a leader in sales
of certain converged voice and data products, including server-based Internet
Protocol telephony systems. We are implementing a strategy focused on these and
other advanced communications solutions.
We support our customers with comprehensive global service offerings,
including remote diagnostics testing of our advanced systems, installation of
our products, on-site repair and maintenance. We believe our global service
organization is an important consideration for customers purchasing our systems
and software and is a source of significant revenue for us, primarily from
maintenance contracts. We also offer professional services for customer
relationship management, converged voice and data networks and unified
communications and value-added services for the outsourcing of messaging and
other portions of an enterprise's communications system.
The following are the three core components of our strategy:
- Revenue growth--increase our revenue growth by focusing our sales and
product development efforts on the higher growth segments of our markets;
- Restructuring--restructure our business to reduce expenses and improve
efficiency; and
- Reinvestment--reinvest in research and development to develop new systems
and solutions to augment our current product and solution offerings.
As part of our strategy to increase revenue growth, we intend to use our
leadership positions in enterprise communications systems and software, our
broad portfolio of products and services and strategic alliances with other
technology and consulting services leaders to offer our broad customer base
comprehensive advanced communications solutions. Our advanced communications
solutions include converged voice and data networks, customer relationship
management solutions, unified communication applications and multi-service
networking products. Our strategy to increase revenue growth also includes a
focus on increasing international sales through alliances and our network of
distributors. In addition, we believe strengthening our network of distributors
in the United States and internationally will better serve the needs of our
small- and mid-sized customers, resulting in increased revenue growth.
In connection with our spin-off from Lucent Technologies Inc., or Lucent, in
September 2000, we engaged in a comprehensive review of our operations with a
view toward improving our profitability and our business performance in the near
term. As a result of this review, we adopted a restructuring plan designed to be
implemented completely by the end of fiscal 2003. During fiscal 2001, we
accelerated the restructuring plan with a goal of completing the implementation
of the plan by the end of fiscal 2002. The primary features of our restructuring
plan include outsourcing the manufacturing of
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substantially all of our products, consolidation of our real estate holdings and
restructuring of our workforce in order to more effectively address the needs of
our business. Some of the highlights of the implementation of our restructuring
plan in fiscal 2001 are as follows:
- we outsourced the manufacture of substantially all of our communications
systems and software to Celestica Inc. under a five-year strategic
manufacturing agreement;
- we reduced our real estate holdings since September 30, 2000 by
approximately 1.6 million square feet, or 11.3%, primarily as a result of
our outsourcing transaction and consolidation of leased properties; and
- we reduced the size of our workforce from 31,000 employees as of
September 30, 2000 to 23,000 employees as of September 30, 2001, primarily
as a result of the outsourcing transaction with Celestica and a
combination of involuntary and voluntary separations, including an early
retirement program targeted at U.S. management employees.
We increased research and development expenses by 14.5% in fiscal 2001, or,
as a percentage of revenue, from 6.1% in fiscal 2000 to 7.9% in fiscal 2001, as
part of our initiative to increase research and development spending. As a part
of Lucent, we were allocated a portion of Lucent's basic research, which did not
necessarily directly benefit our business. Our current and future investments in
research and development will have a greater focus on our products.
We were incorporated under the laws of the State of Delaware under the name
"Lucent EN Corp." on February 16, 2000, as a wholly owned subsidiary of Lucent.
As of June 27, 2000, our name was changed to "Avaya Inc." On September 30, 2000,
Lucent contributed its enterprise networking business to us and distributed all
of the outstanding shares of our capital stock to its shareowners. We refer to
these transactions respectively in this Annual Report on Form 10-K as the
"contribution" and the "distribution." Prior to the contribution and the
distribution, we had no material assets or activities as a separate corporate
entity. Following the distribution, we became an independent public company, and
Lucent has no continuing stock ownership interest in us.
PRODUCT AND SOLUTION OFFERINGS
We offer a broad array of communications systems, solutions and services
that enable enterprises to communicate with their customers, suppliers, partners
and employees through voice, Web, electronic mail, facsimile, Web chat sessions
and other forms of communication, across an array of devices. These devices
include telephones, computers, mobile phones and personal digital assistants. We
classify these products and services as Converged Voice and Data Networks,
Customer Relationship Management, Unified Communication, Multi-service
Networking and Connectivity Solutions. Converged Voice and Data Networks,
Customer Relationship Management, Unified Communication and Multi-Service
Networking and product installation services comprise our Communications
Solutions segment. In addition, our Services segment is comprised of our
maintenance, value-added and data services offerings. Please see Note 15 to our
Consolidated Financial Statements for the year ended September 30, 2001, which
is incorporated by reference from our 2001 Annual Report to Shareholders, for
financial information regarding our segments.
Our broad portfolio of products includes products we have developed
internally, products we have obtained through acquisitions, products we resell
that are manufactured by third parties and products we have developed through
our strategic alliances with other technology leaders. Our products range from
systems designed for multinational enterprises with multiple locations
worldwide, thousands of employees and advanced communications requirements to
systems designed for enterprises with a regional or local presence, a single
location, and less extensive communications requirements.
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COMMUNICATIONS SOLUTIONS SEGMENT
CONVERGED VOICE AND DATA NETWORKS. Our Converged Voice and Data Networks
solutions include our traditional enterprise voice communications systems and
our IP telephony offerings. Internet Protocol, or IP, is a type of protocol, or
set of procedures, for the formatting and timing of data transmission between
two pieces of equipment. Converged networks generally provide for the
integration of voice, data, video and other traffic, including wireless, over a
single unified network. Through our converged network offering, we can offer our
customers a new server-based IP telephony system, or IP PBX, or we can
"IP-enable" their existing voice communications system. We are not a leader in
sales of IP PBXs.
We are a U.S. leader in sales of enterprise voice communications systems,
our core voice communications products. We offer a broad range of systems to
satisfy the communications needs of a diverse group of enterprises. We offer
systems designed for under five users, as well as systems that can be networked
to accommodate an almost unlimited number of users. Our systems are generally
designed to allow an enterprise to add or remove users and have optional
features, including over 450 in our most advanced systems, available to enable
an enterprise to activate additional features as its communications requirements
change.
Our most advanced enterprise voice communications system is our
DEFINITY-Registered Trademark- Enterprise Communications Server, which is
offered in a variety of configurations in approximately 90 countries. Our
DEFINITY product line is a family of products that provides for a reliable
network for voice communication which offers integration with an enterprise's
data network. Our DEFINITY servers support a variety of voice and data
applications such as call and customer contact centers, messaging and
interactive voice response, or IVR, systems. IVR systems allow an individual to
access information in the enterprise's computer databases or conduct
transactions by voice or using a touch-tone telephone. Our DEFINITY servers
support open and standard interfaces for computer telephony integration
applications, which are advanced applications that assist in the making,
receiving and managing of telephone calls. Our DEFINITY servers facilitate the
ongoing transition at many enterprises from private voice telephone systems to
advanced systems that integrate voice and data traffic and deploy increasingly
sophisticated communications applications.
Primarily in Europe, Australia and Japan, we offer two other advanced
systems, the Avaya INDeX-TM- and Avaya Alchemy-TM- product lines, which are
targeted to small- to mid-sized enterprises. These systems are price sensitive
offerings and provide a variety of integrated voice and data applications. In
addition to our advanced systems, we offer two primary voice communications
systems, our Merlin Magix-Registered Trademark- and
Partner-Registered Trademark- product lines, targeted at small- and mid-sized
enterprises with less extensive to moderately sophisticated communications
requirements.
We offer a family of our most advanced converged telephony solutions under
the name Enterprise Class Internet Protocol Solutions, or ECLIPS. Products
comprising the ECLIPS family of solutions include the Avaya IP600 Internet
Protocol Communication Server, the Avaya-TM- R300 Remote Office Communicator,
the Avaya-TM-DEFINITY-Registered Trademark- IP Solutions software, our IP
Telephones and IP Softphone. The ECLIPS family of solutions:
- offers our customers the ability to integrate voice, email and fax
communications using the full range of Avaya solutions and applications
and industry solutions over their converged voice and data networks;
- offers a choice of IP enhancement to a customer's traditional private
branch exchange, or PBX, giving the customer the choice of upgrading its
existing equipment for IP communication or installing an IP PBX on local
and wide area networks and using it for voice as well as data
communication without sacrificing feature functionality;
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- offers enhancements to the range of economically possible solutions and
applications by supporting remote workers with applications such as call
centers, networked voice mail, and unified messaging;
- increases reliability and availability by alternatively routing calls over
the public switched telephone network or the customer's IP wide area
network based on the availability and the performance of each connection;
and
- supports open standard interfaces, facilitating interoperability among
systems from different vendors.
CUSTOMER RELATIONSHIP MANAGEMENT. Avaya CRM offers products that are
essential components of many customer relationship management solutions,
including:
- call and customer contact center systems;
- customer self-service applications, including the integration of voice
communications;
- Web collaboration;
- electronic mail response management;
- Web chat; and
- workflow and business process automation products.
Our core customer relationship management, or CRM, product offerings are
software and hardware systems and software applications for customer contact
centers (including call centers) that are the foundation of many CRM solutions.
We use the term contact center to refer to traditional call centers, which
primarily manage an enterprise's interactions with customers via the telephone,
and to contact centers that allow customers to interact with an enterprise using
multiple mediums of communication, including electronic mail, access from a Web
site, chat rooms, IVR systems, telephone calls and facsimiles. We are a U.S.
leader in sales of call center systems. Our strategy is to leverage this
leadership position to market a broader suite of CRM solutions.
We offer a number of products that can be used either as part of a customer
contact center or on a stand-alone basis. Our customer self-service products
include IVR systems and Web-based self-service applications. We also offer our
workflow and business process automation applications separately from our
customer contact center solutions to perform functions such as order processing,
billing, document processing and accounts payable integration.
In April 2001, we enhanced our CRM offering through the acquisition of
substantially all the assets of Quintus Corporation. Among the assets acquired
was the eContact-TM- multi-vendor, multi-platform comprehensive software suite
that unites traditional call center technology with Web-based communications. We
also announced at that time that we would be focusing our CRM solutions
portfolio in the following areas:
- Interaction Management--providing solutions for real time customer
interactions, self-service options, and outbound contact management with
customers;
- Commitment Management--providing solutions for implementing dynamic,
measurable business processes throughout the enterprise, enabling improved
customer experience and resource effectiveness; and
- Business Intelligence--providing customer experience analysis solutions
for a variety of media channels, customer transactions and enterprise
decision-making.
Avaya CRM is supported by a professional services team of consultants who
are dedicated to assisting enterprises in improving their customer relationship
management, technology and execution.
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Our services range from designing and implementing an enterprise's customer
relationship management technology strategy to setting up and integrating
software applications that an enterprise purchases from us as part of its
customer contact center. Our consultants also work with our sales force in
selling our customer relationship management products. Typically, a customer
that purchases our customer relationship management products purchases
consulting services from us. We also provide subject matter advice to systems
integrators as part of an overall customer relationship management strategy, as
well as to provide guidance to achieve the integration of multi-vendor
solutions.
UNIFIED COMMUNICATION. We define Unified Communication as a family of
solutions that allow individuals to collaborate and communicate more effectively
and to move more quickly in a networked infrastructure. Our Unified
Communication solutions include our messaging and unified messaging products,
our IP-based personal communications portal and other multimedia collaboration
tools. Unified messaging is an advanced messaging solution that delivers the
convenience and benefits of combining the storage of more than one type of
message, including voice, facsimile and electronic mail.
We offer a wide variety of voice messaging and unified messaging solutions
designed to serve the telephone call answering, voice, facsimile and unified
messaging communications needs of enterprises. Unified messaging facilitates
access to messages through the most convenient device, including Internet
browsers, LAN-based personal computers and wireline or wireless telephones,
using text-to-speech technology for telephonic e-mail retrieval. These products
are marketed under a number of brands, including our primary brands,
Octel-Registered Trademark- Messaging and INTUITY-TM-
AUDIX-Registered Trademark- Messaging. The ease and speed of our voice and
facsimile messaging can improve an enterprise's efficiency by allowing messages
to be sent instantly to teams, groups or an entire workforce across multiple
locations. All of our messaging servers can be networked, over the Internet or
public or private voice networks, to provide enterprise-wide voice and facsimile
messaging through a single system.
We are the worldwide leader in sales of voice messaging systems. These
systems are configured either as stand-alone servers or as embedded software or
hardware in communications servers. Many of our messaging systems are compatible
with the voice communications systems of other vendors so that an enterprise may
choose our messaging system as the standard for all its locations.
Our unified messaging capability, which accommodates voice, facsimile and
electronic mail messages, is available for our Octel Messaging and INTUITY AUDIX
systems and is also provided by our innovative Avaya Unified
Messenger-Registered Trademark- system for Microsoft-Registered Trademark-
Exchange, developed in cooperation with Microsoft Corporation. The Avaya Unified
Messenger system is a unified messaging system software solution that stores
voice and facsimile messages directly in a user's Microsoft Exchange electronic
mailbox and enables user access to this mailbox by telephone or fax machine or a
Microsoft Exchange interface on the user's personal computer. In
September 2001, we announced an agreement with International Business Machines
Corporation to develop jointly a unified messaging solution for their Lotus
Notes-Registered Trademark- platform. This solution will provide Lotus Notes
users with a single user interface and mailbox for both email and voice mail
messages. We anticipate this solution will available by the end of fiscal 2002.
We offer unified communication solutions that use the advantages of the
Internet Protocol operating on the Internet, wireless networks and telephone
networks. Our suite of unified communication applications enables a personal
communications portal for enterprise employees and is intended to work with new
applications for scheduling meetings with others, filtering incoming calls,
organizing, scheduling and routing incoming calls and messages, scheduling and
conducting voice conferencing with others, and conducting advanced multimedia
business collaboration and content sharing. Our solutions are intended for use
on standard enterprise servers.
We also provide audio, video and data conferencing systems for enterprises
of varying sizes. These products enable customers to conduct multimedia
communication sessions with a geographically dispersed workforce or across
company boundaries. Through partners and internal development, we
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offer our customers a broad portfolio of multimedia collaboration solutions
backed by the full support capability of our nationwide services organization.
We provide professional services to ensure successful integration of our
Unified Communication products and applications into our customers' specific
business environments. Typically, a customer that purchases our communications
servers and applications requires assistance with their integration and
implementation. Since enterprises are increasingly looking to outsource their
integration needs, we believe that our ability to provide these services is an
important consideration in selecting our communications applications. In
addition to our geographically deployed services employees, we also have
alliances with systems integrators that are trained to implement our
applications. We provide presales support as well as design and implementation
for our messaging systems solutions. These products include the Octel Messaging
and INTUITY AUDIX systems. In connection with these systems, we implement
messaging-based applications that run on stand-alone servers as well as
applications that are embedded software. These solutions include unified
messaging, Internet access to voice mail, and enhanced business applications.
MULTI-SERVICE NETWORKING. We offer a portfolio of products to support
multi-service network infrastructures that carry voice, video and data traffic
over any of the protocols supported by the Internet on local area, wide area and
wireless networks including gigabit Ethernet, which facilitates the integration
of the enterprise network, the service provider network and next generation
switching systems such as optical networking. We are not a leader in
multi-service networking products and our product portfolio in this area is less
complete than the portfolios of some of our competitors. We are implementing a
strategy focused on these and other advanced communications products. Our Multi-
service Networking product offerings include switches, virtual private networks
and policy management software.
Our Avaya Cajun-TM- family of switches supports voice, video and data
traffic over a local area network, or LAN. Each switch is designed for
interoperability with the hardware of numerous other vendors and is comprised of
hardware and software that enable the switch to perform configuration, fault
management and traffic prioritization functions. Configuration is the adding,
deleting and modifying of connections and supported addresses within a network.
Fault management is the detection and correction of network faults.
Prioritization is the capability to consider the nature of the requirements of
various transmissions to determine the relative order and priority of dealing
with several different types of transmissions.
Our Avaya Cajun family of switches also supports additional advanced
applications, such as our switch monitoring, known as SMON, the industry
standard network monitoring software for switched network infrastructures, which
was developed by Lucent. SMON is an open standard application that allows
simultaneous real time monitoring of traffic across multiple switches in a
network. As an analytical tool, SMON enables network managers to review global
traffic across an entire network as well as individual connectivity between two
users.
Our Avaya WirelessLan products provide the ability to operate both indoors
and outdoors, scale from small to large installations, and provide traffic
prioritization. These products enable wireless LAN connectivity across
facilities such as retail stores, warehouses, schools, universities and
hospitals where wiring is costly and difficult to install and clients demand
mobility or flexibility.
We offer wide area network solutions, including virtual private networks, or
VPNs, and firewall products for enterprises. A virtual private network allows an
enterprise to transport voice, video or data over a public or shared network at
a level of security substantially equivalent to the traffic traveling over that
enterprise's own private network. This increased level of security is
accomplished through encryption and encapsulation of this voice, video or data
traffic into a format that is protected from unauthorized access. Our VPN
offering was enhanced by our acquisition of VPNet Technologies, Inc. in
February 2001. Our wide area network access products are sold to many types of
enterprises and are
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designed to meet varying access needs. Our virtual private network routers are
used primarily by enterprises with remote workers and branch or home offices,
and by enterprises using Internet wide area network service. In addition, we
offer firewall hardware and software that function as a security mechanism to
limit the exposure of a network to unauthorized infiltration. The firewall
regulates internal and external network resources and filters network content.
Our firewall products have been designed to meet the testing standards of the
U.S. federal government and allow for a single administrator to manage multiple
firewalls for an entire network from a single location.
We offer automated policy management software called CajunRules-TM-.
CajunRules allows network managers to define, manage and enforce policies which
establish priorities and levels of security for network traffic, based on
parameters such as traffic type, application or user identification. Examples
include a policy that gives voice traffic priority over data traffic in a
network, a policy which gives finance applications priority at the end of a
reporting period, a policy that gives bandwidth priorities to designated users,
such as senior management, or policies that restrict access to sensitive
applications, such as human resources applications, to only authorized users.
Our policy management software products are designed to allow a single
administrator to set policies for all users and locations from a central
location.
AVAYA HOSTED SOLUTIONS. Avaya Hosted Solutions offer communications
solutions for enterprises that wish to outsource their communications solutions
through specialized service providers. By providing hosted and managed customer
premises and service provider equipment solutions, Avaya offers an alternative
network-based communications solution for enterprises who wish to enhance the
effectiveness of their remote operations and increase their focus on core
competencies. These are flexible solutions that are available on demand and
scalable. Our hosted solutions were introduced in fiscal 2001 and are still in
the early stages of development.
Please see "--Services Segment--Customer Service, Installation and
Maintenance" for a description of the installation services we provide for our
Communications Solutions products.
CONNECTIVITY SOLUTIONS SEGMENT
We market our SYSTIMAX-Registered Trademark- SCS product line of structured
cabling systems primarily to enterprises of various sizes for wiring phones,
workstations, personal computers, local area networks and other communications
devices through their buildings or across their campuses and our
ExchangeMAX-Registered Trademark- product line primarily to central offices of
service providers, such as telephone companies or Internet service providers. We
also offer electronic cabinets to enclose an enterprise's electronic devices and
equipment.
SYSTIMAX STRUCTURED CABLING SYSTEMS. We are the worldwide leader in sales
of structured cabling systems to enterprises. We primarily market these products
under the brand name SYSTIMAX. Our SYSTIMAX cabling systems provide high-speed
multifunctional local area network interconnections within a single building or
a campus through an infrastructure of copper or fiber cabling and associated
connecting apparatus. The SYSTIMAX copper and fiber apparatus portfolio includes
a broad line of distribution boxes, interconnects, shelves, racks, connectors
and outlets necessary to connect and manage large building infrastructure
networks.
EXCHANGEMAX STRUCTURED CABLING SYSTEM. We sell our ExchangeMAX structured
cabling systems primarily to central offices of service providers such as
telephone companies or Internet service providers. Central offices are locations
that house switches to serve the subscribers of a service provider. Our
ExchangeMAX system combines our family of high quality central office
connectivity products with an overall system architecture to support the copper
and fiber cable distribution networks of a central office. Our products include
copper distributing frames, copper cable, connectors, patchcords and cable
management software. The ExchangeMAX product line is engineered to meet the
site-specific needs of our customers, and may be utilized either to address the
discreet maintenance and upgrading needs of a central office or to serve as the
foundation of a central office's comprehensive wire center modernization.
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ELECTRONIC CABINETS. An electronic cabinet is a sturdy environmental
enclosure designed to house electronics devices and passive equipment, both in
the outside plant and inside buildings. The product line consists of enclosures
designed for traditional telecommunication access applications, digital
subscriber line, or DSL, applications and wireless applications.
SERVICES SEGMENT
CUSTOMER SERVICE, INSTALLATION AND MAINTENANCE. We have customer service,
installation and maintenance organizations in the United States and
internationally. Our service organization is designed to provide a comprehensive
set of services in support of direct sales and indirect sales through
distributors. The purchase prices of our products typically include installation
costs, which are included in the Communications Solutions segment. Most of our
products, other than our Connectivity Solutions products, have a one-year
warranty. For additional service, our customers can elect to enter into
maintenance contracts with us or, if they do not choose to enter into such
contracts, may have us provide service for them on a time and materials basis.
Our U.S. service organization is comprised of our Field Services
Organization, our National Customer Care Centers and our Technical Services
Organization. Some of these employees are now working on an on-call basis as
described under "Employees." Installation and repair of our products are
performed primarily by our Field Services Organization. Account support in the
United States is conducted primarily through our National Customer Care Centers.
Our Technical Services and Field Services Organizations provide technical
support and maintenance under contracts for our voice communications products.
Our international service organization is comprised of our Field Services
Organizations, a Global Support Organization and a Customer Support Center which
collectively provide installation, maintenance and customer service support. We
have our own Field Services Organizations in 21 countries. Our Field Services
Organizations currently provide installation, on-site and remote maintenance,
and some training for our voice and data products. These organizations primarily
support customers that have purchased from us directly. In those countries in
which we have no direct services presence, customers of our products rely on
local distributors that have been trained and certified by us. Our Field
Services Organizations supplement their engineer and technician resource
requirements via the use of sub-contractors on an as needed basis for responsive
service levels and broad geographic coverage. Similar to our U.S. Technical
Services Organization, our Global Support Organization is a network of support
centers that provide remote technical and engineering support to the Field
Services Organizations, distributors and resellers and select multi-national
customers with multi-national maintenance agreements.
We have established international Customer Care Centers in our Europe,
Middle East, Asia Pacific and Africa regions. The level of customer service
provided at our Customer Care Centers includes servicing requests received via
telephone, facsimile and electronic mail, receipt of product orders, order
fulfillment and tracking, contract management and administration, contract
entitlement verification, invoicing, billing and collection.
VALUE-ADDED SERVICES. Our value-added services are outsourcing services we
provide to both enterprises and to communications service providers, such as
local exchange carriers, or telephone companies, or Internet service providers,
worldwide to operate and maintain a portion of their communications systems.
Our enterprise customers that use our value-added services are generally
large and mid-sized businesses. For enterprise customers, we provide outsourcing
of messaging systems, portions of voice communications systems and contact
centers. We offer these customers a full range of maintenance, management and
support services. We provide either managed services where the customer owns the
communications system or outsourcing services where we both manage and own the
communications
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system. Our services include fault management, including maintenance and help
desk support; remote provisioning and administration, such as establishment of
voice mail boxes; remote monitoring; and recording, reporting and billing. For
service providers, we primarily outsource the operation of their messaging
systems. We outsource messaging systems for established service providers,
emerging service providers and other competitive local exchange carriers.
Currently, we derive the majority of our revenue in value-added services from
customers in the U.S.
We contract with our clients to provide these services, in varying levels,
under agreements that require us to meet service level requirements that vary
from agreement to agreement. Fee arrangements vary by contract, but are
generally made on a per unit or per subscriber basis. These agreements typically
have terms ranging from five to seven years with varying termination provisions.
DATA SERVICES. Our data services solutions include implementation,
installation, maintenance and management of an enterprise's data network. From
our network management center we can remotely manage and monitor an enterprise's
network to limit network downtime and maximize network efficiency. Our staff is
certified to maintain products from a wide variety of industry vendors, allowing
us to extend our expertise beyond Avaya products to offer a complete solution.
Similar to our value-added services, these services also include monitoring and
fault management, configuration management, and performance management. If a
problem cannot be resolved remotely, we dispatch a field service technician to
the customer site for on-site resolution.
In addition, in fiscal 2001 we established, and are continuing to build the
capabilities of, our professional services team for Converged Voice & Data
Networks, which will offer a focused portfolio of consulting and engineering
offers addressing the planning and design phases of a converged network life
cycle. These services are designed to facilitate the integration of an
enterprise's existing network with new converged voice and data systems that
enable the rapid deployment of IP-based communications applications. We have
begun to offer these services only recently and the revenues generated from
these services represent only a small portion of the revenues from our Services
segment.
CUSTOMERS, SALES AND DISTRIBUTION
CUSTOMERS
Our customers include a broad set of enterprises ranging from large,
multinational enterprises to small-and mid-sized enterprises to governments and
schools. They include both established enterprises and start-up ventures, as
well as service providers, including application service providers and Internet
service providers. We have thousands of customers, and no single end user
customer represented more than 10% of our revenue for fiscal 2001 although sales
to our largest distributor were approximately 10% of revenue for fiscal 2001.
SALES AND DISTRIBUTION
In fiscal 2001, we derived 75.9%, or approximately $5.2 billion, of our
total revenue from sales in the U.S. and 24.1%, or approximately $1.6 billion,
from international sales. Our products other than our SYSTIMAX structured
cabling systems are sold both directly and through our worldwide network of
distributors. Our SYSTIMAX structured cabling systems are sold only indirectly
through a worldwide network of distributors. Our ExchangeMAX structured cabling
systems are sold to service providers and our value-added messaging services are
sold to service providers and enterprises worldwide.
DIRECT SALES. Our worldwide direct sales organization markets and sells our
voice, data, messaging and customer relationship management products and
services, as well as our value-added services. Within the U.S., the majority of
our large, end-user customers are served directly through direct sales account
managers. Outside the U.S., we conduct direct sales focused on large enterprises
in major
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areas, including Western Europe, South America, Mexico, Australia, Central
America and Russia with other customers and geographic areas served by our
network of distributors.
INDIRECT SALES. We sell our products indirectly through our global network
of approximately 4,000 distributors, dealers, value-added resellers, and system
integrators. Our relationships with distributors, dealers value-added resellers
and systems integrators for our voice and data products and our structural
cabling systems are generally not exclusive. We typically enter into agreements
with our distributors, dealers and value-added resellers that generally set
forth sales quotas and service levels, with terms of one to two years and rights
to terminate by either party upon 120 days notice. Specific terms vary from
agreement to agreement. We are in the process of developing formal global
alliance agreements with our systems integrator partners. We intend that these
agreements will be structured as joint-development, joint-marketing and/or
joint-sales-and-delivery agreements. We expect these agreements will vary by
alliance.
RESEARCH AND DEVELOPMENT
We invested an amount equal to approximately 8% of our total revenue in
fiscal 2001 in research and development. These investments represent a
significant increase over our investments in research and development for the
fiscal years prior to the distribution, which was approximately 6% of total
revenue. As a part of Lucent, we were allocated a portion of Lucent's basic
research, which did not necessarily directly benefit our business. Our current
and future investments in research and development will have a greater focus on
our products.
Our research and development organization consists of over 3,100 research
and development professionals, most of whom were formerly part of Lucent's Bell
Laboratories, one of the world's leading research and development institutions.
In addition, in October 2000 we formed Avaya Labs, a world-class basic research
organization of 100 professionals focused on technologies that will result in
innovative products and services.
We plan on using our substantial investment in research and development to
develop new systems and software related to business communications
applications, customer relationship management innovations, messaging solutions,
personalized information portals, business infrastructure and architectures, Web
centers, hosted solutions, data networks and services for Avaya's customers.
These new systems and software will augment our current product offerings so
that, together with our strategic alliances and services, we can offer our
customers comprehensive advanced communications solutions. Avaya Labs will
continue to seek opportunities to work with technology leaders from other
companies and educational and research institutions to develop uniform
technological standards as the building blocks for future communications and
related enterprise systems.
MANUFACTURING AND SUPPLIES
In fiscal 2001, we outsourced substantially all of our manufacturing,
including assembly and testing, other than the manufacturing of our Connectivity
Solutions product offerings, to Celestica. Currently, approximately 1,900
employees are engaged in the manufacturing of our Connectivity Solutions product
offerings in five facilities located in China, the United States, Australia,
Venezuela and Ireland.
The successful implementation of our manufacturing initiative will depend on
the willingness and ability of contract manufacturers to produce our products.
We may experience significant disruption to our operations by outsourcing so
much of our manufacturing. If our contract manufacturers terminate their
relationships with us or are unable to fill our orders on a timely basis, we may
be unable to deliver our products to meet our customers' orders, which could
delay or decrease our revenue or otherwise have an adverse effect on our
operations.
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COMPETITION
The market for communications systems and software is quickly evolving,
highly competitive and subject to rapid technological change. Because we offer a
wide range of systems and software for several types of enterprises, we have a
broad range of competitors. Many of our competitors are substantially larger
than we are and have significantly greater financial, sales, marketing,
distribution, technical, manufacturing and other resources. Competition for one
or more of our communications systems and software, other than our structured
cabling systems, includes products manufactured or marketed by a number of large
communications equipment suppliers, including Nortel Networks Corporation, Cisco
Systems, Inc., Siemens Aktiengesellschaft, Alcatel S.A. and LM EricssonAB, as
well as by a number of other companies, some of which focus on particular
segments of the market such as customer relationship management. Some of our
other competitors include Aspect Communication Corporation, Active Voice, Inc.
and NEC Corporation. Our structured cabling systems' primary competitors are ADC
Telecommunications, Inc., Telect Corporation, Siecor Corporation, Marconi plc,
Nordx/CDT, Commscope, Inc. and Belden Inc. Our value-added services compete with
Cisco Systems, Inc., NextiraOne, LLC, Norstan, Inc., Nortel Networks
Corporation, Siemens Aktengesellschaft, Ericsson, Ameritech Corporation and
Verizon Communications Inc. We expect to face increasing competitive pressures
from both current and future competitors in the markets we serve.
Our competitive position varies depending on the segment of our market. We
are a leader worldwide in messaging and structured cabling systems and the U.S.
leader in call center and enterprise communications systems. With respect to
multi-service networking products, we are relatively new and our product
portfolio is less complete than that of many of our competitors. Our
professional services and value-added service groups primarily serve customers
that purchase our systems and software and are relatively small as compared to
our competitors.
Technological developments and consolidation within the communications
industry result in frequent changes to our group of competitors. The principal
competitive factors applicable to our products and solutions include:
- product features and reliability;
- customer service and technical support;
- relationships with distributors, value-added resellers and systems
integrators;
- an installed base of similar or related products;
- relationships with buyers and decision makers;
- price;
- brand recognition;
- the ability to integrate various products into a customer's existing
network; and
- the ability to be among the first to introduce new products.
PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
In connection with the contribution and the distribution, Lucent assigned to
us its rights to a number of patents, trademarks, copyrights, trade secrets and
other intellectual property directly related to and important to our business.
In addition, Lucent and its subsidiaries have also granted rights and licenses
to those of their patents, trademarks, copyrights, trade secrets and other
intellectual property that enable us to manufacture, market and sell all our
products. Further, Lucent has conveyed to us numerous sublicenses under patents
of third parties.
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We currently hold more than 1,600 U.S. patents and patent applications as a
result of patents and patent applications assigned to us by Lucent in connection
with the contribution and the distribution, together with patents and patent
applications we have filed or have obtained through acquisitions. In addition,
we hold corresponding foreign patents and patent applications, as well as
numerous trademarks, both in the United States and in foreign countries. There
are no time restrictions applicable to the patents assigned to us by Lucent. We
have entered into a cross license with Lucent in connection with these patents.
Avaya's intellectual property policy is to protect our products and
processes by asserting our intellectual property rights where appropriate and
prudent. We will also obtain patents, copyrights, and other intellectual
property rights used in connection with our business when practicable and
appropriate.
EMPLOYEES
As of September 30, 2001, we employed approximately 23,000 full-time
employees, of which approximately 15,000 are management and
non-union-represented employees and approximately 8,000 are U.S.
union-represented employees covered by collective bargaining agreements. On
May 31, 1998, Lucent entered into collective bargaining agreements with the
Communications Workers of America and the International Brotherhood of
Electrical Workers. In connection with the distribution, we assumed the
obligations under the agreements with respect to our union-represented
employees. The agreements are effective until May 31, 2003 unless the parties
reach a mutual agreement to amend their terms. We believe that we generally have
a good relationship with our employees and the unions that represent them.
In October 2000, we entered into an agreement with the unions representing
our U.S. Services employees to offer eligible employees the ability to retire
from Lucent as of September 30, 2000 and continue working as on-call support
service technicians at Avaya. The agreement was intended to give us the
flexibility to match our workforce needs with our customers' cyclical service
demands for the design, installation and maintenance of their communications
systems. This agreement is effective until May 31, 2003.
BACKLOG
Our backlog, which represents the aggregate of the sales price of orders
received from customers, but not yet recognized as revenue, was approximately
$320 million and $495 million on September 30, 2001 and September 30, 2000,
respectively. The majority of these orders are fulfilled within two months.
However, all orders are subject to possible rescheduling by customers. Although
we believe that the orders included in the backlog are firm, some orders may be
cancelled by the customer without penalty, and we may elect to permit
cancellation of orders without penalty where management believes it is in our
best interests to do so.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
We are subject to a wide range of governmental requirements relating to
employee safety and health and to the handling and emission into the environment
of various substances used in our operations. We are subject to certain
provisions of environmental laws, particularly in the U.S., governing the
cleanup of soil and groundwater contamination. Such provisions impose liability
for the costs of investigating and remediating releases of hazardous materials
at our currently or formerly owned or operated sites. In certain circumstances,
this liability may also include the cost of cleaning up historical
contamination, whether or not caused by us. We are currently conducting
investigation and/or cleanup of known contamination at approximately five of our
facilities either voluntarily or pursuant to government directives.
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It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. We have established financial reserves
to cover environmental liabilities where they are probable and reasonably
estimable. Reserves for estimated losses from environmental matters are,
depending on the site, based primarily upon internal or third-party
environmental studies and the extent of contamination and the type of required
cleanup. Although we believe that our reserves are adequate to cover known
environmental liabilities, we cannot assure you that the actual amount of
environmental liabilities will not exceed the amount of reserves for such
matters or will not have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
RELATIONSHIP BETWEEN LUCENT AND OUR COMPANY AFTER THE CONTRIBUTION AND THE
DISTRIBUTION
In connection with the contribution and the distribution, we entered into a
Contribution and Distribution Agreement and a number of ancillary agreements
with Lucent for the purpose of accomplishing the contribution and the
distribution. These agreements govern the relationship between Lucent and us
subsequent to the contribution and the distribution and provide for the
allocation of employee benefit, tax and other liabilities and obligations
attributable to periods prior to the distribution.
In addition, the current Federal Tax Allocation Agreement and the current
State and Local Income Tax Allocation Agreement by and among Lucent and its
subsidiaries governing the allocation of income taxes among Lucent and its
subsidiaries continue to apply to us for taxable periods prior to and including
the distribution. The material agreements related to the contribution and the
distribution are incorporated by reference as exhibits to this Annual Report on
Form 10-K and the summaries of any such agreements set forth below are qualified
in their entirety by reference to the full text of such agreements.
CONTRIBUTION AND DISTRIBUTION AGREEMENT
The Contribution and Distribution Agreement sets forth the agreements
between us and Lucent with respect to the principal corporate transactions
required to effect the contribution and the distribution, and other agreements
governing the relationship between Lucent and us.
THE CONTRIBUTION AND THE DISTRIBUTION. To effect the contribution, Lucent
transferred, or agreed to transfer, or to cause its subsidiaries to transfer,
the assets of its enterprise networking businesses. In general, we assumed, or
agreed to assume, and perform and fulfill all of the liabilities of the
contributed businesses in accordance with their respective terms. Pursuant to
the Contribution and Distribution Agreement, the contribution and the
distribution were effected as of 11:59 p.m. on September 30, 2000.
We have resolved all of the contribution and distribution issues with Lucent
related to the settlement of certain employee obligations and the transfer of
certain assets. Accordingly, we recorded a $42 million net reduction to
additional paid-in capital in fiscal 2001. Following the distribution, we
identified approximately $15 million recorded in our Consolidated Balance Sheets
that was primarily related to certain accounts receivable balances due from
Lucent and certain fixed assets which we have agreed will remain with Lucent.
Also in connection with the distribution, we had recorded estimates in our
Consolidated Balance Sheets at September 30, 2000 in prepaid benefit costs and
benefit obligations of various existing Lucent benefit plans related to
employees for whom we assumed responsibility. Following an actuarial review, we
received a valuation, agreed upon by us and Lucent, that provides for a
reduction of approximately $44 million in prepaid benefit costs and $17 million
in pension and postretirement benefit obligations. We recorded the net effect of
these adjustments as a reduction to additional paid-in capital in fiscal 2001
because the transactions relate to the original capital contribution from
Lucent.
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RELEASES AND INDEMNIFICATION. The Contribution and Distribution Agreement
provides for a full and complete release and discharge of all liabilities
existing or arising from all acts and events occurring or failing to occur or
alleged to have occurred or to have failed to occur and all conditions existing
or alleged to have existed on or before the date of the agreement, between or
among us or any of our subsidiaries or affiliates, on the one hand, and Lucent
or any of its subsidiaries or affiliates other than us, on the other hand,
except as expressly set forth in the agreement.
We have agreed to indemnify, hold harmless and defend Lucent, each of its
affiliates and each of their respective directors, officers and employees, from
and against certain liabilities relating to, arising out of or resulting from
the contributed businesses, liabilities or contracts, or any material breach by
us of the agreement or any of the ancillary agreements. Lucent has agreed to
indemnify, hold harmless and defend us, each of our affiliates and each of our
respective directors, officers and employees from and against all liabilities
related to Lucent's businesses other than the contributed businesses and any
material breach by Lucent of the agreement or any of the ancillary agreements.
Also, Lucent has indemnified us and our affiliates, subject to limited
exceptions, against any claims of patent, copyright or trademark infringement or
trade secret misappropriation with respect to any product, software or other
material provided by or ordered from Lucent's retained businesses prior to the
distribution.
CONTINGENT LIABILITIES AND CONTINGENT GAINS. The Contribution and
Distribution Agreement provides for indemnification by us and Lucent with
respect to contingent liabilities primarily relating to our respective
businesses or otherwise assigned to each of us, subject to the sharing
provisions described below. In the event the aggregate value of all amounts paid
by us or Lucent, in each case, together with any affiliates in respect of any
single contingent liability or any set or group of related contingent
liabilities is in excess of $50 million, we and Lucent will share portions in
excess of the threshold amount based on agreed upon percentages.
The Contribution and Distribution Agreement also provides for the sharing of
some contingent liabilities, which are defined as:
- any contingent liabilities that are not primarily contingent liabilities
of Lucent or contingent liabilities associated with the contributed
businesses;
- some specifically identified liabilities, including liabilities relating
to terminated, divested or discontinued businesses or operations; and
- shared contingent liabilities within the meaning of the 1996 separation
and distribution agreement among Lucent, AT&T Corp. and NCR Corporation.
Lucent will assume the defense of, and may seek to settle or compromise, any
third party claim that is a shared contingent liability, and those costs and
expenses will be included in the amount to be shared by us and Lucent.
The Contribution and Distribution Agreement provides that we and Lucent will
have the exclusive right to any benefit received with respect to any contingent
gain that primarily relates to the business of, or that is expressly assigned
to, us or Lucent, respectively.
Please see "Legal Proceedings" for a description of certain matters
involving Lucent for which have assumed responsibility under the Contribution
and Distribution Agreement.
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RESTRICTIONS ON BUSINESS TRANSACTIONS. Subject to Lucent's ability to
terminate some of the rights, including important intellectual property rights
granted to us and our affiliates under the ancillary agreements, the
Contribution and Distribution Agreement provides that none of Lucent, us, or our
respective subsidiaries or affiliates will have any duty to refrain from
engaging in similar activities or lines of business, or from doing business with
any potential or actual supplier or customer of any other person.
PROVISIONS RELATING TO THIRD-PARTY INTELLECTUAL PROPERTY LICENSE
AGREEMENTS. The Contribution and Distribution Agreement provides, generally,
for the grant by Lucent to us of a sublicense under numerous third-party
intellectual property license agreements. The Patent and Technology License
agreement provides similar grants to us from Lucent's subsidiary, Lucent
Technologies GRL Corporation, with respect to third party patent license
agreements executed by that subsidiary.
CHANGE OF CONTROL. In the event that, at any time prior to the third
anniversary of the distribution, there is a change of control of us as defined
in the Contribution and Distribution Agreement, then Lucent could terminate or
cause us to reconvey some of the rights, including important intellectual
property rights granted to us under the Intellectual Property Agreements.
COMMERCIAL AGREEMENTS
We and Lucent entered into a Global Purchase and Service Agreement, a
General Sales Agreement, a Microelectronics Product Purchase Agreement, two
Reseller Agreements, a Master Subcontracting Agreement, a Master Services
Agreement and an Original Equipment Manufacturing and Value Added Reseller
Agreement. The pricing terms for the products and services covered by the Global
Purchase and Service Agreement and all other ancillary commercial agreements
reflected current market prices at the time of the transaction. Each of these
agreements commenced October 1, 2000 and has a three-year term, subject to
extension.
Under the Global Purchase and Service Agreement we will provide to Lucent
communications and other related products for Lucent's internal operational use.
These products include some of our enterprise voice communications products and
our multi-service networking products. Under the agreement, we will also provide
warranty and post-warranty maintenance support services for products that are
already installed in Lucent's offices as well as for new products installed
thereafter. The General Sales Agreement and the Microelectronics Product
Purchase Agreement govern transactions pursuant to which Lucent will provide
goods and services that are part of the businesses not transferred to us.
The Reseller Agreements govern transactions in which either we or Lucent
furnish items to the other for resale. Each agreement covers specified products
and licensed materials of both Lucent and ours, respectively. Either party may
add to or delete products upon ninety days notice.
The Master Subcontracting Agreement sets forth the terms by which we and
Lucent may subcontract for services and related deliverables from each other to
support our respective customers.
The Master Services Agreement covers any order for services not addressed in
any other commercial agreement between us and Lucent. Under this agreement
either we or Lucent or our affiliates or Lucent's affiliates may place orders
for services from the other party including maintenance service, professional
services, changes in services, and extension of services.
The Original Equipment Manufacturing and Value Added Reseller Agreement
governs transactions pursuant to which we and Lucent will buy, on an ordered
basis, products from each other for integration into finished products for sale
or resale or for resale in combination with enhancements added by the other
party.
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INTELLECTUAL PROPERTY AGREEMENTS
We entered into a series of agreements with Lucent pursuant to which Lucent
transferred to us the primary trademarks used in the sale of our products and
services, except for Lucent's name and logo and the Bell Laboratories name; we
and Lucent divided ownership of technology, patents, patent applications and
foreign counterparts between us and Lucent; and we and Lucent granted
cross-licenses to each other with respect to patents and technology.
TAX SHARING AGREEMENT
We and Lucent entered into a Tax Sharing Agreement that governs Lucent's and
our respective rights, responsibilities and obligations after the distribution
with respect to taxes for the periods ending on or before the distribution.
Generally, pre-distribution taxes that are clearly attributable to the business
of one party will be borne solely by that party, and other pre-distribution
taxes will be shared by the parties based on a formula set forth in the Tax
Sharing Agreement. In addition, the Tax Sharing Agreement addresses the
allocation of liability for taxes that are incurred as a result of restructuring
activities undertaken to implement the distribution. If the distribution fails
to qualify as a tax-free distribution under Section 355 of the Internal Revenue
Code because of an acquisition of our stock or assets, or some other actions of
ours, then we will be solely liable for any resulting corporate taxes.
FORWARD LOOKING STATEMENTS
(Cautionary Statements Under the Private Securities Litigation Reform Act of
1995)
Our disclosure and analysis in this report and in our 2001 Annual Report to
Shareholders contain some forward-looking statements. Forward-looking statements
give our current expectations or forecasts of future events. You can identify
these statements by the fact that they do not relate strictly to historical or
current facts. They use words such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe," and other words and terms of similar
meaning in connection with any discussion of future operating or financial
performance. From time to time, we also may provide oral or written
forward-looking statements in other materials we release to the public.
Any or all of our forward-looking statements in this report, in the 2001
Annual Report to Shareholders and in any other public statements we make MAY
TURN OUT TO BE WRONG. They can be affected by inaccurate assumptions we might
make or by known or unknown risks and uncertainties. Many factors mentioned in
the discussion below will be important in determining future results.
Consequently, no forward-looking statement can be guaranteed. Actual future
results may vary materially.
Except as may be required under the federal securities laws, we undertake no
obligation to publicly update forward-looking statements, whether as a result of
new information, future events or otherwise. You are advised, however, to
consult any further disclosures we make on related subjects in our Form 10-Q and
Form 8-K reports filed with the Securities and Exchange Commission. Also note
that we provide the following cautionary discussion of risks, uncertainties and
possibly inaccurate assumptions relevant to our businesses. These are factors
that we think could cause our actual results to differ materially from expected
and historical results. Other factors besides those listed here could also
adversely affect us. This discussion is provided as permitted by the Private
Securities Litigation Reform Act of 1995.
The risks and uncertainties referred to above include, but are not limited
to, price and product competition, rapid technological development, dependence
on new product development, the mix of our products and services, customer
demand for our products and services, the ability to successfully integrate
acquired companies, control of costs and expenses, the ability to form and
implement alliances, the ability to implement in a timely manner our
restructuring plan, the economic, political and other risks associated with
international sales and operations, U.S. and foreign government regulation,
general industry and market conditions and growth rates and general domestic and
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international economic conditions including interest rate and currency exchange
rate fluctuations. In addition, set forth below is a more detailed discussion of
the risks and uncertainties we face.
OUR PRODUCT REVENUE HAS BEEN DECLINING, AND IF WE DO NOT SUCCESSFULLY IMPLEMENT
OUR STRATEGY TO EXPAND OUR SALES IN MARKET SEGMENTS WITH HIGHER GROWTH RATES,
OUR REVENUE MAY CONTINUE TO DECLINE AND WE MAY NOT BE PROFITABLE.
We have been experiencing declines in revenue from our traditional business,
enterprise voice communications products. We expect, based on various industry
reports, the growth rate of the market segments for these traditional products
to be extremely low. We are implementing a strategy to capitalize on the higher
growth opportunities in certain market segments, such as advanced communications
solutions, which includes converged voice and data products. The success of this
strategy, however, is subject to many risks, including risks that:
- we do not develop new products or enhancements to our current products on
a timely basis to meet the changing needs of our customers;
- customers do not accept our products or new technology or industry
standards develop that make our products obsolete; or
- our competitors introduce new products before we do and achieve a
competitive advantage by being among the first to market.
Our traditional business and our advanced communications solutions are a
part of our Communications Solutions segment. If we are unsuccessful in
implementing our strategy, the contribution to our results from Communications
Solutions may decline, reducing our overall profitability and requiring a
greater need for capital resources.
WE ARE SIGNIFICANTLY CHANGING THE FOCUS OF OUR COMPANY IN ORDER TO CONCENTRATE
ON THE DEVELOPMENT AND MARKETING OF ADVANCED COMMUNICATIONS SOLUTIONS, INCLUDING
CONVERGED VOICE AND DATA PRODUCTS, AND THE UNCERTAINTY SURROUNDING THIS NEW
MARKET OPPORTUNITY MAY RESULT IN A DECREASE IN OUR REVENUE AND PROFITABILITY.
We are making a significant change in the direction and strategy of our
company to focus on the development and sales of advanced communications
solutions, including products that facilitate the convergence of voice and data
networks.
This change in direction may involve substantial increased costs and may not
be implemented successfully. If we are not successful, our revenue and
profitability may decline. However, even if we are successful in making these
changes, our revenue may still decrease if the market opportunity for advanced
communications solutions, including converged voice and data products, does not
develop in the ways we anticipate.
WE PLAN TO EXPAND OUR INTERNATIONAL SALES, WHICH WILL SUBJECT US TO ADDITIONAL
BUSINESS RISKS AND MAY CAUSE OUR PROFITABILITY TO DECLINE DUE TO INCREASED
COSTS.
We intend to continue to pursue growth opportunities internationally. In
many countries outside the U.S., long-standing relationships between our
potential customers and their local providers and protective regulations,
including local content requirements and type approvals, create barriers to
entry. In addition, pursuit of such international growth opportunities may
require significant investments for an extended period before returns on such
investments, if any, are realized. For example, to execute our strategy to
expand internationally we are incurring additional costs to enter into strategic
alliances focused on international sales and expanding our presence in high
growth countries. International operations are subject to a number of other
risks and potential costs, including unexpected changes in regulatory
requirements, inadequate protection of intellectual property in foreign
countries, adverse tax consequences and political and economic stability.
20
<Page>
We may not be able to overcome some of these barriers and may incur
significant costs in addressing others.
THE RECENT TERRORIST ATTACKS ON THE UNITED STATES COULD NEGATIVELY AFFECT OUR
BUSINESS PROSPECTS.
Although the September 11, 2001 terrorist attacks against the United States
and the national and global response to these terrorist attacks have not had a
direct material effect on our business, the attacks and related response may
continue to create widespread business uncertainty and adversely affect the
global economy, which may continue to result in delays in purchasing decisions
and/or may adversely affect our business generally.
IF WE SUCCESSFULLY IMPLEMENT OUR MANUFACTURING INITIATIVE, WE WILL DEPEND ON
CONTRACT MANUFACTURERS TO PRODUCE MOST OF OUR PRODUCTS AND IF THESE
MANUFACTURERS ARE UNABLE TO FILL OUR ORDERS ON A TIMELY AND RELIABLE BASIS, WE
WILL LIKELY BE UNABLE TO DELIVER OUR PRODUCTS TO MEET CUSTOMER ORDERS OR SATISFY
THEIR REQUIREMENTS.
We have entered into an agreement to outsource substantially all of our
manufacturing other than manufacturing of structured cabling systems. The first
phase of this transaction closed on May 4, 2001, with the remaining phases
expected to be completed by the end of the first quarter of fiscal 2002. The
successful implementation of our manufacturing initiative will depend on the
willingness and ability of contract manufacturers to produce our products. We
may experience significant disruption to our operations by outsourcing so much
of our manufacturing. If our contract manufacturers terminate their
relationships with us or are unable to fill our orders on a timely basis, we may
be unable to deliver our products to meet our customers' orders, which could
delay or decrease our revenue or otherwise have an adverse effect on our
operations.
WE MAY NOT BE ABLE TO HIRE AND RETAIN HIGHLY SKILLED EMPLOYEES, WHICH COULD
AFFECT OUR ABILITY TO COMPETE EFFECTIVELY AND MAY CAUSE OUR REVENUE AND
PROFITABILITY TO DECLINE.
We depend on highly skilled technical personnel to research and develop,
market and service new products. To succeed, we must hire and retain employees
who are highly skilled in the rapidly changing communications and Internet
technologies.
Individuals who have the skills and can perform the services we need to
provide our products and services are scarce. Because the competition for
qualified employees in our industry is intense, hiring and retaining employees
with the skills we need is both time-consuming and expensive. We might not be
able to hire enough of them or retain the employees we do hire. Our inability to
hire and retain the individuals we seek could hinder our ability to sell our
existing products, systems, software or services or to develop new products,
systems, software or services. If we do not improve our hiring in these areas,
we will not be able to successfully implement many of our strategies and our
revenue and profitability may decline.
THE TERMINATION OF STRATEGIC ALLIANCES OR THE FAILURE TO FORM ADDITIONAL
STRATEGIC ALLIANCES COULD LIMIT OUR ACCESS TO CUSTOMERS AND HARM OUR REPUTATION
WITH INVESTORS.
Our strategic alliances are important to our success because they are
necessary in order for us to offer comprehensive advanced communications
solutions, reach a broader customer base and strengthen brand awareness. We may
not be successful in creating new strategic alliances on acceptable terms or at
all. In addition, most of our current strategic alliances can be terminated
under various circumstances, some of which may be beyond our control. Further,
our alliances are generally non-exclusive, which means our partners may develop
alliances with some of our competitors. We may become more reliant on strategic
alliances in the future, which would increase the risk to our business of losing
these alliances. Because we have announced publicly our strategy to form
alliances, as well as announced the alliances we have entered into, early
termination of our alliances may harm our reputation with our customers and
cause our revenue to decline to the extent we are unable to deliver new products
or our customer base is reduced.
21
<Page>
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS, OUR BUSINESS AND FUTURE
PROSPECTS MAY BE HARMED.
Although we attempt to protect our intellectual property through patents,
trademarks, trade secrets, copyrights, confidentiality and nondisclosure
agreements and other measures, intellectual property is difficult to evaluate
and these measures may not provide adequate protection for our proprietary
rights. Patent filings by third parties, whether made before or after the date
of our filings, could render our intellectual property less valuable.
Competitors may misappropriate our intellectual property, disputes as to
ownership of intellectual property may arise and our intellectual property may
otherwise become known or independently developed by competitors. The failure to
protect our intellectual property could seriously harm our business and future
prospects because we believe that developing new products and technology that
are unique to us is critical to our success. If we do not obtain sufficient
international protection for our intellectual property, our competitiveness in
international markets could be significantly impaired, which would limit our
growth and future revenue.
WE MAY BE SUBJECT TO LITIGATION AND INFRINGEMENT CLAIMS, WHICH COULD CAUSE US TO
INCUR SIGNIFICANT EXPENSES OR PREVENT US FROM SELLING OUR PRODUCTS OR SERVICES.
We cannot assure you that others will not claim that our proprietary or
licensed products, systems and software are infringing their intellectual
property rights or that we do not in fact infringe those intellectual property
rights. We may be unaware of intellectual property rights of others that may
cover some of our technology. If someone claimed that our proprietary or
licensed systems or software infringed their intellectual property rights, any
resulting litigation could be costly and time consuming and could 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. We also may be subject to significant damages
or an injunction against use of our proprietary or licensed systems. A
successful claim of patent or other intellectual property infringement against
us could materially adversely affect our business and profitability.
We have historically indemnified our customers for some of the costs and
damages of patent infringement in circumstances where our product is the factor
creating the customer's infringement exposure, although we generally exclude
coverage where infringement arises out of the combination of our products with
products of others. This policy could have a material adverse effect on our
business and our profitability.
IF WE DO NOT SUCCESSFULLY IMPLEMENT OUR RESTRUCTURING PLAN, WE MAY EXPERIENCE
DISRUPTIONS IN OUR OPERATIONS AND INCUR HIGHER ONGOING COSTS, WHICH MAY CAUSE
OUR PROFITABILITY TO DECLINE.
We are in the process of implementing a restructuring plan on an accelerated
basis as described under "--Overview." If we are unsuccessful in implementing
this plan, we may experience disruptions in our operations and incur higher
ongoing costs, which may cause our profitability to decline. In addition, the
implementation of the restructuring plan and its acceleration may also disrupt
our operations and cause our profitability to decline.
WE MAY ACQUIRE OTHER BUSINESSES OR FORM JOINT VENTURES THAT COULD NEGATIVELY
AFFECT OUR PROFITABILITY.
The pursuit of additional technology, services or distribution channels
through acquisitions or joint ventures is an aspect of our business strategy. We
may not identify or complete these transactions in a timely manner, on a cost
effective basis or at all. Even if we do identify and complete these
transactions, we may not be able to successfully integrate such technology,
services or distribution channels into our existing operations and we may not
realize the benefits of such acquisition or joint venture. In addition, if we
were to make any acquisitions, we could incur debt, which could involve
restrictive covenants, or we could assume unknown or contingent liabilities.
WE MAY NOT HAVE FINANCING FOR FUTURE STRATEGIC ACQUISITIONS AND INVESTMENTS AND
ANY FINANCING WE DO RECEIVE MAY INCREASE OUR DEBT. IN ADDITION, WE ASSUMED A
SIGNIFICANT AMOUNT OF DEBT IN CONNECTION WITH THE
22
<Page>
DISTRIBUTION AND WE MAY SUBSTANTIALLY INCREASE OUR DEBT IN THE FUTURE, WHICH
COULD SUBJECT US TO VARIOUS RESTRICTIONS AND HIGHER INTEREST COSTS, AND DECREASE
OUR PROFITABILITY.
We may need to incur additional debt in order to make any strategic
acquisition or investment. Such financing may not be available to us on
acceptable terms or at all. Our ability to make payments on and to refinance our
indebtedness, including indebtedness outstanding under our commercial paper
program, our Liquid Yield Option Notes due 2021, or LYONs, and future
indebtedness, and to fund working capital, capital expenditures and strategic
acquisitions and investments will depend on our ability to generate cash in the
future. Our ability to generate cash is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. In addition, our ability to issue equity to fund acquisitions or
investments is constrained because our issuance of additional stock may cause
Lucent's distribution of our stock to its shareowners to be taxable to Lucent
under Section 355(e) of the Internal Revenue Code.
In addition, at the distribution date, we assumed $780 million of debt under
a commercial paper program. We also have two unsecured revolving credit
facilities with third-party financial institutions, a 364-day credit facility
and a five-year credit facility, that enable us to borrow up to $1.25 billion in
the aggregate. We are able to borrow funds under these facilities for general
corporate purposes, to backstop commercial paper and for acquisitions. In
addition, we recently issued approximately $944 million aggregate principal
amount at maturity of LYONs.
We may substantially increase our debt in the future. We may from time to
time issue additional commercial paper under our commercial paper program, if
the market permits such borrowings, make borrowings under our revolving credit
facilities or issue other long or short-term debt, if available. Our credit
facilities and the indenture governing the LYONs impose, and future indebtedness
may impose, various restrictions and covenants on us, which could limit our
ability to respond to market conditions, to provide for unanticipated capital
investments or to take advantage of business opportunities. We also may incur
higher than expected interest expense in servicing our debt, which would
decrease our profitability.
OUR INDUSTRY IS HIGHLY COMPETITIVE AND IF WE CANNOT EFFECTIVELY COMPETE, OUR
REVENUES MAY DECLINE.
The market for our products and services is very competitive and subject to
rapid technological advances. We expect the intensity of competition to continue
to increase in the future as existing competitors enhance and expand their
product and service offerings and as new participants enter the market.
Increased competition also may result in price reductions, reduced gross margins
and loss of market share. Our failure to maintain and enhance our competitive
position would adversely affect our business and prospects. See "--Competition."
OUR HISTORICAL FINANCIAL INFORMATION RELATED TO PERIODS PRIOR TO THE
DISTRIBUTION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS A SEPARATE COMPANY AND,
THEREFORE, MAY NOT BE RELIABLE AS AN INDICATOR OF OUR HISTORICAL OR FUTURE
RESULTS.
The historical financial information incorporated by reference in this
Annual Report on Form 10-K for periods prior to the distribution may not reflect
what our results of operations, financial position and cash flows would have
been had we been a stand-alone company during the periods presented or what our
results of operations, financial position and cash flows will be in the future.
For information about our past financial performance and the basis of
presentation of our consolidated financial statements, including our estimates
of interest expense, please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and the related notes incorporated by reference from our 2001 Annual
Report to Shareholders.
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<Page>
IF THE DISTRIBUTION DOES NOT QUALIFY FOR TAX-FREE TREATMENT, WE COULD BE
REQUIRED TO PAY LUCENT OR THE INTERNAL REVENUE SERVICE A SUBSTANTIAL AMOUNT OF
MONEY.
Lucent has received a private letter ruling from the Internal Revenue
Service stating, based on certain assumptions and representations, that the
distribution described in this Annual Report on Form 10-K would not be taxable
to Lucent. Nevertheless, Lucent could incur significant tax liability if the
distribution did not qualify for tax-free treatment because any of those
assumptions or representations was not correct.
Although any U.S. federal income taxes imposed in connection with the
distribution generally would be imposed on Lucent, we could be liable for all or
a portion of any taxes owed under the terms of the Tax Sharing Agreement between
Lucent and us or under the U.S. federal income tax laws if Lucent fails to pay
such taxes. In addition, if the distribution fails to qualify as a tax-free
distribution because of an acquisition of our stock or assets, or some other
actions of ours, we will be solely liable for any resulting corporate taxes.
ITEM 2. PROPERTIES.
As of September 30, 2001, we operated three manufacturing facilities, 37
warehouse locations and one repair site in the United States and five other
countries. We also have 512 offices located in 51 countries and ten research and
development facilities located in Australia, India, Israel, France, Singapore,
the United Kingdom and the United States. Our manufacturing facilities are
located in Australia, Ireland and the United States. We also have a 25.5%
interest in a joint venture located in Gandhinagar, India and 51% interests in
joint ventures in each of China and Venezuela. All of these joint ventures are
predominantly used as manufacturing sites and are mostly on owned property. Our
facilities have aggregate floor space of approximately 12.5 million square feet,
of which approximately 4 million square feet is owned and approximately
8.5 million square feet is leased. Our lease terms range from monthly leases to
18 years. We believe that all of our facilities and equipment are in good
condition and are well maintained and able to operate at present levels.
ITEM 3. LEGAL PROCEEDINGS.
From time to time we are involved in legal proceedings arising in the
ordinary course of business. Other than as described below, we believe there is
no litigation pending that could have, individually or in the aggregate, a
material adverse effect on our financial position, results of operations or cash
flows.
YEAR 2000 ACTIONS
Three separate purported class action lawsuits are pending against Lucent,
one in state court in West Virginia, one in federal court in the Southern
District of New York and another in federal court in the Southern District of
California. The case in New York was filed in January 1999 and, after being
dismissed, was re-filed in September 2000. The case in West Virginia was filed
in April 1999 and the case in California was filed in June 1999, and amended in
2000, to include Avaya as a defendant. We may also be named a party to the other
actions and, in any event, have assumed the obligations of Lucent for all of
these cases under the Contribution and Distribution Agreement. All three actions
are based upon claims that Lucent sold products that were not Year 2000
compliant, meaning that the products were designed and developed without
considering the possible impact of the change in the calendar from December 31,
1999 to January 1, 2000. The complaints allege that the sale of these products
violated statutory consumer protection laws and constituted breaches of implied
warranties. A class has not been certified in any of the three cases, and to the
extent a class is certified in any of the cases, we expect that class to
constitute those enterprises that purchased the products in question. The
complaints seek, among other remedies, compensatory damages, punitive damages
and counsel fees in amounts that have not yet been specified. Although we
believe that the outcome of these actions will not adversely affect our
financial position, results of operations or cash flows, if these cases are not
resolved in a timely manner, they will require expenditure of significant legal
costs related to their defense.
24
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COUPON PROGRAM CLASS ACTION
In April 1998, a class action was filed against Lucent in state court in New
Jersey, alleging that Lucent improperly administered a coupon program resulting
from the settlement of a prior class action. The plaintiffs allege that Lucent
improperly limited the redemption of the coupons from dealers by not allowing
them to be combined with other volume discount offers, thus limiting the market
for the coupons. We have assumed the obligations of Lucent for these cases under
the Contribution and Distribution Agreement. The complaint alleges breach of
contract, fraud and other claims and the plaintiffs seek compensatory and
consequential damages, interest and attorneys' fees. The parties have entered
into a proposed settlement agreement, pending final approval by the court.
LUCENT SECURITIES LITIGATION
In November 2000, three purported class actions were filed against Lucent in
the Federal District Court for the District of New Jersey alleging violations of
the federal securities laws as a result of the facts disclosed in Lucent's
announcement on November 21, 2000 that it had identified a revenue recognition
issue affecting its financial results for the fourth quarter of fiscal 2000. The
actions purport to be filed on behalf of purchasers of Lucent common stock
during the period from October 10, 2000 (the date Lucent originally reported
these financial results) through November 21, 2000.
The above actions have been consolidated with other purported class actions
filed against Lucent on behalf of its stockholders in January 2000 and are
pending in the Federal District Court for the District of New Jersey. We
understand that Lucent has filed its Answer to the Fifth Consolidated Amended
and Supplemental Class Action Complaint in the consolidated action. The
plaintiffs allege that they were injured by reason of certain alleged false and
misleading statements made by Lucent in violation of the federal securities
laws. The consolidated cases were initially filed on behalf of stockholders of
Lucent who bought Lucent common stock between October 26, 1999 and January 6,
2000, but the consolidated complaint was amended to include purported class
members who purchased Lucent common stock up to November 21, 2000. A class has
not yet been certified in the consolidated actions. The plaintiffs in all these
stockholder class actions seek compensatory damages plus interest and attorneys'
fees.
Any liability incurred by Lucent in connection with these stockholder class
action lawsuits may be deemed a shared contingent liability under the
Contribution and Distribution Agreement and, as a result, we would be
responsible for 10% of any such liability in excess of $50 million. All of these
actions are in the early stages of litigation and an outcome cannot be
predicted, and as a result, we cannot assure you that these cases will not have
a material adverse effect on our financial position, results of operations or
cash flows.
LICENSING MEDIATION
In March 2001, a third party licensor made formal demand for alleged royalty
payments which it claims we owe as a result of a contract between the licensor
and our predecessors, initially entered into in 1995, and renewed in 1997. The
contract provides for mediation of disputes followed by binding arbitration if
the mediation does not resolve the dispute. The licensor claims that we owe
royalty payments for software integrated into certain of our products. The
licensor also alleges that we have breached the governing contract by not
honoring a right of first refusal related to development of fax software for
next generation products. We engaged in mediation with the licensor, but did not
resolve this matter. At this point, an outcome in any future proceeding cannot
be predicted, and as a result, there can be no assurance that this case will not
have a material adverse effect on our financial position, results of operations
or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
During the fourth quarter of the fiscal year covered by this Annual Report
on Form 10-K, no matter was submitted to a vote of security-holders.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information required by this item is incorporated by reference from Note 18
to the Consolidated Financial Statements on page 52 of our 2001 Annual Report to
Shareholders.
ITEM 6. SELECTED FINANCIAL DATA.
Information required by this item is incorporated by reference from SELECTED
FINANCIAL DATA on page 12 of our 2001 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Information required by this item is incorporated by reference from
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS on pages 13 through 26 of our 2001 Annual Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information required by this item is incorporated by reference from the
discussion under the heading "FINANCIAL INSTRUMENTS" in MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS on pages 25 and 26
of our 2001 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information required by this item is incorporated by reference from the
REPORT OF INDEPENDENT ACCOUNTANTS on page 27 of our 2001 Annual Report and from
our consolidated financial statements and related notes on pages 28 through 52
of our 2001 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth information as to persons who serve as our
executive officers.
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Donald K. Peterson.................... 52 Vice Chairman, President and Chief
Executive Officer
Pamela F. Craven...................... 48 Vice President, General Counsel and
Secretary
Michael A. Dennis..................... 43 Vice President of Worldwide Operations
and Services
David P. Johnson...................... 41 Vice President of Worldwide Sales
Steven Markman........................ 56 Chief Product Officer
Karyn Mashima......................... 48 Vice President of Global Strategy and
Technology
Garry K. McGuire, Sr.................. 55 Chief Financial Officer
</Table>
Information about our Directors, including Mr. Peterson, is incorporated by
reference from the discussion under Proposal 1 set forth in our Proxy Statement
for the 2002 Annual Meeting of Shareholders.
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<Page>
PAMELA F. CRAVEN has been our Vice President, General Counsel and Secretary
since September 30, 2000. Mrs. Craven was a director of Avaya from its inception
until September 30, 2000 and was Vice President, General Counsel and Secretary
of Lucent Technologies Inc.'s ("Lucent") Enterprise Networks Group from
March 2000 until September 30, 2000. Mrs. Craven served as Vice President, Law
for Lucent from November 1995 to April 2000 and was also Secretary of Lucent
from February 1, 1999 until April 2000.
MICHAEL A. DENNIS has been our Vice President of Worldwide Operations and
Services since September 30, 2000. Mr. Dennis was Vice President of U.S.
Services for Lucent Technologies Inc.'s ("Lucent") Enterprise Networks Group
from April 2000 until September 30, 2000. He joined AT&T Corp. in July 1981 and
moved to Lucent following its spin-off in 1996. Mr. Dennis has held various
positions at Lucent including Sales Vice President and Field Services Vice
President.
DAVID P. JOHNSON has been our Vice President of Worldwide Sales since
September 30, 2000. Mr. Johnson was Vice President of Worldwide Sales for Lucent
Technologies Inc.'s ("Lucent") Enterprise Networks Group from April 2000 until
September 30, 2000. He joined AT&T Corp. in 1982 and moved to Lucent following
its spin-off in 1996. Mr. Johnson has held various positions at Lucent,
including International President of Enterprise Networks and Regional President
of Asia/Pacific Region.
STEVEN MARKMAN has been our Chief Product Officer since May 10, 2001.
Dr. Markman was Chairman of General Magic, Inc. from January 2001 to May 2001
and Chief Executive Officer and President from 1996 to 2001. Prior to that,
Dr. Markman was Executive Vice President and General Manager, Products Group, of
Novell, Inc. from 1994 to 1996.
KARYN MASHIMA has been our Vice President of Global Strategy and Technology
since September 30, 2000. Ms. Mashima was Vice President of Strategy and
Technology for Lucent Technologies Inc.'s ("Lucent") Enterprise Networks Group
from March 2000 until September 30, 2000. She joined AT&T Corp. in 1994 and
moved to Lucent following its spin-off in 1996. Ms. Mashima has held various
positions at Lucent, including Vice President of Advanced Multi-Media
Communications Systems, Vice President of the Enterprise Systems Group and Vice
President and Chief Technical Officer of the Business Communications Systems
Group.
GARRY K. MCGUIRE, SR. has been our Chief Financial Officer since
September 30, 2000. Mr. McGuire was Chief Financial Officer for Lucent
Technologies Inc.'s ("Lucent") Enterprise Networks Group from May 2000 until
September 30, 2000. Mr. McGuire was a consultant to Kleiner, Perkins, Caufield
and Byers/Broadband Office from August 1999 to December 1999. He was President
and Chief Executive Officer of Williams Communications Solutions, LLC, from
April 1997 to July 1999, and was President of Nortel Communications Systems, LLC
("Nortel"), from September 1995 until April 1997.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the
discussion under the heading EXECUTIVE COMPENSATION AND OTHER INFORMATION in our
Proxy Statement for the 2002 Annual Meeting of Shareholders, except for the
discussions under the headings "Report on Executive Compensation" and
"Performance Graph."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this item is incorporated by reference from the
discussion under the heading SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT in our Proxy Statement for the 2002 Annual Meeting of Shareholders.
27
<Page>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this item is incorporated by reference from the
discussion under the heading CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS in our Proxy Statement for the 2002 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of this Annual Report on Form 10-K:
(1) Financial Statements:
<Table>
<Caption>
PAGE(S) IN OUR 2001
ANNUAL REPORT
-------------------
<S> <C> <C>
(i) Consolidated Statements of Operations....................... 28
(ii) Consolidated Balance Sheets................................. 29
(iii) Consolidated Statements of Changes in Stockholders' Equity 30
and of Comprehensive Income (Loss)..........................
(iv) Consolidated Statements of Cash Flows....................... 31
(v) Notes to Consolidated Financial Statements.................. 32-52
</Table>
(2) Financial Statement Schedules:
<Table>
<S> <C> <C>
(i) Schedule II--Valuation and Qualifying Accounts.............. S-1
</Table>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Avaya Inc.:
Our audits of the consolidated financial statements referred to in our
report dated October 24, 2001 appearing in the 2001 Annual Report to
Stockholders of Avaya Inc. (which report and consolidated financial statements
are incorporated by reference in this Annual Report on Form 10-K) also included
an audit of the financial statement schedule listed in Item 14(a)(2) of this
Form 10-K. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
New York, New York
October 24, 2001
Separate financial statements of subsidiaries not consolidated and
50 percent or less owned persons are omitted since no such entity constitutes a
"significant subsidiary" pursuant to the provisions of Regulation S-X,
Article 3-09.
28
<Page>
(3) Exhibits:
The following documents are filed as Exhibits to this Annual Report on
Form 10-K or incorporated by reference herein:
<Table>
<Caption>
EXHIBIT
NUMBER
- ---------------------
<S> <C>
2 Contribution and Distribution Agreement+
3.1 Restated Certificate of Incorporation of Avaya Inc.+
3.2 Amended and Restated By-laws of Avaya Inc.*
4.1 Specimen Common Stock certificate+
4.2 Restated Certificate of Incorporation of Avaya Inc.
(incorporated by reference as Exhibit 3.1 hereto)+
4.3 Amended and Restated By-laws of Avaya Inc. (filed as Exhibit
3.2 hereto)*
4.4 Rights Agreement between Avaya Inc. and The Bank of New
York, as Rights Agent+
4.5 Form of Certificate of Designations of Series A Junior
Participating Preferred Stock (attached as Exhibit A to the
Rights Agreement filed as Exhibit 4.4hereto)+
4.6 Form of Right Certificate (attached as Exhibit B to the
Rights Agreement incorporated by reference as Exhibit 4.4
hereto)+
4.7 Preferred Stock Certificate**
4.8 Series A Warrant**
4.9 Series B Warrant**
4.10 Form of Indenture between Avaya Inc. and The Bank of New
York, as Trustee**
4.11 Form of Supplemental Indenture between the Company and The
Bank of New York, as Trustee, relating to the Liquid Yield
Options Notes due 2021 (ZeroCoupon-Senior)****
10.1 Contribution and Distribution Agreement (incorporated by
reference as Exhibit 2 hereto)+
10.2 Interim Services and Systems Replication Agreement+
10.3 Employee Benefits Agreement+
10.4 Tax Sharing Agreement+
10.5 Avaya Inc. Short Term Incentive Plan+
10.6 Avaya Inc. 2000 Long Term Incentive Plan+
10.7 Avaya Inc. 2000 Long Term Incentive Plan Restricted Stock
Unit Award Agreement+
10.8 Avaya Inc. 2000 Long Term Incentive Plan Nonstatutory Stock
Option Agreement+
10.9 Avaya Inc. Deferred Compensation Plan+
10.10 Employment Agreement of Mr. Peterson, dated August 8, 1995+
10.11 Avaya Inc. Supplemental Pension Plan+
10.12 Avaya Inc. 2000 Stock Compensation Plan for Non-Employee
Directors+
10.13 Trademark License Agreement+
</Table>
29
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER
- ---------------------
<S> <C>
10.14 Patent and Technology License Agreement+
10.15 Technology Assignment and Joint Ownership Agreement+
10.16 Development Project Agreement+
10.17 Preferred Stock and Warrant Purchase Agreement+
10.18 Certificate of Designations, Preferences and Rights of
Series B Convertible Participating Preferred Stock of Avaya
Inc. (attached as Exhibit A to the Preferred Stock and
Warrant Purchase Agreement incorporated by reference as
Exhibit 10.17 hereto)+
10.20 364-Day Competitive Advance and Revolving Credit Facility
Agreement, dated as of August 28, 2001 among Avaya Inc.,
Citibank, N.A., as Agent, Salomon Smith Barney, as Lead
Arranger, The Chase Manhattan Bank and Deutsche Bank AG New
York Branch and Credit Suisse First Boston, as
Co-Syndication Agents, and the Lenders party thereto*****
10.21 Five Year Competitive Advance and Revolving Credit Facility
Agreement, dated as of September 25, 2000 among Lucent
Technologies Inc., Avaya Inc., Citibank, N.A., as Agent,
Salomon Smith Barney, as Lead Arranger, Bank One, NA, The
Chase Manhattan Bank and Deutsche Bank AG New York and/or
Cayman Islands Branches, as Co-Syndication Agents and
Co-Arrangers, Commerzbank AG, as Co-Arranger and the Lenders
party thereto*
10.22 Letter Amendment No. 1, dated as of August 10, 2001, to the
Five Year Credit Agreement by and among Avaya Inc.,
Citibank, N.A., as Agent and the Lenders party thereto***
12 Computation of Earnings to Fixed Charges and Earnings to
Combined Fixed Charges and Preferred Stock Accretion*****
13 The 2001 Annual Report to Shareholders, which, except for
those portions incorporated by reference, is furnished
solely for the information of the Commission and is not
deemed "filed."*****
21 List of Subsidiaries of Avaya Inc.*****
23 Consent of PricewaterhouseCoopers LLP*****
24 Power of Attorney*****
</Table>
- ------------------------
+ Incorporated by reference from Avaya's Registration Statement on Form 10
(Reg. No. 1-15951), declared effective by the Securities and Exchange
Commission on September 15, 2000.
* Incorporated by reference from Avaya's Annual Report on Form 10-K for the
year ended September 30, 2000.
** Incorporated by reference from Avaya's Registration Statement on Form S-3
(Reg. No. 333-57962), declared effective by the Commission on May 24, 2001.
*** Incorporated by reference from Avaya's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001.
****Incorporated by reference from Avaya's Registration Statement on Form 8-A
dated October 30, 2001.
*****Filed herewith.
(b) Reports on Form 8-K during the last quarter of the fiscal year covered
by this Report: None.
30
<Page>
AVAYA INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN MILLIONS)
<Table>
<Caption>
COLUMN B COLUMN C COLUMN D COLUMN E
------------ ---------- -------- ----------
ADDITIONS
BALANCE AT CHARGED CHARGED
BEGINNING OF TO COSTS & TO OTHER BALANCE AT
COLUMN A PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- -------- ------------ ---------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
YEAR 2001
Allowance for doubtful accounts....... $62 $53 $-- $47 $68
Deferred tax asset valuation
allowance........................... 49 -- -- -- 49
YEAR 2000
Allowance for doubtful accounts....... 58 36 -- 32 62
Deferred tax asset valuation
allowance........................... 73 -- -- 24 49
YEAR 1999
Allowance for doubtful accounts....... 82 25 1 50 58
Deferred tax asset valuation
allowance........................... 48 14 11 -- 73
</Table>
S-1
<Page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<Table>
<S> <C> <C>
AVAYA INC.
By: /s/ CHARLES D. PEIFFER
-----------------------------------------
Charles D. Peiffer
Controller
</Table>
December 26, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the date indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Principal Executive Officer:
* Vice Chairman, President
------------------------------------------- and Chief Executive December 26, 2001
Donald K. Peterson Officer
Principal Financial Officer:
/s/ GARRY K. MCGUIRE, SR.
------------------------------------------- Chief Financial Officer December 26, 2001
Garry K. McGuire, Sr.
Principal Accounting Officer:
/s/ CHARLES D. PEIFFER
------------------------------------------- Controller December 26, 2001
Charles D. Peiffer
Directors:
*
------------------------------------------- Chairman of the Board of December 26, 2001
Patricia F. Russo Directors
*
------------------------------------------- Director December 26, 2001
Jeffrey A. Harris
*
------------------------------------------- Director December 26, 2001
Mark Leslie
*
------------------------------------------- Director December 26, 2001
Henry B. Schacht
*
------------------------------------------- Director December 26, 2001
Daniel C. Stanzione
*
------------------------------------------- Director December 26, 2001
Franklin A. Thomas
</Table>
* by Charles D. Peiffer, Attorney-In-Fact
<Page>
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT PAGE
NUMBER NUMBER
- --------------------- --------
<C> <S> <C>
2 Contribution and Distribution Agreement+
3.1 Restated Certificate of Incorporation of Avaya Inc.+
3.2 Amended and Restated By-laws of Avaya Inc.*
4.1 Specimen Common Stock certificate+
4.2 Restated Certificate of Incorporation of Avaya Inc.
(incorporated by reference as Exhibit 3.1 hereto)+
4.3 Amended and Restated By-laws of Avaya Inc. (filed as Exhibit
3.2 hereto)*
4.4 Rights Agreement between Avaya Inc. and The Bank of New
York, as Rights Agent+
4.5 Form of Certificate of Designations of Series A Junior
Participating Preferred Stock (attached as Exhibit A to the
Rights Agreement filed as Exhibit 4.4 hereto)+
4.6 Form of Right Certificate (attached as Exhibit B to the
Rights Agreement incorporated by reference as Exhibit 4.4
hereto)+
4.7 Preferred Stock Certificate**
4.8 Series A Warrant**
4.9 Series B. Warrant**
4.10 Form of Indenture between Avaya Inc. and The Bank of New
York, as Trustee**
4.11 Form of Supplemental Indenture between the Company and the
Bank of New York, as Trustee, relating to the Liquid Yield
Options Notes due 2021 (Zero Coupon-Senior)****
10.1 Contribution and Distribution Agreement (incorporated by
reference as Exhibit 2 hereto)+
10.2 Interim Services and Systems Replication Agreement+
10.3 Employee Benefits Agreement+
10.4 Tax Sharing Agreement+
10.5 Avaya Inc. Short Term Incentive Plan+10.6 Avaya Inc. 2000
Long Term Incentive Plan+
10.7 Avaya Inc. 2000 Long Term Incentive Plan Restricted Stock
Unit Award Agreement+
10.8 Avaya Inc. 2000 Long Term Incentive Plan Nonstatutory Stock
Option Agreement+
10.9 Avaya Inc. Deferred Compensation Plan+
10.10 Employment Agreement of Mr. Peterson, dated August 8, 1995+
10.11 Avaya Inc. Supplemental Pension Plan+
10.12 Avaya Inc. 2000 Stock Compensation Plan for Non-Employee
Directors+
10.13 Trademark License Agreement+
10.14 Patent and Technology License Agreement+
10.15 Technology Assignment and Joint Ownership Agreement+
10.16 Development Project Agreement+
</Table>
<Page>
<Table>
<Caption>
EXHIBIT PAGE
NUMBER NUMBER
- --------------------- --------
<C> <S> <C>
10.17 Preferred Stock and Warrant Purchase Agreement+
10.18 Certificate of Designations, Preferences and Rights of
Series B Convertible Participating Preferred Stock of Avaya
Inc. (attached as Exhibit A to the Preferred Stock and
Warrant Purchase Agreement incorporated by reference as
Exhibit 10.17 hereto)+
10.20 364-Day Competitive Advance and Revolving Credit Facility
Agreement, dated as of August 28, 2001 among Avaya Inc.,
Citibank, N.A., as Agent, Salomon Smith Barney, as Lead
Arranger, The Chase Manhattan Bank and Deutsche Bank AG New
York Branch and Credit Suisse First Boston, as
Co-Syndication Agents, and the Lenders party thereto*****
10.21 Five Year Competitive Advance and Revolving Credit Facility
Agreement, dated as of September 25, 2000 among Lucent
Technologies Inc., Avaya Inc., Citibank, N.A., as Agent,
Salomon Smith Barney, as Lead Arranger, Bank One, NA, The
Chase Manhattan Bank and Deutsche Bank AG New York and/or
Cayman Islands Branches, as Co-Syndication Agents and
Co-Arrangers, Commerzbank AG, as Co-Arranger and the Lenders
party thereto*
10.22 Letter Amendment No. 1, dated as of August 10, 2001, to the
Five Year Credit Agreement by and among Avaya Inc.,
Citibank, N.A., as Agent and the Lenders party thereto***
12 Computation of Earnings to Fixed Charges and Earnings to
Combined Fixed Charges and Preferred Stock Accretion*****
13 The 2001 Annual Report to Shareholders, which, except for
those portions incorporated by reference, is furnished
solely for the information of the Commission and is not
deemed "filed."*****
21 List of Subsidiaries of Avaya Inc.*****
23 Consent of PricewaterhouseCoopers LLP*****
24 Power of Attorney*****
</Table>
* Filed herewith.
- ------------------------
+ Incorporated by reference from Avaya's Registration Statement on Form 10
(Reg. No. 1-15951), declared effective by the Securities and Exchange
Commission on September 15, 2000.
* Incorporated by reference from Avaya's Annual Report on Form 10-K for the
year ended September 30, 2000.
** Incorporated by reference from Avaya's Registration Statement on Form S-3
(Reg. No. 333-57962), declared effective by the Commission on May 24, 2001.
*** Incorporated by reference from Avaya's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001.
****Incorporated by reference from Avaya's Registration Statement on Form 8-A
dated
October 30, 2001.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.20
<SEQUENCE>3
<FILENAME>a2066518zex-10_20.txt
<DESCRIPTION>EXHIBIT 10.20
<TEXT>
<Page>
EXHIBIT 10.20
EXECUTION COPY
364-DAY
COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT
Dated as of August 28, 2001
among
AVAYA INC.,
as Borrower,
THE LENDERS PARTY HERETO,
CITIBANK, N.A.,
as Agent
THE CHASE MANHATTAN BANK,
DEUTSCHE BANK AG NEW YORK BRANCH
and
CREDIT SUISSE FIRST BOSTON,
as Co-Syndication Agents
and
SALOMON SMITH BARNEY INC.,
as Lead Arranger
<Page>
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS
SECTION 1.01. DEFINED TERMS....................................................1
SECTION 1.02. TERMS GENERALLY.................................................11
ARTICLE II THE CREDITS
SECTION 2.01. COMMITMENTS.....................................................12
SECTION 2.02. LOANS...........................................................12
SECTION 2.03. COMPETITIVE BID PROCEDURE.......................................13
SECTION 2.04. COMMITTED BORROWING PROCEDURE...................................15
SECTION 2.05. CONVERSION AND CONTINUATION OF COMMITTED LOANS..................16
SECTION 2.06. FEES............................................................17
SECTION 2.07. REPAYMENT OF LOANS; EVIDENCE OF DEBT............................17
SECTION 2.08. INTEREST ON LOANS...............................................18
SECTION 2.09. DEFAULT INTEREST................................................19
SECTION 2.10. ALTERNATE RATE OF INTEREST......................................19
SECTION 2.11. TERMINATION AND REDUCTION OF COMMITMENTS........................20
SECTION 2.12. PREPAYMENT......................................................20
SECTION 2.13. RESERVE REQUIREMENTS; CHANGE IN CIRCUMSTANCES...................21
SECTION 2.14. CHANGE IN LEGALITY..............................................22
SECTION 2.15. INDEMNITY.......................................................23
SECTION 2.16. PRO RATA TREATMENT..............................................24
SECTION 2.17. SHARING OF SETOFFS..............................................24
SECTION 2.18. PAYMENTS........................................................25
SECTION 2.19. TAXES 25
SECTION 2.20. MANDATORY ASSIGNMENT; COMMITMENT TERMINATION....................27
SECTION 2.21. EXPANSION OF COMMITMENTS........................................28
SECTION 2.22. EXTENSION OF MATURITY DATE......................................28
ARTICLE III REPRESENTATIONS AND WARRANTIES
SECTION 3.01. ORGANIZATION; POWERS............................................30
SECTION 3.02. AUTHORIZATION...................................................30
SECTION 3.03. ENFORCEABILITY..................................................30
SECTION 3.04. GOVERNMENTAL APPROVALS..........................................30
SECTION 3.05. FINANCIAL STATEMENTS............................................30
SECTION 3.06. LITIGATION; COMPLIANCE WITH LAWS................................31
SECTION 3.07. FEDERAL RESERVE REGULATIONS.....................................31
SECTION 3.08. INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT......31
SECTION 3.09. USE OF PROCEEDS.................................................31
SECTION 3.10. NO MATERIAL MISSTATEMENTS.......................................31
i
<Page>
ARTICLE IV CONDITIONS OF LENDING
SECTION 4.01. ALL BORROWINGS..................................................32
SECTION 4.02. CLOSING DATE....................................................32
ARTICLE V COVENANTS
SECTION 5.01. EXISTENCE.......................................................33
SECTION 5.02. FINANCIAL STATEMENTS, REPORTS, ETC..............................33
SECTION 5.03. MAINTAINING RECORDS.............................................34
SECTION 5.04. USE OF PROCEEDS.................................................34
SECTION 5.05. COMPLIANCE WITH LAWS, ETC.......................................34
SECTION 5.06. CONSOLIDATIONS, MERGERS, AND SALES OF ASSETS....................34
SECTION 5.07. LIMITATIONS ON LIENS. The Borrower will not create or
suffer to exist, or permit any of its Material Subsidiaries
to create or suffer to exist, any Lien on or with respect to
any of its properties, whether now owned or hereafter
acquired, or assign, or permit any of its Material
Subsidiaries to assign, any right to receive income, other
than:................................................................35
SECTION 5.08. INTEREST COVERAGE RATIO.........................................36
ARTICLE VI EVENTS OF DEFAULT
ARTICLE VII THE AGENT
ARTICLE VIII MISCELLANEOUS
SECTION 8.01. NOTICES.........................................................40
SECTION 8.02. SURVIVAL OF AGREEMENT...........................................41
SECTION 8.03. BINDING EFFECT..................................................41
SECTION 8.04. SUCCESSORS AND ASSIGNS..........................................41
SECTION 8.05. EXPENSES; INDEMNITY.............................................44
SECTION 8.06. RIGHT OF SETOFF.................................................44
SECTION 8.07. APPLICABLE LAW..................................................45
SECTION 8.08. WAIVERS; AMENDMENT..............................................45
SECTION 8.09. ENTIRE AGREEMENT................................................45
SECTION 8.10. SEVERABILITY....................................................46
SECTION 8.11. COUNTERPARTS....................................................46
SECTION 8.12. HEADINGS........................................................46
SCHEDULE I Applicable Lending Offices
SCHEDULE 2.01 Allocations
EXHIBIT A-1 Form of Competitive Bid Request
EXHIBIT A-1 Form of Notice of Competitive Bid Request
EXHIBIT A-3 Form of Competitive Bid
EXHIBIT A-4 Form of Competitive Accept/Reject Letter
EXHIBIT A-5 Form of Competitive Bid Note
ii
<Page>
EXHIBIT A-6 Form of Committed Borrowing Request
EXHIBIT B Form of Standby Note
EXHIBIT C Assignment and Acceptance
EXHIBIT D Form of Opinion of Counsel to Avaya Inc.
iii
<Page>
364-DAY COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY
AGREEMENT dated as of August 28, 2001, among AVAYA INC., a Delaware corporation
(the "Borrower"), the lenders listed in Schedule 2.01 (the "Lenders"), CITIBANK,
N.A., a New York banking corporation, as agent for the Lenders (in such
capacity, the "Agent"), THE CHASE MANHATTAN BANK, DEUTSCHE BANK AG NEW YORK
BRANCH and CREDIT SUISSE FIRST BOSTON, as Co-Syndication Agents, and SALOMON
SMITH BARNEY INC., as Lead Arranger.
The Borrower has requested the Lenders to extend credit to it
to enable it to borrow on a standby revolving credit basis on and after the date
hereof and at any time and from time to time prior to the Maturity Date (as
herein defined) a principal amount not in excess of $400,000,000 at any time
outstanding. The Borrower has also requested the Lenders to provide a procedure
pursuant to which the Borrower may invite the Lenders to bid on an uncommitted
basis on borrowings by the Borrower. The proceeds of such borrowings are to be
used for general corporate purposes, including refunding of debt, support for
commercial paper and acquisition financing. The Lenders are willing to extend
such credit to the Borrower on the terms and subject to the conditions herein
set forth.
Accordingly, the Borrower, the Lenders and the Agent agree as
follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. DEFINED TERMS. As used in this Agreement, the
following terms shall have the meanings specified below:
"ABR Borrowing" shall mean a Borrowing comprised of ABR Loans.
"ABR Loan" shall mean any Committed Loan bearing interest at a
rate determined by reference to the Alternate Base Rate in accordance with the
provisions of Article II.
"Administrative Fees" shall have the meaning assigned to such
term in Section 2.06(b).
"Administrative Questionnaire" shall mean an Administrative
Questionnaire containing contact information for each Lender in form
satisfactory to the Agent.
"Affiliate" shall mean, when used with respect to a specified
person, another person that directly or indirectly controls or is controlled by
or is under common control with the person specified.
"Alternate Base Rate" shall mean, for any day, a rate per
annum equal to the greater of (a) the Base Rate in effect on such day and (b)
the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For
purposes hereof, "Base Rate" shall mean the rate of interest per annum publicly
announced from time to time by the Agent as its base rate in effect at
<Page>
its principal office in New York City; each change in the Base Rate shall be
effective on the date such change is publicly announced as effective. For
purposes hereof, "Federal Funds Effective Rate" shall mean, for any day, the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers, as
published for such day (or, if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day which is a Business Day, the arithmetic
average, as determined by the Agent, of the quotations for the day of such
transactions received by the Agent from three Federal funds brokers of
recognized standing selected by it. If for any reason the Agent shall have
determined (which determination shall be conclusive absent manifest error) that
it is unable to ascertain the Federal Funds Effective Rate for any reason,
including the inability or failure of the Agent to obtain sufficient quotations
in accordance with the terms thereof, the Alternate Base Rate shall be
determined without regard to clause (b) of the first sentence of this definition
until the circumstances giving rise to such inability no longer exist. Any
change in the Alternate Base Rate due to a change in the Base Rate or the
Federal Funds Effective Rate shall be effective on the effective date of such
change in the Base Rate or the Federal Funds Effective Rate, respectively.
"Applicable Margin" shall mean (a) for ABR Loans, 0% per annum
and (b) for Eurodollar Committed Loans, a percentage per annum determined by
reference to the Public Debt Rating in effect on such date as set forth below:
<Table>
<Caption>
--------------------------------------------------------
APPLICABLE MARGIN
FOR EURODOLLAR
PUBLIC DEBT RATING S&P/MOODY'S COMMITTED LOANS
--------------------------------------------------------
<S> <C>
I: At least A or A2 0.305%
--------------------------------------------------------
II: Below I, but at least
A- or A3 0.410%
--------------------------------------------------------
III: Below II, but at least
BBB+ or Baa1 0.500%
--------------------------------------------------------
IV: Below III, but at least
BBB or Baa2 0.600%
--------------------------------------------------------
V: Below IV, but at least
BBB- or Baa3 0.825%
--------------------------------------------------------
VI: Below V 1.025%
--------------------------------------------------------
</Table>
"Applicable Percentage" means, as of any date, a percentage
per annum determined by reference to the Public Debt Rating in effect on such
date as set forth below:
<Table>
<Caption>
--------------------------------------------------------
PUBLIC DEBT RATING APPLICABLE
S&P/MOODY'S PERCENTAGE
--------------------------------------------------------
<S> <C>
I: At least A or A2 0.070%
--------------------------------------------------------
2
<Page>
--------------------------------------------------------
II: Below I, but at least 0.090%
A- or A3
--------------------------------------------------------
III: Below II, but at least 0.125%
BBB+ or Baa1
--------------------------------------------------------
IV: Below III, but at least 0.150%
BBB or Baa2
--------------------------------------------------------
V: Below IV, but at least 0.175%
BBB- or Baa3
--------------------------------------------------------
VI: Below V 0.225%
--------------------------------------------------------
</Table>
"Applicable Utilization Fee" means, with respect to Eurodollar
Committed Loans, as of any date that the aggregate Loans exceed 50% of the
aggregate Commitments, a percentage per annum determined by reference to the
Public Debt Rating in effect on such date as set forth below:
<Table>
<Caption>
--------------------------------------------------------
PUBLIC DEBT RATING APPLICABLE
S&P/MOODY'S UTILIZATION FEE
--------------------------------------------------------
<S> <C>
I: At least A or A2 0.075%
--------------------------------------------------------
II: Below I, but at least 0.100%
A- or A3
--------------------------------------------------------
III: Below II, but at least 0.125%
BBB+ or Baa1
--------------------------------------------------------
IV: Below III, but at least 0.125%
BBB or Baa2
--------------------------------------------------------
V: Below IV, but at least 0.250%
BBB- or Baa3
--------------------------------------------------------
VI: Below V 0.250%
--------------------------------------------------------
</Table>
"Assignment and Acceptance" shall mean an assignment and
acceptance entered into by a Lender and an assignee, and accepted by the Agent,
in the form of Exhibit C.
"Board" shall mean the Board of Governors of the Federal
Reserve System of the United States.
"Board of Directors" shall mean the Board of Directors of the
Borrower, or any duly authorized committee thereof.
"Borrowing" shall mean a group of Loans of a single Type made
by the Lenders (or, in the case of a Competitive Borrowing, by the Lender or
Lenders whose Competitive Bids have been accepted pursuant to Section 2.03) on a
single date and as to which a single Interest Period is in effect.
"Business Day" shall mean any day (other than a day which is a
Saturday, Sunday or legal holiday in the State of New York) on which banks are
open for business in New York City; PROVIDED, HOWEVER, that, when used in
connection with a Eurodollar Loan, the term
3
<Page>
"Business Day" shall also exclude any day on which banks are not open for
dealings in dollar deposits in the London interbank market.
"Capitalized Leases" means all leases that have been or should
be, in accordance with GAAP, recorded as capitalized leases.
"Closing Date" shall mean the date hereof.
"Code" shall mean the Internal Revenue Code of 1986, as the
same may be amended from time to time.
"Commitment" shall mean, with respect to each Lender, the
Commitment of such Lender as set forth in Schedule 2.01 hereto.
"Committed Borrowing" shall mean a Borrowing consisting of
simultaneous Committed Loans from each of the Lenders.
"Committed Borrowing Request" shall mean a request made
pursuant to Section 2.04 in the form of Exhibit A-6.
"Committed Loans" shall mean the revolving loans made by the
Lenders to the Borrower pursuant to Section 2.04. Each Committed Loan shall be a
Eurodollar Committed Loan or an ABR Loan.
"Competitive Bid" shall mean an offer by a Lender to make a
Competitive Loan pursuant to Section 2.03.
"Competitive Bid Accept/Reject Letter" shall mean a
notification made by the Borrower pursuant to Section 2.03(d) in the form of
Exhibit A-4.
"Competitive Bid Rate" shall mean, as to any Competitive Bid
made by a Lender pursuant to Section 2.03(b), (i) in the case of a Eurodollar
Loan, the Margin, and (ii) in the case of a Fixed Rate Loan, the fixed rate of
interest offered by the Lender making such Competitive Bid.
"Competitive Bid Request" shall mean a request made pursuant
to Section 2.03 in the form of Exhibit A-1.
"Competitive Borrowing" shall mean a Borrowing consisting of a
Competitive Loan or concurrent Competitive Loans from the Lender or Lenders
whose Competitive Bids for such Borrowing have been accepted by the Borrower
under the bidding procedure described in Section 2.03.
"Competitive Loan" shall mean a Loan from a Lender to the
Borrower pursuant to the bidding procedure described in Section 2.03. Each
Competitive Loan shall be a Eurodollar Competitive Loan or a Fixed Rate Loan.
4
<Page>
"Consolidated EBIT" shall mean, for any period, net income (or
net loss) PLUS the sum of (a) consolidated interest expense and (b) consolidated
income tax expense, in each case determined in accordance with GAAP for such
period, EXCLUDING, up to $950,000,000 of charges in connection with the business
restructuring plan during such period to be taken no later than the fourth
quarter of fiscal year 2001 of the Borrower, up to $300,000,000 of start-up
costs associated with the establishment of the Borrower as a separate business
entity incurred during the period to be taken through the fourth quarter of
fiscal year 2001 of the Borrower and up to $450,000,000 of non-cash business
restructuring charges during such period to be taken no later than the fourth
quarter of fiscal year 2001 of the Borrower.
"Consolidated Net Worth" shall mean, at any date, as to the
Borrower, the consolidated total assets appearing on the most recently prepared
consolidated balance sheet of it and its consolidated subsidiaries as of the end
of the most recent fiscal quarter for which such balance sheet is available,
prepared in accordance with GAAP, less all consolidated total liabilities as
shown on such balance sheet.
"Debt " of any Person means, without duplication, (a) all
indebtedness of such Person for borrowed money, (b) all obligations of such
Person for installment sale or other deferred purchase price of property or
services (other than trade payables incurred in the ordinary course of such
Person's business), (c) all obligations of such Person evidenced by notes,
bonds, debentures or other similar instruments, (d) all obligations of such
Person as lessee under Capitalized Leases, (e) all obligations, contingent or
otherwise, of such Person in respect of acceptances, standby letters of credit
or similar extensions of credit, (f) all net payment obligations of such Person
in respect of Hedge Agreements, (g) all Debt of others referred to in clauses
(a) through (f) above or clause (h) below guaranteed directly or indirectly in
any manner by such Person, or in effect guaranteed directly or indirectly by
such Person through an agreement (1) to pay or purchase such Debt or to advance
or supply funds for the payment or purchase of such Debt or (2) to purchase,
sell or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of providing direct or indirect security for such Debt
or to assure the holder of such Debt against loss, and (h) all Debt referred to
in clauses (a) through (g) above secured by (or for which the holder of such
Debt has an existing right, contingent or otherwise, to be secured by) any Lien
on property (including, without limitation, accounts and contract rights) owned
by such Person, even though such Person has not assumed or become liable for the
payment of such Debt.
"Default" shall mean any event or condition which upon notice,
lapse of time or both would constitute an Event of Default.
"Defaulting Lender" means, at any time, any Lender that, at
such time, (a) has failed to fund any portion of any Loan required to be made by
such Lender to the Borrower pursuant to Section 2.01 or 2.02 at or prior to such
time or (b) shall take any action or be the subject of any action or proceeding
of a type described in Section 6.01(g) or (h).
"dollars" or "$" shall mean lawful money of the United States
of America.
"Environmental Law" shall mean any federal, state, local or
foreign statute, law, ordinance, rule, regulation, code, order, judgment, decree
or judicial or agency interpretation,
5
<Page>
policy or guidance relating to pollution or protection of the environment,
health, safety or natural resources, including, without limitation, those
relating to the use, handling, transportation, treatment, storage, disposal,
release or discharge of Hazardous Materials.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time, and the regulations promulgated and
rulings issued thereunder.
"ERISA Affiliate" means any Person that for purposes of Title
IV of ERISA is a member of the Borrower's controlled group, or under common
control with the Borrower, within the meaning of Section 414 of the Internal
Revenue Code.
"ERISA Event" means (a) (i) the occurrence of a reportable
event, within the meaning of Section 4043 of ERISA, with respect to any Plan
unless the 30-day notice requirement with respect to such event has been waived
by the PBGC, or (ii) the requirements of subsection (1) of Section 4043(b) of
ERISA (without regard to subsection (2) of such Section) are met with a
contributing sponsor, as defined in Section 4001(a)(13) of ERISA, of a Plan, and
an event described in paragraph (9), (10), (11), (12) or (13) of Section 4043(c)
of ERISA is reasonably expected to occur with respect to such Plan within the
following 30 days; (b) the application for a minimum funding waiver with respect
to a Plan; (c) the provision by the administrator of any Plan of a notice of
intent to terminate such Plan pursuant to Section 4041(a)(2) of ERISA (including
any such notice with respect to a plan amendment referred to in Section 4041(e)
of ERISA); (d) the cessation of operations at a facility of the Borrower or any
ERISA Affiliate in the circumstances described in Section 4062(e) of ERISA; (e)
the withdrawal by the Borrower or any ERISA Affiliate from a Multiple Employer
Plan during a plan year for which it was a substantial employer, as defined in
Section 4001(a)(2) of ERISA; (f) the conditions for the imposition of a lien
under Section 302(f) of ERISA shall have been met with respect to any Plan; (g)
the adoption of an amendment to a Plan requiring the provision of security to
such Plan pursuant to Section 307 of ERISA; or (h) the institution by the PBGC
of proceedings to terminate a Plan pursuant to Section 4042 of ERISA, or the
occurrence of any event or condition described in Section 4042 of ERISA that
constitutes grounds for the termination of, or the appointment of a trustee to
administer, a Plan.
"Eurodollar Borrowing" shall mean a Borrowing comprised of
Eurodollar Loans.
"Eurodollar Competitive Loan" shall mean any Competitive Loan
bearing interest at a rate determined by reference to the LIBO Rate in
accordance with the provisions of Article II.
"Eurodollar Committed Loan" shall mean any Committed Loan
bearing interest at a rate determined by reference to the LIBO Rate in
accordance with the provisions of Article II.
"Eurodollar Loan" shall mean any Eurodollar Competitive Loan
or Eurodollar Committed Loan.
"Event of Default" shall have the meaning assigned to such
term in Article VI.
"Facility Fee" shall have the meaning assigned to such term in
Section 2.06(a).
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"Fee Letter" shall mean the Fee Letter dated August __, 2001,
between the Borrower, Salomon Smith Barney Inc. and the Agent.
"Fees" shall mean the Facility Fee and the Administrative
Fees.
"Financial Officer" of any corporation shall mean the chief
financial officer, principal accounting officer or Treasurer of such
corporation.
"Fixed Rate Borrowing" shall mean a Borrowing comprised of
Fixed Rate Loans.
"Fixed Rate Loan" shall mean any Competitive Loan bearing
interest at a fixed percentage rate per annum (expressed in the form of a
decimal to no more than four decimal places) specified by the Lender making such
Loan in its Competitive Bid.
"GAAP" shall mean generally accepted accounting principles,
applied on a consistent basis.
"Governmental Authority" shall mean any Federal, state, local
or foreign court or governmental agency, authority, instrumentality or
regulatory body.
"Hazardous Materials" shall mean (a) petroleum and petroleum
products, byproducts or breakdown products, radioactive materials,
asbestos-containing materials, polychlorinated biphenyls and radon gas and (b)
any other chemicals, materials or substances designated, classified or regulated
as hazardous or toxic or as a pollutant or contaminant under any Environmental
Law.
"Hedge Agreement" means interest rate swap or collar
agreements, interest rate future contracts, currency swap agreements, currency
future contracts and other similar agreements.
"Interest Payment Date" shall mean, with respect to any Loan,
the last day of the Interest Period applicable thereto and, in the case of a
Eurodollar Loan with an Interest Period of more than three months' duration or a
Fixed Rate Loan with an Interest Period of more than 90 days' duration, each day
that would have been an Interest Payment Date for such Loan had successive
Interest Periods of three months' duration or 90 days' duration, as the case may
be, been applicable to such Loan and, in addition, the date of any conversion of
such Loan to a Loan of a different Type.
"Interest Period" shall mean (a) as to any Eurodollar
Borrowing, the period commencing on the date of such Borrowing or on the last
day of the immediately preceding Interest Period applicable to such Borrowing,
as the case may be, and ending on the numerically corresponding day (or, if
there is no numerically corresponding day, on the last day) in the calendar
month that is 1, 2, 3, 6 or to the extent available to each Lender, 9 months
thereafter, as the Borrower may elect, (b) as to any ABR Borrowing, the period
commencing on the date of such Borrowing or on the last day of the immediately
preceding Interest Period applicable to such Borrowing, as the case may be, and
ending on the earliest of (i) the next succeeding March 31, June 30, September
30 or December 31, (ii) the Maturity Date, and (iii) the date such Borrowing is
converted to a Borrowing of a different Type in accordance with Section 2.05 or
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repaid or prepaid in accordance with Section 2.07 or Section 2.12 and (c) as to
any Fixed Rate Borrowing, the period commencing on the date of such Borrowing
and ending on the date specified in the Competitive Bids in which the offer to
make the Fixed Rate Loans comprising such Borrowing were extended, which shall
not be earlier than four days after the date of such Borrowing or later than 360
days after the date of such Borrowing; PROVIDED, HOWEVER, that if any Interest
Period would end on a day other than a Business Day, such Interest Period shall
be extended to the next succeeding Business Day unless, in the case of
Eurodollar Loans only, such next succeeding Business Day would fall in the next
calendar month, in which case such Interest Period shall end on the next
preceding Business Day. Interest shall accrue from and including the first day
of an Interest Period to but excluding the last day of such Interest Period.
"LIBO Rate" means, for any Interest Period for all of the
Eurodollar Loans comprising part of the same Borrowing, an interest rate per
annum equal to the rate per annum (rounded upward to the nearest whole multiple
of 1/16 of 1% per annum) appearing on Telerate Markets Page 3750 (or any
successor page) as the London interbank offered rate for deposits in United
States dollars at approximately 11:00 A.M. (London time) two Business Days prior
to the first day of such Interest Period for a term comparable to such Interest
Period or, if for any reason such rate is not available, the average (rounded
upward to the nearest whole multiple of 1/16 of 1% per annum, if such average is
not such a multiple) of the rate per annum at which deposits in United States
dollars are offered by the principal office of each of the Reference Banks in
London, England to prime banks in the London interbank market at 11:00 A.M.
(London time) two Business Days before the first day of such Interest Period in
an amount substantially equal to such Reference Bank's Eurodollar Loan
comprising part of such Borrowing to be outstanding during such Interest Period
(or, if any Reference Bank shall not have such a Eurodollar Loan, $1,000,000)
and for a period equal to such Interest Period. The LIBO Rate for any Interest
Period for each of the Eurodollar Loans comprising part of the same Borrowing
shall be determined by the Agent on the basis of applicable rates furnished to
and received by the Agent from the Reference Banks two Business Days before the
first day of such Interest Period, SUBJECT, HOWEVER, to the provisions of
Section 2.08.
"Lien" means any lien, security interest or other charge or
encumbrance of any kind, or any other type of preferential arrangement,
including, without limitation, the lien or retained security title of a
conditional vendor and any easement, right of way or other encumbrance on title
to real property.
"Loan" shall mean a Competitive Loan or a Committed Loan,
whether made as a Eurodollar Loan, an ABR Loan or a Fixed Rate Loan, as
permitted hereby.
"Margin" shall mean, as to any Eurodollar Competitive Loan,
the margin (expressed as a percentage rate per annum in the form of a decimal to
no more than four decimal places) to be added to or subtracted from the LIBO
Rate in order to determine the interest rate applicable to such Loan, as
specified in the Competitive Bid relating to such Loan.
"Margin Regulations" shall mean Regulations T, U and X of the
Board as from time to time in effect, and all official rulings and
interpretations thereunder or thereof.
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"Margin Stock" shall have the meaning given such term under
Regulation U of the Board.
"Material Adverse Effect" shall mean a material adverse effect
on the business, assets, operations or condition, financial or otherwise, of the
Borrower and its subsidiaries taken as a whole.
"Material Subsidiary" of the Borrower, as the case may be,
means, at any time, each of its Subsidiaries having (a) assets with a value of
not less than 5% of the total value of the consolidated assets of the Borrower
and its Subsidiaries, taken as a whole, or (b) consolidated revenues not less
than 5% of the consolidated revenues of the Borrower and its Subsidiaries, taken
as a whole, in each case as of the end of or for most recently completed fiscal
year of the Borrower.
"Maturity Date" shall mean August 27, 2002, subject to Section
2.22.
"Moody's" shall mean Moody's Investors Service, Inc.
"Multiemployer Plan" means a multiemployer plan, as defined in
Section 4001(a)(3) of ERISA, to which the Borrower or any ERISA Affiliate is
making or accruing an obligation to make contributions, or has within any of the
preceding five plan years made or accrued an obligation to make contributions.
"Multiple Employer Plan" means a single employer plan, as
defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of
the Borrower or any ERISA Affiliate and at least one person other than the
Borrower or the ERISA Affiliate or (b) was so maintained and in respect of which
the Borrower or any ERISA Affiliate could have liability under Section 4064 or
4069 of ERISA in the event such plan has been or were to be terminated.
"PBGC" means the Pension Benefit Guaranty Corporation (or any
successor).
"Permitted Lien" means such of the following as to which no
enforcement, collection, execution, levy or foreclosure proceeding shall have
been commenced: (a) Liens for taxes, assessments and governmental charges or
levies other than any such Lien that is being contested in good faith and by
proper proceedings and as to which appropriate reserves are being maintained,
and as to which no Lien resulting therefrom has attached to its property and
become enforceable against its other creditors; (b) landlord's liens and Liens
imposed by law, such as materialmen's, mechanics', carriers', workmen's and
repairmen's Liens and other similar Liens arising in the ordinary course of
business securing obligations that are not overdue for a period of more than 60
days; (c) pledges or deposits to secure obligations under workers' compensation
laws or similar legislation or to secure public or statutory obligations; and
(d) easements, rights of way and other encumbrances on title to real property
that do not render title to the property encumbered thereby unmarketable or
materially adversely affect the use of such property for its present purposes
(e) governmental (Federal, state or municipal) liens arising out of contracts
for the purchase of products and deposits or pledges to obtain the release of
any of such liens; (f) liens created by or resulting from any litigation or
legal proceeding that is currently being contested in good faith by appropriate
proceedings; (g) deposits in connection with bids, tenders,
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contracts (other than for the payment of money) (h) deposits in connection with
obtaining or maintaining self-insurance or to obtain the benefits of any law,
regulation or arrangement pertaining to unemployment insurance, old age
pensions, social security or similar matters; and (i) deposits of cash or
obligations of the United States of America to secure surety, appeal or customs
bonds.
"Person" or "person" shall mean any natural person,
corporation, business trust, joint venture, association, company, partnership or
government, or any agency or political subdivision thereof.
"Plan" means a Single Employer Plan or a Multiple Employer
Plan.
"Public Debt Rating" means, as of any date, the lowest rating
that has been most recently announced by either S&P or Moody's, as the case may
be, for any class of non-credit enhanced long-term senior unsecured debt issued
by the Borrower. For purposes of the foregoing, (a) if only one of S&P and
Moody's shall have in effect a Public Debt Rating, the Applicable Margin, the
Applicable Percentage and the Applicable Utilization Fee shall be determined by
reference to the available rating; (b) if neither S&P nor Moody's shall have in
effect a Public Debt Rating, the Applicable Margin, the Applicable Percentage
and the Applicable Utilization Fee will be set in accordance with Level VI under
the definition of "Applicable Margin", "Applicable Percentage" or "Applicable
Utilization Fee", as the case may be; (c) if the ratings established by S&P and
Moody's shall fall within different levels, the Applicable Margin, the
Applicable Percentage and the Applicable Utilization Fee shall be based upon the
higher of such ratings, PROVIDED that if the lower of such ratings is more than
one level below the higher of such ratings, the Applicable Percentage, the
Applicable Margin and the Applicable Utilization Fee shall be determined by
reference to the level that is one level above such lower rating, PROVIDED
FURTHER that if either of the ratings established by S&P or Moody's shall fall
within Level VI, the Applicable Margin, the Applicable Percentage and the
Applicable Utilization Fee will be set in accordance with Level VI under the
definition of "Applicable Margin", "Applicable Percentage" or "Applicable
Utilization Fee", as the case may be; (d) if any rating established by S&P or
Moody's shall be changed, such change shall be effective as of the date on which
such change is first announced publicly by the rating agency making such change;
and (e) if S&P or Moody's shall change the basis on which ratings are
established, each reference to the Public Debt Rating announced by S&P or
Moody's, as the case may be, shall refer to the then equivalent rating by S&P or
Moody's, as the case may be.
"Reference Banks" shall mean Citibank, N.A., The Chase
Manhattan Bank and Deutsche Bank AG.
"Register" shall have the meaning given such term in Section
8.04(d).
"Required Lenders" shall mean, at any time, Lenders having
Commitments representing at least 51% of the Total Commitment or, for purposes
of acceleration pursuant to clause (ii) of Article VI, Lenders holding Committed
Loans representing at least 51% of the aggregate principal amount of the
Committed Loans outstanding.
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"Responsible Officer" of any corporation shall mean any
executive officer or Financial Officer of such corporation and any other officer
or similar official thereof responsible for the administration of the
obligations of such corporation in respect of this Agreement.
"S&P" shall mean Standard and Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc.
"SEC" shall mean the Securities and Exchange Commission.
"Single Employer Plan" means a single employer plan, as
defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of
the Borrower or any ERISA Affiliate and no person other than the Borrower or the
ERISA Affiliate or (b) was so maintained and in respect of which the Borrower or
any ERISA Affiliate could have liability under Section 4069 of ERISA in the
event such plan has been or were to be terminated.
"Subsidiary" shall mean, with respect to the Borrower, any
corporation, partnership, joint venture, limited liability company, trust or
estate, a majority of the Voting Shares of which are at the time owned or
controlled, directly or indirectly, by it or by one or more of its Subsidiaries
and required to be consolidated in accordance with GAAP in its consolidated
financial statements.
"Total Commitment" shall mean, at any time, the aggregate
amount of Commitments of all the Lenders, as in effect at such time.
"Transactions" shall have the meaning assigned to such term in
Section 3.02.
"Type", when used in respect of any Loan or Borrowing, shall
refer to the Rate by reference to which interest on such Loan or on the Loans
comprising such Borrowing is determined. For purposes hereof, "Rate" shall
include the LIBO Rate, the Alternate Base Rate and the Fixed Rate.
"Voting Shares" shall mean, as to shares or other ownership
interests of a particular corporation, partnership, joint venture, limited
liability company, trust or estate (i) outstanding shares of stock of any class
of such corporation entitled to vote in the election of directors, excluding
shares entitled so to vote only upon the happening of some contingency, (ii) the
interests in the capital or profits of such partnership, joint venture or
limited liability company or (iii) the beneficial interest in such trust or
estate.
SECTION 1.02. TERMS GENERALLY. The definitions in Section 1.01
shall apply equally to both the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The words "include," "includes" and
"including" shall be deemed to be followed by the phrase "without limitation."
All references herein to Articles, Sections, Exhibits and Schedules shall be
deemed references to Articles and Sections of, and Exhibits and Schedules to,
this Agreement unless the context shall otherwise require. Except as otherwise
expressly provided herein, all terms of an accounting or financial nature shall
be construed in accordance with GAAP, as in effect from time to time.
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ARTICLE II
THE CREDITS
SECTION 2.01. COMMITMENTS. Subject to the terms and conditions
and relying upon the representations and warranties herein set forth, each
Lender agrees, severally and not jointly, to make Committed Loans to the
Borrower, at any time and from time to time on and after the date hereof and
until the earlier of the Maturity Date and the termination of the Commitment of
such Lender, in an aggregate principal amount at any time outstanding not to
exceed such Lender's Commitment minus the amount by which the Competitive Loans
outstanding at such time shall be deemed to have used such Commitment pursuant
to Section 2.16, subject, however, to the conditions that (i) at no time shall
(A) the sum of (x) the outstanding aggregate principal amount of all Committed
Loans made by all Lenders plus (y) the outstanding aggregate principal amount of
all Competitive Loans made by all Lenders exceed (B) the Total Commitment, and
(ii) at all times the outstanding aggregate principal amount of all Committed
Loans made by each Lender shall equal the product of (A) the percentage which
its Commitment represents of the Total Commitment times (B) the outstanding
aggregate principal amount of all Committed Loans made pursuant to Section 2.04.
Each Lender's Commitment is set forth opposite its name in Schedule 2.01. Such
Commitments may be terminated or reduced from time to time pursuant to Section
2.11.
Within the foregoing limits, the Borrower may borrow, pay or
prepay and reborrow Committed Loans hereunder, on and after the Closing Date and
prior to the Maturity Date, subject to the terms, conditions and limitations set
forth herein.
SECTION 2.02. LOANS. (a) Each Committed Loan shall be made as
part of a Borrowing consisting of Loans made by the Lenders ratably in
accordance with their respective Commitments; PROVIDED, HOWEVER, that the
failure of any Lender to make any Committed Loan shall not in itself relieve any
other Lender of its obligation to lend hereunder (it being understood, however,
that no Lender shall be responsible for the failure of any other Lender to make
any Loan required to be made by such other Lender). Each Competitive Loan shall
be made in accordance with the procedures set forth in Section 2.03. The
Committed Loans or Competitive Loans comprising any Borrowing shall be (i) in
the case of Competitive Loans, in an aggregate principal amount which is an
integral multiple of $1,000,000 and not less than $10,000,000 and (ii) in the
case of Committed Loans, in an aggregate principal amount which is an integral
multiple of $1,000,000 and not less than $10,000,000 (or an aggregate principal
amount equal to the remaining balance of the available Commitments).
(b) Each Competitive Borrowing shall be comprised entirely of
Eurodollar Competitive Loans or Fixed Rate Loans, and each Committed Borrowing
shall be comprised entirely of Eurodollar Committed Loans or ABR Loans, as the
Borrower may request pursuant to Section 2.03 or 2.04, as applicable. Each
Lender may at its option make any Eurodollar Loan by causing any domestic or
foreign branch or Affiliate of such Lender to make such Loan; PROVIDED that any
exercise of such option shall not affect the obligation of the Borrower to repay
such Loan in accordance with the terms of this Agreement. Borrowings of more
than one Type may be outstanding at the same time; PROVIDED, HOWEVER, that the
Borrower shall not be entitled to request any Borrowing which, if made, would
result in an aggregate of more than 10 separate
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Committed Borrowings comprised of Eurodollar Committed Loans being outstanding
hereunder at any one time. For purposes of the foregoing, Loans having different
Interest Periods, regardless of whether they commence on the same date, shall be
considered separate Loans.
(c) Subject to Section 2.05, each Lender shall make each Loan
to be made by it hereunder on the proposed date thereof by wire transfer of
immediately available funds to the Agent in New York, New York, not later than
12:00 noon, New York City time, and the Agent shall by 3:00 p.m., New York City
time, credit the amounts so received to the general deposit account of the
Borrower with the Agent or, if a Borrowing shall not occur on such date because
any condition precedent herein specified shall not have been met, return the
amounts so received to the respective Lenders. Competitive Loans shall be made
by the Lender or Lenders whose Competitive Bids therefor are accepted pursuant
to Section 2.03 in the amounts so accepted. Committed Loans shall be made by the
Lenders pro rata in accordance with Section 2.16. Unless the Agent shall have
received notice from a Lender prior to the date of any Borrowing that such
Lender will not make available to the Agent such Lender's portion of such
Borrowing, the Agent may assume that such Lender has made such portion available
to the Agent on the date of such Borrowing in accordance with this paragraph (c)
and the Agent may, in reliance upon such assumption, make available to the
Borrower on such date a corresponding amount. If and to the extent that such
Lender shall not have made such portion available to the Agent, such Lender and
the Borrower severally agree to repay to the Agent forthwith on demand such
corresponding amount together with interest thereon, for each day from the date
such amount is made available to the Borrower until the date such amount is
repaid to the Agent at (i) in the case of the Borrower, the interest rate
applicable at the time to the Loans comprising such Borrowing and (ii) in the
case of such Lender, the Federal Funds Effective Rate. If such Lender shall
repay to the Agent such corresponding amount, such amount shall constitute such
Lender's Loan as part of such Borrowing for purposes of this Agreement.
SECTION 2.03. COMPETITIVE BID PROCEDURE. (a) In order to
request Competitive Bids, the Borrower shall hand deliver or telecopy to the
Agent a duly completed Competitive Bid Request in the form of Exhibit A-1
hereto, to be received by the Agent (i) in the case of a Eurodollar Competitive
Borrowing, not later than 10:00 a.m., New York City time, four Business Days
before a proposed Competitive Borrowing and (ii) in the case of a Fixed Rate
Borrowing, not later than 10:00 a.m., New York City time, one Business Day
before a proposed Competitive Borrowing. No ABR Loan shall be requested in, or
made pursuant to, a Competitive Bid Request. A Competitive Bid Request that does
not conform substantially to the format of Exhibit A-1 may be rejected in the
Agent's sole discretion, and the Agent shall promptly notify the Borrower of
such rejection by telecopy. Each Competitive Bid Request shall refer to this
Agreement and specify (x) whether the Borrowing then being requested is to be a
Eurodollar Borrowing or a Fixed Rate Borrowing, (y) the date of such Borrowing
(which shall be a Business Day) and the aggregate principal amount thereof which
shall be in a minimum principal amount of $10,000,000 and in an integral
multiple of $1,000,000, and (z) the Interest Period with respect thereto (which
may not end after the Maturity Date) and the interest payment date or dates
relating thereto. Promptly after its receipt of a Competitive Bid Request that
is not rejected as aforesaid, the Agent shall invite by telecopy (in the form
set forth in Exhibit A-2 hereto) the Lenders to bid, on the terms and conditions
of this Agreement, to make Competitive Loans pursuant to the Competitive Bid
Request.
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(b) Each Lender invited to bid may, in its sole discretion,
make one or more Competitive Bids to the Borrower responsive to the Borrower's
Competitive Bid Request. Each Competitive Bid by a Lender must be received by
the Agent via telecopy, in the form of Exhibit A-3 hereto, (i) in the case of a
Eurodollar Competitive Borrowing, not later than 9:30 a.m., New York City time,
three Business Days before a proposed Competitive Borrowing and (ii) in the case
of a Fixed Rate Borrowing, not later than 9:30 a.m., New York City time, on the
day of a proposed Competitive Borrowing. Multiple bids will be accepted by the
Agent. Competitive Bids that do not conform substantially to the format of
Exhibit A-3 may be rejected by the Agent after conferring with, and upon the
instruction of, the Borrower, and the Agent shall notify the Lender making such
nonconforming bid of such rejection as soon as practicable. Each Competitive Bid
shall refer to this Agreement and specify (x) the principal amount (which shall
be in a minimum principal amount of $5,000,000 and in an integral multiple of
$1,000,000 and which may equal the entire principal amount of the Competitive
Borrowing requested by the Borrower) of the Competitive Loan or Loans that the
Lender is willing to make to the Borrower, (y) the Competitive Bid Rate or Rates
at which the Lender is prepared to make the Competitive Loan or Loans and (z)
the Interest Period, the last day thereof and the interest payment date or dates
relating thereto. If any Lender invited to bid shall elect not to make a
Competitive Bid, such Lender shall so notify the Agent via telecopy (I) in the
case of Eurodollar Competitive Loans, not later than 9:30 a.m., New York City
time, three Business Days before a proposed Competitive Borrowing, and (II) in
the case of Fixed Rate Loans, not later than 9:30 a.m., New York City time, on
the day of a proposed Competitive Borrowing; PROVIDED, HOWEVER, that failure by
any Lender to give such notice shall not cause such Lender to be obligated to
make any Competitive Loan as part of such Competitive Borrowing. A Competitive
Bid submitted by a Lender pursuant to this paragraph (b) shall be irrevocable.
(c) The Agent shall promptly notify the Borrower, by telecopy,
of all the Competitive Bids made, the Competitive Bid Rate and the principal
amount of each Competitive Loan in respect of which a Competitive Bid was made
and the identity of the Lender that made each bid. The Agent shall send a copy
of all Competitive Bids to the Borrower for its records as soon as practicable
after completion of the bidding process set forth in this Section 2.03.
(d) The Borrower may in its sole and absolute discretion,
subject only to the provisions of this paragraph (d), accept or reject any
Competitive Bid referred to in paragraph (c) above. The Borrower shall notify
the Agent by telephone, confirmed by telecopy in the form of a Competitive Bid
Accept/Reject Letter, whether and to what extent it has decided to accept or
reject any of or all the bids referred to in paragraph (c) above, (x) in the
case of a Eurodollar Competitive Borrowing, not later than 10:30 a.m., New York
City time, three Business Days before a proposed Competitive Borrowing, and (y)
in the case of a Fixed Rate Borrowing, not later than 10:30 a.m., New York City
time, on the day of a proposed Competitive Borrowing; PROVIDED, HOWEVER, that
(i) the failure by the Borrower to give such notice shall be deemed to be a
rejection of all the bids referred to in paragraph (c) above, (ii) the Borrower
shall not accept a bid made at a particular Competitive Bid Rate if it has
decided to reject a bid made at a lower Competitive Bid Rate, (iii) the
aggregate amount of the Competitive Bids accepted by the Borrower shall not
exceed the principal amount specified in the Competitive Bid Request, (iv) if
the Borrower shall accept a bid or bids made at a particular Competitive Bid
Rate but the amount of such bid or bids shall cause the total amount of bids to
be accepted by the Borrower to exceed the amount specified in the Competitive
Bid Request, then the Borrower shall accept a portion of
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such bid or bids in an amount equal to the amount specified in the Competitive
Bid Request less the amount of all other Competitive Bids accepted with respect
to such Competitive Bid Request, which acceptance, in the case of multiple bids
at such Competitive Bid Rate, shall be made pro rata in accordance with the
amount of each such bid at such Competitive Bid Rate, and (v) except pursuant to
clause (iv) above, no bid shall be accepted for a Competitive Loan unless such
Competitive Loan is in a minimum principal amount of $5,000,000 and an integral
multiple of $1,000,000; PROVIDED FURTHER, HOWEVER, that if a Competitive Loan
must be in an amount less than $5,000,000 because of the provisions of clause
(iv) above, such Competitive Loan may be for a minimum of $1,000,000 or any
integral multiple thereof, and in calculating the pro rata allocation of
acceptances of portions of multiple bids at a particular Competitive Bid Rate
pursuant to clause (iv) the amounts shall be rounded to integral multiples of
$1,000,000 in a manner which shall be in the discretion of the Borrower. A
notice given by the Borrower pursuant to this paragraph (d) shall be
irrevocable.
(e) The Agent shall promptly notify each bidding Lender
whether or not its Competitive Bid has been accepted (and if so, in what amount
and at what Competitive Bid Rate) by telecopy sent by the Agent, and each
successful bidder will thereupon become bound, subject to the other applicable
conditions hereof, to make the Competitive Loan in respect of which its bid has
been accepted.
(f) A Competitive Bid Request shall not be made within five
Business Days after the date of any previous Competitive Bid Request. No
Competitive Borrowing shall be requested or made hereunder if after giving
effect thereto any of the conditions set forth in Section 2.01 would not be met.
(g) If the Agent shall elect to submit a Competitive Bid in
its capacity as a Lender, it shall submit such bid directly to the Borrower one
quarter of an hour earlier than the latest time at which the other Lenders are
required to submit their bids to the Agent pursuant to paragraph (b) above.
(h) Upon the request of any Lender making a Competitive Loan,
the indebtedness of the Borrower resulting from such Competitive Loan shall be
evidenced by a separate promissory note of the Borrower in substantially the
form of Exhibit A-5 hereto payable to the order of the Lender making such
Competitive Loan.
(i) All notices required by this Section 2.03 shall be given
in accordance with Section 8.01.
SECTION 2.04. COMMITTED BORROWING PROCEDURE. In order to
request a Committed Borrowing, the Borrower shall hand deliver or telecopy to
the Agent a duly completed Committed Borrowing Request in the form of Exhibit
A-6 (a) in the case of a Eurodollar Committed Borrowing, not later than 10:30
a.m., New York City time, three Business Days before a proposed Borrowing and
(b) in the case of an ABR Borrowing, not later than 10:30 a.m., New York City
time, on the day of a proposed Borrowing. No Fixed Rate Loan shall be requested
or made pursuant to a Committed Borrowing Request. Such notice shall be
irrevocable and shall in each case specify (i) whether the Borrowing then being
requested is to be a Eurodollar Committed Borrowing or an ABR Borrowing; (ii)
the date of such Committed
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Borrowing (which shall be a Business Day) and the amount thereof; and (iii) if
such Borrowing is to be a Eurodollar Committed Borrowing, the Interest Period
with respect thereto, which shall not end after the Maturity Date. If no
election as to the Type of Committed Borrowing is specified in any such notice,
then the requested Committed Borrowing shall be an ABR Borrowing. If no Interest
Period with respect to any Eurodollar Committed Borrowing is specified in any
such notice, then the Borrower shall be deemed to have selected an Interest
Period of one month's duration. Notwithstanding any other provision of this
Agreement to the contrary, the Borrower shall not be entitled to request any
Committed Borrowing if the Interest Period requested with respect to such
Committed Borrowing would end after the Maturity Date. The Agent shall promptly
advise the Lenders of any notice given pursuant to this Section 2.04 and of each
Lender's portion of the requested Borrowing.
SECTION 2.05. CONVERSION AND CONTINUATION OF COMMITTED LOANS.
The Borrower shall have the right at any time upon prior irrevocable notice to
the Agent (i) not later than 10:30 a.m., New York City time, on the day of the
conversion, to convert all or any part of any Eurodollar Committed Borrowing
into an ABR Borrowing, (ii) not later than 10:30 a.m., New York City time, three
Business Days prior to conversion or continuation, to convert any ABR Borrowing
into a Eurodollar Committed Borrowing or to continue any Eurodollar Committed
Borrowing as a Eurodollar Committed Borrowing for an additional Interest Period
and (iv) not later than 10:30 a.m., New York City time, three Business Days
prior to conversion, to convert the Interest Period, with respect to any
Eurodollar Committed Borrowing to another permissible Interest Period, subject
in each case to the following:
(a) if less than all the outstanding principal amount of any
Committed Borrowing shall be converted or continued, the aggregate
principal amount of the Committed Borrowing converted or continued
shall be an integral multiple of $1,000,000 and not less than
$10,000,000;
(b) accrued interest on a Committed Borrowing (or portion
thereof) being converted shall be paid by the Borrower at the time of
conversion;
(c) if any Eurodollar Committed Borrowing is converted at a
time other than the end of the Interest Period applicable thereto, the
Borrower shall pay, upon demand, any amounts due to the Lenders
pursuant to Section 2.15;
(d) any portion of a Committed Borrowing maturing or required
to be repaid in less than one month may not be converted into or
continued as a Eurodollar Committed Borrowing;
(e) any portion of a Eurodollar Committed Borrowing which
cannot be continued as a Eurodollar Committed Borrowing by reason of
clause (d) above shall be automatically converted at the end of the
Interest Period in effect for such Eurodollar Committed Borrowing into
an ABR Borrowing; and
(f) no Interest Period may be selected for any Eurodollar
Committed Borrowing that would end later than the Maturity Date.
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Each notice of the Borrower pursuant to this Section 2.05
shall be irrevocable and shall refer to this Agreement and specify (i) the
identity and amount of the Committed Borrowing that the Borrower requests to be
converted or continued, (ii) whether such Committed Borrowing is to be converted
to or continued as a Eurodollar Committed Borrowing or an ABR Borrowing, (iii)
if such notice requests a conversion, the date of such conversion (which shall
be a Business Day) and (iv) if such Committed Borrowing is to be converted to or
continued as a Eurodollar Committed Borrowing, the Interest Period with respect
thereto. If no Interest Period is specified in any such notice with respect to
any conversion to or continuation as a Eurodollar Committed Borrowing, the
Borrower shall be deemed to have selected an Interest Period of one month's
duration. If the Borrower shall not have given notice in accordance with this
Section 2.05 to convert or continue any Committed Borrowing, such Committed
Borrowing shall, at the end of the Interest Period applicable thereto (unless
repaid pursuant to the terms hereof), automatically be converted or continued
into a new Interest Period as an ABR Borrowing.
SECTION 2.06. FEES. (a) The Borrower agrees to pay to each
Lender, through the Agent, on each March 31, June 30, September 30 and December
31 (with the first payment being due on September 30, 2001) and on the date on
which the Commitment of such Lender shall be terminated or reduced as provided
herein, a facility fee (a "Facility Fee") equal to the Applicable Percentage per
annum in effect from time to time on the average daily amount of the Commitment
of such Lender, whether used or unused, during the preceding quarter (or other
period commencing on the date of this Agreement, or ending with the Maturity
Date or any date on which the Commitment of such Lender shall be terminated or
reduced). All Facility Fees shall be computed on the basis of the actual number
of days elapsed in a year of 360 days. The Facility Fee due to each Lender shall
commence to accrue on the date of this Agreement, and shall cease to accrue on
the earlier of the Maturity Date and the termination of the Commitment of such
Lender as provided herein.
(b) The Borrower agrees to pay the Agent, for its own account,
the administrative and other fees referred to in the Fee Letter (the
"Administrative Fees") at the times and in the amounts agreed upon in the Fee
Letter.
(c) All Fees shall be paid on the dates due, in immediately
available funds, to the Agent for distribution, if and as appropriate, among the
Lenders. Once paid, none of the Fees shall be refundable under any
circumstances.
SECTION 2.07. REPAYMENT OF LOANS; EVIDENCE OF DEBT. (a) The
Borrower hereby agrees that the outstanding principal balance of each Committed
Loan shall be payable on the Maturity Date, and that the outstanding principal
balance of each Competitive Loan shall be payable on the last day of the
Interest Period applicable thereto. Each Loan shall bear interest on the
outstanding principal balance thereof as set forth in Section 2.08.
(b) Each Lender shall maintain in accordance with its usual
practice an account or accounts evidencing the indebtedness of the Borrower to
the appropriate lending office of such Lender resulting from each Loan made by
such lending office of such Lender from time to time, including the amounts of
principal and interest payable and paid such lending office of such Lender from
time to time under this Agreement.
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(c) The Agent shall maintain the Register pursuant to Section
8.04(d), and a subaccount for each Lender, in which Register and accounts (taken
together) shall be recorded (i) the amount of each Loan made hereunder, the Type
of each Loan made and the Interest Period applicable thereto, (ii) the amount of
any principal or interest due and payable or to become due and payable from the
Borrower to each Lender hereunder and (iii) the amount of any sum received by
the Agent hereunder from the Borrower and each Lender's share thereof.
(d) The entries made in the Register and accounts maintained
pursuant to paragraph (b) and (c) of this Section 2.07 shall, to the extent
permitted by applicable law, be prima facie evidence of the existence and
amounts of the obligations of the Borrower therein recorded; PROVIDED, HOWEVER,
that the failure of any Lender or the Agent to maintain such account, such
Register or such subaccount, as applicable, or any error therein shall not in
any manner affect the obligation of the Borrower to repay the Loans made to the
Borrower by such Lender in accordance with their terms.
(e) The Borrower agrees that upon notice by any Lender after
the initial borrowing hereunder to the Borrower (with a copy to the Agent) to
the effect that a promissory note or other evidence of indebtedness is required
or appropriate in order for such Lender to evidence (whether for purposes of
pledge, enforcement or otherwise) the Committed Loans owing to, or to be made
by, such Lender, the Borrower shall promptly, execute and deliver to such
Lender, with a copy to the Agent, a promissory note or notes, in substantially
the form of Exhibit B hereto, payable to the order of such Lender in a principal
amount equal to the Commitment of such Lender.
SECTION 2.08. INTEREST ON LOANS. (a) Subject to the provisions
of Section 2.09, the Loans comprising each Eurodollar Borrowing shall bear
interest (computed on the basis of the actual number of days elapsed over a year
of 360 days) at a rate per annum equal to (i) in the case of each Eurodollar
Committed Loan, the LIBO Rate for the Interest Period in effect for such
Borrowing plus (x) the Applicable Margin from time to time in effect plus (y)
the Applicable Utilization Fee from time to time in effect and (ii) in the case
of each Eurodollar Competitive Loan, the LIBO Rate for the Interest Period in
effect for such Borrowing plus the Margin offered by the Lender making such Loan
and accepted by the Borrower pursuant to Section 2.03.
(b) Subject to the provisions of Section 2.09, the Loans
comprising each ABR Borrowing shall bear interest (computed on the basis of the
actual number of days elapsed over a year of 365 or 366 days, as the case may
be, for periods during which the Alternate Base Rate is determined by reference
to the Base Rate and 360 days for periods during which the Alternate Base Rate
is determined by reference to the Federal Funds Effective Rate) at a rate per
annum equal to the Alternate Base Rate from time to time in effect plus the
Applicable Margin from time to time in effect.
(c) Subject to the provisions of Section 2.09, each Fixed Rate
Loan shall bear interest at a rate per annum (computed on the basis of the
actual number of days elapsed over a year of 360 days) equal to the fixed rate
of interest offered by the Lender making such Loan and accepted by the Borrower
pursuant to Section 2.03.
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(d) Interest on each Loan shall be payable on each Interest
Payment Date applicable to such Loan except as otherwise provided in this
Agreement. The applicable LIBO Rate or Alternate Base Rate for each Interest
Period or day within an Interest Period, as the case may be, shall be determined
in good faith by the Agent, and such determination shall be conclusive absent
manifest error.
(e) Each Reference Bank agrees to furnish to the Agent timely
information for the purpose of determining each Eurodollar Loan and each LIBO
Rate. If any one or more of the Reference Banks shall not furnish such timely
information to the Agent for the purpose of determining any such interest rate,
the Agent shall determine such interest rate on the basis of timely information
furnished by the remaining Reference Banks. The Agent shall give prompt notice
to the Borrower and the Lenders of the applicable interest rate determined by
the Agent for purposes of Section 2.08(a), (b) or (c), and the rate, if any,
furnished by each Reference Bank for the purpose of determining the interest
rate under Section 2.08(a).
(f) If fewer than two Reference Banks furnish timely
information to the Agent for determining the LIBO Rate for any Eurodollar Loan,
(i) the Agent shall forthwith notify the Borrower and the
Lenders that the interest rate cannot be determined for such Eurodollar
Loans,
(ii) with respect to Eurodollar Loans, each such Loan will
automatically, on the last day of the then existing Interest Period
therefor, be prepaid by the Borrower or be automatically converted into
a Base Rate Loan, and
(iii) the obligation of the Lenders to make Eurodollar Loans
or to convert Base Rate Loans into Eurodollar Loans shall be suspended
until the Agent shall notify the Borrower and the Lenders that the
circumstances causing such suspension no longer exist.
(g) Upon the occurrence and during the continuance of any
Event of Default under Section 6.01(b) or (c), (i) each Eurodollar Committed
Loan will automatically, on the last day of the then existing Interest Period
therefor, be converted into Base Rate Loans and (ii) the obligation of the
Lenders to make, or to convert Advances into, Eurodollar Committed Loans shall
be suspended.
SECTION 2.09. DEFAULT INTEREST. If the Borrower shall default
in the payment of the principal of or interest on any Loan or any other amount
becoming due hereunder, whether by scheduled maturity, notice of prepayment,
acceleration or otherwise, the Borrower shall on demand from time to time from
the Agent pay interest, to the extent permitted by law, on such defaulted amount
up to (but not including) the date of actual payment (after as well as before
judgment) at a rate per annum (computed on the basis of the actual number of
days elapsed over a year of 360 days) equal to the Alternate Base Rate plus 1%.
SECTION 2.10. ALTERNATE RATE OF INTEREST. In the event, and on
each occasion, that on the day two Business Days prior to the commencement of
any Interest Period for a Eurodollar Borrowing the Agent shall have determined
in good faith (i) that dollar deposits in the principal amounts of the
Eurodollar Loans comprising such Borrowing are not generally
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available in the London interbank market or (ii) that reasonable means do not
exist for ascertaining the LIBO Rate, the Agent shall, as soon as practicable
thereafter, give telecopy notice of such determination to the Borrower and the
Lenders. In the event of any such determination under clauses (i) or (ii) above,
until the Agent shall have advised the Borrower and the Lenders that the
circumstances giving rise to such notice no longer exist, (x) any request by the
Borrower for a Eurodollar Competitive Borrowing pursuant to Section 2.03 shall
be of no force and effect and shall be denied by the Agent and (y) any request
by the Borrower for a Eurodollar Committed Borrowing pursuant to Section 2.04
shall be deemed to be a request for an ABR Borrowing. In the event a Lender
notifies the Agent that the rates at which dollar deposits are being offered
will not adequately and fairly reflect the cost to such Lender of making or
maintaining its Eurodollar Loan during such Interest Period, the Agent shall
notify the Borrower of such notice and until the Lender shall have advised the
Agent that the circumstances giving rise to such notice no longer exist, any
request by the Borrower for a Eurodollar Committed Borrowing shall be deemed a
request for an ABR Borrowing for the same Interest Period with respect to such
Lender. Each determination by the Agent hereunder shall be in good faith and
conclusive absent manifest error.
SECTION 2.11. TERMINATION AND REDUCTION OF COMMITMENTS. (a)
The Commitments shall be automatically terminated on the Maturity Date.
(b) Upon at least three Business Days' prior irrevocable
telecopy notice to the Agent, the Borrower may at any time in whole permanently
terminate, or from time to time in part permanently reduce, the Total
Commitment; PROVIDED, HOWEVER, that (i) each partial reduction of the Total
Commitment shall be in an integral multiple of $1,000,000 and in a minimum
principal amount of $10,000,000 and (ii) no such termination or reduction shall
be made which would reduce the Total Commitment to an amount less than the
aggregate outstanding principal amount of the Loans. Once terminated or reduced,
the Total Commitment may not be reinstated.
(c) Each reduction in the Total Commitment hereunder shall be
made ratably among the Lenders in accordance with their respective Commitments.
The Borrower shall pay to the Agent for the account of the Lenders, on the date
of each termination or reduction of the Commitment, the Facility Fees on the
amount of the Commitments so terminated or reduced accrued through the date of
such termination or reduction.
SECTION 2.12. PREPAYMENT. (a) The Borrower shall have the
right at any time and from time to time to prepay any Committed Borrowing, in
whole or in part, upon giving telecopy notice (or telephone notice promptly
confirmed by telecopy notice) to the Agent: (i) before 10:00 a.m., New York City
time, two Business Days prior to prepayment, in the case of Eurodollar Loans,
and (ii) before 10:00 a.m., New York City time, on the same Business Day of
prepayment, in the case of ABR Loans; PROVIDED, HOWEVER, that each partial
prepayment shall be in an amount which is an integral multiple of $1,000,000 and
not less than $5,000,000. The Borrower shall not have the right to prepay any
Competitive Borrowing.
(b) On the date of any termination or reduction of the
Commitments pursuant to Section 2.11, the Borrower shall pay or prepay so much
of the Committed Borrowings as shall be necessary in order that the aggregate
principal amount of the Competitive Loans and
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Committed Loans outstanding will not exceed the Total Commitment, after giving
effect to such termination or reduction.
(c) Each notice of prepayment from the Borrower shall specify
the prepayment date and the principal amount of each Borrowing (or portion
thereof) to be prepaid, shall be irrevocable and shall commit the Borrower to
prepay such Borrowing (or portion thereof) by the amount stated therein on the
date stated therein. All prepayments under this Section 2.12 shall be subject to
Section 2.15 but otherwise without premium or penalty. All prepayments under
this Section 2.12 shall be accompanied by accrued interest on the principal
amount being prepaid to the date of payment.
SECTION 2.13. RESERVE REQUIREMENTS; CHANGE IN CIRCUMSTANCES.
(a) Notwithstanding any other provision herein, if after the date of this
Agreement any change in applicable law or regulation or in the interpretation or
administration thereof by any governmental authority charged with the
interpretation or administration thereof (whether or not having the force of
law) shall result in the imposition, modification or applicability of any
reserve, special deposit or similar requirement against assets of, deposits with
or for the account of or credit extended by any Lender, or shall result in the
imposition on such Lender or the London interbank market any other condition
affecting this Agreement, such Lender's Commitment or any Eurodollar Loan, or
Fixed Rate Loan made by such Lender, and the result of any of the foregoing
shall be to increase the cost to such Lender of making or maintaining any
Eurodollar Loan or Fixed Rate Loan or to reduce the amount of any sum received
or receivable by such Lender hereunder (whether of principal, interest or
otherwise) by an amount deemed by such Lender to be material, then the Borrower
will pay to such Lender upon demand such additional amount or amounts as will
compensate such Lender for such additional costs incurred or reduction suffered.
Notwithstanding the foregoing, no Lender shall be entitled to request
compensation under this paragraph with respect to any Competitive Loan if the
change giving rise to such request was applicable to such Lender at the time of
submission of the Competitive Bid pursuant to which such Competitive Loan shall
have been made.
(b) If any Lender shall have determined that the applicability
of any law, rule, regulation or guideline adopted after the date hereof pursuant
to or arising out of the July 1988 report of the Basle Committee on Banking
Regulations and Supervisory Practices entitled "International Convergence of
Capital Measurement and Capital Standards," or the adoption after the date
hereof of any other law, rule, regulation or guideline regarding capital
adequacy, or any change in any of the foregoing or in the interpretation or
administration of any of the foregoing by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by any Lender (or any lending office of such Lender) or
any Lender's holding company with any request or directive regarding capital
adequacy (whether or not having the force of law) of any such authority, central
bank or comparable agency, has or would have the effect of reducing the rate of
return on such Lender's capital or on the capital of such Lender's holding
company, if any, as a consequence of this Agreement, such Lender's Commitment or
the Loans made by such Lender pursuant hereto to a level below that which such
Lender or such Lender's holding company could have achieved but for such
adoption, change or compliance (taking into consideration such Lender's policies
and the policies of such Lender's holding company with respect to capital
adequacy) by an amount deemed by such Lender to be material, then from time to
time the Borrower shall pay to such
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Lender such additional amount or amounts as will compensate such Lender or such
Lender's holding company for any such reduction suffered.
(c) A certificate of the Lender setting forth such amount or
amounts (including computation of such amount or amounts) as shall be necessary
to compensate the Lender or its holding company as specified in paragraph (a) or
(b) above, as the case may be, shall be delivered to the Borrower and such
amount or amounts may be reviewed by the Borrower. Unless the Borrower disagrees
in good faith with the computation of the amount or amounts in such certificate,
the Borrower shall pay to the Lender, within 10 Business Days after receipt by
the Borrower of such certificate delivered by the Lender, the amount shown as
due on any such certificate. If the Borrower, after receipt of any such
certificate from the Lender, disagrees with the Lender on the computation of the
amount or amounts owed to the Lender pursuant to paragraph (a) or (b) above, the
Lender and the Borrower shall negotiate in good faith to promptly resolve such
disagreement. In either case, however, the Lender shall have a duty to mitigate
the damages that may arise as a consequence of paragraph (a) or (b) above to the
extent that such mitigation will not, in the judgment of the Lender, entail any
cost or disadvantage to the Lender that the Lender is not reimbursed or
compensated for by the Borrower.
(d) Failure on the part of any Lender to demand compensation
for any increased costs or reduction in amounts received or receivable or
reduction in return on capital with respect to any period shall not constitute a
waiver of such Lender's right to demand compensation with respect to any other
period; PROVIDED that if any Lender fails to make such demand within 45 days
after it obtains knowledge of the event giving rise to the demand such Lender
shall, with respect to amounts payable pursuant to this Section 2.13 resulting
from such event, only be entitled to payment under this Section 2.13 for such
costs incurred or reduction in amounts or return on capital from and after the
date 45 days prior to the date that such Lender does make such demand. The
protection of this Section shall be available to each Lender regardless of any
possible contention of the invalidity or inapplicability of the law, rule,
regulation, guideline or other change or condition which shall have occurred or
been imposed.
SECTION 2.14. CHANGE IN LEGALITY. (a) Notwithstanding any
other provision herein, if any change in any law or regulation or in the
interpretation thereof by any Governmental Authority charged with the
administration or interpretation thereof shall make it unlawful for any Lender
to make or maintain any Eurodollar Loan or to give effect to its obligations as
contemplated hereby with respect to any Eurodollar Loan, then, by 30 days' (or
such shorter period as shall be required in order to comply with applicable law)
written notice to the Borrower and to the Agent, such Lender may:
(i) declare that Eurodollar Loans will not thereafter be made
by such Lender hereunder, whereupon such Lender shall not submit a
Competitive Bid in response to a request for Eurodollar Competitive
Loans and any request by the Borrower for a Eurodollar Committed
Borrowing shall, as to such Lender only, be deemed a request for an ABR
Loan unless such declaration shall be subsequently withdrawn; and
(ii) require that all outstanding Eurodollar Loans made by it
be converted to ABR Loans, in which event all such Eurodollar Loans
shall be automatically converted to ABR Loans as of the effective date
of such notice as provided in paragraph (b) below.
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In the event any Lender shall exercise its rights under (i) or
(ii) above, all payments and prepayments of principal which would otherwise have
been applied to repay the Eurodollar Loans that would have been made by such
Lender or the converted Eurodollar Loans of such Lender shall instead be applied
to repay the ABR Loans made by such Lender in lieu of, or resulting from the
conversion of, such Eurodollar Loans.
(b) For purposes of this Section 2.14, a notice to the
Borrower by any Lender shall be effective as to each Eurodollar Loan, if lawful,
on the last day of the Interest Period currently applicable to such Eurodollar
Loan; in all other cases such notice shall be effective on the date of receipt
by the Borrower.
SECTION 2.15. INDEMNITY. The Borrower shall indemnify each
Lender against any out-of-pocket loss or expense which such Lender may sustain
or incur as a consequence of (a) any failure by the Borrower to borrow or to
refinance, convert or continue any Loan hereunder after irrevocable notice of
such borrowing, refinancing, conversion or continuation has been given pursuant
to Section 2.03, 2.04 or 2.05, (b) any payment, prepayment or conversion, or an
assignment required under Section 2.20, of a Eurodollar Loan by the Borrower
required by any other provision of this Agreement or otherwise made or deemed
made on a date other than the last day of the Interest Period, if any,
applicable thereto, (c) any default by the Borrower in payment or prepayment of
the principal amount of any Loan or any part thereof or interest accrued
thereon, as and when due and payable (at the due date thereof, whether by
scheduled maturity, acceleration, irrevocable notice of prepayment or otherwise)
or (d) the occurrence of any Event of Default.
In the case of a Eurodollar Loan, such out-of-pocket loss or
expense shall be limited to an amount equal to the excess, if any, of (i) its
cost of obtaining the funds for the Loan being paid, prepaid, converted or not
borrowed, converted or continued (based on the LIBO Rate applicable thereto) for
the period from the date of such payment, prepayment, conversion or failure to
borrow, convert or continue to the last day of the Interest Period for such Loan
(or, in the case of a failure to borrow, convert or continue, the Interest
Period for such Loan which would have commenced on the date of such failure)
over (ii) the amount of interest that would be realized by the Lender in
reemploying the funds so paid, prepaid, converted or not borrowed, converted or
continued for such period or Interest Period, as the case may be. In the case of
an ABR Loan, such out-of-pocket loss or expense shall be limited to an amount
equal to the excess, if any, of (i) its cost of obtaining the funds for the ABR
Loan being paid, prepaid, converted or not borrowed, converted or continued for
the period from the date of such payment, prepayment, conversion or failure to
borrow, convert or continue to the next Business Day for such ABR Loan over (ii)
the amount of interest that would be realized by the Lender in reemploying the
funds so paid, prepaid, converted or not borrowed, converted or continued until
the next Business Day, as the case may be.
A certificate of the Lender setting forth such amount or
amounts (including the computation of such amount or amounts) as shall be
necessary to compensate the Lender or its holding company for the out-of-pocket
expenses defined herein shall be delivered to the Borrower and such amount or
amounts may be reviewed by the Borrower. If the Borrower, after receipt of any
such certificate from the Lender, disagrees in good faith with the Lender on the
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computation of the amount owed to the Lender pursuant to this Section 2.15, the
Lender and the Borrower shall negotiate in good faith to promptly resolve such
disagreement.
Each Lender shall have a duty to mitigate the damages to such
Lender that may arise as a consequence of clause (a), (b), (c) or (d) above to
the extent that such mitigation will not, in the judgment of such Lender, entail
any cost or disadvantage to such Lender that such Lender is not reimbursed or
compensated for by the Borrower.
SECTION 2.16. PRO RATA TREATMENT. Except as required under
Sections 2.10, 2.13, 2.14, 2.15, 2.19 and 2.20, each Committed Borrowing, each
payment or prepayment of principal of any Committed Borrowing, each payment of
interest on the Committed Loans, each payment of the Facility Fees, each
reduction of the Commitments and each refinancing or conversion of any Borrowing
with a Committed Borrowing of any Type, shall be allocated pro rata among the
Lenders in accordance with their respective Commitments (or, if such Commitments
shall have expired or been terminated, in accordance with the respective
principal amounts of their outstanding Committed Loans). Each payment of
principal of any Competitive Borrowing shall be allocated pro rata among the
Lenders participating in such Borrowing in accordance with the respective
principal amounts of their outstanding Competitive Loans comprising such
Borrowing. Each payment of interest on any Competitive Borrowing shall be
allocated pro rata among the Lenders participating in such Borrowing in
accordance with the respective amounts of accrued and unpaid interest on their
outstanding Competitive Loans comprising such Borrowing. For purposes of
determining the available Commitments of the Lenders at any time, each
outstanding Competitive Borrowing shall be deemed to have utilized the
Commitments of the Lenders (including those Lenders which shall not have made
Loans as part of such Competitive Borrowing) pro rata in accordance with such
respective Commitments. Each Lender agrees that in computing such Lender's
portion of any Borrowing to be made hereunder, the Agent may, in its discretion,
round each Lender's percentage of such Borrowing to the next higher or lower
whole dollar amount.
SECTION 2.17. SHARING OF SETOFFS. Each Lender agrees that if
it shall, through the exercise of a right of banker's lien, setoff or
counterclaim against the Borrower, or pursuant to a secured claim under Section
506 of Title 11 of the United States Code or other security or interest arising
from, or in lieu of, such secured claim, received by such Lender under any
applicable bankruptcy, insolvency or other similar law or otherwise, or by any
other means, obtain payment (voluntary or involuntary) in respect of any
Committed Loan or Loans as a result of which the unpaid principal portion of the
Committed Loans of such Lender shall be proportionately less than the unpaid
principal portion of the Committed Loans of any other Lender, it shall be deemed
simultaneously to have purchased from such other Lender at face value, and shall
promptly pay to such other Lender the purchase price for, a participation in the
Committed Loans of such other Lender, so that the aggregate unpaid principal
amount of the Committed Loans and participations in the Committed Loans held by
each Lender shall be in the same proportion to the aggregate unpaid principal
amount of all Committed Loans then outstanding as the principal amount of its
Committed Loans prior to such exercise of banker's lien, setoff or counterclaim
or other event was to the principal amount of all Committed Loans outstanding
prior to such exercise of banker's lien, setoff or counterclaim or other event;
PROVIDED, HOWEVER, that, if any such purchase or purchases or adjustments shall
be made pursuant to this Section 2.17 and the payment giving rise thereto shall
thereafter be recovered,
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such purchase or purchases or adjustments shall be rescinded to the extent of
such recovery and the purchase price or prices or adjustment restored without
interest. The Borrower expressly consents to the foregoing arrangements and
agrees that any Lender holding a participation in a Committed Loan deemed to
have been so purchased may exercise any and all rights of banker's lien, setoff
or counterclaim with respect to any and all moneys owing by the Borrower to such
Lender by reason thereof as fully as if such Lender had made a Committed Loan
directly to the Borrower in the amount of such participation.
SECTION 2.18. PAYMENTS. (a) The Borrower shall make each
payment (including principal of or interest on any Borrowing or any Fees or
other amounts) hereunder from an account in the United States not later than
12:00 noon, New York City time, on the date when due in dollars to the Agent at
its offices at 399 Park Avenue, New York, NY 10043, in immediately available
funds.
(b) Whenever any payment (including principal of or interest
on any Borrowing or any Fees or other amounts) hereunder shall become due, or
otherwise would occur, on a day that is not a Business Day, such payment may be
made on the next succeeding Business Day, and such extension of time shall in
such case be included in the computation of interest or Fees, if applicable.
SECTION 2.19. TAXES. (a) Any and all payments by the Borrower
hereunder shall be made, in accordance with Section 2.18, free and clear of and
without deduction for any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect thereto
imposed by the United States or any political subdivision or taxing authority
thereof, excluding taxes imposed on the Agent's or any Lender's (or any
transferee's or assignee's, including a participation holder's (any such entity
a "Transferee")) net income and franchise taxes imposed on the Agent or any
Lender (or Transferee) by the United States or any political subdivision or
taxing authority thereof (all such nonexcluded taxes, levies, imposts,
deductions, charges, withholdings and liabilities being hereinafter referred to
as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from
or in respect of any sum payable hereunder to any Lender (or any Transferee) or
the Agent, (i) the sum payable shall be increased by the amount necessary so
that after making all required deductions (including deductions applicable to
additional sums payable under this Section 2.19) such Lender (or Transferee) or
the Agent (as the case may be) shall receive an amount equal to the sum it would
have received had no such deductions been made, (ii) the Borrower shall make
such deductions and (iii) the Borrower shall pay the full amount deducted to the
relevant taxing authority or other Governmental Authority in accordance with
applicable law.
(b) In addition, the Borrower agrees to pay any present or
future stamp or documentary taxes or any other excise or property taxes, charges
or similar levies which arise from any payment made hereunder or from the
execution, delivery or registration of, or otherwise with respect to, this
Agreement imposed by the United States or any political subdivision or taxing
authority thereof (hereinafter referred to as "Other Taxes").
(c) The Borrower will indemnify each Lender (or Transferee)
and the Agent for the full amount of Taxes and Other Taxes (including any Taxes
or Other Taxes on amounts payable under this Section 2.19) paid by such Lender
(or Transferee) or the Agent, as the case
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may be, with respect to the Borrower and any liability (including penalties,
interest and reasonable out-of-pocket expenses) arising therefrom or with
respect thereto (other than any such liability that results from the gross
negligence or willful misconduct of the Lender (or Transferee) or Agent),
whether or not such Taxes or Other Taxes were correctly or legally asserted by
the relevant taxing authority or other Governmental Authority. Such
indemnification shall be made within 30 days after the date any Lender (or
Transferee) or the Agent, as the case may be, makes written demand therefor. If
the Borrower or any Lender (or Transferee) or the Agent shall determine that
Taxes or Other Taxes may not have been correctly or legally assessed by the
relevant taxing authority or other Governmental Authority, and that a Lender (or
Transferee) or the Agent may be entitled to receive a refund in respect of Taxes
or Other Taxes, it shall promptly notify the other party of the availability of
such refund and such Lender (or Transferee) or the Agent shall, within 60 days
after receipt of a request by the Borrower, apply for such refund at the
Borrower's expense. If any Lender (or Transferee) or the Agent receives a refund
or credit or offset against another tax liability in respect of any Taxes or
Other Taxes for which such Lender (or Transferee) or the Agent has received
payment from the Borrower hereunder it shall promptly repay such refund or
credit or offset against another tax liability (including any interest received
by such Lender (or Transferee) or the Agent from the taxing authority with
respect to the refund with respect to such Taxes or Other Taxes) to the
Borrower, net of all out-of-pocket expenses of such Lender; PROVIDED that the
Borrower, upon the request of such Lender (or Transferee) or the Agent, agrees
to return such refund or credit or offset against another tax liability (plus
penalties, interest or other charges) to such Lender (or Transferee) or the
Agent in the event such Lender (or Transferee) or the Agent is required to repay
such refund or credit or offset against another tax liability. For purposes of
the preceding sentence, the Agent or any Lender shall determine in good faith
and in its discretion the amount of any credit or offset against another tax
liability and shall be under no obligation to make available to the Borrower any
of its tax returns or any other information that it deems to be confidential.
(d) As soon as practicable after the date of any payment of
Taxes or Other Taxes withheld by the Borrower in respect of any payment to any
Lender (or Transferee) or the Agent, the Borrower will furnish to the Agent, at
its address referred to in Section 8.01, the original or a certified copy of a
receipt evidencing payment thereof.
(e) Without prejudice to the survival of any other agreement
contained herein, the agreements and obligations contained in this Section 2.19
shall survive the payment in full of the principal of and interest on all Loans
made hereunder.
(f) Each Lender (or Transferee) which is organized outside the
United States shall, prior to the due date of the first payment by the Borrower
to such Lender (or Transferee) hereunder, deliver to the Borrower such
certificates, documents or other evidence, as required by the Code or Treasury
Regulations issued pursuant thereto, including Internal Revenue Service Form
W-8BEN or Form W-8ECI and any other certificate or statement of exemption
required by Treasury Regulation Section 1.1441-1(a) or Section 1.1441-6(c) or
any subsequent version thereof, properly completed and duly executed by such
Lender (or Transferee) establishing that such payment is (i) not subject to
withholding under the Code because such payment is effectively connected with
the conduct by such Lender (or Transferee) of a trade or business in the United
States or (ii) totally exempt from United States tax under a provision of an
applicable tax treaty. Each such Lender (or Transferee) that changes its funding
office shall promptly notify
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the Borrower of such change and, upon written request from the Borrower, shall
deliver any new certificates, documents or other evidence required pursuant to
the preceding sentence prior to the immediately following due date of any
payment by the Borrower hereunder. Unless the Borrower and the Agent have
received forms or other documents satisfactory to them indicating that payments
hereunder are not subject to United States withholding tax, notwithstanding
paragraph (a), the Borrower or the Agent shall withhold taxes from such payments
at the applicable statutory rate in the case of payments to or for any Lender
(or Transferee) organized under the laws of a jurisdiction outside the United
States.
(g) The Borrower shall not be required to pay any additional
amounts to any Lender (or Transferee) in respect of Taxes and Other Taxes
pursuant to paragraphs (a), (b) and (c) above if the obligation to pay such
additional amounts would not have arisen but for a failure by such Lender (or
Transferee) to comply with the provisions of paragraph (f) above unless such
Lender (or Transferee) is unable to comply with paragraph (f) because of (i) a
change in applicable law, regulation or official interpretation thereof or (ii)
an amendment, modification or revocation of any applicable tax treaty or a
change in official position regarding the application or interpretation thereof,
in each case after the date hereof (and, in the case of a Transferee, after the
date of assignment or transfer).
(h) Any Lender (or Transferee) claiming any additional amounts
payable under this Section 2.19 shall (i) to the extent legally able to do so,
file any certificate or document if such filing would avoid the need for or
reduce the amount of any such additional amounts which may thereafter accrue,
and the Borrower shall not be obligated to pay such additional amounts if, any
Lender (or Transferee) could have filed such certificate or document and failed
to do so; or (ii) consistent with legal and regulatory restrictions, use
reasonable efforts to change the jurisdiction of its applicable lending office
if the making of such change would avoid the need for or reduce the amount of
any additional amounts which may thereafter accrue and would not, in the sole
determination of such Lender (or Transferee), be otherwise disadvantageous to
such Lender (or Transferee).
SECTION 2.20. MANDATORY ASSIGNMENT; COMMITMENT TERMINATION. In
the event any Lender delivers to the Agent or the Borrower, as appropriate, a
certificate in accordance with Section 2.13(c) or a notice in accordance with
Section 2.10 or 2.14 or is a Defaulting Lender, or the Borrower is required to
pay any additional amounts or other payments in accordance with Section 2.19,
the Borrower may, at its own expense, and in its sole discretion (a) require
such Lender to transfer and assign in whole or in part, without recourse (in
accordance with Section 8.04), all or part of its interests, rights and
obligations under this Agreement (other than outstanding Competitive Loans) to
an assignee acceptable to the Agent which shall assume such assigned obligations
(which assignee may be another Lender, if a Lender accepts such assignment);
PROVIDED that (i) such assignment shall not conflict with any law, rule or
regulation or order of any court or other Governmental Authority and (ii) the
Borrower or such assignee shall have paid to the assigning Lender in immediately
available funds the principal of and interest accrued to the date of such
payment on the Loans made by it hereunder and all other amounts owed to it
hereunder or (b) terminate the Commitment of such Lender and prepay all
outstanding Loans (other than Competitive Loans) of such Lender; PROVIDED that
(x) such termination of the Commitment of such Lender and prepayment of Loans
does not conflict with any law, rule or regulation or order of any court or
Governmental Authority, (y) the Borrower
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shall have paid to such Lender in immediately available funds the principal of
and interest accrued to the date of such payment on the Loans (other than
Competitive Loans) made by it hereunder and all other amounts owed to it
hereunder and (z) the Borrower shall have paid to the Agent a processing and
recordation fee of $3,500 if such assignee is not an existing Lender.
SECTION 2.21. EXPANSION OF COMMITMENTS. The Borrower may from
time to time, and notwithstanding any prior reductions in the Total Commitment
by the Borrower, by notice to the Agent (which shall promptly deliver a copy to
each of the Lenders), request that the Total Commitment be increased by an
amount that is not less than $50,000,000 and will not result in the Total
Commitment under this Agreement exceeding $850,000,000. Each such notice shall
set forth the requested amount of the increase in the Total Commitment and the
date on which such increase is to become effective (which shall be not fewer
than 20 days after the date of such notice), and shall offer each Lender the
opportunity to increase its Commitment by its ratable share, based on the
amounts of the Lenders' Commitments, of the requested increase in the Total
Commitment. Each Lender shall, by notice to the Borrower and the Agent given not
more than 10 Business Days after the date of the Borrower's notice, either agree
to increase its Commitment by all or a portion of the offered amount or decline
to increase its Commitment (and any Lender that does not deliver such a notice
within such period of 10 Business Days shall be deemed to have declined to
increase its Commitment). In the event that, on the 10th Business Day after the
Borrower shall have delivered a notice pursuant to the first sentence of this
paragraph, the Lenders shall have agreed pursuant to the preceding sentence to
increase their Commitments by an aggregate amount less than the increase in the
Total Commitment requested by the Borrower, the Borrower shall have the right to
arrange for one or more banks or other financial institutions (any such assignee
Lender, bank or other financial institution being called an "Augmenting
Lender"), which may include any Lender, to extend Commitments or increase their
existing Commitments in an aggregate amount equal to all or part of the
unsubscribed amount, provided that each Augmenting Lender, if not already a
Lender hereunder, shall be subject to the approval of the Borrower and the Agent
(which approval shall not be unreasonably withheld), the commitment of each such
Augmenting Lender, if not already a Lender hereunder, shall not be less than
$25,000,000, and such Augmenting Lender shall execute all such documentation as
the Agent shall specify to evidence its status as a Lender hereunder. If (and
only if) Lenders (including Augmenting Lenders) shall have agreed to increase
their Commitments or to extend new Commitments in an aggregate amount not less
than $50,000,000, such increases and such new Commitments shall become effective
on the date specified in the notice delivered by the Borrower pursuant to the
first sentence of this paragraph, and shall be deemed added to the Commitments
set forth in Schedule 2.01 hereof. Notwithstanding the foregoing, no increase in
the Total Commitment (or in the Commitment of any Lender) shall become effective
under this paragraph unless, on the date of such increase, the conditions set
forth in paragraphs (b) and (c) of Section 4.01 shall be satisfied (with all
references in such paragraphs to a Borrowing being deemed to be references to
such increase) and the Agent shall have received a certificate to that effect
dated such date and executed by a Responsible Officer of the Borrower.
SECTION 2.22. EXTENSION OF MATURITY DATE. (a) The Borrower
may, by notice to the Agent (which shall promptly deliver a copy to each of the
Lenders) not less than 30 days and not more than 60 days prior to the Maturity
Date, request that the Lenders extend the Maturity Date for an additional 364
days from the Maturity Date then in effect hereunder (the
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"Existing Maturity Date"). Each Lender shall, by notice to the Agent given not
less than 20 days and not more than 30 days prior to the Existing Maturity Date,
advise the Agent whether or not such Lender agrees to such extension (and any
Lender that does not advise the Agent on or before the 20th day prior to the
Existing Maturity Date shall be deemed to have advised the Agent that it will
not agree to such extension). The Agent shall, by notice to the Borrower given
no later than 15 days prior to the Existing Maturity Date, inform the Borrower
of the Lenders' decisions to extend the Existing Maturity Date.
(b) The Borrower shall have the right on or before the
Existing Maturity Date to require any Lender which shall have advised or been
deemed to advise the Borrower that it will not agree to an extension of the
Maturity Date (each a "Non-Extending Lender") to transfer without recourse (in
accordance with and subject to the restrictions contained in Section 8.04,
except that the $3,500 processing fee set forth in Section 8.04(b)(iii) shall be
paid by the Borrower) all its interests, rights and obligations under this
Agreement FIRST, to one or more existing Lenders and SECOND, in the event the
existing Lenders do not accept the assignment of all of the Commitments of the
Non-Extending Lenders, to one or more other banks or other financial
institutions (any such assignee Lender, bank or other financial institution
being called a "Substitute Lender"), PROVIDED that (i) such Substitute Lender,
if not already a Lender hereunder, shall be subject to the approval of the
Borrower and the Agent (which approval shall not be unreasonably withheld) and
shall execute all such documentation as the Agent shall specify to evidence its
status as a Lender hereunder, (ii) such assignment shall become effective as of
the Existing Maturity Date and (iii) the Borrower shall pay to such
Non-Extending Lender in immediately available funds on the effective date of
such assignment the principal of and interest accrued to the date of payment on
the Loans made by it hereunder and all other amounts accrued for its account or
owed to it hereunder.
(c) If (and only if) Lenders (including Substitute Lenders)
holding Commitments that represent at least 51% of the Total Commitment shall
have agreed to extend the Existing Maturity Date (the "CONTINUING LENDERS"),
then, (i) the Maturity Date shall be extended to the date that is 364 days after
the Existing Maturity Date, and (ii) the Commitment of each Non-Extending Lender
(subject to any transfer and assignment pursuant to paragraph (b) above) shall
terminate (but such Lender shall continue to be entitled to the benefits of
Sections 2.13, 2.15, 2.19 and 8.05), and all Loans of such Non-Extending Lender
shall become due and payable, together with all interest accrued thereon and all
other amounts owed to such Lender hereunder, on the Existing Maturity Date. The
Maturity Date as so extended may be further extended from time to time pursuant
to this Section 2.22 but no more frequently than once per fiscal year of the
Borrower.
Notwithstanding the foregoing, no extension of the Maturity
Date shall be effective with respect to any Lender unless, on and as of the
Existing Maturity Date, the conditions set forth in paragraphs (b) and (c) of
Section 4.01 shall be satisfied (with all references in such paragraphs to a
Borrowing being deemed to be references to such extension) and the Agent shall
have received a certificate to that effect, dated the Existing Maturity Date,
and executed by a Responsible Officer of the Borrower.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to each of the Lenders
that:
SECTION 3.01. ORGANIZATION; POWERS. It (a) is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, (b) has all requisite power and authority to
own its property and assets and to carry on its business as now conducted and as
proposed to be conducted, (c) is qualified to do business in every jurisdiction
where such qualification is required, except where the failure so to qualify
would not result in a Material Adverse Effect, and (d) has the corporate power
and authority to execute, deliver and perform its obligations under this
Agreement and to borrow funds hereunder.
SECTION 3.02. AUTHORIZATION. The execution, delivery and
performance by it of this Agreement and the Borrowings by it hereunder
(collectively, the "Transactions") (a) have been duly authorized by all
requisite corporate actions and (b) will not (i) violate (A) any provision of
any law, statute, rule or regulation (including, without limitation, the Margin
Regulations) or of its certificate of incorporation or other constitutive
documents or by-laws, (B) any order of any Governmental Authority or (C) any
provision of any indenture, agreement or other instrument to which it is a party
or by which it or any of its property is or may be bound, (ii) be in conflict
with, result in a breach of or constitute (alone or with notice or lapse of time
or both) a default under any such indenture, agreement or other instrument or
(iii) result in the creation or imposition of any lien upon any of its property
or assets.
SECTION 3.03. ENFORCEABILITY. This Agreement has been duly
executed and delivered by it and constitutes its legal, valid and binding
obligation enforceable against it in accordance with its terms.
SECTION 3.04. GOVERNMENTAL APPROVALS. No action, consent or
approval of, registration or filing with or any other action by any Governmental
Authority is or will be required in connection with the Transactions.
SECTION 3.05. FINANCIAL STATEMENTS. (a) The Borrower has
heretofore furnished to the Agent and the Lenders copies of its consolidated
financial statements as of and for (i) the fiscal year ended September 30, 2000,
as included in the Borrower's Annual Report on Form 10-K dated December 28, 2000
and (ii) the quarter ended June 30, 2001, as included in the Borrower's
Quarterly Report on Form 10-Q dated August 14, 2001 (the "Third Quarter From
10-Q"). Such financial statements present fairly, in all material respects, the
consolidated financial condition and the results of operations of the Borrower
as of such dates and for such periods in accordance with GAAP.
(b) As of the date hereof, except as disclosed in the
Borrower's Report on Form 10-Q dated February 14, 2001, May 15, 2001 and August
14, 2001 and in the Borrower's Current Reports on Form 8-K dated October 2,
2000, October 23, 2000 and February 20, 2001, there has been no material adverse
change in the consolidated business, assets, operations or
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condition, financial or otherwise, of the Borrower and its subsidiaries taken as
a whole since September 30, 2000.
SECTION 3.06. LITIGATION; COMPLIANCE WITH LAWS. (a) (i) There
are no actions or proceedings filed or (to its knowledge) investigations pending
or threatened against it in any court or before any Governmental Authority or
arbitration board or tribunal which question the validity, enforceability or
legality of or seek damages in connection with this Agreement, the Transactions
or any action taken or to be taken pursuant to this Agreement and no order or
judgment has been issued or entered restraining or enjoining it from the
execution, delivery or performance of this Agreement nor is there any action or
proceeding which involves a probable risk of an adverse determination which
would have any such effect; (ii) nor is there as of the date hereof any other
action or proceeding filed or (to its knowledge) investigation pending or
threatened against it in any court or before any Governmental Authority or
arbitration board or tribunal which involves a probable risk of a material
adverse decision which would result in a Material Adverse Effect , except as
provided in the Third Quarter Form 10-Q or materially restrict the ability of it
to comply with its obligations under this Agreement.
(b) Except as provided in the Third Quarter Form 10-Q, neither
it nor any of its Subsidiaries is in violation of any law, rule or regulation,
or in default with respect to any judgment, writ, injunction or decree of any
Governmental Authority, where such violation or default could result in a
Material Adverse Effect.
SECTION 3.07. FEDERAL RESERVE REGULATIONS. (a) Neither it nor
any of its subsidiaries is engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of purchasing or
carrying Margin Stock.
(b) No part of the proceeds of any Loan will be used, whether
directly or indirectly, and whether immediately, incidentally or ultimately, for
any purpose which entails a violation of, or which is inconsistent with, the
provisions of the Margin Regulations.
SECTION 3.08. INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING
COMPANY ACT. Neither it nor any of its subsidiaries is (a) an "investment
company" as defined in, or subject to regulation under, the Investment Company
Act of 1940 or (b) a "holding company" as defined in, or subject to regulation
under, the Public Utility Holding Company Act of 1935.
SECTION 3.09. USE OF PROCEEDS. All proceeds of the Loans shall
be used for general corporate purposes of the Borrower, including refunding of
debt, support for commercial paper and acquisition financing.
SECTION 3.10. NO MATERIAL MISSTATEMENTS. No report, financial
statement or other written information furnished by it or on its behalf to the
Agent or any Lender pursuant to Section 3.05 or Section 5.02 hereof contains as
of the date hereof in the case of Section 3.05, or will contain as of the date
furnished in the case of Section 5.02, any material misstatement of fact or
omits or will omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were or will be
made, not misleading.
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ARTICLE IV
CONDITIONS OF LENDING
The obligations of the Lenders to make Loans hereunder are
subject to the satisfaction of the following conditions:
SECTION 4.01. ALL BORROWINGS. On the date of each Borrowing:
(a) The Agent shall have received a notice of such Borrowing
as required by Section 2.03 or Section 2.04, as applicable.
(b) The representations and warranties set forth in Article
III hereof shall be true and correct in all material respects on and as of the
date of such Borrowing with the same effect as though made on and as of such
date, except to the extent such representations and warranties expressly relate
to an earlier date; PROVIDED that the representations and warranties in Section
3.05(b) and Section 3.06(a)(ii) shall only be made upon the Closing Date and at
the time of each extension of the Maturity Date in accordance with Section 2.22.
(c) The Borrower shall be in compliance with all the terms and
provisions set forth herein in all material respects, and at the time of and
immediately after such Borrowing no Event of Default or Default shall have
occurred and be continuing.
Each Borrowing shall be deemed to constitute a representation and warranty by
the Borrower on the date of such Borrowing as to the matters specified in
paragraphs (b) and (c) of this Section 4.01.
SECTION 4.02. CLOSING DATE. On the Closing Date:
(a) The Agent shall have received a favorable written opinion
of (i) a corporate counsel of the Borrower, dated the Closing Date and
addressed to the Lenders, to the effect set forth in Exhibit D hereto
and (ii) Shearman & Sterling, counsel for the Agent, in form and
substance satisfactory to the Agent.
(b) The Agent shall have received (i) a long form certificate
as to the certificate of incorporation, including all amendments
thereto, of the Borrower, as of a recent date by the Secretary of State
of the state of incorporation of the Borrower and a certificate as to
the good standing of the Borrower as of a recent date, from such
Secretary of State; (ii) a certificate of the Secretary or an Assistant
Secretary of the Borrower dated the Closing Date and certifying (A)
that attached thereto is a true and complete copy of the by-laws of the
Borrower as in effect on the Closing Date and at all times since a date
prior to the date of the resolutions described in clause (B) below
except for any changes specified in such certificate, (B) that attached
thereto is a true and complete copy of resolutions duly adopted by the
Board of Directors of the Borrower authorizing the execution, delivery
and performance of this Agreement and the Borrowings hereunder, and
that such resolutions have not been modified, rescinded or amended and
are in full force and effect, (C) that the certificate of incorporation
of the Borrower has not been amended since the date of the last
amendment thereto shown on
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the certificate of good standing furnished pursuant to clause (i)
above, and (D) as to the incumbency and specimen signature of each
officer executing this Agreement or any other document delivered in
connection herewith on behalf of the Borrower; and (iii) a certificate
of another officer of the Borrower as to the incumbency and specimen
signature of the Secretary or Assistant Secretary executing the
certificate pursuant to (ii) above.
(c) The Agent shall have received a certificate from the
Borrower, dated the Closing Date and signed by a Financial Officer of
the Borrower, confirming compliance with the conditions precedent set
forth in paragraphs (b) and (c) of Section 4.01.
(d) The Agent shall have received any Fees and other amounts
due and payable on or prior to the Closing Date.
ARTICLE V
COVENANTS
The Borrower covenants and agrees with each Lender and the
Agent that so long as this Agreement shall remain in effect or the principal of
or interest on any Loan, any Fees or any other expenses or amounts payable
hereunder shall be unpaid unless the Required Lenders shall otherwise consent in
writing:
SECTION 5.01. EXISTENCE. It will do or cause to be done all
things necessary to preserve, renew and keep in full force and effect its legal
existence, except as otherwise expressly permitted under Section 5.06.
SECTION 5.02. FINANCIAL STATEMENTS, REPORTS, ETC.. It will
furnish to the Agent and each Lender:
(a) within 105 days after the end of each fiscal year, its
consolidated balance sheets and the related statements of income and
cash flows, showing its consolidated financial condition as of the
close of such fiscal year and the consolidated results of its
operations during such year, all audited by PricewaterhouseCoopers LLC
or other independent auditors of recognized national standing and
accompanied by an opinion of such auditors to the effect that such
consolidated financial statements fairly present in all material
respects its financial condition and results of operations on a
consolidated basis in accordance with GAAP consistently applied;
(b) within 60 days after the end of each of the first three
fiscal quarters of each fiscal year, its consolidated balance sheets
and related statements of income and cash flows, showing its
consolidated financial condition as of the close of such fiscal quarter
and the consolidated results of its operations during such fiscal
quarter and the then elapsed portion of such fiscal year, all certified
by one of its Financial Officers as fairly presenting in all material
respects its financial condition and results of operations on a
consolidated basis in accordance with GAAP consistently applied,
subject to normal year-end audit adjustments;
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(c) concurrently with any delivery of financial statements
under paragraph (a) above, a certificate of a Financial Officer (i)
certifying that no Event of Default or Default has occurred and is
continuing or, if such an Event of Default or Default has occurred and
is continuing, specifying the nature and extent thereof and any
corrective action taken or proposed to be taken with respect thereto
and (ii) setting forth in reasonable detail the calculations necessary
to demonstrate compliance with Section 5.08;
(d) promptly after the same become publicly available, copies
of all reports filed by it with the SEC (other than reports on Form 8-K
which are filed solely for the purpose of filing exhibits), or any
Governmental Authority succeeding to any of or all the functions of the
SEC, or distributed to its shareholders, as the case may be; and
(e) promptly after a Financial Officer becomes aware thereof,
notice of each Default or Event of Default that is continuing,
specifying the nature and extent thereof and any corrective action
taken or proposed to be taken with respect thereto.
Reports and financial statements required to be delivered by
the Borrower pursuant to paragraphs (a), (b) and (d) of this Section 5.02 shall
be deemed to have been delivered on the date on which it posts such reports, or
reports containing such financial statements, on its website on the Internet at
www.avaya.com and when such reports, or reports containing such financial
statements are posted on the SEC's website at www.sec.gov; PROVIDED that it
shall deliver paper copies of the reports and financial statements referred to
in paragraphs (a), (b) and (d) of this Section 5.02 to the Agent or any Lender
who requests it to deliver such paper copies until written notice to cease
delivering paper copies is given by the Agent or such Lender; and PROVIDED
FURTHER that in every instance it shall provide paper copies of the certificate
required by subsection (c) to the Agent and each of the Lenders until such time
as the Agent shall provide it written notice otherwise.
SECTION 5.03. MAINTAINING RECORDS. It will record, summarize
and report all financial information in accordance with GAAP.
SECTION 5.04. USE OF PROCEEDS. It will use the proceeds of the
Loans only for the purposes set forth in Section 3.09.
SECTION 5.05. COMPLIANCE WITH LAWS, ETC. It will comply in all
material respects with all applicable laws, rules, regulations and orders, such
compliance to include, without limitation, compliance with ERISA and
Environmental Laws.
SECTION 5.06. CONSOLIDATIONS, MERGERS, AND SALES OF ASSETS. It
will not merge or consolidate with or into, or convey, transfer, lease or
otherwise dispose of (whether in one transaction or in a series of transactions)
all or substantially all of its assets (whether now owned or hereafter acquired)
to, any Person, except that the Borrower may merge or consolidate with any other
Person so long as (a) the Borrower is the surviving corporation, or (b) if the
Borrower is not the surviving corporation, (i) the surviving corporation
expressly assumes the obligations of the Borrower under this Agreement and the
Notes and (ii) the surviving corporation has a Public Debt Rating of not lower
than BBB- from S&P and Baa3 from Moody's, PROVIDED, in each case, that no
Default or Event of Default would result therefrom.
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SECTION 5.07. LIMITATIONS ON LIENS. The Borrower will not
create or suffer to exist, or permit any of its Material Subsidiaries to create
or suffer to exist, any Lien on or with respect to any of its properties,
whether now owned or hereafter acquired, or assign, or permit any of its
Material Subsidiaries to assign, any right to receive income, other than:
(i) Permitted Liens;
(ii) Liens existing on the date hereof securing Debt of the
Borrower or its Material Subsidiaries outstanding on the date hereof;
(iii) purchase money Liens upon or in or conditional sales
agreements or other title retention agreements with respect to, real
property or equipment acquired or held by the Borrower or any of its
Material Subsidiaries in the ordinary course of business to secure the
purchase price of such property or equipment or to secure Debt incurred
solely for the purpose of financing the acquisition, construction or
improvement of any such property or equipment to be subject to such
Liens (including any Liens placed on such property or equipment within
180 days after the latest of the acquisition, completion of
construction or improvement of such property), or Liens existing on any
such property or equipment at the time of acquisition (other than any
such Liens created in contemplation of such acquisition that do not
secure the purchase price), or extensions, renewals, refundings or
replacements of any of the foregoing for the same or a lesser amount;
PROVIDED, HOWEVER, that no such Lien shall extend to or cover any
property other than the property or equipment being acquired,
constructed or improved, and no such extension, renewal, refunding or
replacement shall extend to or cover any property not theretofore
subject to the Lien being extended, renewed, refunded or replaced
(except to the extent of financed construction or improvement);
(iv) Liens (including financing statements and undertakings to
file financing statements) arising solely from precautionary filings of
financing statements under the Uniform Commercial Code of the
applicable jurisdiction in respect of equipment leases under which the
Borrower or any of its Material Subsidiaries is the lessee; PROVIDED
that any such Lien in respect of any equipment lease is limited to the
equipment being leased under such lease and the proceeds thereof;
(v) any Lien existing on any asset of any corporation at the
time such corporation becomes a Material Subsidiary and not created in
contemplation of such event;
(vi) any Lien on any asset of any corporation existing at the
time such corporation is merged or consolidated with or into the
Borrower or a Material Subsidiary and not created in contemplation of
such event;
(vii) any Lien existing on any asset prior to the acquisition
thereof by the Borrower or a Material Subsidiary and not created in
contemplation of such acquisition;
(viii) assignments of the right to receive income in
connection with any financing pursuant to which the Borrower or any
Subsidiary of the Borrower may sell convey or otherwise transfer to any
Person, or grant a Lien on, any accounts receivable
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(and related assets) of the Borrower or such Subsidiary, PROVIDED that
such financing shall be on customary market terms and shall be with
limited recourse to the Borrower and its Subsidiaries (other than a
bankruptcy-remote, special purpose wholly owned Subsidiary of the
Borrower) except to the extent customary for such transactions;
(ix) synthetic lease transactions on properties owned as of
the date hereof in an aggregate principal amount not to exceed the
greater of $200,000,000 or 15% of Consolidated Net Worth;
(x) Liens not otherwise permitted by the foregoing clauses of
this definition securing Debt of the Borrower or its Material
Subsidiaries in an aggregate principal amount at any time outstanding
not to exceed the greater of $500,000,000 or 15% of Consolidated Net
Worth; and
(xi) any Lien arising out of the refinancing, extension,
renewal or refunding of any Debt secured by any Lien permitted by any
of the foregoing clauses of this Section, PROVIDED that (x) such Debt
is not secured by any additional assets, and (y) the amount of such
Debt secured by any such Lien is not increased.
SECTION 5.08. INTEREST COVERAGE RATIO. It will maintain at all
times a ratio of Consolidated EBIT of the Borrower and its Subsidiaries to
interest expense during the previous four consecutive fiscal quarters by the
Borrower and its Subsidiaries of not less than 3.00:1.00.
ARTICLE VI
EVENTS OF DEFAULT
In case of the happening of any of the following events (each
an "Event of Default"):
(a) any representation or warranty made or deemed made in or
in connection with the execution and delivery of this Agreement or the
Borrowings hereunder, shall prove to have been false or misleading in
any material respect when so made, deemed made or furnished;
(b) default shall be made in the payment of any principal of
any Loan when and as the same shall become due and payable, whether at
the due date thereof or at a date fixed for prepayment thereof or by
acceleration thereof or otherwise;
(c) default shall be made in the payment of any interest on
any Loan or any Fee or any other amount (other than an amount referred
to in paragraph (b) above) due hereunder, when and as the same shall
become due and payable, and such default shall continue unremedied for
a period of five Business Days;
(d) default shall be made in the due observance or performance
of any covenant, condition or agreement contained in Section 5.01,
5.02(e), 5.04, 5.06, 5.07, or 5.08;
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(e) default shall be made in the due observance or performance
of any covenant, condition or agreement contained herein (other than
those specified in (b), (c) or (d) above or (f) below) and such default
shall continue unremedied for a period of 30 days after notice thereof
from the Agent or any Lender to the Borrower;
(f) default shall be made in the due observance or performance
of covenants, conditions or agreements contained in Section 5.02 (a)
through (d) and such default shall continue unremedied for a period of
15 days after notice thereof from the Agent or any Lender to the
Borrower;
(g) a court or governmental agency having jurisdiction in the
premises shall enter a decree or order for relief in respect of the
Borrower in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or
appointing a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or similar official) of the Borrower, or for any
substantial part of its property or ordering the winding up or
liquidation of its affairs, and such decree or order shall remain
unstayed and in effect for a period of 20 consecutive days;
(h) the Borrower shall commence a voluntary case under any
applicable bankruptcy or other similar law now or hereafter in effect,
or consent to the entry of an order for relief in an involuntary case
under any such law; or consent to the appointment or taking possession
by a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) of the Borrower, or for any substantial part of
its property or make any general assignment for the benefit of
creditors; or the Borrower shall admit in writing its inability to pay
its debts generally as they become due, or corporate action shall be
taken by the Borrower in furtherance of any of the aforesaid purposes;
(i) The Borrower or any of its Subsidiaries shall fail to pay
any principal of or premium or interest on any Debt that is outstanding
in a principal amount of at least $100,000,000 in the aggregate (but
excluding Debt outstanding hereunder) of the Borrower or such
Subsidiary (as the case may be), when the same becomes due and payable
(whether by scheduled maturity, required prepayment, acceleration,
demand or otherwise), and such failure shall continue after the
applicable grace period, if any, specified in the agreement or
instrument relating to such Debt; or any such Debt shall be declared to
be due and payable, or required to be prepaid or redeemed (other than
by a regularly scheduled required prepayment or redemption), purchased
or defeased, or an offer to prepay, redeem, purchase or defease such
Debt shall be required to be made, in each case prior to the stated
maturity thereof;
(j) Judgments or orders for the payment of money in excess of
$100,000,000 in the aggregate shall be rendered against the Borrower or
any of its Subsidiaries and either (i) enforcement proceedings shall
have been commenced by any creditor upon such judgment or order or (ii)
there shall be any period of 45 consecutive days during which a stay of
enforcement of such judgment or order, by reason of a pending appeal or
otherwise, shall not be in effect; PROVIDED, HOWEVER, that any such
judgment or order shall not be an Event of Default under this clause
(j) if and for so long as and to the extent that (i) the amount of such
judgment or order is covered by a valid and binding policy of
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insurance between the defendant and the insurers covering payment
thereof and (ii) such insurers, which shall be rated at least "B+" by
A.M. Best Company, have been notified of, and coverage has not been
denied for, the amount of such judgment or order; and
(k) The Borrower or any of its ERISA Affiliates shall incur,
or shall be reasonably likely to incur liability in excess of
$100,000,000 in the aggregate as a result of one or more of the
following: (i) the occurrence of any ERISA Event; (ii) the partial or
complete withdrawal of the Borrower or any of its ERISA Affiliates from
a Multiemployer Plan; or (iii) the reorganization or termination of a
Multiemployer Plan;
then, and in every such event (other than an event described in paragraph (g) or
(h) above), and at any time thereafter during the continuance of such event, the
Agent, at the request of the Required Lenders, shall, by notice to the Borrower,
take either or both of the following actions, at the same or different times:
(i) terminate forthwith the Commitments and (ii) declare the Loans then
outstanding to be forthwith due and payable in whole or in part, whereupon the
principal of the Loans so declared to be due and payable, together with accrued
interest thereon and any unpaid accrued Fees and all other liabilities of the
Borrower accrued hereunder, shall become forthwith due and payable, without
presentment, demand, protest or any other notice of any kind, all of which are
hereby expressly waived by the Borrower, anything contained herein to the
contrary notwithstanding; and, in any event with respect to the Borrower
described in paragraph (f) or (g) above, the Commitments shall automatically
terminate and the principal of the Loans then outstanding, together with accrued
interest thereon and any unpaid accrued Fees and all other liabilities of the
Borrower accrued hereunder, shall automatically become due and payable, without
presentment, demand, protest or any other notice of any kind, all of which are
hereby expressly waived by the Borrower, anything contained herein to the
contrary notwithstanding.
ARTICLE VII
THE AGENT
In order to expedite the transactions contemplated by this
Agreement, Citibank, N.A. is hereby appointed to act as Agent on behalf of the
Lenders. Each of the Lenders hereby irrevocably authorizes the Agent to take
such actions on behalf of such Lender and to exercise such powers as are
specifically delegated to the Agent by the terms and provisions hereof, together
with such actions and powers as are reasonably incidental thereto. The Agent is
hereby expressly authorized by the Lenders, without hereby limiting any implied
authority, (a) to receive on behalf of the Lenders all payments of principal of
and interest on the Loans and all other amounts due to the Lenders hereunder,
and promptly to distribute to each Lender its proper share of each payment so
received; (b) to give notice on behalf of each of the Lenders to the Borrower of
any Event of Default specified in this Agreement of which the Agent has actual
knowledge acquired in connection with its agency hereunder; and (c) to
distribute to each Lender copies of all notices, financial statements and other
materials delivered by the Borrower pursuant to this Agreement as received by
the Agent.
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Neither the Agent nor any of its directors, officers,
employees or agents shall be liable as such for any action taken or omitted by
any of them except for its or his own gross negligence or willful misconduct, or
be responsible for any statement, warranty or representation herein or the
contents of any document delivered in connection herewith, or be required to
ascertain or to make any inquiry concerning the performance or observance by the
Borrower of any of the terms, conditions, covenants or agreements contained in
this Agreement. The Agent shall not be responsible to the Lenders for the due
execution, genuineness, validity, enforceability or effectiveness of this
Agreement or other instruments or agreements. The Agent may deem and treat the
Lender which makes any Loan as the holder of the indebtedness resulting
therefrom for all purposes hereof until it shall have received notice from such
Lender, given as provided herein, of the transfer thereof. The Agent shall in
all cases be fully protected in acting, or refraining from acting, in accordance
with written instructions signed by the Required Lenders and, except as
otherwise specifically provided herein, such instructions and any action or
inaction pursuant thereto shall be binding on all the Lenders. The Agent shall,
in the absence of knowledge to the contrary, be entitled to rely on any
instrument or document believed by it in good faith to be genuine and correct
and to have been signed or sent by the proper person or persons. Neither the
Agent nor any of its directors, officers, employees or agents shall have any
responsibility to the Borrower on account of the failure of or delay in
performance or breach by any Lender of any of its obligations hereunder or to
any Lender on account of the failure of or delay in performance or breach by any
other Lender or the Borrower of any of their respective obligations hereunder or
in connection herewith. The Agent may execute any and all duties hereunder by or
through agents or employees and shall be entitled to rely upon the advice of
legal counsel selected by it with respect to all matters arising hereunder and
shall not be liable for any action taken or suffered in good faith by it in
accordance with the advice of such counsel.
The Lenders hereby acknowledge that the Agent shall be under
no duty to take any discretionary action permitted to be taken by it pursuant to
the provisions of this Agreement unless it shall be requested in writing to do
so by the Required Lenders.
Subject to the appointment and acceptance of a successor Agent
as provided below, the Agent may resign at any time by notifying the Lenders and
the Borrower. Upon any such resignation, the Required Lenders shall have the
right to appoint a successor Agent acceptable to the Borrower. If no successor
shall have been so appointed by the Required Lenders and shall have accepted
such appointment within 30 days after the retiring Agent gives notice of its
resignation, then the retiring Agent may, on behalf of the Lenders, appoint a
successor Agent which shall be a bank with an office in New York, New York,
having a combined capital and surplus of at least $500,000,000 or an Affiliate
of any such bank. Upon the acceptance of any appointment as Agent hereunder by a
successor bank, such successor shall succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent and the retiring
Agent shall be discharged from its duties and obligations hereunder. After the
Agent's resignation hereunder, the provisions of this Article and Section 8.05
shall continue in effect for its benefit in respect of any actions taken or
omitted to be taken by it while it was acting as Agent.
With respect to the Loans made by it hereunder, the Agent in
its individual capacity and not as Agent shall have the same rights and powers
as any other Lender and may exercise the same as though it were not the Agent,
and the Agent and its Affiliates may accept
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deposits from, lend money to and generally engage in any kind of business with
the Borrower or any Subsidiary or other Affiliate thereof as if it were not the
Agent.
Each Lender agrees (i) to reimburse the Agent, on demand, in
the amount of its pro rata share (based on its Commitment hereunder) of any
expenses incurred for the benefit of the Lenders by the Agent, including counsel
fees and compensation of agents and employees paid for services rendered on
behalf of the Lenders, which shall not have been reimbursed by the Borrower, and
(ii) to indemnify and hold harmless the Agent and any of its directors,
officers, employees or agents, on demand, in the amount of such pro rata share,
from and against any and all liabilities, taxes, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind or nature whatsoever which may be imposed on, incurred by or asserted
against it in its capacity as the Agent or any of them in any way relating to or
arising out of this Agreement or any action taken or omitted by it or any of
them under this Agreement to the extent the same shall not have been reimbursed
by the Borrower; PROVIDED that no Lender shall be liable to the Agent for any
portion of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting from the gross
negligence or willful misconduct of the Agent or any of its directors, officers,
employees or agents.
Each Lender acknowledges that it has, independently and
without reliance upon the Agent or any other Lender and based on such documents
and information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement. Each Lender also acknowledges that it
will, independently and without reliance upon the Agent or any other Lender and
based on such documents and information as it shall from time to time deem
appropriate, continue to make its own decisions in taking or not taking action
under or based upon this Agreement or any related agreement or any document
furnished hereunder or thereunder.
Each Lender hereby acknowledges that none of the Lead
Arranger, the Co-Syndication Agents, the Co-Arrangers or any agent (other than
the Agent) designated on the signature pages hereof has any liability hereunder
other than in its capacity as a Lender.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. NOTICES. Notices and other communications
provided for herein shall be in writing and shall be delivered by hand or
overnight courier service, mailed or sent by telecopy, graphic scanning or other
telegraphic communications equipment of the sending party, as follows:
(a) if to the Borrower, to it at Avaya Inc., 211 Mount Airy
Road, Basking Ridge, New Jersey 07920, Attention: Treasurer (facsimile
No. 908- 953-2657) with a copy thereof to it at 219 Mount Airy Road,
Basking Ridge, new Jersey 07920, Attention: Vice President, Law -
Corporate (Facsimile No. 908-953-4912);
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(b) if to the Agent, to it at Two Penns Way, New Castle,
Delaware 19720, Attention: Bank Loan Syndications Department,
(Facsimile No. 302-849-6120); with a copy thereof to it at 399 Park
Avenue, NY 10043, Attention: Charles Foster, Global Media and
Telecommunications Department, (Fascimile No. (212) 793-6873); and
(c) if to a Lender, to it at its address (or telecopy number)
set forth in Schedule 2.01 or in the Assignment and Acceptance pursuant
to which such Lender became a party hereto.
All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement shall be deemed to have been given on the
date of receipt if delivered by hand or overnight courier service or sent by
telecopy, graphic scanning or other telegraphic communications equipment of the
sender, or on the date five Business Days after dispatch by certified or
registered mail if mailed, in each case delivered, sent or mailed (properly
addressed) to such party as provided in this Section 8.01 or in accordance with
the latest unrevoked direction from such party given in accordance with this
Section 8.01.
SECTION 8.02. SURVIVAL OF AGREEMENT. All covenants,
agreements, representations and warranties made by the Borrower herein and in
the certificates or other instruments prepared or delivered in connection with
or pursuant to this Agreement shall be considered to have been relied upon by
the Lenders and shall survive the making by the Lenders of the Loans regardless
of any investigation made by the Lenders or on their behalf, and shall continue
in full force and effect as long as the principal of or any accrued interest on
any Loan or any Fee or any other amount payable under this Agreement is
outstanding and unpaid and so long as the Commitments have not been terminated.
SECTION 8.03. BINDING EFFECT. This Agreement shall become
effective when it shall have been executed by the Borrower and the Agent and
when the Agent shall have received copies hereof (telefaxed or otherwise) which,
when taken together, bear the signatures of each Lender, and thereafter shall be
binding upon and inure to the benefit of the Borrower, the Agent and each Lender
and their respective successors and assigns.
SECTION 8.04. SUCCESSORS AND ASSIGNS. (a) Whenever in this
Agreement any of the parties hereto is referred to, such reference shall be
deemed to include the successors and assigns of such party; and all covenants,
promises and agreements by or on behalf of the Borrower, the Agent or the
Lenders that are contained in this Agreement shall bind and inure to the benefit
of their respective successors and assigns.
(b) Each Lender may assign to one or more assignees all or a
portion of its interests, rights and obligations under this Agreement (including
all or a portion of its Commitment and the Loans at the time owing to it);
PROVIDED, HOWEVER, that (i) the Borrower must give its prior written consent to
such assignment (such consent not to be unreasonably withheld) except for an
assignment to an Affiliate of a Lender provided that, in such case, the Lender
give notice of such assignment to the Borrower and, in each case, the Lender
give notice of such assignment to the Agent, (ii) the amount of the Commitment
of the assigning Lender subject to each such assignment (determined as of the
date the Assignment and Acceptance with respect to such assignment is delivered
to the Agent) shall be at least $10,000,000 or increments
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of $1,000,000 in excess thereof (or the remaining balance of its Commitment) and
the amount of the Commitment of such Lender remaining after such assignment
shall not be less than $10,000,000 or shall be zero, (iii) the parties to each
such assignment shall execute and deliver to the Agent an Assignment and
Acceptance, and a processing and recordation fee of $3,500 and (iv) the
assignee, if it shall not be a Lender, shall deliver to the Agent an
Administrative Questionnaire. Upon acceptance and recording pursuant to
paragraph (e) of this Section 8.04, from and after the effective date specified
in each Assignment and Acceptance, which effective date shall be at least five
Business Days after the execution thereof, (A) the assignee thereunder shall be
a party hereto and, to the extent of the interest assigned by such Assignment
and Acceptance, have the rights and obligations of a Lender under this
Agreement, (B) the assigning Lender thereunder shall, to the extent of the
interest assigned by such Assignment and Acceptance, be released from its
obligations under this Agreement (and, in the case of an Assignment and
Acceptance covering all or the remaining portion of an assigning Lender's rights
and obligations under this Agreement, such Lender shall cease to be a party
hereto (but shall continue to be entitled to the benefits of Sections 2.13,
2.15, 2.19 and 8.05, as well as to any Fees accrued for its account hereunder
and not yet paid)) and (C) Schedule 2.01 shall be deemed amended to give effect
to such assignment. Notwithstanding the foregoing, any Lender assigning its
rights and obligations under this Agreement may retain any Competitive Loans
made by it outstanding at such time, and in such case shall retain its rights
hereunder in respect of any Loans so retained until such Loans have been repaid
in full in accordance with this Agreement.
(c) By executing and delivering an Assignment and Acceptance,
the assigning Lender thereunder and the assignee thereunder shall be deemed to
confirm to and agree with each other and the other parties hereto as follows:
(i) such assigning Lender warrants that it is the legal and beneficial owner of
the interest being assigned thereby free and clear of any adverse claim, (ii)
except as set forth in (i) above, such assigning Lender makes no representation
or warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Agreement, or
the execution, legality, validity, enforceability, genuineness, sufficiency or
value of this Agreement or any other instrument or document furnished pursuant
hereto or the financial condition of the Borrower or the performance or
observance by the Borrower of any of its obligations under this Agreement or any
other instrument or document furnished pursuant hereto; (iii) such assignee
represents and warrants that it is legally authorized to enter into such
Assignment and Acceptance; (iv) such assignee confirms that it has received a
copy of this Agreement, together with copies of the most recent financial
statements delivered pursuant to Section 5.02 and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into such Assignment and Acceptance; (v) such assignee will
independently and without reliance upon the Agent, such assigning Lender or any
other Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement; (vi) such assignee appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement as are delegated to the Agent by the terms
hereof, together with such powers as are reasonably incidental thereto; and
(vii) such assignee agrees that it will perform in accordance with their terms
all the obligations which by the terms of this Agreement are required to be
performed by it as a Lender.
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(d) The Agent shall maintain at one of its offices in the City
of New York a copy of each Assignment and Acceptance delivered to it and a
register for the recordation of the names and addresses of the Lenders, and the
Commitment of, and the principal amount of the Loans owing to, each Lender
pursuant to the terms hereof from time to time (the "Register"). The entries in
the Register shall be conclusive in the absence of manifest error and the
Borrower, the Agent and the Lenders may treat each person whose name is recorded
in the Register pursuant to the terms hereof as a Lender hereunder for all
purposes of this Agreement. The Register shall be available for inspection by
the Borrower and each Lender, at any reasonable time and from time to time upon
reasonable prior notice.
(e) Upon its receipt of a duly completed Assignment and
Acceptance executed by an assigning Lender and an assignee together with an
Administrative Questionnaire completed in respect of the assignee (unless the
assignee shall already be a Lender hereunder), the processing and recordation
fee referred to in paragraph (b) above and, if required, the written consent of
the Borrower to such assignment, the Agent shall (i) accept such Assignment and
Acceptance and (ii) record the information contained therein in the Register.
(f) Each Lender may, without the consent of the Borrower or
the Agent, sell participations to one or more banks or other entities in all or
a portion of its rights and obligations under this Agreement (including all or a
portion of its Commitment and the Loans owing to it); PROVIDED, HOWEVER, that
(i) such Lender's obligations under this Agreement shall remain unchanged, (ii)
such Lender shall remain solely responsible to the other parties hereto for the
performance of such obligations, (iii) each participating bank or other entity
shall be entitled to the benefit of the cost protection provisions contained in
Sections 2.13, 2.15 and 2.19 to the same extent as if it was the selling Lender,
except that all claims and petitions for payment and payments made pursuant to
such Sections shall be made through such selling Lender, and (iv) the Borrower,
the Agent and the other Lenders shall continue to deal solely and directly with
such selling Lender in connection with such Lender's rights and obligations
under this Agreement, and such Lender shall retain the sole right (and
participating banks or other entities shall have no right) to enforce the
obligations of the Borrower relating to the Loans and to approve any amendment,
modification or waiver of any provision of this Agreement (other than
amendments, modifications or waivers decreasing any fees payable hereunder or
the amount of principal of or the rate at which interest is payable on the
Loans, or extending any scheduled principal payment date or date fixed for the
payment of interest on the Loans).
Any Lender or participant may, in connection with any
assignment or participation or proposed assignment or participation pursuant to
this Section 8.04, disclose to the assignee or participant or proposed assignee
or participant any information relating to the Borrower furnished to such Lender
by or on behalf of the Borrower; PROVIDED that, prior to any such disclosure,
each such assignee or participant or proposed assignee or participant shall
execute an agreement whereby such assignee or participant shall agree to be
bound by the confidentiality restrictions included in the Information Memorandum
dated August 11, 2000 used by the Agent in connection with the syndication of
the Commitments.
(g) and shall agree (subject to customary exceptions) to
preserve the confidentiality of any such confidential information relating to
the Borrower.
43
<Page>
(h) Except in accordance with Section 8.13, the Borrower shall
not assign or delegate any of its respective rights and duties hereunder without
the prior written consent of all Lenders and any attempted assignment without
such consent shall be void.
(i) Any Lender may at any time pledge all or any portion of
its rights under this Agreement to a Federal Reserve Bank; PROVIDED that no such
pledge shall release any Lender from its obligations hereunder or substitute any
such Bank for such Lender as a party hereto. In order to facilitate such an
assignment to a Federal Reserve Bank, the Borrower shall, at the request of the
assigning Lender, duly execute and deliver to the assigning Lender a promissory
note or notes in the form of Exhibit A-5 or B hereto, as applicable, evidencing
the Loans made to the Borrower by the assigning Lender hereunder.
SECTION 8.05. EXPENSES; INDEMNITY. (a) The Borrower agrees to
pay all reasonable out-of-pocket expenses incurred by the Agent in connection
with entering into this Agreement or in connection with any amendments,
modifications or waivers of the provisions hereof, or incurred by the Agent or
any Lender in connection with the enforcement or protection of their rights in
connection with this Agreement or in connection with the Loans made hereunder,
including the fees and disbursements of counsel for the Agent or, in the case of
enforcement or protection, Lenders.
(b) The Borrower agrees to indemnify the Agent, the Lenders,
Affiliates, and their respective directors, officers, employees and agents (each
such person being called an "Indemnitee") against, and to hold each Indemnitee
harmless from, any and all losses, claims, damages, liabilities and related
expenses, including reasonable counsel fees and expenses, incurred by or
asserted against any Indemnitee arising out of (i) the execution or delivery of
this Agreement or any agreement or instrument contemplated thereby, the
performance by the parties thereto of their respective obligations thereunder or
the consummation of the transactions contemplated thereby, (ii) the use of the
proceeds of the Loans or (iii) any claim, litigation, investigation or
proceeding relating to any of the foregoing, whether or not any Indemnitee is a
party thereto; PROVIDED that such indemnity shall not, as to any Indemnitee, be
available to the extent that such losses, claims, damages, liabilities or
related expenses are determined by a court of competent jurisdiction by final
and nonappealable judgment to have resulted from the gross negligence or willful
misconduct of such Indemnitee.
(c) The provisions of this Section 8.05 shall remain operative
and in full force and effect regardless of the expiration of the term of this
Agreement, the consummation of the transactions contemplated hereby, the
repayment of any of the Loans, the invalidity or unenforceability of any term or
provision of this Agreement or any investigation made by or on behalf of the
Agent or any Lender. All amounts due under this Section 8.05 shall be payable on
written demand therefor.
SECTION 8.06. RIGHT OF SETOFF. Upon (i) the occurrence and
during the continuance of any Event of Default and (ii) the making of the
request specified by Section 6.01 to authorize the Agent to declare the Loans
due and payable pursuant to the provisions of Section 6.01, each Lender and each
of its Affiliates is hereby authorized at any time and from time to time, to the
fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness
44
<Page>
at any time owing by such Lender or such Affiliate to or for the credit or the
account of the Borrower against any and all of the obligations of the Borrower
now or hereafter existing under this Agreement, whether or not such Lender shall
have made any demand under this Agreement and although such obligations may be
unmatured. Each Lender agrees promptly to notify the Borrower after any such set
off and application, PROVIDED that the failure to give such notice shall not
affect the validity of such setoff and application. The rights of each Lender
and its Affiliates under this Section are in addition to other rights and
remedies (including, without limitation, other rights of setoff) that such
Lender and its Affiliates may have.
SECTION 8.07. APPLICABLE LAW. THIS AGREEMENT SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
SECTION 8.08. WAIVERS; AMENDMENT. (a) No failure or delay of
the Agent or any Lender in exercising any power or right hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such right
or power, or any abandonment or discontinuance of steps to enforce such a right
or power, preclude any other or further exercise thereof or the exercise of any
other right or power. The rights and remedies of the Agent and the Lenders
hereunder are cumulative and are not exclusive of any rights or remedies which
they would otherwise have. No waiver of any provision of this Agreement or
consent to any departure by the Borrower therefrom shall in any event be
effective unless the same shall be permitted by paragraph (b) below, and then
such waiver or consent shall be effective only in the specific instance and for
the purpose for which given. No notice or demand on the Borrower in any case
shall entitle the Borrower to any other or further notice or demand in similar
or other circumstances.
(b) Neither this Agreement nor any provision hereof may be
waived, amended or modified except pursuant to an agreement or agreements in
writing entered into by the Borrower and the Required Lenders; PROVIDED,
HOWEVER, that no such agreement shall (i) decrease the principal amount of, or
extend the maturity of or any scheduled principal payment date or date for the
payment of any interest on any Loan, or waive or excuse any such payment or any
part thereof, or decrease the rate of interest on any Loan, without the prior
written consent of each Lender affected thereby, (ii) increase the Commitment or
decrease the Facility Fee of any Lender without the prior written consent of
such Lender, or (iii) amend or modify the provisions of Section 2.16 or Section
8.04(h), the provisions of this Section or the definition of the "Required
Lenders," without the prior written consent of each Lender; PROVIDED FURTHER,
HOWEVER, that no such agreement shall amend, modify or otherwise affect the
rights or duties of the Agent hereunder without the prior written consent of the
Agent. Each Lender shall be bound by any waiver, amendment or modification
authorized by this Section and any consent by any Lender pursuant to this
Section shall bind any assignee of its rights and interests hereunder.
SECTION 8.09. ENTIRE AGREEMENT. This Agreement and the Fee
Letter constitute the entire contract among the parties relative to the subject
matter hereof. Any previous agreement among the parties with respect to the
subject matter hereof is superseded by this Agreement and the Fee Letter.
Nothing in this Agreement or the Fee Letter expressed or
45
<Page>
implied, is intended to confer upon any party other than the parties hereto any
rights, remedies, obligations or liabilities under or by reason of this
Agreement or the Fee Letter.
SECTION 8.10. SEVERABILITY. In the event any one or more of
the provisions contained in this Agreement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby. The parties shall endeavor in good-faith negotiations to
replace the invalid, illegal or unenforceable provisions with valid provisions
the economic effect of which comes as close as possible to that of the invalid,
illegal or unenforceable provisions.
SECTION 8.11. COUNTERPARTS. This Agreement may be executed in
two or more counterparts, each of which shall constitute an original but all of
which when taken together shall constitute but one contract, and shall become
effective as provided in Section 8.03.
SECTION 8.12. HEADINGS. Article and Section headings and the
Table of Contents used herein are for convenience of reference only, are not
part of this Agreement and are not to affect the construction of, or to be taken
into consideration in interpreting, this Agreement.
46
<Page>
IN WITNESS WHEREOF, the Borrower, the Agent and the Lenders
have caused this Agreement to be duly executed by their respective authorized
officers as of the day and year first above written.
AVAYA INC.
By /s/ Rhonda Seegal
--------------------------------------
Name: Rhonda Seegal
Title: Vice President and Treasurer
ADMINISTRATIVE AGENT
CITIBANK, N.A., individually and as Agent
By /s/ Steven R. Victorin
--------------------------------------
Name: Steven R. Victorin
Title: Vice President
CO-SYNDICATION AGENTS
THE CHASE MANHATTAN BANK
By /s/ Dennis R. Wilczek
--------------------------------------
Name: Dennis R. Wilczek
Title: Vice President
DEUTSCHE BANK AG NEW YORK BRANCH
By /s/ Andreas Neumeier
--------------------------------------
Name: Andreas Neumeier
Title: Director
By /s/ Virginia Mahler Cosenza
--------------------------------------
Name: Virginia Mahler Cosenza
Title: Vice President
CREDIT SUISSE FIRST BOSTON
By /s/ Robert Hetu
--------------------------------------
Name: Robert Hetu
Title: Director
By /s/ Jeffrey Bernstein
--------------------------------------
Name: Jeffrey Bernstein
Title: Vice President
47
<Page>
MANAGING AGENT
THE BANK OF NEW YORK
By /s/ Ernest Fung
--------------------------------------
Name: Ernest Fung
Title: Vice President
LENDERS
BANCO BILBAO VIZCAYA ARGENTARIA S.A.
By /s/ Santiago Hernandez Monsalve
--------------------------------------
Name: Santiago Hernandez Monsalve
Title: Vice President - Global
Corporate Banking
By /s/ Salustiano Machado
--------------------------------------
Name: Salustiano Machado
Title: Vice President - Global
Corporate Banking
THE BANK OF TOKYO -
MITSUBISHI LTD., NEW YORK BRANCH
By /s/ Jeffrey K. Stanton
--------------------------------------
Name: Jeffrey K. Stanton
Title: Vice President
HSBC BANK USA
By /s/ Monisha Khadse
--------------------------------------
Name: Monisha Khadse
Title: First Vice President
THE NORTHERN TRUST COMPANY
By /s/ Nicole D. Bochin
--------------------------------------
Name: Nicole D. Bochin
Title: Second Vice President
WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW
YORK BRANCH
By /s/ Barry S. Wadler
--------------------------------------
Name: Barry S. Wadler
Title: Associate Director
By /s/ Lisa Walker
--------------------------------------
Name: Lisa Walker
Title: Associate Director
48
<Page>
SCHEDULE I
APPLICABLE LENDING OFFICES
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
Name of Initial Lender Domestic Lending Office Eurodollar Lending Office
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Banco Bilboz Vizcaya Argentaria S.A. 1345 Avenue of the Americas, 45th 1345 Avenue of the Americas, 45th
Floor Floor
New York, NY 10105 New York, NY 10105
Attn: Fancesc Alvarez Attn: Fancesc Alvarez
T: 212 728-1634 T: 212 728-1634
F: 212 333-2904 F: 212 333-2904
- -------------------------------------------------------------------------------------------------------------------
The Bank of New York One Wall Street, 21st Floor One Wall Street, 21st Floor
New York, NY 10286 New York, NY 10286
Attn: Pat Butler Attn: Pat Butler
Terry Blackburn Terry Blackburn
T: 212 635-7937/7938 T: 212 635-7937/7938
F: 212 635-7978 F: 212 635-7978
- -------------------------------------------------------------------------------------------------------------------
The Bank of Tokyo-Mitsubishi Ltd., 1251 Avenue of the Americas 1251 Avenue of the Americas
New York Branch 12th Floor 12th Floor
New York, NY 10020 New York, NY 10020
Attn: Rolando Uy Attn: Rolando Uy
T: 212 782-5637 T: 212 782-5637
F: 212 782-5635 F: 212 782-5635
- -------------------------------------------------------------------------------------------------------------------
The Chase Manhattan Bank 270 Park Avenue 270 Park Avenue
New York, NY 10017 New York, NY 10017
Attn: Camile Wilson Attn: Camile Wilson
T: 212 552-7488 T: 212 552-7488
F: 212 552-5700 F: 212 552-5700
- -------------------------------------------------------------------------------------------------------------------
Citibank, N.A. Two Penns Way Two Penns Way
New Castle, Delaware 19720 New Castle, Delaware 19720
Attn: Bilal Aman Attn: Bilal Aman
T: 302 89406013 T: 302 89406013
F: 302 894-6120 F: 302 894-6120
- -------------------------------------------------------------------------------------------------------------------
Credit Suisse First Boston 11 Madison Avenue 11 Madison Avenue
New York, NY 10010 New York, NY 10010
Attn: Robert Hetu Attn: Robert Hetu
T: 212 325-4542 T: 212 325-4542
F: 212 325-8309 F: 212 325-8309
- -------------------------------------------------------------------------------------------------------------------
Deutsche Bank AG New York Branch 31 West 52nd Street 31 West 52nd Street
New York, NY 10019 New York, NY 10019
Attn: Joseph Gyurindak Attn: Joseph Gyurindak
T: 212 469-4107 T: 212 469-4107
F: 212 469-4139 F: 212 469-4139
- -------------------------------------------------------------------------------------------------------------------
HSBC Bank USA 140 Broadway, 4th Floor 140 Broadway, 4th Floor
New York, NY 10005 New York, NY 10005
Attn: Monisha Khadse Attn: Monisha Khadse
T: 212 658-5572 T: 212 658-5572
F: 212 658-5109 F: 212 658-5109
- -------------------------------------------------------------------------------------------------------------------
<Page>
- -------------------------------------------------------------------------------------------------------------------
The Northern Trust Company 50 S. LaSalle Street 50 S. LaSalle Street
Chicago, IL 60675 Chicago, IL 60675
Attn: Linda Honda Attn: Linda Honda
T: 312 444-3532 T: 312 444-3532
F: 312 630-1566 F: 312 630-1566
- -------------------------------------------------------------------------------------------------------------------
Westdeutsche Landesbank 1211 Avenue of the Americas 1211 Avenue of the Americas
Girozentrale, New York Branch New York, NY 10036 New York, NY 10036
Attn: Pascal Kabemba Attn: Pascal Kabemba
T: 212 852-5938 T: 212 852-5938
F: 212 852-6300 F: 212 852-6300
- -------------------------------------------------------------------------------------------------------------------
</Table>
2
<Page>
SCHEDULE 2.01
<Table>
<Caption>
- ------------------------------------------------------------------------
NAME AND ADDRESS OF LENDER COMMITMENT
- ------------------------------------------------------------------------
<S> <C>
- ------------------------------------------------------------------------
Citibank N.A. $105,000,000
- ------------------------------------------------------------------------
Chase Manhattan Bank 57,000,000
- ------------------------------------------------------------------------
Deutsche Bank AG New York Branch 55,000,000
- ------------------------------------------------------------------------
Credit Suisse First Boston 50,000,000
- ------------------------------------------------------------------------
Bank of New York 37,000,000
- ------------------------------------------------------------------------
Banco Bilbao Vizcaya Argentaria 25,000,000
- ------------------------------------------------------------------------
Bank of Tokyo - Mitsubishi Ltd. 10,000,000
- ------------------------------------------------------------------------
HSBC 23,000,000
- ------------------------------------------------------------------------
Northern Trust Company 15,000,000
- ------------------------------------------------------------------------
Westdeutsche Landesbank 23,000,000
- ------------------------------------------------------------------------
TOTAL $400,000,000
- ------------------------------------------------------------------------
</Table>
<Page>
EXHIBIT A-1
FORM OF COMPETITIVE BID REQUEST
Citibank, N.A., as Agent for
the Lenders referred to below,
- -------------------------
- -------------------------
Attention: [Date]
Ladies and Gentlemen:
The undersigned, Avaya Inc. (the "Borrower"), refers to the
364-Day Competitive Advance and Revolving Credit Facility Agreement dated as of
August 28, 2001 (as it may hereafter be amended, modified, extended or restated
from time to time, the "Credit Agreement"), among the Borrower, the Lenders
named therein, the agents named therein and Citibank, N.A., as Agent.
Capitalized terms used herein and not otherwise defined herein shall have the
meanings assigned to such terms in the Credit Agreement. The Borrower hereby
gives you notice pursuant to Section 2.03(a) of the Credit Agreement that it
requests a Competitive Borrowing under the Credit Agreement, and in that
connection sets forth below the terms on which such Competitive Borrowing is
requested to be made:
(A) Date of Competitive Borrowing (which is a
Business Day)
--------
(B) Principal Amount of Competitive Borrowing *
--------
(C) Interest rate basis **
--------
(C) Interest Payment Date(s)**
--------
(E) Interest Period and the last day thereof ***
--------
- --------
*Not less than $10,000,000 (and in integral multiples of $1,000,000) or
greater than the Total Commitment then available.
**Eurodollar Loan or Fixed Rate Loan.
**Eurodollar Loan or Fixed Rate Loan.
***Which shall be subject to the definition of "Interest Period" and end
not later than the Maturity Date.
<Page>
Upon acceptance of any or all of the Loans offered by the
Lenders in response to this request, the Borrower shall be deemed to have
represented and warranted that the conditions to lending specified in Section
4.01(b) and (c) of the Credit Agreement have been satisfied.
Very truly yours,
AVAYA INC.
By
---------------------------
Name:
Title: [Responsible Officer]
2
<Page>
EXHIBIT A-2
FORM OF NOTICE OF COMPETITIVE BID REQUEST
[Name of Lender]
[Address]
New York, N.Y.
Attention: [Date]
Ladies and Gentlemen:
Reference is made to the 364-Day Competitive Advance and
Revolving Credit Facility Agreement dated as of August 28, 2001 (as it may
hereafter be amended, modified, extended or restated from time to time, the
"Credit Agreement"), among Avaya Inc., the Lenders named therein, the agents
named therein and Citibank, N.A., as Agent. Capitalized terms used herein and
not otherwise defined herein shall have the meanings assigned to such terms in
the Credit Agreement. Avaya Inc. (the "Borrower") made a Competitive Bid Request
on , 20 , pursuant to Section 2.03(a) of the Credit Agreement, and in that
connection you are invited to submit a Competitive Bid by [Date]/[Time]. * Your
Competitive Bid must comply with Section 2.03(b) of the Credit Agreement and the
terms set forth below on which the Competitive Bid Request was made:
(A) Date of Competitive Borrowing _______________
(B) Principal amount of Competitive Borrowing _______________
(C) Interest rate basis _______________
(D) Interest Period and the last day thereof _______________
Very truly yours,
CITIBANK, N.A., as Agent,
By
-------------------------------------
Name:
Title: [Responsible Officer]
- ----------
* The Competitive Bid must be received by the Agent (i) in the case of
Eurodollar Loans, not later than 9:30 a.m., New York City time, three
Business Days before a proposed Competitive Borrowing, and (ii) in the
case of Fixed Rate Loans, not later than 9:30 a.m., New York City time,
on the Business Day of a proposed Competitive Borrowing.
<Page>
EXHIBIT A-3
FORM OF COMPETITIVE BID
Citibank, N.A., as Agent for
the Lenders referred to below,
- -------------------------
- -------------------------
Attention:
Ladies and Gentlemen:
The undersigned, [Name of Lender], refers to the 364-Day
Competitive Advance and Revolving Credit Facility Agreement dated as of August
28, 2001 (as it may hereafter be amended, modified, extended or restated from
time to time, the "Credit Agreement"), among Avaya Inc., the Lenders named
therein, the agents named therein and Citibank, N.A., as Agent. Capitalized
terms used herein and not otherwise defined herein shall have the meanings
assigned to such terms in the Credit Agreement. The undersigned hereby makes a
Competitive Bid pursuant to Section 2.03(b) of the Credit Agreement, in response
to the Competitive Bid Request made by Avaya Inc. (the "Borrower") on , 20 , and
in that connection sets forth below the terms on which such Competitive Bid is
made:
(A) Principal Amount *
-----------------
(B) Competitive Bid Rate **
-----------------
(C) Interest Period and last day thereof
-----------------
The undersigned hereby confirms that it is prepared, subject
to the conditions set forth in the Credit Agreement, to extend credit to the
Borrower upon acceptance by the Borrower of this bid in accordance with Section
2.03(d) of the Credit Agreement.
Very truly yours,
[NAME OF LENDER],
By
---------------------------------
Name:
Title:
- ----------
* Not less than $5,000,000 or greater than the requested Competitive
Borrowing and in integral multiples of $1,000,000. Multiple bids will
be accepted by the Agent.
** I.E., LIBO Rate + or - %, in the case of Eurodollar Loans or %, in the
case of Fixed Rate Loans.
<Page>
EXHIBIT A-4
FORM OF COMPETITIVE BID ACCEPT/REJECT LETTER
Citibank, N.A., as Agent for
the Lenders referred to below,
- -------------------------
- -------------------------
Attention:
Ladies and Gentlemen:
The undersigned, Avaya Inc. (the "Borrower"), refers to the
364-Day Competitive Advance and Revolving Credit Facility Agreement dated as of
August 28, 2001 (as it may hereafter be amended, modified, extended or restated
from time to time, the "Credit Agreement"), among the Borrower, the Lenders
named therein, the agents named therein and Citibank, N.A., as Agent for the
Lenders.
In accordance with Section 2.03(c) of the Credit Agreement, we
have received a summary of bids in connection with our Competitive Bid Request
dated ___________ and in accordance with Section 2.03(d) of the Credit
Agreement, we hereby accept the following bids for maturity on [date]:
PRINCIPAL AMOUNT FIXED RATE/MARGIN LENDER e:
--------------------------------------------------
$ [%]/[+/-. %]
$
We hereby reject the following bids:
PRINCIPAL AMOUNT FIXED RATE/MARGIN LENDER e:
--------------------------------------------------
$ [%]/[+/-. %]
$
The $ should be deposited in the Citibank,
N.A. account number [ ] on [date].
Very truly yours,
AVAYA INC.
By
----------------------------------
Name:
Title:
<Page>
EXHIBIT A-5
FORM OF COMPETITIVE BID NOTE
$ [_____________] New York, New York
[Date]
FOR VALUE RECEIVED, the undersigned, Avaya Inc., a Delaware
corporation (the "Borrower"), hereby promises to pay to the order of [Name of
Lender] (the "Lender"), at the office of Citibank, N.A. (the "Agent") at
[Address of Citibank, N.A.], on ___________, 200_, pursuant to the 364-Day
Competitive Advance and Revolving Credit Facility Agreement dated as of August
28, 2001 (the "Credit Agreement"), among the Borrower, the Lenders named
therein, the agents named therein and the Agent) the principal amount for a
Competitive Loan in the amount of [Loan amount in words] ($[ ]), in lawful money
of the United States of America, in immediately available funds, and to pay
interest on the principal amount hereof in like funds from the date hereof until
such principal amount is paid in full, at the interest rate and payable on the
interest payment date or dates provided below:
Interest Rate: _____% per annum (calculated on the basis of a
year of _____ days for the actual number of days elapsed) payable on
____________.
The Borrower promises to pay interest, on demand, on any
overdue principal and, to the extent permitted by law, overdue interest from
their due dates at the rate or rates provided in the Credit Agreement.
The Borrower hereby waives diligence, presentment, demand,
protest and notice of any kind whatsoever. The nonexercise by the holder of any
of its rights hereunder in any particular instance shall not constitute a waiver
thereof in that or any subsequent instance.
The Loans evidenced hereby are Competitive Loans referred to
in the Credit Agreement, which, among other things, contains provisions for the
acceleration of the maturity thereof upon the happening of certain events and
for the amendment or waiver of certain provisions of the Credit Agreement, all
upon the terms and conditions therein specified. THIS NOTE SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
AVAYA INC.
By
------------------------------------
Name:
Title:
<Page>
EXHIBIT A-6
FORM OF COMMITTED BORROWING REQUEST
Citibank, N.A., as Agent for
the Lenders referred to below,
- -------------------------
- -------------------------
Attention: [Date]
Ladies and Gentlemen:
The undersigned, Avaya Inc. (the "Borrower"), refers to the
364-Day Competitive Advance and Revolving Credit Facility Agreement dated as of
August 28, 2001 (as it may hereafter be amended, modified, extended or restated
from time to time, the "Credit Agreement"), among the Borrower, the Lenders
named therein, the agents named therein and Citibank, N.A., as Agent.
Capitalized terms used herein and not otherwise defined herein shall have the
meanings assigned to such terms in the Credit Agreement. The Borrower hereby
gives you notice pursuant to Section 2.04 of the Credit Agreement that it
requests a Committed Borrowing under the Credit Agreement, and in that
connection sets forth below the terms on which such Committed Borrowing is
requested to be made:
(A) Date of Committed Borrowing (which is
a Business Day)
---------
(B) Principal Amount of Committed Borrowing *
---------
(C) Interest rate basis **
---------
(D) Interest Period and the last day thereof ***
---------
- ----------
*Not less than $10,000,000 (and in integral multiples of $1,000,000) or
greater than the Total Commitment then available.
**Eurodollar Loan or ABR Loan.
***Which shall be subject to the definition of "Interest Period" and end
not later than the Maturity Date.
2
<Page>
Upon acceptance of any or all of the Loans made by the Lenders
in response to this request, the Borrower shall be deemed to have represented
and warranted that the conditions to lending specified in Section 4.01(b) and
(c) of the Credit Agreement have been satisfied.
Very truly yours,
AVAYA INC.
By
-----------------------------------
Name:
Title: [Responsible Officer]
3
<Page>
EXHIBIT B
FORM OF STANDBY NOTE
$ [Amount of Commitment] New York, New York
[Date]
FOR VALUE RECEIVED, the undersigned, Avaya Inc., a Delaware
corporation (the "Borrower"), hereby promises to pay to the order of [Name of
Lender] (the "Lender"), at the office of Citibank, N.A. (the "Agent") at
[Address of Citibank, N.A.], on the Maturity Date (as defined in the 364-Day
Competitive Advance and Revolving Credit Facility Agreement dated as of August
28, 2001 (the "Credit Agreement"), among the Borrower, the Lenders named
therein, the agents named therein and the Agent) the lesser of the principal sum
of [amount of Commitment in words] ($[ ]) and the aggregate unpaid principal
amount of all Loans (as defined in the Credit Agreement) made to the Borrower by
the Lender pursuant to the Credit Agreement, in lawful money of the United
States of America, in immediately available funds, and to pay interest on the
principal amount hereof from time to time outstanding, in like funds, at said
office, at the rate or rates per annum, from the dates and payable on the dates
provided in the Credit Agreement.
The Borrower promises to pay interest, on demand, on any
overdue principal and, to the extent permitted by law, overdue interest from
their due dates at the rate or rates provided in the Credit Agreement.
The Borrower hereby waives diligence, presentment, demand,
protest and notice of any kind whatsoever. The nonexercise by the holder of any
of its rights hereunder in any particular instance shall not constitute a waiver
thereof in that or any subsequent instance.
All borrowings evidenced by this Note and all payments and
prepayments of the principal hereof and interest hereon and the respective dates
and maturity dates thereof shall be endorsed by the holder hereof on the
schedule attached hereto and made a part hereof or on a continuation thereof
which shall be attached hereto and made a part hereof, or otherwise recorded by
such holder in its internal records; PROVIDED, HOWEVER, that the failure of the
holder to make such a notation or any error in such a notation shall not affect
the obligations of the Borrower under this Note.
<Page>
The Loans evidenced hereby are Committed Loans referred to in
the Credit Agreement, which, among other things, contains provisions for the
acceleration of the maturity thereof upon the happening of certain events, for
optional and mandatory prepayment of the principal thereof prior to the maturity
thereof and for the amendment or waiver of certain provisions of the Credit
Agreement, all upon the terms and conditions therein specified. THIS NOTE SHALL
BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK.
AVAYA INC.
By
------------------------------------
Name:
Title:
2
<Page>
LOANS AND PAYMENTS
<Table>
<Caption>
- ----------------- -------------- --------------- ------------- ------------- ----------- --------------- ---------------
Date Amount Maturity Principal Payments Interest Unpaid Name of
and Type Date Principal Person
of Loan Balance Making
of Note Notation
- ----------------- -------------- --------------- ------------- ------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------- -------------- --------------- ------------- ------------- ----------- --------------- ---------------
- ----------------- -------------- --------------- ------------- ------------- ----------- --------------- ---------------
</Table>
3
<Page>
EXHIBIT C
FORM OF
ASSIGNMENT AND ACCEPTANCE
Reference is made to the 364-Day Competitive Advance and
Revolving Credit Facility Agreement dated as of August 28, 2001 (as the same may
be modified, amended, extended or restated from time to time, the "Credit
Agreement"), among Avaya Inc. (the "Borrower"), the lenders party thereto (the
"Lenders"), the agents party thereto and Citibank, N.A., as agent for the
Lenders (in such capacity, the "Agent"). Terms defined in the Credit Agreement
are used herein with the same meanings.
1. The Assignor hereby sells and assigns, without recourse, to
the Assignee, and the Assignee hereby purchases and assumes, without recourse,
from the Assignor, effective as of the Effective Date set forth on the reverse
hereof, the interests set forth on the reverse hereof (the "Assigned Interest")
in the Assignor's rights and obligations under the Credit Agreement, including,
without limitation, the interests set forth on the reverse hereof in the
Commitment of the Assignor on the Effective Date and the Competitive Loans (if
noted on the attached Schedule) and Committed Loans owing to the Assignor which
are outstanding on the Effective Date, together with unpaid interest accrued on
the assigned Loans to the Effective Date. Each of the Assignor and the Assignee
hereby makes and agrees to be bound by all the representations, warranties and
agreements set forth in Section 8.04(c) of the Credit Agreement, a copy of which
has been received by each such party. From and after the Effective Date (i) the
Assignee shall be a party to and be bound by the provisions of the Credit
Agreement and, to the extent of the interests assigned by this Assignment and
Acceptance, have the rights and obligations of a Lender thereunder and (ii) the
Assignor shall, to the extent of the interests assigned by this Assignment and
Acceptance, relinquish its rights (except as set forth in Section 8.04(b) of the
Credit Agreement) and be released from its obligations under the Credit
Agreement.
2. This Assignment and Acceptance is being delivered to the
Agent together with (i) if the Assignee is organized under the laws of a
jurisdiction outside the United States, the forms specified in Section 2.19(f)
of the Credit Agreement, duly completed and executed by such Assignee, (ii) if
the Assignee is not already a Lender under the Credit Agreement, an
Administrative Questionnaire and (iii) a processing and recordation fee of
$3,500.
3. This Assignment and Acceptance shall be governed by and
construed in accordance with the laws of the State of New York.
Date of Assignment:
Legal Name of Assignor:
Legal Name of Assignee:
Assignee's Address for Notices:
Effective Date of Assignment
<Page>
(may not be fewer than 5 Business
Days after the Date of Assignment):
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------
Percentage Assigned of Facility
and Commitment thereunder (set
forth, to at least 8 decimals, as
Principal Amount Assigned (and a percentage of the Facility and
identifying information as to the aggregate Commitments of ALL
individual competitive loans) the lenders thereunder)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commitment Assigned: $ %
- ----------------------------------------------------------------------------------------------------------
Committed Loans:
- ----------------------------------------------------------------------------------------------------------
Competitive Loans, if any:
- ----------------------------------------------------------------------------------------------------------
</Table>
The terms set forth above and on the
reverse side hereof are hereby agreed to: Accepted: as of .
-----------
, as Assignor CITIBANK, N.A., as agent
- ---------------------------
By: By:
-------------------------------------- ----------------------------
Name: Name:
Title: Title:
, as Assignee AVAYA INC.
- ---------------------------
By: By:
-------------------------------------- ----------------------------
Name: Name:
Title: Title:
, as Assignee
- ---------------------------
By:
--------------------------------------
Name:
Title:
2
<Page>
EXHIBIT D
FORM OF
OPINION OF COUNSEL FOR AVAYA INC.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>4
<FILENAME>a2066518zex-12.txt
<DESCRIPTION>EXHIBIT 12
<TEXT>
<Page>
EXHIBIT 12
RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK ACCRETION
The following table sets forth our ratio of earnings to fixed charges and ratio
of earnings to combined fixed charges and preferred stock accretion derived from
our audited consolidated financial statements for the fiscal years ended
September 30, 1997, 1998, 1999, 2000 and 2001. Except for our financial
statements for the fiscal year ended September 30, 2001, our consolidated
financial statements have been derived from the financial statements and
accounting records of Lucent Technologies Inc. using the historical results of
operations and historical basis of the assets and liabilities transferred to us
from Lucent. We believe the assumptions underlying the consolidated financial
statements are reasonable. The ratio of earnings to fixed charges and ratio of
earnings to combined fixed charges and preferred stock accretion prior to
September 30, 2000 may not be indicative of our future performance as an
independent company.
In reviewing the ratio of earnings to fixed charges and ratio of earnings to
combined fixed charges and preferred stock accretion, please note the following:
- --On September 30, 2000, we were spun off from Lucent pursuant to a distribution
of all outstanding shares of our common stock to Lucent shareowners. Although
our consolidated statements of operations include interest expense for each of
the respective years, our balance sheets prior to the distribution do not
include an allocation of Lucent debt at the corporate level because Lucent used
a centralized approach to finance its operations. The interest rates used equate
to an estimate of what we believe we would have obtained with a "BBB" rating,
our current long term debt rating by Standard & Poor's. Average debt balances
utilized for the interest expense calculation include an estimate of the amount
of financing thought to be needed to historically fund our operations. These
estimates were determined based upon the cash flows for each of the periods and
do not necessarily reflect the level of financing we will incur as a stand-alone
company.
- --On September 30, 2000, we assumed $780 million of commercial paper from
Lucent, which largely represents the portion of Lucent liabilities that Lucent
determined should be attributed to us. As of September 30, 2001, we repaid
approximately $348 million of the commercial paper.
- --On October 2, 2000, we sold to Warburg, Pincus Equity Partners, L.P. and
related investment funds four million shares of our Series B convertible
participating preferred stock and warrants to purchase our common stock for
an aggregate purchase price of $400 million. For the fiscal year ended
September 30, 2001, we recorded a reduction of approximately $27 million in
retained earnings representing the amount accreted on the Series B preferred
stock for the dividend period.
AVAYA INC.
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK ACCRETION
(DOLLARS IN MILLIONS)
(UNAUDITED)
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
2001 2000 1999 1998 1997
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
EARNINGS
Adjusted Income (Loss) Before Income Taxes ............... $(571) $(448) $ 307 $ 240 $ 82
Interest Capitalized During the Period .............. 5 2 -- -- --
Fixed Charges ....................................... 106 137 139 125 81
----- ----- ----- ----- -----
TOTAL EARNINGS AVAILABLE ................................. $(470) $(313) $ 446 $ 365 $ 163
ADJUSTED INCOME (LOSS) BEFORE INCOME TAXES
Income (Loss) Before Income Taxes ........................ $(570) $(448) $ 307 $ 240 $ 82
Less: Undistributed Earnings of Less than 50% owned
affiliates .......................................... (1) -- -- -- --
----- ----- ----- ----- -----
Adjusted Income (Loss) Before Income Taxes ............... $(571) $(448) $ 307 $ 240 $ 82
FIXED CHARGES
Total Interest Expense Including Capitalized
Interest ............................................ $ 41 $ 78 $ 90 $ 94 $ 59
Interest Portion of Rental Expense (1) ................... 65 59 49 31 22
----- ----- ----- ----- -----
TOTAL FIXED CHARGES ...................................... $ 106 $ 137 $ 139 $ 125 $ 81
Accretion of Series B Preferred Stock .................... 43 (2) -- -- -- --
----- ----- ----- ----- -----
</Table>
<Page>
<Table>
<S> <C> <C> <C> <C> <C>
TOTAL COMBINED FIXED CHARGES AND PREFERRED STOCK ACCRETION $ 149 $ 137 $ 139 $ 125 $ 81
RATIO OF EARNINGS TO FIXED CHARGES ....................... N/A (3) N/A (4) 3.2 2.9 2.0
===== ===== ===== ===== =====
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED
STOCK ACCRETION ..................................... N/A (3) N/A (4) 3.2 2.9 2.0
===== ===== ===== ===== =====
</Table>
(1) For all periods presented, the percent of rental expense included in the
computation of fixed charges represents a reasonable approximation of the
interest factor.
(2) This amount represents pre-tax earnings required to cover the preferred
stock accretion requirement of $27 million for the respective period and is
calculated by dividing the preferred stock accretion by the reciprocal
effective income tax rate of 38.3% for the period.
(3) For the year ended September 30, 2001, earnings available are inadequate to
cover fixed charges and combined fixed charges and preferred stock
accretion by $576 million and $619 million, respectively.
(4) For the year ended September 30, 2000, earnings available are inadequate to
cover fixed charges and combined fixed charges and preferred stock
accretion by $450 million.
2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>5
<FILENAME>a2066518zex-13.txt
<DESCRIPTION>EXHIBIT 13
<TEXT>
<Page>
Exhibit 13
FINANCIAL REVIEW
TABLE OF CONTENTS
Selected Financial Data 12 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 Report of Independent Accountants 27
Consolidated Statements of Operations 28 Consolidated Balance Sheets 29
Consolidated Statements of Changes in Stockholders' Equity and of
Comprehensive Income (Loss) 30 Consolidated Statements of Cash Flows 31 Notes
to Consolidated Financial Statements 32
SELECTED FINANCIAL DATA
The following table sets forth selected financial information derived from our
audited consolidated financial statements as of and for the fiscal years ended
September 30, 1997, 1998, 1999, 2000 and 2001. The selected financial
information for the years prior to the fiscal year ended September 30, 2001 may
not be indicative of our future performance as an independent company. The
selected financial information for all periods should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the consolidated financial statements and the notes thereto
included elsewhere in this annual report.
In reviewing the selected financial information, please note the following:
o The purchased in-process research and development is attributable to the
acquisitions of Quintus Corporation and VPNet Technologies, Inc. in 2001, Lannet
Ltd., SDX Business Systems PLC, and Prominet Corporation in 1998, and Octel
Communications Corporation and Agile Networks, Inc. in 1997.
o We merged with Mosaix, Inc. in July 1999.
o Effective October 1, 1998, we changed our method for calculating the
market-related value of plan assets used in determining the expected
return-on-asset component of annual net pension and postretirement benefit
costs.
o Total debt represents the amount of financing we assumed as a stand-alone
company following the separation from Lucent as of September 30, 2000 and debt
attributable to our foreign entities.
o In October 2000, we sold four million shares of our Series B convertible
participating preferred stock and warrants to purchase our common stock for an
aggregate purchase price of $400 million.
<Table>
<Caption>
Year Ended September 30,
---------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of operations information:
Revenue $6,793 $7,732 $8,268 $7,754 $6,413
Business restructuring and related charges (reversals) 837 684 (33) - -
Purchased in-process research and development 32 - - 306 472
Income (loss) before cumulative effect of accounting change (352) (375) 186 43 (148)
Cumulative effect of accounting change - - 96 - -
Net income (loss) (352) (375) 282 43 (148)
Earnings (loss) per common share - basic:
Income (loss) available to common stockholders $(1.33) $(1.39) $ 0.72 $ 0.17 $(0.60)
Cumulative effect of accounting change - - 0.37 - -
------ ------ ------ ------ ------
Net income (loss) available to common stockholders $(1.33) $(1.39) $ 1.09 $ 0.17 $(0.60)
------ ------ ------ ------ ------
Earnings (loss) per common share - diluted:
Income (loss) available to common stockholders $(1.33) $(1.39) $ 0.68 $ 0.17 $(0.60)
Cumulative effect of accounting change - - 0.35 - -
------ ------ ------ ------ ------
Net income (loss) available to common stockholders $(1.33) $(1.39) $ 1.03 $ 0.17 $(0.60)
------ ------ ------ ------ ------
<Caption>
As of September 30,
---------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Balance sheet information:
Total assets $4,648 $5,037 $4,239 $4,177 $3,340
Total debt 645 793 10 14 25
Series B convertible participating preferred stock 395 - - - -
</Table>
12.
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following section should be read in conjunction with the consolidated
financial statements and the notes thereto included elsewhere in this annual
report. The matters discussed in Management's Discussion and Analysis of
Financial Condition and Results of Operations contain certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Statements made that are not historical facts are forward-looking and are
based on estimates, forecasts and assumptions involving risks and uncertainties
that could cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements.
The risks and uncertainties referred to above include, but are not limited
to, price and product competition; rapid technological development;
dependence on new product development; the successful introduction of new
products; the mix of our products and services; customer demand for our
products and services; the ability to successfully integrate acquired
companies; control of costs and expenses; the ability to form and implement
alliances; the ability to implement in a timely manner our restructuring
plans; the economic, political and other risks associated with international
sales and operations; United States and foreign government regulation;
general industry and market conditions; and growth rates and general domestic
and international economic conditions including interest rate and currency
exchange rate fluctuations. See also "Forward-Looking Statements" in our
Annual Report on Form 10-K.
OVERVIEW
We are a leading provider of communications systems and software for
enterprises, including businesses, government agencies and other organizations.
We offer voice, converged voice and data, customer relationship management,
messaging, multi-service networking and structured cabling products and
services. Multi-service networking products are those products that support
network infrastructures which carry voice, video and data traffic over any of
the protocols, or set of procedures, supported by the Internet on local area and
wide area data networks. A structured cabling system is a flexible cabling
system designed to connect phones, workstations, personal computers, local area
networks and other communications devices through a building or across one or
more campuses. We are a worldwide leader in sales of messaging and structured
cabling systems and a U.S. leader in sales of enterprise voice communications
and call center systems. We are not a leader in multi-service networking
products, and our product portfolio in this area is less complete than the
portfolios of some of our competitors. In addition, we are not a leader in sales
of certain converged voice and data products, including server-based Internet
Protocol telephony systems. We are implementing a strategy focused on these and
other advanced communications solutions.
We report our operations in three segments: Communications Solutions,
Services and Connectivity Solutions. The Communications Solutions segment
represents our core business, which consists of our enterprise voice
communications systems and software, communications applications, professional
services for customer relationship management, converged voice and data networks
and unified communication, multi-servicing networking products and product
installation services. The Services segment represents our maintenance,
value-added and data services. The Connectivity Solutions segment represents our
structured cabling systems and our electronic cabinets. The costs of shared
services and other corporate center operations managed on a common basis
represent business activities that do not qualify for separate operating segment
reporting and are aggregated in the corporate and other category. In the first
quarter of fiscal 2001, we realigned the method of allocating costs of shared
services and other corporate center operations managed outside of the reportable
operating segments. Financial data for the periods prior to the realignment have
been restated to conform to the current presentation. Effective January 1, 2002,
we intend to implement a broad internal reorganization of our company and expect
to effect a corresponding reorganization of our reportable segments in the
second quarter of fiscal 2002.
We have been experiencing declines in revenue from our traditional business,
enterprise voice communications products. We expect, based on various industry
reports, a low growth rate in the market segments for these traditional
products. We are implementing a strategy to capitalize on the higher growth
opportunities in our market, including advanced communications solutions such as
converged voice and data networks, customer relationship management solutions,
unified communication applications and multi-service networking products. This
strategy requires us to make a significant change in the direction and strategy
of our company to focus on the development and sales of these advanced products.
The success of this strategy, however, is subject to many risks, including the
risks that:
o we do not develop new products or enhancements to our current products on a
timely basis to meet the changing needs of our customers;
o customers do not accept our products or new technology, or industry standards
develop that make our products obsolete; or
o our competitors introduce new products before we do and achieve a competitive
advantage by being among the first to market.
Our traditional enterprise voice communications products and the advanced
communications solutions described above are a part of our Communications
Solutions segment. If we are unsuccessful in implementing our strategy, the
contribution to our results from Communications Solutions may decline, reducing
our overall profitability, thereby requiring a greater need for external capital
resources.
In addition, although the September 11, 2001 terrorist attacks against the
U.S. and the national and global response to these terrorist attacks have not
had a direct material effect on our business, the attacks and related response
may continue to create widespread business uncertainty and adversely affect the
global economy, which may continue to result in delays in purchasing decisions
and/or may adversely affect our business generally.
13.
<Page>
The following table sets forth the allocation of our revenue among our
operating segments, expressed as a percentage of total external revenue,
excluding corporate and other revenue:
<Table>
<Caption>
Year Ended September 30,
-------------------------------
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Operating Segments:
Communications Solutions 49.7% 56.3% 61.6%
Services 30.8 25.3 23.0
Connectivity Solutions 19.5 18.4 15.4
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
</Table>
SEPARATION FROM LUCENT TECHNOLOGIES INC.
On September 30, 2000, under the terms of a Contribution and Distribution
Agreement between Lucent and us, Lucent contributed its enterprise networking
business to us and distributed all of the outstanding shares of our capital
stock to its stockholders. We refer to these transactions as the contribution
and the distribution, respectively. We had no material assets or activities
until the contribution, which occurred immediately prior to the distribution.
Lucent conducted such businesses through various divisions and subsidiaries.
Following the distribution, we became an independent public company, and Lucent
no longer has a continuing stock ownership interest in us. Prior to the
distribution, we entered into several agreements with Lucent in connection with,
among other things, intellectual property, interim services and a number of
ongoing commercial relationships, including product supply arrangements. The
interim services agreement set forth charges generally intended to allow the
providing company to fully recover the allocated direct costs of providing the
services, plus all out-of-pocket costs and expenses, but without any profit.
With limited exceptions, these interim services expired on March 31, 2001. The
pricing terms for goods and services covered by the commercial agreements
reflect current market prices at the time of the transaction.
Our consolidated financial statements as of and for each of the two fiscal
years ended September 30, 2000 have been derived from the financial statements
and accounting records of Lucent using the historical results of operations and
historical basis of the assets and liabilities of the enterprise networking
businesses transferred to us immediately prior to the distribution. We believe
these consolidated financial statements are a reasonable representation of the
financial position, results of operations, cash flows and changes in
stockholders' equity of such businesses as if Avaya were a separate entity.
Our consolidated financial statements as of and for each of the two years
ended September 30, 2000 include allocations of certain Lucent corporate
headquarters' assets, liabilities, and expenses relating to these businesses
that were transferred to us from Lucent. General corporate overhead has been
allocated either based on the ratio of our costs and expenses to Lucent's costs
and expenses, or based on our revenue as a percentage of Lucent's total revenue.
General corporate overhead primarily includes cash management, legal,
accounting, tax, insurance, public relations, advertising and data services and
amounted to $398 million and $449 million in fiscal 2000 and 1999, respectively.
In addition, the consolidated financial statements for fiscal 2000 and 1999
include an allocation from Lucent to fund a portion of the costs of basic
research conducted by Lucent's BellLaboratories. This allocation was based on
our revenue as a percentage of Lucent's total revenue and amounted to $75
million and $78 million in fiscal 2000 and 1999, respectively. We believe the
costs of corporate services and research charged to us are a reasonable
representation of the costs that would have been incurred if we had performed
these functions as a stand-alone entity. We currently perform these corporate
functions and basic research requirements using our own resources or purchased
services.
Prior to the distribution, cash deposits from our businesses were transferred
to Lucent on a regular basis. As a result, none of Lucent's cash, cash
equivalents or debt at the corporate level had been allocated to us. Although
our Consolidated Statements of Operations include interest expense for the
fiscal years ended September 30, 2000 and 1999, the Consolidated Balance Sheets
for periods prior to the distribution do not include an allocation of Lucent
debt at the corporate level because Lucent used a centralized approach to cash
management and the financing of its operations. We have assumed for purposes of
calculating interest expense that we would have had average debt balances of
$962 million and $1,320 million and average interest rates of 7.9% and 6.8% per
annum for fiscal 2000 and 1999, respectively. We believe the interest rates and
average debt balances used in the calculation of interest expense reasonably
reflect the cost of financing our assets and operations during the periods prior
to the distribution.
Income taxes were calculated in fiscal 2000 and 1999 as if we filed separate
tax returns. However, Lucent was managing its tax position for the benefit of
its entire portfolio of businesses, and its tax strategies were not necessarily
reflective of the tax strategies that we would have followed or will follow as a
stand-alone company. Commencing with fiscal 2001, we will begin filing our own
consolidated income tax returns.
We have resolved all of the contribution and distribution issues with Lucent
related to the settlement of certain employee obligations and the transfer of
certain assets. Accordingly, we recorded a $42 million net reduction to
additional paid-in capital in fiscal 2001. Following the distribution, we had
identified approximately $15 million recorded in our Consolidated Balance Sheets
that was primarily related to certain accounts receivable balances due from
Lucent and certain fixed assets, which we have agreed will remain with Lucent.
Also in connection with the distribution, we had recorded estimates in our
Consolidated Balance Sheets at September 30, 2000 in prepaid benefit costs and
benefit obligations of various existing Lucent benefit plans related to
employees for whom we assumed responsibility. Following an actuarial review, we
received a valuation, agreed upon by us and
14.
<Page>
Lucent, that provides for a reduction of approximately $44 million in prepaid
benefit costs and $17 million in pension and postretirement benefit obligations.
We recorded the net effect of these adjustments as a reduction to additional
paid-in capital in fiscal 2001 because the transactions relate to the original
capital contribution from Lucent.
In addition, Avaya and Lucent have amended the Contribution and Distribution
Agreement to remove the provisions restricting us from entering into strategic
alliances with Nortel Networks Corporation and Cisco Systems, Inc.
BUSINESS RESTRUCTURING AND RELATED CHARGES
In fiscal 2001, we outsourced certain manufacturing facilities and accelerated
our restructuring plan that was originally adopted in September 2000 to improve
profitability and business performance as a stand-alone company. As a result, we
recorded a pretax charge of $872 million in fiscal 2001 for business
restructuring and related charges, which is expected to result in a $295 million
usage of cash. This charge was partially offset by a $35 million reversal to
income primarily attributable to fewer employee separations than originally
anticipated and more favorable than expected real estate lease termination
costs.
The components of the fiscal 2001 charge include $650 million of employee
separation costs, $24 million of lease termination costs, and $198 million of
other related charges. The charge for employee separation costs is composed of
$577 million primarily related to enhanced pension and postretirement benefits,
which represent the cost of curtailment in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and $73 million for severance, special benefit payments
and other employee separation costs. The $198 million of other related charges
is composed of $178 million for incremental period expenses primarily to
facilitate the separation from Lucent, including computer system transition
costs, and $20 million for an asset impairment charge related to land, buildings
and equipment at the Shreveport manufacturing facility that we expect to dispose
of during fiscal 2002. Employee separation costs of $55 million established in
fiscal 2000 for union-represented employees at Shreveport will be paid as
enhanced severance benefits from existing pension and benefit assets and,
accordingly, such amount was reclassified in fiscal 2001 out of the business
restructuring reserve and recorded as a reduction to prepaid benefit costs.
The employee separation costs in fiscal 2001 were incurred in connection with
the elimination of 6,810 employee positions of which 5,600 were through a
combination of involuntary and voluntary separations, including an early
retirement program targeted at U.S. management employees, and a workforce
reduction of 1,210 employees due to the outsourcing of certain of our
manufacturing operations to Celestica Inc. Employee separation payments that are
included in the business restructuring reserve will be made either through a
lump sum or a series of payments extending over a period of up to two years from
the date of departure at each employee's option. This workforce reduction was
substantially complete as of September 30, 2001. Real estate lease termination
costs are being incurred primarily in the U.S., Europe and Asia, and have been
reduced for sublease income that management believes is probable. Payments on
lease obligations, which consist of real estate and equipment leases, will
extend through 2003. In fiscal 2001, accrued costs for lease obligations
represent approximately 666,000 square feet of excess sales and services support
offices, materials, stocking and logistics warehouses, and Connectivity
Solutions facilities. As of September 30, 2001, we had not yet vacated any of
this space.
In fiscal 2000, we recorded a pretax business restructuring charge of $684
million in connection with our separation from Lucent. The components of the
charge include $365 million of employee separation costs, $127 million of lease
termination costs, $28 million of other exit costs, and $164 million of other
related charges.
The charge for employee separation costs in fiscal 2000 includes severance,
medical and other benefits attributable to the worldwide reduction of 4,900
union-represented and management positions. This charge is the result of
redesigning the services organization by reducing the number of field
technicians to a level needed for non-peak workloads, consolidating and closing
certain U.S. and European manufacturing facilities and realigning the sales
effort to focus the direct sales force on strategic accounts and address smaller
accounts through indirect sales channels. This workforce reduction was
substantially complete as of September 30, 2001. The charge for lease
termination obligations included approximately two million square feet of excess
manufacturing, distribution and administrative space, of which we have vacated
646,000 square feet as of September 30, 2001. Other exit costs consist of
decommissioning legacy computer systems in connection with our separation from
Lucent and terminating other contractual obligations.
The $164 million of other related charges in fiscal 2000 is composed of $89
million for incremental period expenses related to the separation from Lucent,
including computer system transition costs, and a $75 million asset impairment
charge that was primarily related to an outsourcing contract with a major
customer. With respect to the asset impairment, we terminated our obligation
under a leasing arrangement and purchased the underlying equipment, which had
been used to support a contract with a customer to provide outsourcing and
related services. Based on the terms of this contract, the estimated
undiscounted cash flows from the equipment's use and eventual disposition was
determined to be less than the equipment's carrying value, and resulted in an
impairment charge of $50 million to write such equipment down to its fair value.
In fiscal 1999, we reversed $33 million of employee separation costs,
originally established in December 1995, due to higher than expected voluntary
employee attrition. As of September 30, 1999, all prior restructuring related
plans were complete and no such reserves remained.
15.
<Page>
The following table summarizes the status of our business restructuring and
related charges as well as the related reserve during fiscal 2000 and 2001:
<Table>
<Caption>
Business Restructuring Charges Other Related Charges
--------------------------------------------------- ------------------------
Total Total Business
Employee Lease Business Restructuring
Separation Termination Other Restructuring Asset Incremental and Related
Costs Obligations Exit Costs Charges Impairments Period Costs Charges
---------- ----------- ---------- ------------- ----------- ------------ -------------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Fiscal 2000:
Charges $ 365 $127 $ 28 $ 520 $ 75 $ 89 $ 684
Cash payments (20) - (1) (21) - (89) (110)
Asset impairments - - - - (75) - (75)
----- ---- ---- ----- ---- ----- -----
Balance as of September 30, 2000 $ 345 $127 $ 27 $ 499 $ - $ - $ 499
----- ---- ---- ----- ---- ----- -----
Fiscal 2001:
Charges $ 650 $ 24 $ - $ 674 $ 20 $ 178 $ 872
Reversals (17) (7) (11) (35) - - (35)
Decrease in prepaid benefit costs/
increase in benefit obligations, net (577) - - (577) - - (577)
Cash payments (250) (66) (11) (327) - (178) (505)
Asset impairments - - - - (20) - (20)
Reclassification (55) - - (55) - - (55)
----- ---- ---- ----- ---- ----- -----
Balance as of September 30, 2001 $ 96 $ 78 $ 5 $ 179 $ - $ - $ 179
===== ==== ==== ===== ==== ===== =====
</Table>
In addition, in fiscal 2001 and 2000, we recorded $48 million and $73 million,
respectively, in selling, general and administrative expenses for start-up
activities related to establishing independent operations, including fees for
investment banking and other professional advisors, and marketing costs
associated with establishing the Avaya brand.
During fiscal 2002, we expect to incur additional period costs of
approximately $22 million and $24 million related to the outsourcing of certain
of our manufacturing facilities and our accelerated restructuring program,
respectively. We expect to fund these expenses through a combination of debt and
internally generated funds.
We believe that outsourcing our manufacturing will allow us to improve our
cash flow over the next few years through a reduction of inventory and reduced
capital expenditures.
ACQUISITIONS
As part of our continued efforts to broaden our portfolio of product offerings,
we completed the following key acquisitions during fiscal 2001 and 1999. There
were no material acquisitions in fiscal 2000.
APRIL 2001 - Acquisition of substantially all of the assets, including $10
million of cash acquired, and the assumption of $20 million of certain
liabilities of Quintus Corporation, a provider of comprehensive electronic
customer relationship management solutions. We paid $29 million in cash for
these assets. This transaction was accounted for as a purchase combination.
FEBRUARY 2001 - Acquisition of VPNet Technologies, Inc. ("VPNet"), a privately
held distributor of virtual private network solutions and devices. The total
purchase price of $117 million was paid in cash and stock options. This
transaction was accounted for as a purchase combination.
JULY 1999 - Merger with Mosaix, Inc., a provider of software that manages an
enterprise's various office functions. Lucent issued 2.6 million shares of
Lucent common stock, with a value of $145 million, for all of the outstanding
stock of Mosaix. The transaction was accounted for as a pooling of interests.
REVENUE
We derive revenue primarily from the sales of communication systems and
software. We sell our products both directly through our worldwide sales force
and indirectly through our global network of approximately 4,000 distributors,
dealers, value-added resellers, system integrators and contractors. The purchase
price of our systems and software typically includes installation and a one-year
warranty. We also derive revenue from:
o maintenance services, including services provided under maintenance contracts
and on a time and material basis;
o professional services for customer relationship management, converged voice
and data networks, and unified communications; and
o value-added services for outsourcing messaging and other parts of
communication systems.
16.
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Maintenance contracts typically have terms that range from one to five years.
Contracts for professional services typically have terms that range from two to
four weeks for standard solutions and from six months to one year for customized
solutions. Contracts for value-added services typically have terms that range
from one to seven years. Revenue from sales of communications systems and
software is recognized when contractual obligations have been satisfied, title
and risk of loss has been transferred to the customer, and collection of the
resulting receivable is reasonably assured. Revenue from the direct sales of
products that include installation services is recognized at the time the
products are installed, after satisfaction of all the terms and conditions of
the underlying customer contract. Our indirect sales to distribution partners
generally are recognized at the time of shipment if all contractual obligations
have been satisfied. We provide for estimated sales returns and other allowances
and deferrals as a reduction of revenue at the time of revenue recognition, as
required. Revenue from services performed under our value-added service
arrangements, professional services and services performed under maintenance
contracts are recognized over the term of the underlying customer contract or at
the end of the contract, when obligations have been satisfied. For services
performed on a time and materials basis, revenue is recognized upon performance.
COSTS AND OPERATING EXPENSES
Our costs of products consist primarily of materials and components, labor and
manufacturing overhead. Our costs of services consist primarily of labor, parts
and service overhead. Our selling, general and administrative expenses and
research and development expenses consist primarily of salaries, commissions,
benefits and other miscellaneous items. Please see "Purchased In-Process
Research and Development" for a discussion of this line item.
Total operating expenses in the fiscal years ended September 30, 2001 and
1999 were reduced due to the reversal of $35 million and $33 million of business
restructuring liabilities recorded in September 2000 and December 1995,
respectively, primarily related to fewer employee separations than originally
anticipated for those years.
OPERATING TRENDS
We have been increasing, and intend to continue to increase, the percentage of
our sales made through our indirect sales channels. To further this strategy, in
March 2000, we sold our primary distribution function for our voice
communications systems for small- and mid-sized enterprises to Expanets, Inc. If
sales volumes remain constant as the percentage of our sales through indirect
sales channels increases, then our revenue would decline.
RESULTS OF OPERATIONS
The following table sets forth line items from our Consolidated Statements of
Operations as a percentage of revenue for the years indicated:
<Table>
<Caption>
Year Ended September 30,
-------------------------------
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Costs 57.4 58.0 57.6
----- ----- -----
Gross margin 42.6 42.0 42.4
----- ----- -----
Operating expenses:
Selling, general and
administrative 30.3 32.8 31.8
Business restructuring and
related charges (reversals) 12.3 8.8 (0.4)
Research and development 7.9 6.1 6.5
Purchased in-process research
and development 0.5 - -
----- ----- -----
Total operating expenses 51.0 47.7 37.9
----- ----- -----
Operating income (loss) (8.4) (5.7) 4.5
Other income, net 0.5 0.9 0.3
Interest expense (0.5) (1.0) (1.1)
Provision (benefit) for income taxes (3.2) (1.0) 1.5
Cumulative effect of
accounting change - - 1.2
----- ----- -----
Net income (loss) (5.2)% (4.8)% 3.4%
===== ===== =====
</Table>
Included in operating income for the fiscal year ended September 30, 1999, is
$97 million received on the sale of equipment, which was previously leased to
customers, net of the equipment's book value of approximately $2 million. This
equipment consisted predominantly of discontinued product lines. This
transaction represented 1.2% of fiscal 1999 revenue.
FISCAL YEAR ENDED SEPTEMBER 30, 2001 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 2000
The following table shows the change in external revenue, both in
dollars and in percentage terms:
<Table>
<Caption>
Year Ended September 30, Change
------------------------ ------------------
2001 2000 $ %
---- ---- ----- -----
(dollars in millions)
<S> <C> <C> <C> <C>
Operating Segments:
Communications
Solutions $3,377 $4,354 $(977) (22.4)%
Services 2,092 1,958 134 6.8
Connectivity
Solutions 1,322 1,418 (96) (6.8)
Corporate and other 2 2 - -
------ ------ ----- -----
Total $6,793 $7,732 $(939) (12.1)%
====== ====== ===== =====
</Table>
17.
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REVENUE. Revenue decreased 12.1% or $939 million, from $7,732 million in fiscal
2000 to $6,793 million in fiscal 2001, due to a decrease in revenue from the
Communications Solutions and Connectivity Solutions segments partially offset by
an increase in revenue from the Services segment. The overall reduction in
revenue was mainly attributable to the weakened economic conditions in the
technology sector that resulted in a sagging demand for telephony equipment and
related products. The decrease in the Communications Solutions segment was
largely due to a decline in customer purchases of $639 million in enterprise
voice communications systems, $163 million in messaging systems and $105 million
in customer relationship management products predominantly in the U.S.,
partially offset by growth worldwide of $155 million in the multi-service
networking business. The revenue decline in the Communications Solutions segment
also resulted from a shift in the sales effort to focus the direct sales force
on strategic accounts and address smaller accounts through indirect sales
channels beginning in the third quarter of fiscal 2000, changes in product mix,
a decrease of $145 million in installation revenue as a result of the reduction
in product sales, and the effects of customers having purchased systems in
fiscal 2000 in anticipation of Year 2000 concerns. In addition to the negative
effects of the economic slowdown in the U.S., the decrease in revenues within
the Connectivity Solutions segment was also related to a reduction in purchases
of $164 million in our ExchangeMAX cabling systems for service providers, due to
a reduction in capital spending by customers of ExchangeMAX, and certain Federal
Communications Commission regulatory changes that permitted common exchange
carriers access to local exchange carrier networks. The decrease in revenues
from ExchangeMAX was partially offset by a modest increase of $47 million in
revenues from sales primarily in the U.S. of our SYSTIMAX(R) structured cabling
systems for enterprises, including the introduction of new apparatus products
and increased sales of $21 million of electronic cabinets predominantly in the
U.S. The increase in the Services segment was mainly the result of the positive
effects in the U.S. of introducing data services of $142 million as well as the
strong growth outside of the U.S. in value-added services of $46 million,
partially offset by a decrease of $62 million in maintenance revenues primarily
in the U.S.
Revenue within the U.S. decreased 15.6% or $952 million, from $6,110 million
in fiscal 2000 to $5,158 million in fiscal 2001. However, revenue outside the
U.S. increased slightly by 0.8% or $13 million, from $1,622 million for fiscal
2000, to $1,635 million for fiscal 2001. Revenue outside the U.S. represented
24.1% of revenue in fiscal 2001 compared with 21.0% in fiscal 2000.
We continued to expand our business outside of the U.S. with marginal growth
across most regions, primarily led by the Asia Pacific region. Our largest
increases in sales outside of the U.S. were made in Services, Communications
Solutions' multi-service networking products and professional services, and
Connectivity Solutions' ExchangeMAX product.
COSTS AND GROSS MARGIN. Total costs decreased 13.1% or $586 million, from $4,483
million in fiscal 2000 to $3,897 million in fiscal 2001. The gross margin
percentage increased slightly from 42.0% in fiscal 2000 to 42.6% in fiscal 2001.
The increase in gross margin was primarily attributed to favorable product mix
and lower discounts in Connectivity Solutions combined with the ongoing savings
from the business restructuring, including the improvement to the cost structure
within the Services segment. This increase was largely offset by the decrease in
gross margin within Communications Solutions due to lower sales volumes, a less
favorable product mix and the shift to an indirect sales channel.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses decreased 19.0% or $482
million, from $2,540 million in fiscal 2000 to $2,058 million in fiscal 2001.
The decrease is primarily due to savings associated with our business
restructuring plan, including lower staffing levels, terminated real estate
lease obligations, cost improvements associated with the implementation of our
new SAP information technology system, process improvements in sales and sales
operations, and streamlining delivery of several corporate functions, including
the outsourcing of payroll and procurement services. The reduction in SG&A was
also attributable to lower start-up activities related to establishing
independent operations, which are primarily composed of advertising costs
associated with establishing our brand. The reduction in SG&A expenses was
partially offset by an increase in ongoing marketing expense.
BUSINESS RESTRUCTURING AND RELATED CHARGES. Business restructuring and related
charges of $837 million in fiscal 2001 represent costs associated with our
restructuring plan to improve profitability and business performance as a
stand-alone company. The components of the fiscal 2001 charge include $540
million for our accelerated restructuring plan, which is essentially composed of
enhanced pension and healthcare benefits that were offered through an early
retirement program, severance and terminated lease obligations, $134 million
primarily for employee separation costs associated with the outsourcing of
certain manufacturing operations to Celestica, $178 million representing
incremental period costs largely associated with our separation from Lucent
including computer system transition costs such as data conversion activities,
asset transfers and training, and a $20 million asset impairment charge. These
charges were partially offset by a $35 million reversal of business
restructuring liabilities originally recorded in September 2000.
Business restructuring and related charges of $684 million for fiscal 2000
include $520 million principally for employee separations and lease obligations,
$75 million of asset impairment charges, and $89 million of incremental period
costs associated with our separation from Lucent.
18.
<Page>
RESEARCH AND DEVELOPMENT. R&D expenses increased 14.5% or $68 million, from $468
million in fiscal 2000 to $536 million in fiscal 2001. Our investment in R&D
represented 7.9% of revenue in fiscal 2001 as compared with 6.1% in fiscal 2000.
This increased investment supports our plan to shift spending to high growth
areas of our business and reduce spending on more mature product lines.
We intend to invest in R&D an amount equal to approximately 8% to 10% of our
total revenue by the end of fiscal 2003. These investments represent a
significant increase over our investments in R&D for the fiscal years prior to
the distribution, which were approximately 6% of total revenue. As a part of
Lucent, we were allocated a portion of Lucent's basic research, which did not
necessarily directly benefit our business. Our current and future investments in
R&D will have a greater focus on our products.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. In fiscal 2001, we acquired VPNet
and substantially all of the assets of Quintus Corporation. The purchase prices
for these acquisitions included certain technologies that had not reached
technological feasibility and had no future alternative use and, accordingly,
were charged to expense immediately upon consummation of the respective
acquisitions. There was no charge in fiscal 2000 for purchased in-process
research and development.
OTHER INCOME, NET. Other income, net decreased 52.1% or $37 million, from $71
million in fiscal 2000 to $34 million in fiscal 2001. This decrease was
primarily due to a gain recorded in March 2000 on the sale of our U.S. sales
division serving small- and mid-sized enterprises, which was partially offset by
interest income earned on higher cash balances during fiscal 2001.
INTEREST EXPENSE. Interest expense decreased 51.3% or $39 million, from $76
million in fiscal 2000 to $37 million in fiscal 2001. The decrease is primarily
attributable to higher weighted average interest rates and assumed debt levels
utilized in fiscal 2000 to reflect the level of financing that was thought to be
needed to fund our operations as a stand-alone entity.
PROVISION FOR INCOME TAXES. The effective tax rates in fiscal 2001 and 2000
reflect a benefit of 38.3% and 16.3%, respectively. The difference between the
rates is due primarily to a favorable change in the tax differential on foreign
earnings and lower non-deductible restructuring costs offset by an increase in
purchased in-process research and development expense. Excluding purchased
in-process research and development and other acquisition related costs, the
adjusted effective tax rates in fiscal 2001 and 2000 would be benefits of 40.7%
and 16.3%, respectively.
FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 1999
The following table shows the change in external revenue, both in dollars and in
percentage terms:
<Table>
<Caption>
Year Ended September 30, Change
------------------------ ------------------
2000 1999 $ %
---- ---- ----- -----
(dollars in millions)
<S> <C> <C> <C> <C>
Operating Segments:
Communications
Solutions $4,354 $5,088 $(734) (14.4)%
Services 1,958 1,900 58 3.1
Connectivity
Solutions 1,418 1,274 144 11.3
Corporate and other 2 6 (4) (66.7)
------ ------ ----- -----
Total $7,732 $8,268 $(536) (6.5)%
====== ====== ===== =====
</Table>
REVENUE. Revenue decreased 6.5% or $536 million, from $8,268 million in fiscal
1999 to $7,732 million in fiscal 2000 due to a decrease in the Communications
Solutions segment, partially offset by increases in the Connectivity Solutions
and Services segments. The decrease in the Communications Solutions segment was
partially attributable to a sales reduction of $188 million of our Merlin
Magix(R) and Partner,(R) and $127 million of our DEFINITY(R) product lines due
largely to the shift in the sales effort to focus the direct sales force on
strategic accounts and address smaller accounts through indirect sales channels
resulting from our sale of this distribution function in March 2000. The sales
reduction of our enterprise voice communications systems was also attributed to
attrition within our skilled sales force, which particularly affected our most
advanced DEFINITY product offering. In addition, sales of our messaging products
decreased by $204 million as customers purchased a higher than usual number of
systems in 1999 to upgrade their systems in anticipation of Year 2000 concerns.
In addition, the Communications Solutions segment experienced a $218 million
decrease in installation revenue as a result of the reduction in product sales.
These decreases were partially offset by increases in professional services as
well as in sales of our eBusiness Communications Solutions. The Connectivity
Solutions segment increase was driven by growth in ExchangeMAX structured
cabling systems and electronic cabinet sales of $215 million, largely offset by
a decrease in SYSTIMAX structured cabling systems. The increase in the Services
segment was the result of strong growth in maintenance services internationally
and in existing value-added services.
Revenue within the U.S. decreased 8.6% or $573 million, from $6,683 million
in fiscal 1999 to $6,110 million in fiscal 2000. Revenue outside the U.S.
increased 2.3% or $37 million, from $1,585 million in fiscal 1999 to $1,622
million in fiscal 2000. Revenue outside the U.S. in fiscal 2000 represented
21.0% of revenue compared with 19.2% in fiscal 1999. We continued to expand our
business outside of the U.S., with growth led by the Asia Pacific region.
19.
<Page>
COSTS AND GROSS MARGIN. Total costs decreased 5.8% or $277 million, from $4,760
million in fiscal 1999 to $4,483 million in fiscal 2000 primarily due to the
decrease in product sales. Gross margin percentage remained essentially flat
with a decrease of 0.4%, from 42.4% in fiscal 1999 to 42.0% in fiscal 2000. The
slight reduction in gross margin was largely due to aggressive pricing and
promotional actions that more than offset the decrease in costs.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses decreased 3.5% or $92
million, from $2,632 million in fiscal 1999 to $2,540 million in fiscal 2000.
The decrease is primarily due to reduced bonus compensation expenses resulting
from lower than anticipated financial performance and lower staffing levels
resulting from the realignment and integration of our sales force and our
information systems group. The headcount reductions for our information systems
group were associated with the ongoing implementation of a new computer software
platform. The majority of these reductions were associated with the shutdown and
elimination of support for obsolete and redundant computer systems. The
reduction in SG&A expenses was partially offset by $73 million in charges for
start-up activities related to establishing independent operations including
fees for investment banking and other professional advisors, and marketing costs
associated with establishing our brand.
BUSINESS RESTRUCTURING AND RELATED CHARGES (REVERSALS). Business restructuring
and related charges of $684 million in fiscal 2000 represent costs associated
with our restructuring plan to improve profitability and business performance as
a stand-alone company. The components of the charge include $520 million of
business restructuring costs principally for employee separations and lease
obligations, $75 million of asset impairment charges, and $89 million of
incremental period costs associated with our separation from Lucent.
The business restructuring reversal of $33 million in fiscal 1999 represents
the reduction of business restructuring liabilities recorded in December 1995
and is primarily the result of fewer employee separations than originally
anticipated under that plan.
RESEARCH AND DEVELOPMENT. R&D expenses decreased 13.3% or $72 million, from $540
million in fiscal 1999 to $468 million in fiscal 2000. Increases in funding for
call center and converged voice and data products, as well as spending
associated with the acquisition of Mosaix, were more than offset by reduced
spending on more mature product lines such as Partner, Merlin Magix and
Wireless. In addition, spending decreased due to synergies realized in
consolidation of the data product line research and development operations of
Prominet and Lannet.
OTHER INCOME, NET. Other income, net increased 153.6% or $43 million, from $28
million in fiscal 1999 to $71 million in fiscal 2000. This increase was
primarily due to a gain of $45 million recognized in March 2000 on the sale of
our U.S. sales division serving small- and mid-sized enterprises, which was
calculated based on the net cash proceeds received related to this sale.
PROVISION FOR INCOME TAXES. The effective tax rate in fiscal 2000 was a benefit
of 16.3% as compared with an expense of 39.4% in fiscal 1999. The tax benefit in
fiscal 2000 is primarily due to our net loss that resulted from the business
restructuring and related charges, offset by non-deductible charges associated
with our reorganization, and taxes on foreign earnings in connection with our
separation from Lucent.
LIQUIDITY AND CAPITAL RESOURCES
Avaya's cash and cash equivalents decreased to $250 million at September 30,
2001, from $271 million at September 30, 2000. The decrease resulted from $133
million and $365 million of net cash used for operating and investing
activities, respectively, partially offset by $483 million of net cash provided
by financing activities. In fiscal 2000, Avaya's cash and cash equivalents
increased to $271 million at September 30, 2000, from $194 million at September
30, 1999. The increase resulted from $485 million of net cash provided by
operating activities, offset in part by $428 million of net cash used in
investing activities.
Our net cash used for operating activities was $133 million in fiscal 2001
compared with net cash provided by operating activities of $485 million in
fiscal 2000. Net cash used for operating activities in fiscal 2001 was composed
of a net loss of $352 million adjusted for non-cash items of $779 million, and
net cash used for changes in operating assets and liabilities of $560 million.
Net cash used for operating activities is primarily attributed to cash payments
made for our business restructuring related activities resulting from our
separation from Lucent and our establishment as an independent company. In
addition, we have decreased our accounts payable, payroll related liabilities
and advance billings and deposits. This usage of cash was partially offset by
receipts of cash on amounts due from our customers. Days sales outstanding in
accounts receivable for fiscal 2001, excluding the effect of the securitization
transaction discussed below, was 95 days versus 74 days for fiscal 2000. This
increase is primarily attributable to transition issues resulting from the
consolidation of our customer collection facilities coupled with the temporary
effects of the September 11, 2001 tragedy on our customers and business
partners. Days sales of inventory on-hand for fiscal 2001 were 70 days versus 51
days for fiscal 2000. The increase in days sales of inventory on-hand is
primarily due to lower than expected sales volumes.
In fiscal 2000, net cash provided by operating activities of $485 million
resulted primarily from a net loss of $375 million adjusted for non-cash charges
of $538 million, and cash generated by changes in operating assets and
liabilities of $322 million. Our net cash provided by operating activities
increased from $431 million in fiscal 1999 to $485 million in fiscal 2000
primarily as a result of a reduction in working capital. The reduction in
working capital resulted from a decrease in inventory and an increase in
accounts payable due to business restructuring and start-up activities related
to establishing our independent operations. These changes were partially offset
by a decrease in payroll and benefit liabilities. In fiscal 2000 and 1999, days
sales outstanding
20.
<Page>
in accounts receivable were 74 and 69, respectively, and days sales of inventory
on-hand were 51 and 61, respectively.
Our net cash used for investing activities was $365 million in fiscal 2001
compared with $428 million and $86 million in fiscal 2000 and 1999,
respectively. Capital expenditures, which account for the largest component of
investing activities in each year, generally relate to expenditures for
equipment and facilities used in manufacturing and research and development.
Capital expenditures for fiscal 2001 and 2000 also include payments made by
Avaya to establish itself as a stand-alone entity, including the implementation
of SAP, establishing and upgrading our information technology systems, and other
corporate infrastructure expenditures. Additionally, in fiscal 2001, we used
$120 million of cash to acquire VPNet and substantially all the assets of
Quintus Corporation. The net cash used for investing activities in fiscal 2001
was partially offset by the receipt of proceeds from the sale-leaseback of an
aircraft, the sale of manufacturing equipment to Celestica and the sale of other
corporate infrastructure assets. In fiscal 2000, cash used for investing
activities was partially offset by the receipt of proceeds from the sale of our
U.S. sales division serving small- and mid-sized enterprises.
Net cash provided by financing activities was $483 million in fiscal 2001
compared with $42 million in fiscal 2000. Cash flows from financing activities
in fiscal 2001 were mainly due to (i) $400 million in proceeds from the sale of
our Series B convertible participating preferred stock and warrants to purchase
our common stock described below, (ii) $200 million of proceeds from the
securitization of certain trade receivables, (iii) a $200 million drawdown on
our credit facility, which was used to repay maturing commercial paper, and (iv)
$40 million in proceeds resulting from the issuance of our common stock,
primarily through our Employee Stock Purchase Plan. The receipt of cash from
financing activities in fiscal 2001 was partially offset by $357 million in net
payments for the retirement of commercial paper and other debt.
Net cash provided by financing activities was $42 million in fiscal 2000
compared with net cash used in financing activities of $257 million in fiscal
1999. Prior to the distribution, we relied on Lucent to provide financing for
our operations. Cash flows from financing activities principally reflect changes
in Lucent's investment in us prior to the distribution. In addition, upon the
distribution, we assumed all of Lucent's obligations in connection with its
issuance of $780 million of commercial paper, which had a weighted average
interest rate and maturity period of approximately 6.9% and 21 days,
respectively.
Our commercial paper program is composed of short-term borrowings in the
commercial paper market at market interest rates. Interest rates on our
commercial paper obligations are variable due to their short-term nature. The
weighted average interest rate and maturity period for the $432 million of
commercial paper outstanding as of September 30, 2001 was approximately 3.9% and
62 days, respectively.
We have two unsecured revolving credit facilities with third party financial
institutions consisting of a $400 million 364-day credit facil- ity that expires
in August 2002 and an $850 million five-year credit facility that expires in
September 2005. Funds are available under these revolving credit facilities for
general corporate purposes, to backstop commercial paper, and for acquisitions.
In September 2001, we borrowed $200 million under the five-year credit facility
and used the proceeds to repay maturing commercial paper. The borrowing carried
a variable interest rate of 3.5% and was repaid in October 2001 using proceeds
from the issuance of commercial paper. The borrowing under the credit facility
was necessitated by disruptions in the commercial paper markets as a result of
the September 11 terrorist attacks.
As of September 30, 2001, we classified our outstanding commercial paper as
long-term debt in our Consolidated Balance Sheets since it is supported by the
five-year credit facility and it is management's intent to reissue approximately
$500 million of commercial paper on a long-term basis. A variation of .125% in
the interest rate charged under the commercial paper program and revolving
credit facilities would result in an annual change of approximately $790,000 in
interest expense based on the aggregate of variable interest rate debt
outstanding as of September 30, 2001.
In October 2000, we sold to Warburg, Pincus Equity Partners, L.P. and related
investment funds (collectively, the "Warburg Funds") four million shares of our
Series B convertible participating preferred stock and warrants to purchase our
common stock for an aggregate purchase price of $400 million. Based on a
conversion price of $26.71, the Series B preferred stock is convertible into
15,973,068 shares of our common stock as of September 30, 2001.
The warrants have an exercise price of $34.73 representing 130% of the
conversion price for the Series B preferred stock. Of these warrants, warrants
exercisable for 6,883,933 shares of common stock have a four-year term expiring
on October 2, 2004, and warrants exercisable for 5,507,146 shares of common
stock have a five-year term expiring on October 2, 2005. During the period from
May 24, 2001 until October 2, 2002, if the market price of our common stock
exceeds 200%, in the case of the four-year warrants, and 225%, in the case of
the five-year warrants, of the exercise price of the warrants for 20 consecutive
trading days, we can force the exercise of up to 50% of the four-year and the
five-year warrants, respectively.
The shares of Series B preferred stock had an aggregate initial liquidation
value of $400 million and will accrete for the first 10 years at an annual rate
of 6.5% and 12% thereafter, compounded quarterly. After the third anniversary of
the original issue date of the Series B preferred stock, 50% of the amount
accreted for the year may be paid in cash as a dividend on a quarterly basis at
our option. After the fifth anniversary of the issue date through the tenth
anniversary, we may elect to pay 100% of the amount accreted for the year as a
cash dividend on a quarterly basis. The liquidation value calculated on each
quarterly dividend payment date, which includes the accretion for the dividend
period, will be reduced by the amount of any cash dividends paid. Following the
tenth anniversary of the issue date, we will pay quarterly cash dividends at an
annual rate of 12% of the then accreted liquidation value of the Series B
preferred stock, compounded quarterly. The Series B preferred shares also
participate, on an as-converted basis, in dividends paid on our common stock.
For fiscal 2001, accretion of the Series B preferred stock was $27 million
21.
<Page>
resulting in a liquidation value of $427 million as of September 30, 2001. The
total number of shares of common stock into which the Series B preferred stock
are convertible is determined by dividing the liquidation value in effect at the
time of conversion by the conversion price.
A beneficial conversion feature would exist if the conversion price for the
Series B preferred stock or warrants was less than the fair value of our common
stock at the commitment date. We determined that no beneficial conversion
features existed at the commitment date and therefore there was no impact on our
results of operations associated with the Series B preferred stock or with the
warrants. The beneficial conversion features, if any, associated with dividends
paid in-kind, where it is our option to pay dividends on the Series B preferred
stock in cash or in-kind, will be measured when dividends are declared and
recorded as a reduction to net income available to common stockholders.
At any time after the fifth anniversary of their issuance, we may force
conversion of the shares of Series B preferred stock. If we give notice of a
forced conversion, the investors will be able to require us to redeem the Series
B preferred shares at 100% of the then current liquidation value, plus accrued
and unpaid dividends. Following a change in control of us during the first five
years after the investment, other than a change of control transaction involving
solely the issuance of common stock, the accretion of some or all of the
liquidation value of the Series B preferred stock through the fifth anniversary
of the issue date will be accelerated, subject to our ability to pay a portion
of the accelerated accretion in cash in some instances. In addition, for 60 days
following the occurrence of any change of control of us during the first five
years after the investment, the investors will be able to require us to redeem
the Series B preferred stock at 101% of the liquidation value, including any
accelerated accretion of the liquidation value, plus accrued and unpaid
dividends.
Our cost of capital and ability to obtain external financing may be affected
by our debt ratings, which are periodically reviewed by the major credit rating
agencies. Our commercial paper is currently rated P-2 by Moody's and A-2 by
Standard & Poor's, and our long-term debt rating is Baa1 by Moody's and BBB by
Standard & Poor's, each with a negative outlook. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the rating organization. Each rating should be
evaluated independently of any other rating.
Our ability to issue additional equity may be constrained because our
issuance of additional equity may cause the distribution to be taxable to Lucent
under Section 355(e) of the Internal Revenue Code, and under the tax-sharing
agreement between Lucent and us, we would be required to indemnify Lucent
against that tax.
In May 2001, the Securities and Exchange Commission ("SEC") declared
effective our shelf registration statement on Form S-3 registering $1.44 billion
of common stock, preferred stock, debt securities or warrants to purchase debt
securities, or any combination of these securities, in one or more offerings
through May 2003. We intend to use the proceeds from the sale of the securities
for general corporate purposes, including debt repayment and refinancing,
capital expenditures and acquisitions. We also registered with the SEC for
resale by the Warburg Funds, of the preferred stock and warrants described above
and shares of common stock issuable upon conversion or exercise thereof. We will
not receive any proceeds from the sale by the Warburg Funds of these securities.
In October 2001, we sold in an underwritten public offering under our shelf
registration statement an aggregate principal amount at maturity of
approximately $821 million of Liquid Yield Option(TM) Notes ("LYONs") due in
2021. In November 2001, we sold an additional $123 million aggregate principal
amount at maturity of LYONs pursuant to the exercise of the underwriter's
overallotment option. The net proceeds of approximately $447 million were used
to refinance a portion of our outstanding commercial paper. Underwriting fees
for these transactions amounted to $13 million. The LYONs were issued at a $484
million discount that will accrue daily at a rate of 3.625% per year calculated
on a semiannual bond equivalent basis. We will not make periodic cash payments
of interest on the LYONs. Instead, the original issue discount will be recorded
as interest expense and represents the accretion of the LYONs issue price to its
maturity value. The original issue discount will cease to accrue on the LYONs
upon maturity, conversion, or purchase by us at the option of the holder or
redemption. The LYONs are unsecured obligations that rank equally in right of
payment with all existing and future unsecured and unsubordinated indebtedness
of Avaya.
The LYONs are convertible into 35,333,073 shares of our common stock at any
time on or before the maturity date. The conversion rate may be adjusted for
certain reasons, but will not be adjusted for accrued original issue discount.
Upon conversion, the holder will not receive any cash payment representing
accrued original issue discount. Accrued original issue discount will be
considered paid by the shares of common stock received by the holder of the
LYONs on conversion.
We may redeem all or a portion of the LYONs for cash at any time on or after
October 31, 2004 at a price equal to the sum of the issue price and accrued
original issue discount on the LYONs as of the applicable redemption date.
Conversely, holders may require us to purchase all or a portion of their LYONs
on the third, fifth and tenth anniversary of the original issue date of the
LYONs at a price equal to the sum of the issue price and accrued original issue
discount on the LYONs as of the applicable purchase date. We may, at our option,
elect to pay the purchase price in cash or shares of common stock, or any
combination thereof.
Our primary future cash needs on a recurring basis will be to fund working
capital, capital expenditures and debt service. We believe that our cash flows
from operations will be sufficient to meet these needs. We expect to fund our
business restructuring and related charges through a combination of debt and
internally generated funds. If we do not generate sufficient cash from
operations, we may need to incur additional debt. We currently anticipate
spending approximately $208 million in fiscal 2002 for activities related to
business restructuring, our establishment as an independent company, and
outsourcing of certain manufacturing facilities. The cash payments are planned
to be composed of $108 million for employee
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separation costs, $54 million for lease obligations, $5 million for other exit
costs and $41 million for incremental period costs, including computer
transition expenditures, relocation and consolidation costs.
In order to meet our cash needs, we may from time to time issue additional
commercial paper under our commercial paper program, if the market permits such
borrowings, borrow under our revolving credit facilities or issue other long- or
short-term debt, if available. We may also refinance all or a portion of the
commercial paper program with long-term or other short-term debt instruments. We
cannot assure you that any such financings will be available to us on acceptable
terms or at all. Our ability to make payments on and to refinance our
indebtedness, and to fund working capital, capital expenditures and strategic
acquisitions, will depend on our ability to generate cash in the future, which
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. Our credit facilities and the
indenture governing the LYONs impose, and any future indebtedness may impose,
various restrictions and covenants which could limit our ability to respond to
market conditions, to provide for unanticipated capital investments or to take
advantage of business opportunities. We may also incur higher than expected
interest expense in servicing our debt, which would decrease our profitability.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with our acquisitions in fiscal 2001, a portion of the purchase
price, $31 million for VPNet and $1 million for Quintus Corporation, was
allocated to purchased in-process research and development. As part of the
process of analyzing these acquisitions, we made a decision to buy technology
that had not yet been commercialized rather than develop the technology
internally. We based this decision on factors such as the amount of time it
would take to bring the technology to market. We also considered each entity's
resource allocation and its progress on comparable technology, if any. Our
management expects to use a similar decision process in the future.
At the date of each acquisition, the in-process research and development
projects had not yet reached technological feasibility and had no future
alternative use. Accordingly, the value allocated to these projects was
capitalized and immediately expensed at acquisition. If the projects are not
successful or completed in a timely manner, management's product pricing and
growth rates may not be achieved and we may not realize the financial benefits
expected from the projects.
The value allocated to purchased in-process research and development for the
acquisitions was determined 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. Where appropriate, we deducted an
amount reflecting the contribution of the core technology from the anticipated
cash flows from an in-process research and development project. The selection of
the discount rate was based on consideration of our weighted average cost of
capital, as well as other factors, including the useful life of each technology,
profitability levels of each technology, the uncertainty of technology advances
that were known at the time, and the stage of completion of each technology. We
believe that the estimated in-process research and development amounts so
determined represent fair value and do not exceed the amount a third party would
have paid for the projects.
Revenue forecasts were estimated based on relevant market size and growth
factors, expected industry trends, individual product sales cycles and the
estimated life of each product's underlying technology. Estimated operating
expenses, income taxes, and charges for the use of contributory assets were
deducted from estimated revenue to determine estimated after-tax cash flows for
each project. Estimated operating expenses include cost of goods sold, selling,
general and administrative expenses, and research and development expenses. The
research and development expenses include estimated costs to maintain the
products once they have been introduced into the market and generate revenue and
costs to complete the purchased in-process research and development.
The development efforts related to the majority of the purchased in-process
technology projects are progressing in accordance with the assumptions
underlying the appraisals. As expected in the normal course of product
development, a number of projects have experienced delays and other projects are
being evaluated due to changes in strategic direction and market conditions.
These factors are not expected to have a material adverse effect on our results
of operations and financial position in future periods.
Set forth below are descriptions of the significant acquired in-process
research and development projects related to our acquisition of VPNet.
In February 2001, we completed the purchase of VPNet and allocated
approximately $31 million to in-process research and development projects, using
the income approach described above, to the following projects: low-end
technologies for $5 million and high-end technologies for $26 million. These
projects under development at the valuation date represent next-generation
technologies that are expected to address emerging market demands for low- and
high-end network data security needs.
At the acquisition date, the low-end technologies under development were
approximately 80% complete based on engineering data and technological progress.
Revenue attributable to the developmental low-end VPNet technologies was
estimated to be $8 million in 2002 and $13 million in 2003. Revenue was
estimated to grow at a compounded annual growth rate of approximately 60% for
the six years following introduction, assuming the successful completion and
market acceptance of the major research and development programs. Revenue was
expected to peak in 2004 and decline thereafter through the end of the
technologies' life in 2007 as new product technologies were expected to be
introduced.
At the acquisition date, the high-end technologies under development were
approximately 60% complete, based on engineering data and technological
progress. Revenue attributable to the developmental high-end VPNet technologies
was estimated to be $52 million in 2002 and $86 million in 2003. Revenue was
estimated
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to grow at a compounded annual growth rate of approximately 50% for the seven
years following introduction, assuming the successful completion and market
acceptance of the major research and development programs. Revenue was expected
to peak in 2004 and decline thereafter through the end of the technologies' life
in 2008 as new product technologies were expected to be introduced.
VPNet had spent approximately $4 million on these in-process technology
projects, and expected to spend approximately $4 million to complete all phases
of research and development.
The rates utilized to discount the net cash flows to their present value were
based on estimated cost of capital calculations. Due to the nature of the
forecasts and the risks associated with the successful development of the
projects, a discount rate of 25% was used to value the in-process research and
development. The discount rate utilized was higher than our weighted average
cost of capital due to the inherent uncertainties surrounding the successful
development of the purchased in-process technology, the useful life of such
technology, the profitability levels of the technology, and the uncertainty of
technological advances that are unknown at this time.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
We are subject to a wide range of governmental requirements relating to employee
safety and health and to the handling and emission into the environment of
various substances used in our operations. We are subject to certain provisions
of environmental laws, particularly in the U.S., governing the cleanup of soil
and groundwater contamination. Such provisions impose liability for the costs of
investigating and remediating releases of hazardous materials at our currently
or formerly owned or operated sites. In certain circumstances, this liability
may also include the cost of cleaning up historical contamination, whether or
not caused by us. We are currently conducting investigation and/or cleanup of
known contamination at approximately five of our facilities either voluntarily
or pursuant to government directives.
It is often difficult to estimate the future impact of environmental matters,
including potential liabilities. We have established financial reserves to cover
environmental liabilities where they are probable and reasonably estimable.
Reserves for estimated losses from environmental matters are, depending on the
site, based primarily upon internal or third party environmental studies and the
extent of contamination and the type of required cleanup. Although we believe
that our reserves are adequate to cover known environmental liabilities, there
can be no assurance that the actual amount of environmental liabilities will not
exceed the amount of reserves for such matters or will not have a material
adverse effect on our financial position, results of operations or cash flows.
LEGAL PROCEEDINGS
From time to time we are involved in legal proceedings arising in the ordinary
course of business. Other than as described below, we believe there is no
litigation pending that could have, individually or in the aggregate, a material
adverse effect on our financial position, results of operations or cash flows.
YEAR 2000 ACTIONS
Three separate purported class action lawsuits are pending against Lucent, one
in state court in West Virginia, one in federal court in the Southern District
of New York and another in federal court in the Southern District of California.
The case in New York was filed in January 1999 and, after being dismissed, was
refiled in September 2000. The case in West Virginia was filed in April 1999 and
the case in California was filed in June 1999, and amended in 2000, to include
Avaya as a defendant. We may also be named a party to the other actions and, in
any event, have assumed the obligations of Lucent for all of these cases under
the Contribution and Distribution Agreement. All three actions are based upon
claims that Lucent sold products that were not Year 2000 compliant, meaning that
the products were designed and developed without considering the possible impact
of the change in the calendar from December 31, 1999 to January 1, 2000. The
complaints allege that the sale of these products violated statutory consumer
protection laws and constituted breaches of implied warranties. A class has not
been certified in any of the three cases and, to the extent a class is certified
in any of the cases, we expect that class to constitute those enterprises that
purchased the products in question. The complaints seek, among other remedies,
compensatory damages, punitive damages and counsel fees in amounts that have not
yet been specified. Although we believe that the outcome of these actions will
not adversely affect our financial position, results of operations or cash
flows, if these cases are not resolved in a timely manner, they will require
expenditure of significant legal costs related to their defense.
COUPON PROGRAM CLASS ACTION
In April 1998, a class action was filed against Lucent in state court in New
Jersey, alleging that Lucent improperly administered a coupon program resulting
from the settlement of a prior class action. The plaintiffs allege that Lucent
improperly limited the redemption of the coupons from dealers by not allowing
them to be combined with other volume discount offers, thus limiting the market
for the coupons. We have assumed the obligations of Lucent for these cases under
the Contribution and Distribution Agreement. The complaint alleges breach of
contract, fraud and other claims and the plaintiffs seek compensatory and
consequential damages, interest and attorneys' fees. The parties have entered
into a proposed settlement agreement, pending final approval by the court.
LUCENT SECURITIES LITIGATION
In November 2000, three purported class actions were filed against Lucent in the
Federal District Court for the District of New Jersey alleging violations of the
federal securities laws as a result of the facts disclosed in Lucent's
announcement on November 21, 2000 that it had identified a revenue recognition
issue affecting its financial results for the fourth quarter of fiscal 2000. The
actions purport
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to be filed on behalf of purchasers of Lucent common stock during the period
from October 10, 2000 (the date Lucent originally reported these financial
results) through November 21, 2000.
The above actions have been consolidated with other purported class actions
filed against Lucent on behalf of its stockholders in January 2000 and are
pending in the Federal District Court for the District of New Jersey. We
understand that Lucent has filed its Answer to the Fifth Consolidated Amended
and Supplemental Class Action Complaint in the consolidated action. The
plaintiffs allege that they were injured by reason of certain alleged false and
misleading statements made by Lucent in violation of the federal securities
laws. The consolidated cases were initially filed on behalf of stockholders of
Lucent who bought Lucent common stock between October 26, 1999 and January 6,
2000, but the consolidated complaint was amended to include purported class
members who purchased Lucent common stock up to November 21, 2000. A class has
not yet been certified in the consolidated actions. The plaintiffs in all these
stockholder class actions seek compensatory damages plus interest and attorneys'
fees.
Any liability incurred by Lucent in connection with these stockholder class
action lawsuits may be deemed a shared contingent liability under the
Contribution and Distribution Agreement and, as a result, we would be
responsible for 10% of any such liability in excess of $50 million. All of these
actions are in the early stages of litigation and an outcome cannot be predicted
and, as a result, we cannot assure you that these cases will not have a material
adverse effect on our financial position, results of operations or cash flows.
LICENSING MEDIATION
In March 2001, a third party licensor made formal demand for alleged royalty
payments which it claims we owe as a result of a contract between the licensor
and our predecessors, initially entered into in 1995, and renewed in 1997. The
contract provides for mediation of disputes followed by binding arbitration if
the mediation does not resolve the dispute. The licensor claims that we owe
royalty payments for software integrated into certain of our products. The
licensor also alleges that we have breached the governing contract by not
honoring a right of first refusal related to development of fax software for
next generation products. We engaged in mediation with the licensor, but did not
resolve this matter. At this point, an outcome in any future proceeding cannot
be predicted and, as a result, there can be no assurance that this case will not
have a material adverse effect on our financial position, results of operations
or cash flows.
FINANCIAL INSTRUMENTS
We are exposed to risk from changes in foreign currency exchange rates and
interest rates that could affect our results of operations, financial position
or cash flows. We manage our exposure to these market risks through our regular
operating and financing activities and, when deemed appropriate, through the use
of derivative financial instruments. We conduct our business on a multi-national
basis in a wide variety of foreign currencies and, as such, use derivative
financial instruments to reduce earnings and cash flow volatility associated
with foreign exchange rate changes. We use foreign currency forward contracts,
and to a lesser extent, foreign currency options, to mitigate the effects of
fluctuations of exchange rates on intercompany loans that are denominated in
currencies other than the subsidiary's functional currency, and to reduce the
exposure to the risk that the eventual net cash flows resulting from the
purchase or sale of products to or from non-U.S. customers will be adversely
affected by changes in exchange rates. Derivative financial instruments are used
as risk management tools and not for speculative or trading purposes.
RECORDED TRANSACTIONS
We use foreign currency forward contracts primarily to manage exchange rate
exposures on intercompany loans residing on our foreign subsidiaries' books that
are denominated in currencies other than the subsidiary's functional currency.
When these loans are translated into the subsidiary's functional currency at the
month-end exchange rates, the fluctuations in the exchange rates are recognized
in earnings as other income or expense. Gains and losses resulting from the
impact of currency exchange rate movements on foreign currency forward contracts
designated to offset these non-functional currency denominated loans are also
recognized in earnings as other income or expense in the period in which the
exchange rates change and are generally offset by the foreign currency losses
and gains on the loans. For the fiscal year ended September 30, 2001, the net
effect of the gains and losses on the change in the fair value of the foreign
currency forward contracts and the translation of the non-functional currency
denominated loans were not material to our results of operations.
The fair value of foreign currency exchange contracts is sensitive to changes
in foreign currency exchange rates. As of September 30, 2001 and 2000, a 10%
appreciation in foreign currency exchange rates from the prevailing market rates
would increase our related net unrealized gain for fiscal 2001 and 2000 by $13
million and $20 million, respectively. Conversely, a 10% depreciation in these
currencies from the prevailing market rates would decrease our related net
unrealized gain for fiscal 2001 and 2000 by $13 million and $18 million,
respectively. Consistent with the nature of the economic hedge of such foreign
currency exchange contracts, such unrealized gains or losses would be offset by
corresponding decreases or increases, respectively, of the underlying asset,
liability or transaction being hedged.
FORECASTED TRANSACTIONS
We use foreign currency forward and option contracts to offset certain
forecasted foreign currency transactions primarily related to the purchase or
sale of product expected to occur during the ensuing twelve months. The gains
and losses resulting from the impact of currency exchange rate movements on
these foreign currency forward and option contracts are recognized as other
income or expense in the period in which the exchange rates change. For the
fiscal years ended September 30, 2001 and 2000, these gains and losses were not
material to our results of operations.
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Electing to not use hedge accounting under SFAS 133, "Accounting for
Derivative Investments and Hedging Activities," could result in a gain or loss
from fluctuations in exchange rates related to a derivative contract that is
different from the loss or gain recognized from the underlying forecasted
transaction. However, we have procedures to manage the risks associated with our
derivative instruments, which include limiting the duration of the contracts,
typically six months or less, and the amount of the underlying exposures that
can be economically hedged. Historically, the gains and losses on these
transactions have not been significant.
While we hedge many foreign currency transactions, the decline in value of
non-U.S. dollar currencies may, if not reversed, adversely affect our ability to
contract for product sales in U.S. dollars because our products may become more
expensive to purchase in U.S. dollars for local customers doing business in the
countries of the affected currencies.
By their nature, all derivative instruments involve, to varying degrees,
elements of market risk and credit risk not recognized in our financial
statements. The market risk associated with these instruments resulting from
currency exchange rate movements is expected to offset the market risk of the
underlying transactions, assets and liabilities being economically hedged. The
counterparties to the agreements relating to our foreign exchange instruments
consist of a diversified group of major financial institutions. We do not
believe that there is significant risk of loss in the event of non-performance
of the counterparties because we control our exposure to credit risk through
credit approvals and limits, and continual monitoring of the credit ratings of
such counterparties. In addition, we limit the financial exposure and the amount
of agreements entered into with any one financial institution.
European Monetary Unit ("EURO")
In 1999, most member countries of the European Union established fixed
conversion rates between their existing sovereign currencies and the European
Union's new currency, the euro. This conversion permitted transactions to be
conducted in either the euro or the participating countries' national
currencies. By February 28, 2002, all member countries are expected to have
permanently withdrawn their national currencies as legal tender and replaced
their currencies with euro notes and coins.
The euro conversion may have a favorable impact on cross-border competition
by eliminating the effects of foreign currency translations thereby creating
price transparency. We will continue to evaluate the accounting, tax, legal and
regulatory requirements associated with the euro introduction. We do not expect
the conversion to the euro to have a material adverse effect on our consolidated
financial position, results of operations or cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 141 - In July 2001, the Financial Accounting Standards Board ("FASB")
issued Statement No. 141, "Business Combinations" ("SFAS 141"), which requires
all business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting. As a result, use of the
pooling-of-interests method is prohibited for business combinations initiated
thereafter. SFAS 141 also establishes criteria for the separate recognition of
intangible assets acquired in a business combination. In fiscal 2001, we adopted
this Statement which did not have a material impact on our consolidated results
of operations, financial position or cash flows.
New accounting statements issued, but not yet adopted by us, include the
following:
SFAS 142 - In July 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), which requires that goodwill and certain other
intangible assets having indefinite lives no longer be amortized to earnings,
but instead be subject to periodic testing for impairment. Intangible assets
determined to have definitive lives will continue to be amortized over their
useful lives. This Statement is effective for our 2003 fiscal year, and early
adoption is permitted. However, goodwill and intangible assets acquired after
June 30, 2001 are subject immediately to the non-amortization and amortization
provisions of this Statement. Effective October 1, 2001, we adopted SFAS142 and
implemented certain provisions, specifically the discontinuation of goodwill
amortization, and will be implementing the remaining provisions by the end of
fiscal 2002. In fiscal 2001, we recorded goodwill amortization expense of $40
million. We are currently evaluating the remaining provisions of SFAS 142 to
determine the effect, if any, they may have on our consolidated results of
operations, financial position or cash flows.
SFAS 143 - In August 2001, the FASB issued Statement No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"), which provides the accounting
requirements for retirement obligations associated with tangible long-lived
assets. This Statement requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred. This
Statement is effective for our 2003 fiscal year, and early adoption is
permitted. The adoption of SFAS 143 is not expected to have a material impact on
our consolidated results of operations, financial position or cash flows.
SFAS 144 - In October 2001, the FASB issued Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which excludes
from the definition of long-lived assets goodwill and other intangibles that are
not amortized in accordance with SFAS 142. SFAS 144 requires that long-lived
assets to be disposed of by sale be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in continuing operations or in
discontinued operations. SFAS 144 also expands the reporting of discontinued
operations to include components of an entity that have been or will be disposed
of rather than limiting such discontinuance to a segment of a business. This
Statement is effective for our 2003 fiscal year, and early adoption is
permitted. We are currently evaluating the impact of SFAS 144 to determine the
effect, if any, it may have on our consolidated results of operations, financial
position or cash flows.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Avaya Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
comprehensive income (loss), and of cash flows present fairly, in all material
respects, the financial position of Avaya Inc. and its subsidiaries (the
"Company") at September 30, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 2001, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Until September 30, 2000, the Company was a fully integrated business of
Lucent Technologies Inc. ("Lucent"); consequently, as indicated in Note 1, these
consolidated financial statements have been derived from the consolidated
financial statements and accounting records of Lucent, and reflect significant
assumptions and allocations. Moreover, as indicated in Note 1, prior to
September 30, 2000, the Company relied on Lucent and its other businesses for
administrative, management and other services. Accordingly, the consolidated
financial statements as of and for each of the two years ended September 30,
2000 do not necessarily reflect the financial position, results of operations,
changes in stockholders' equity and cash flows of the Company had it been a
separate stand-alone entity, independent of Lucent during such periods.
As discussed in Notes 2 and 12 to the consolidated financial statements, the
Company adopted Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" in 2000 and changed its method
for calculating annual pension and postretirement benefit costs in 1999,
respectively.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
October 24, 2001
27.
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CONSOLIDATED STATEMENTS OF OPERATIONS
Avaya Inc. and Subsidiaries
<Table>
<Caption>
Year Ended September 30,
-----------------------------
2001 2000 1999
---- ---- ----
(dollars in millions, except per share amounts)
<S> <C> <C> <C>
REVENUE
Products $ 4,701 $ 5,774 $ 6,368
Services 2,092 1,958 1,900
------- ------- -------
6,793 7,732 8,268
------- ------- -------
COSTS
Products 2,937 3,471 3,720
Services 960 1,012 1,040
------- ------- -------
3,897 4,483 4,760
------- ------- -------
GROSS MARGIN 2,896 3,249 3,508
------- ------- -------
OPERATING EXPENSES
Selling, general and administrative 2,058 2,540 2,632
Business restructuring and related charges (reversals) 837 684 (33)
Research and development 536 468 540
Purchased in-process research and development 32 -- --
------- ------- -------
TOTAL OPERATING EXPENSES 3,463 3,692 3,139
------- ------- -------
OPERATING INCOME (LOSS) (567) (443) 369
Other income, net 34 71 28
Interest expense (37) (76) (90)
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES (570) (448) 307
Provision (benefit) for income taxes (218) (73) 121
------- ------- -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (352) (375) 186
Cumulative effect of accounting change (net of income taxes of $62) -- -- 96
------- ------- -------
NET INCOME (LOSS) $ (352) $ (375) $ 282
======= ======= =======
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (1.33) $ (1.39) $ 1.09
======= ======= =======
Diluted $ (1.33) $ (1.39) $ 1.03
======= ======= =======
</Table>
See Notes to Consolidated Financial Statements.
28.
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CONSOLIDATED BALANCE SHEETS
Avaya Inc. and Subsidiaries
<Table>
<Caption>
As of September 30,
-------------------
2001 2000
---- ----
(dollars in millions, except per share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 250 $ 271
Receivables, less allowances of $68 in 2001 and $62 in 2000 1,163 1,758
Inventory 649 639
Deferred income taxes, net 246 450
Other current assets 461 244
------- -------
TOTAL CURRENT ASSETS 2,769 3,362
------- -------
Property, plant and equipment, net 988 966
Prepaid benefit costs -- 387
Deferred income taxes, net 529 44
Goodwill and other intangible assets, net 255 204
Other assets 107 74
------- -------
TOTAL ASSETS $ 4,648 $ 5,037
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 624 $ 763
Current portion of long-term debt 145 80
Business restructuring reserve 179 499
Payroll and benefit obligations 333 491
Advance billings and deposits 133 253
Other current liabilities 604 503
------- -------
TOTAL CURRENT LIABILITIES 2,018 2,589
------- -------
Long-term debt 500 713
Benefit obligations 637 421
Deferred revenue 84 83
Other liabilities 533 467
------- -------
TOTAL NON-CURRENT LIABILITIES 1,754 1,684
------- -------
Commitments and contingencies
Series B convertible participating preferred stock, par value $1.00 per share,
4 million shares authorized, issued and outstanding as of September 30, 2001 395 --
------- -------
STOCKHOLDERS' EQUITY
Series A junior participating preferred stock, par value $1.00 per share,
7.5 million shares authorized; none issued and outstanding -- --
Common stock, par value $0.01 per share, 1.5 billion shares authorized, 286,851,934 and
282,027,675 issued and outstanding as of September 30, 2001 and 2000, respectively 3 3
Additional paid-in capital 905 825
Accumulated deficit (379) --
Accumulated other comprehensive loss (46) (64)
Less treasury stock at cost (147,653 shares as of September 30, 2001) (2) --
------- -------
TOTAL STOCKHOLDERS' EQUITY 481 764
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,648 $ 5,037
======= =======
</Table>
See Notes to Consolidated Financial Statements.
29.
<Page>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND OF COMPREHENSIVE
INCOME (LOSS)
Avaya Inc. and Subsidiaries
<Table>
<Caption>
Year Ended September 30,
-----------------------------
2001 2000 1999
---- ---- ----
(dollars in millions)
<S> <C> <C> <C>
FORMER PARENT'S NET INVESTMENT:
Beginning balance $ -- $ 1,871 $ 1,854
Net income (loss) -- (375) 282
Transfers to Lucent -- (7,783) (8,488)
Transfers from Lucent -- 7,115 8,223
Recapitalization upon Distribution -- (828) --
------- ------- -------
Ending balance $ -- $ -- $ 1,871
------- ------- -------
COMMON STOCK:
Beginning balance $ 3 $ -- $ --
Issuance of stock pursuant to the Distribution -- 3 --
------- ------- -------
Ending balance $ 3 $ 3 $ --
------- ------- -------
ADDITIONAL PAID-IN CAPITAL:
Beginning balance $ 825 $ -- $ --
Additional paid-in capital resulting from the Distribution -- 825 --
Issuance of warrants 32 -- --
Issuance of common stock for options exercised 7 -- --
Issuance of common stock to employees under the stock purchase plan 33 -- --
Issuance of other stock unit awards 28 -- --
Other stock transactions (Note 4) 22 -- --
Adjustment to Lucent capital contribution (Notes 12 and 16) (42) -- --
------- ------- -------
Ending balance $ 905 $ 825 $ --
------- ------- -------
ACCUMULATED DEFICIT:
Beginning balance $ -- $ -- $ --
Preferred stock accretion (27) -- --
Net loss (352) -- --
------- ------- -------
Ending balance $ (379) $ -- $ --
------- ------- -------
ACCUMULATED OTHER COMPREHENSIVE LOSS:
Beginning balance $ (64) $ (54) $ (59)
Foreign currency translations 18 (10) 5
------- ------- -------
Ending balance $ (46) $ (64) $ (54)
------- ------- -------
TREASURY STOCK:
Beginning balance $ -- $ -- $ --
Purchase of treasury stock at cost (2) -- --
------- ------- -------
Ending balance $ (2) $ -- $ --
------- ------- -------
TOTAL STOCKHOLDERS' EQUITY $ 481 $ 764 $ 1,817
======= ======= =======
COMPREHENSIVE INCOME (LOSS):
Net income (loss) $ (352) $ (375) $ 282
Other comprehensive income (loss) - foreign currency translations 18 (10) 5
------- ------- -------
Comprehensive income (loss) $ (334) $ (385) $ 287
======= ======= =======
</Table>
See Notes to Consolidated Financial Statements.
30.
<Page>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Avaya Inc. and Subsidiaries
<Table>
<Caption>
Year Ended September 30,
-----------------------
2001 2000 1999
---- ---- ----
(dollars in millions)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(352) $(375) $ 282
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Cumulative effect of accounting change -- -- (96)
Business restructuring and related charges (reversals) 659 595 (33)
Depreciation and amortization 273 220 212
Provision for uncollectible receivables 53 36 25
Deferred income taxes (264) (288) (2)
Purchased in-process research and development 32 -- --
Gain on businesses sold (6) (44) (24)
Adjustments for other non-cash items, net 32 19 26
Changes in operating assets and liabilities, net of effects of
acquired and divested businesses:
Receivables 198 (50) 5
Inventory (6) 131 81
Accounts payable (138) 298 (47)
Payroll and benefits, net (215) (372) (12)
Advance billings and deposits (120) 55 59
Other assets and liabilities (279) 260 (45)
----- ----- -----
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (133) 485 431
----- ----- -----
INVESTING ACTIVITIES:
Capital expenditures (341) (499) (202)
Proceeds from the sale of property, plant and equipment 108 14 17
Disposal of businesses -- 82 29
Acquisitions of businesses, net of cash acquired (120) -- --
Cash from merger -- -- 60
Purchases of equity investments (27) -- --
Other investing activities, net 15 (25) 10
----- ----- -----
NET CASH USED FOR INVESTING ACTIVITIES (365) (428) (86)
----- ----- -----
FINANCING ACTIVITIES:
Issuance of convertible participating preferred stock 368 -- --
Issuance of warrants 32 -- --
Issuance of common stock 40 -- --
Transfers to Lucent, net -- (741) (253)
Credit facility borrowing 200 -- --
Net decrease in commercial paper (348) -- --
Assumption of commercial paper from Lucent -- 780 --
Proceeds from securitization of accounts receivable 200 -- --
Other financing activities, net (9) 3 (4)
----- ----- -----
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 483 42 (257)
----- ----- -----
Effect of exchange rate changes on cash and cash equivalents (6) (22) (1)
----- ----- -----
Net increase (decrease) in cash and cash equivalents (21) 77 87
Cash and cash equivalents at beginning of year 271 194 107
----- ----- -----
Cash and cash equivalents at end of year $ 250 $ 271 $ 194
===== ===== =====
</Table>
See Notes to Consolidated Financial Statements.
31.
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Avaya Inc. and Subsidiaries
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
On September 30, 2000, Avaya Inc. (the "Company" or "Avaya") was spun
off from Lucent Technologies Inc. ("Lucent" or "Former Parent") pursuant to a
contribution by Lucent of its enterprise networking businesses to the Company
and a distribution of the outstanding shares of the Company's common stock, to
Lucent stockholders (the "Distribution"). The Company provides communication
systems and software for enterprises, including businesses, government agencies
and other organizations. The Company offers a broad range of voice, converged
voice and data, customer relationship management, messaging, multi-service
networking and structured cabling products and services.
The Company was incorporated in Delaware under the name "Lucent EN Corp." in
February 2000 as a wholly owned subsidiary of Lucent. In June 2000, the
Company's name was changed to "Avaya Inc." At the Distribution, the Company's
authorized capital stock consisted of 200 million shares of preferred stock, par
value $1.00 per share, of which the Company has presently designated 7.5 million
shares as Series A junior participating preferred stock and 4 million shares as
Series B convertible participating preferred stock, and 1.5 billion shares of
common stock, par value $0.01 per share.
The Company adopted a rights agreement prior to the Distribution date. The
issuance of a share of the Company's common stock also constitutes the issuance
of a Series A junior participating preferred stock purchase right associated
with such share. These rights may have anti-takeover effects in that the
existence of the rights may deter a potential acquirer from making a takeover
proposal or a tender offer.
BASIS OF PRESENTATION
The accompanying consolidated financial statements as of and for the fiscal year
ended September 30, 2001 depict the first full year of Avaya's results as a
stand-alone company.
The consolidated financial statements as of and for each of the two fiscal
years ended September 30, 2000 include the Company and its subsidiaries as well
as certain assets, liabilities, and related operations transferred to the
Company from Lucent immediately prior to the Distribution. These consolidated
financial statements have been derived from the accounting records of Lucent
using the historical results of operations and historical basis of the assets
and liabilities of the enterprise networking businesses transferred to the
Company. Since no direct ownership existed among all of the various units
comprising the Company prior to the Distribution, Lucent's net investment in
Avaya is shown in place of stockholders' equity in the Consolidated Statements
of Changes in Stockholders' Equity in fiscal 2000 and 1999. Management believes
these consolidated financial statements are a reasonable representation of the
financial position, results of operations, cash flows and changes in
stockholders' equity of such businesses as if Avaya were a separate entity
during such periods.
The consolidated financial statements as of and for each of the two years
ended September 30, 2000 include allocations of certain Lucent corporate
headquarters' assets, liabilities, and expenses relating to these businesses
that were transferred to Avaya fromLucent. General corporate overhead has been
allocated either based on the ratio of the Company's costs and expenses to
Lucent's costs and expenses, or based on the Company's revenue as a percentage
of Lucent's total revenue.General corporate overhead primarily includes cash
management, legal, accounting, tax, insurance, public relations, advertising and
data services and amounted to $398 million and $449 million in fiscal 2000 and
1999, respectively. In addition, the consolidated financial statements for
fiscal 2000 and 1999 include an allocation from Lucent to fund a portion of the
costs of basic research conducted byLucent's Bell Laboratories.This allocation
was based on the Company's revenue as a percentage of Lucent's total revenue and
amounted to $75 million and $78 million in fiscal 2000 and 1999, respectively.
Management believes the costs of corporate services and research charged to the
Company are a reasonable representation of the costs that would have been
incurred if the Company had performed these functions as a stand-alone entity.
The Company currently performs these corporate functions and basic research
requirements using its own resources or purchased services.
During the periods covered by the consolidated financial statements as of and
for each of the two years ended September 30, 2000, Lucent used a centralized
approach to cash management and the financing of its operations.Prior to the
Distribution, cash deposits from the Company's businesses were transferred to
Lucent on a regular basis and were netted against Lucent's net investment
account. As a result, none of Lucent's cash or cash equivalents at the corporate
level had been allocated to the Company. Changes in stockholders' equity in
fiscal 2000 and 1999 represent funding required fromLucent for working capital,
acquisitions or capital expenditures after giving effect to the Company's
transfers to or fromLucent of its cash flows from operations and other non-cash
transactions between the Company and Lucent.
Although the Company's Consolidated Statements of Operations include interest
expense for each of the two fiscal years ended September 30, 2000, the
Consolidated Balance Sheets for periods prior to the Distribution do not include
an allocation of Lucent debt at the corporate level because of the centralized
approach that Lucent used to finance its operations. The Company has assumed for
purposes of calculating interest expense that it would have had average debt
balances of $962 million and $1,320 million and average interest rates of 7.9%
and 6.8% per annum for fiscal 2000 and 1999, respectively. The Company believes
the interest rates and average debt balances used in the calculation of interest
expense reasonably reflect the cost of financing its assets and operations
during the periods prior to the Distribution.
Income taxes were calculated in fiscal 2000 and 1999 as if the Company filed
separate tax returns. However, Lucent was managing its tax position for the
benefit of its entire portfolio of businesses, and its tax strategies were not
necessarily reflective of the tax strategies that the Company would have
followed or will follow as a stand-alone company. Commencing with fiscal 2001,
the Company will begin filing consolidated income tax returns for Avaya and its
subsidiaries.
32.
<Page>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include all majority-owned subsidiaries in
which the Company exercises control. Investments in which the Company exercises
significant influence, but which it does not control (generally a 20%-50%
ownership interest), are accounted for under the equity method of accounting.
All intercompany transactions and balances between and among the Company's
businesses have been eliminated. Transactions between any of the Company's
businesses and Lucent are included in these financial statements.
USE OF ESTIMATES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and revenue and expenses
during the period reported. These estimates include an allocation of costs by
Lucent in fiscal 2000 and 1999, assessing the collectability of accounts
receivable, the use and recoverability of inventory, the realization of deferred
tax assets, restructuring reserves, and useful lives of tangible and intangible
assets, among others. The markets for the Company's products are characterized
by intense competition, rapid technological development and frequent new product
introductions, all of which could affect the future realizability of the
Company's assets. Estimates and assumptions are reviewed periodically and the
effects of revisions are reflected in the consolidated financial statements in
the period they are determined to be necessary. Actual results could differ from
these estimates.
FOREIGN CURRENCY TRANSLATION
Balance sheet accounts of the Company's foreign operations are translated from
foreign currencies into U.S. dollars at period-end exchange rates while income
and expenses are translated at average exchange rates during the period.
Translation gains or losses related to net assets located outside the U.S. are
shown as a component of accumulated other comprehensive loss in stockholders'
equity. Gains and losses resulting from foreign currency transactions, which are
denominated in a currency other than the entity's functional currency, are
included in the Consolidated Statements of Operations.
REVENUE RECOGNITION
Revenue from sales of communications systems and software is recognized when
contractual obligations have been satisfied, title and risk of loss have been
transferred to the customer, and collection of the resulting receivable is
reasonably assured. Revenue from the direct sales of products that include
installation services is recognized at the time the products are installed,
after satisfaction of all the terms and conditions of the underlying customer
contract. The Company's indirect sales to distribution partners are generally
recognized at the time of shipment if all contractual obligations have been
satisfied. The Company accrues a provision for estimated sales returns and other
allowances and deferrals as a reduction of revenue at the time of revenue
recognition, as required. Revenue from services performed under value-added
service arrangements, professional services and services performed under
maintenance contracts are recognized over the term of the underlying customer
contract or at the end of the contract, when obligations have been satisfied.
For services performed on a time and materials basis, revenue is recognized upon
performance.
RESEARCH AND DEVELOPMENT COSTS AND
SOFTWARE DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. The costs
incurred for the development of computer software that will be sold, leased or
otherwise marketed, however, are capitalized when technological feasibility has
been established. These capitalized costs are subject to an ongoing assessment
of recoverability based on anticipated future revenues and changes in hardware
and software technologies. Costs that are capitalized include direct labor and
related overhead.
Amortization of capitalized software development costs begins when the
product is available for general release to customers. Amortization is
recognized on a product-by-product basis on the greater of either the ratio of
current gross revenues to the total of current and anticipated future gross
revenues, or the straight-line method over three years. Unamortized capitalized
software development costs determined to be in excess of net realizable value of
the product are expensed immediately.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents primarily represent amounts held by the Company's
foreign operations. All highly liquid investments with original maturities of
three months or less are considered to be cash equivalents.
ACCOUNTS RECEIVABLE SECURITIZATION
The amount attributable to the sale of a qualified trade accounts receivable is
removed from the Consolidated Balance Sheets and the proceeds received from the
sale are reflected as cash provided by financing activities in the Consolidated
Statements of Cash Flows. The Company is generally required to retain an
interest in the trade receivables sold and arranges for the transfer of the
applicable receivables at their carrying amount to a wholly owned
bankruptcy-remote subsidiary, a special purpose entity. The carrying amount of
the retained interest in the receivables is reclassified to other current assets
and typically approximates fair value because of the relatively short-term
nature of the receivable collections. Costs associated with the sale of
receivables are recorded in other income, net in the Consolidated Statements of
Operations.
The Company reviews the fair value assigned to retained interests at each
reporting date. Fair value is reviewed using similar valuation techniques as
those used to initially measure the retained interest and, if a change in events
or circumstances warrants, the fair value is adjusted.
33.
<Page>
INVENTORY
Inventory is stated at the lower of cost, determined on a first-in, first-out
basis, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is determined using a straight-line method over the estimated
useful lives of the various asset classes. Estimated lives range from three to
10 years for machinery and equipment, and 40 years for buildings.
Major renewals and improvements are capitalized and minor replacements,
maintenance and repairs are charged to expense as incurred. Upon retirement or
disposal of assets, the cost and related accumulated depreciation are removed
from the Consolidated Balance Sheets and any gain or loss is reflected in the
Consolidated Statements of Operations.
The Company adopted Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" in October 1999.
Certain costs of computer software developed or obtained for internal use, which
were previously expensed as incurred, are capitalized and amortized on a
straight-line basis over three years. Costs for general and administrative,
overhead, maintenance and training, as well as the cost of software that does
not add functionality to the existing system, are expensed as incurred. As of
September 30, 2001 and 2000, the Company had unamortized internal use software
costs of $68 million and $46 million, respectively.
GOODWILL AND LONG-LIVED ASSETS
Goodwill is the excess of the purchase price over the fair value of identifiable
net assets acquired in business combinations accounted for as purchases.
Goodwill is amortized on a straight-line basis over the periods benefited.
Long-lived assets and goodwill are reviewed for impairment whenever events such
as product discontinuance, plant closures, product dispositions or other changes
in circumstances indicate that the carrying amount may not be recoverable. In
reviewing for impairment, the Company compares the carrying value of such assets
to the estimated undiscounted future cash flows expected from the use of the
assets and their eventual disposition. An impairment loss, equal to the
difference between the assets' fair value and their carrying value, is
recognized when the estimated future cash flows are less than their carrying
amount (see Note 3 - SFAS 142).
Goodwill and other intangible assets as of September 30, 2001 and 2000 were
net of accumulated amortization of $230 million and $161 million, respectively.
FINANCIAL INSTRUMENTS
The Company uses various financial instruments, including foreign currency
forward contracts, to manage and reduce risk to the Company by generating cash
flows which offset the cash flows of certain transactions in foreign currencies
or underlying financial instruments in relation to their amount and timing. The
Company's derivative financial instruments are used as risk management tools and
not for speculative or trading purposes. Although not material, these
derivatives represent assets and liabilities and are classified as other current
assets or other current liabilities on the accompanying Consolidated Balance
Sheets. Gains and losses on the changes in the fair values of the Company's
derivative instruments are included in other income, net on the Consolidated
Statements of Operations.
The Company has elected to not use hedge accounting under Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which could result in a gain or loss from
fluctuations in exchange rates related to a derivative contract which is
different from the loss or gain recognized from the underlying forecasted
transaction. However, the Company has procedures to manage risks associated with
its derivative instruments, which include limiting the duration of the
contracts, typically six months or less, and the amount of the underlying
exposures that can be economically hedged. Historically, the gains and losses on
these transactions have not been significant.
The Company also utilizes non-derivative financial instruments including
letters of credit and commitments to extend credit.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the Consolidated Statement of Operations in the period
that includes the enactment date. A valuation allowance is recorded to reduce
the carrying amounts of deferred tax assets if it is more likely than not that
such assets will not be realized.
OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) is recorded directly to a separate section of
stockholders' equity in accumulated other comprehensive loss and includes
unrealized gains and losses excluded from the Consolidated Statements of
Operations. These unrealized gains and losses consist of foreign currency
translation adjustments, which are not adjusted for income taxes since they
primarily relate to indefinite investments in non-U.S. subsidiaries.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
34.
<Page>
3. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 141 - In July 2001, the Financial Accounting Standards Board ("FASB")
issued Statement No. 141, "Business Combinations" ("SFAS 141"), which requires
all business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting. As a result, use of the
pooling-of-interests method is prohibited for business combinations initiated
thereafter. SFAS 141 also establishes criteria for the separate recognition of
intangible assets acquired in a business combination. In fiscal 2001, Avaya
adopted this Statement, which did not have a material impact on the Company's
consolidated results of operations, financial position or cash flows.
New accounting statements issued, but not yet adopted by the Company, include
the following:
SFAS 142 - In July 2001, the FASB issued Statement No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), which requires that goodwill and
certain other intangible assets having indefinite lives no longer be
amortized to earnings, but instead be subject to periodic testing for
impairment. Intangible assets determined to have definitive lives will
continue to be amortized over their useful lives. This Statement is effective
for the Company's 2003 fiscal year, and early adoption is permitted. However,
goodwill and intangible assets acquired after June 30, 2001 are subject
immediately to the non-amortization and amortization provisions of this
Statement. Effective October 1, 2001, the Company adopted SFAS142 and
implemented certain provisions, specifically the discontinuation of goodwill
amortization, and will be implementing the remaining provisions by the end of
fiscal 2002. In fiscal 2001, the Company recorded goodwill amortization
expense of $40 million. The Company is currently evaluating the remaining
provisions of SFAS 142 to determine the effect, if any, they may have on the
Company's consolidated results of operations, financial position or cash
flows.
SFAS 143 - In August 2001, the FASB issued Statement No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"), which provides the accounting
requirements for retirement obligations associated with tangible long-lived
assets. This Statement requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred. This
Statement is effective for the Company's 2003 fiscal year, and early adoption is
permitted. The adoption of SFAS 143 is not expected to have a material impact on
the Company's consolidated results of operations, financial position or cash
flows.
SFAS 144 - In October 2001, the FASB issued Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which excludes
from the definition of long-lived assets goodwill and other intangibles that are
not amortized in accordance with SFAS 142. SFAS 144 requires that long-lived
assets to be disposed of by sale be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in continuing operations or in
discontinued operations. SFAS 144 also expands the reporting of discontinued
operations to include components of an entity that have been or will be disposed
of rather than limiting such discontinuance to a segment of a business. This
Statement is effective for the Company's 2003 fiscal year, and early adoption is
permitted. The Company is currently evaluating the impact of SFAS 144 to
determine the effect, if any, it may have on the Company's consolidated results
of operations, financial position or cash flows.
4. BUSINESS COMBINATIONS AND OTHER TRANSACTIONS
ACQUISITIONS
The following table presents information about certain acquisitions by the
Company during the fiscal year ended September 30, 2001. These acquisitions were
accounted for under the purchase method of accounting, and the acquired
technology valuation included existing technology, purchased in-process research
and development ("IPR&D") and other intangibles. The consolidated financial
statements include the results of operations and the estimated fair values of
the assets and liabilities assumed from the respective dates of acquisition. All
charges related to the write-off of purchased in-process research and
development were recorded in the quarter in which the transaction was completed.
There were no material acquisitions accounted for under the purchase method in
fiscal 2000 and 1999.
<Table>
<Caption>
Allocation of Purchase Price(1) Amortization Period (in years)
--------------------------------------------- ---------------------------------
Purchase Existing Other Purchased Existing Other
Acquisition Date Price Goodwill Technology Intangibles IPR&D Goodwill Technology Intangibles
---------------- ----- -------- ---------- ----------- ----- -------- ---------- -----------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
VPNet(2) February 6, 2001 $117 $48 $30 $16 $31 5 5 5
Quintus(3) April 11, 2001 $ 29 $ 3 $ 9 $ 3 $ 1 5 3 3
</Table>
(1) Excludes amounts allocated to specific tangible assets and liabilities.
(2) Acquisition of VPNet Technologies, Inc., a privately held distributor of
virtual private network solutions and devices. The total purchase price of $117
million was paid in cash and stock options.
(3) Acquisition of substantially all of the assets, including $10 million of
cash acquired, and the assumption of $20 million of certain liabilities of
Quintus Corporation, a provider of comprehensive electronic customer
relationship management solutions. The Company paid $29 million in cash for
these assets.
Included in the purchase price for each of the above acquisitions was purchased
in-process research and development. At the date of each acquisition, some of
the technology had not yet reached technological feasibility and had no future
alternative use. Accordingly, the purchased in-process research and development
was written off as a charge to earnings immediately upon consummation of the
respective acquisitions.
35.
<Page>
The charge related to VPNet purchased in-process research and development was
not tax deductible. The remaining purchase price was allocated to tangible and
intangible assets, including goodwill, existing technology and other intangible
assets, less liabilities assumed.
The value allocated to purchased in-process research and development for the
acquisitions was determined 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. Where appropriate, the Company
deducted an amount reflecting the contribution of the core technology from the
anticipated cash flows from an in-process research and development project. The
selection of the discount rate was based on consideration of the Company's
weighted average cost of capital, as well as other factors, including the useful
life of each technology, profitability levels of each technology, the
uncertainty of technology advances that were known at the time, and the stage of
completion of each technology. The Company believes that the estimated
in-process research and development amounts so determined represent fair value
and do not exceed the amount a third party would have paid for the projects.
Revenue forecasts were estimated based on relevant market size and growth
factors, expected industry trends, individual product sales cycles and the
estimated life of each product's underlying technology. Estimated operating
expenses, income taxes, and charges for the use of contributory assets were
deducted from estimated revenue to determine estimated after-tax cash flows for
each project. Estimated operating expenses include cost of goods sold, selling,
general and administrative expenses, and research and development expenses. The
research and development expenses include estimated costs to maintain the
products once they have been introduced into the market and generate revenue and
costs to complete the purchased in-process research and development.
Management is primarily responsible for estimating the fair value of the
assets and liabilities acquired, and has conducted due diligence in determining
the fair value. Management has made estimates and assumptions that affect the
reported amounts of assets, liabilities and expenses resulting from such
acquisitions. Actual results could differ from these amounts.
POOLING OF INTERESTS MERGER
In July 1999, the Company completed its merger with Mosaix, Inc., a provider of
software that manages an enterprise's various office functions and helps to
deliver more responsive and efficient customer service. Under the terms of the
agreement, the outstanding common stock of Mosaix was converted into
approximately 2.6 million shares of Lucent common stock with a value of $145
million. The financial position and results of operations of Mosaix were
immaterial to the Company and, as such, the consolidated financial statements
include the results of operations and the historical basis of the assets
acquired and liabilities assumed from the date of acquisition.
DIVESTITURES
In March 2000, the Company completed the sale of its U.S. sales division that
served small- and mid-sized businesses to Expanets, Inc. Under the agreement,
approximately 1,800 of the Company's sales and sales support employees were
transferred to Expanets, which became a distributor of the Company's products to
this market and a significant customer of the Company. A gain of $45 million was
recognized to the extent of cash proceeds received related to the sale of this
business and is included in other income, net.
OTHER TRANSACTIONS
AIRCRAFT SALE-LEASEBACK In June 2001, the Company sold a corporate aircraft for
approximately $34 million and subsequently entered into an agreement to lease it
back over a five-year period. At the end of the lease term, the Company has the
option to renew the lease subject to the consent of the lessors, or to purchase
the aircraft for a price as defined in the agreement. If the Company elects not
to either renew the lease or purchase the aircraft, the Company must arrange for
the sale of the aircraft to a third party. Under the sale option, the Company
has guaranteed approximately 60% of the unamortized original cost as the
residual value of the aircraft. The lease is accounted for as an operating lease
for financial statement purposes and as a loan for tax purposes.
OUTSOURCING OF CERTAIN MANUFACTURING FACILITIES In May 2001, the Company closed
the first phase of a five-year strategic manufacturing agreement to outsource
most of the manufacturing of its communications systems and software to
Celestica Inc. Under the agreement, Avaya will receive approximately $200
million in cash for the assets it is transferring to Celestica, of which the
Company has received $188 million as of September 30, 2001. The Company has
deferred $100 million of these proceeds, which will be recognized to income on a
straight-line basis over the term of the agreement. As of September 30, 2001,
the unamortized portion of these proceeds amounted to $20 million in other
current liabilities and $71 million in other liabilities. The Company expects
the remaining phases of the transaction, which include closing the Shreveport,
Louisiana facility, to be completed by the end of the first quarter of fiscal
2002.
In September 2000, in conjunction with the Company's restructuring plans to
exit certain manufacturing businesses, the Company sold its manufacturing
facility located in San Jose, California, to Sanmina Corporation. This facility
produced electronic equipment used in structured cabling systems. In connection
with the sale, the Company received proceeds of approximately $18 million and
recorded a loss of approximately $1 million.
SALE OF EQUIPMENT In fiscal 1999, the Company sold equipment, which was
previously leased to customers, for $97 million. The equipment had a net book
value of approximately $2 million and consisted predominantly of discontinued
product lines. Rental income generated by this equipment for fiscal 1999 was $79
million.
36.
<Page>
5. SUPPLEMENTARY FINANCIAL INFORMATION
STATEMENT OF OPERATIONS INFORMATION
<Table>
<Caption>
Year Ended September 30,
------------------------
2001 2000 1999
---- ---- ----
(dollars in millions)
<S> <C> <C> <C>
DEPRECIATION AND AMORTIZATION
INCLUDED IN COSTS:
Amortization of software
development costs $ 24 $ 24 $ 14
INCLUDED IN SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES:
Amortization of goodwill and
other intangible assets 72 55 59
INCLUDED IN COSTS AND
OPERATING EXPENSES:
Depreciation and amortization of
property, plant and equipment
and internal use software 177 141 139
----- ----- -----
Total depreciation and
amortization $ 273 $ 220 $ 212
===== ===== =====
OTHER INCOME, NET
Loss on foreign currency transactions $ (5) $ (10) $ --
Gain on businesses sold 6 44 24
Interest income 27 7 --
Miscellaneous, net 6 30 4
----- ----- -----
Total other income, net $ 34 $ 71 $ 28
===== ===== =====
<Caption>
BALANCE SHEET INFORMATION
As of September 30,
-------------------
2001 2000
---- ----
(dollars in millions)
<S> <C> <C>
INVENTORY
Completed goods $ 420 $ 472
Work in-process and raw materials 229 167
------- -------
Total inventory $ 649 $ 639
======= =======
PROPERTY, PLANT AND EQUIPMENT, NET
Land and improvements $ 46 $ 42
Buildings and improvements 485 383
Machinery and equipment 1,126 1,091
Assets under construction 47 179
Internal use software 89 50
------- -------
Total property, plant and equipment 1,793 1,745
Less: Accumulated depreciation and amortization (805) (779)
------- -------
Property, plant and equipment, net $ 988 $ 966
======= =======
<Caption>
SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended September 30, 2001
-----------------------------
(dollars in millions)
<S> <C>
ACQUISITION OF BUSINESSES:
Fair value of assets acquired, net of cash acquired $ 192
Less: Fair value of liabilities assumed (72)
-----
Acquisition of businesses, net of cash acquired $ 120
-----
In the second quarter of fiscal 2001, the Company
paid off $9 million of debt assumed from its
acquisition of VPNet
Interest payments, net of amounts capitalized $ 41
-----
Income tax payments $ 66
-----
Non-cash transactions:
Accretion of Series B Preferred Stock (Note 8) $ 27
Fair market value of stock options issued in connection
with acquisition (Note 4) 16
Adjustments to Contribution by Lucent
(Notes 12 and 16):
Accounts receivable 8
Property, plant and equipment, net 7
Net benefit assets 27
-----
Total non-cash transactions $ 85
=====
<Caption>
Year Ended September 30, 2000
-----------------------------
(dollars in millions)
<S> <C>
DISPOSITION OF BUSINESSES:
Cash proceeds $ 82
Less: Basis in net assets sold (38)
Gain on businesses sold $ 44
</Table>
Payments for interest and income taxes prior to the Distribution 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.
Net transfers to Lucent prior to the Distribution are composed predominantly
of the following non-cash transactions: (1) for the fiscal year ended September
30, 2000, a $528 million increase in Former Parent's net investment due to
prepaid pension costs and other assets and a $439 million decrease from benefit
obligations and other accrued liabilities assumed by the Company from Lucent on
the Distribution date, and for the fiscal year ended September 30, 1999, (2) a
$96 million decrease in Former Parent's net investment for a change in
accounting related to pension and postretirement benefit costs, partially offset
by (3) an $82 million increase in Former Parent's net investment attributed to
the Mosaix pooling of interests merger.
37.
<Page>
6. SECURITIZATION OF ACCOUNTS RECEIVABLE
In June 2001, the Company entered into a receivables purchase agreement and
transferred a designated pool of qualified trade accounts receivable to a
special purpose entity ("SPE"), which in turn sold an undivided ownership
interest to an unaffiliated financial institution. The Company, through the SPE,
has a retained interest in a portion of the receivables, and the financial
institution has no recourse to the Company's other assets for failure of
customers to pay when due. The assets of the SPE are not available to pay
creditors of the Company. The Company is responsible for defined fees payable
monthly to the financial institution for costs associated with the outstanding
capital issued by the financial institution to fund the purchase of receivables
and a backstop liquidity commitment. The Company will continue to service,
administer and collect the receivables on behalf of the financial institution
and receive a fee for performance of these services. Collections of receivables
are used by the financial institution to purchase, from time to time, new
interests in receivables up to an aggregate of $200 million. The Company is
subject to certain receivable collection ratios, among other covenants contained
in the agreement. During fiscal 2001, the Company was in compliance with such
covenants. The receivables purchase agreement expires in June 2002, but may be
extended through June 2004 with the financial institution's consent.
In connection with the transaction, the Company received cash proceeds of
$200 million from the sale and securitization of these receivables. The accounts
receivable balances were removed from the Consolidated Balance Sheet and the
proceeds received from the sale were reflected as cash provided by financing
activities in the Consolidated Statement of Cash Flows. As of September 30,
2001, the Company had a retained interest of $153 million in the SPE's
designated pool of qualified accounts receivable representing collateral for the
sale. The carrying amount of the Company's retained interest, which approximates
fair value because of the relatively short-term nature of the receivable
collections, was reclassified to other current assets.
The Company did not record an asset or liability related to any servicing
obligations because the initial measure for servicing was determined to be
adequate to compensate the Company for its servicing responsibilities. Although
not material, costs associated with the sale of the receivables were recorded in
other income, net in the Consolidated Statement of Operations. No significant
gain or loss resulted from this transaction.
7. BUSINESS RESTRUCTURING AND RELATED CHARGES
In fiscal 2001, the Company outsourced certain manufacturing facilities and
accelerated its restructuring plan that was originally adopted in September 2000
to improve profitability and business performance as a stand-alone company. As a
result, the Company recorded a pretax charge of $872 million in fiscal 2001 for
business restructuring and related charges, which is expected to result in a
$295 million usage of cash. This charge was partially offset by a $35 million
reversal to income primarily attributable to fewer employee separations than
originally anticipated and more favorable than expected real estate lease
termination costs.
The components of the fiscal 2001 charge include $650 million of employee
separation costs, $24 million of lease termination costs, and $198 million of
other related charges. The charge for employee separation costs is composed of
$577 million primarily related to enhanced pension and postretirement benefits,
which represent the cost of curtailment in accordance with SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and $73 million for severance,
special benefit payments and other employee separation costs. The $198 million
of other related charges is composed of $178 million for incremental period
expenses primarily to facilitate the separation from Lucent, including computer
system transition costs, and $20 million for an asset impairment charge related
to land, buildings and equipment at the Shreveport manufacturing facility that
the Company expects to dispose of during fiscal 2002. Employee separation costs
of $55 million established in fiscal 2000 for union-represented employees at
Shreveport will be paid as enhanced severance benefits from existing pension and
benefit assets and, accordingly, such amount was reclassified in fiscal 2001 out
of the business restructuring reserve and recorded as a re