- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-15951
------------------------
AVAYA INC.
A DELAWARE I.R.S. EMPLOYER
CORPORATION NO. 22-3713430
211 MOUNT AIRY ROAD, BASKING RIDGE, NEW JERSEY 07920
TELEPHONE NUMBER 908-953-6000
------------------------
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 / /
At December 31, 2000, 282,666,636 common shares were outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
---- ----------- --------
PART I
1. Financial Statements........................................ 3
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 26
PART II
1. Legal Proceedings........................................... 28
2. Changes in Securities and Use of Proceeds................... 28
3. Defaults Upon Senior Securities............................. 28
4. Submission of Matters to a Vote of Security Holders......... 28
5. Other Information........................................... 28
6. Exhibits and Reports on Form 8-K............................ 28
2
PART I
ITEM 1. FINANCIAL STATEMENTS.
AVAYA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
----------------------
2000 1999
-------- --------
REVENUE
Products.................................................... $1,286 $1,380
Services.................................................... 499 470
------ ------
1,785 1,850
------ ------
COSTS
Products.................................................... 771 742
Services.................................................... 217 235
------ ------
988 977
------ ------
GROSS MARGIN................................................ 797 873
------ ------
OPERATING EXPENSES
Selling, general and administrative....................... 608 636
Business restructuring and related charges................ 23 --
Research and development.................................. 140 105
------ ------
TOTAL OPERATING EXPENSES.................................. 771 741
------ ------
OPERATING INCOME............................................ 26 132
Other income, net........................................... 9 4
Interest expense............................................ (10) (21)
------ ------
INCOME BEFORE INCOME TAXES.................................. 25 115
Provision for income taxes.................................. 9 46
------ ------
NET INCOME.................................................. $ 16 $ 69
====== ======
Earnings Per Common Share:
Basic..................................................... $ 0.03 $ 0.26
====== ======
Diluted................................................... $ 0.03 $ 0.25
====== ======
See Notes to Consolidated Financial Statements.
3
AVAYA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
DECEMBER 31, SEPTEMBER 30,
2000 2000
------------ -------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 560 $ 271
Receivables less allowances of $65 at December 31, 2000
and $62 at September 30, 2000............................. 1,647 1,758
Inventory................................................... 688 639
Deferred income taxes, net.................................. 397 450
Other current assets........................................ 252 244
------ ------
TOTAL CURRENT ASSETS........................................ 3,544 3,362
------ ------
Property, plant and equipment, net.......................... 1,013 966
Prepaid benefit costs....................................... 389 387
Deferred income taxes, net.................................. 45 44
Goodwill, net............................................... 200 204
Other assets................................................ 80 74
------ ------
TOTAL ASSETS................................................ $5,271 $5,037
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................ $ 744 $ 763
Current portion of long term debt........................... 14 80
Business restructuring reserve.............................. 361 499
Payroll and benefit liabilities............................. 505 491
Advance billings and deposits............................... 188 253
Other current liabilities................................... 619 503
------ ------
TOTAL CURRENT LIABILITIES................................... 2,431 2,589
------ ------
Long term debt.............................................. 700 713
Benefit obligations......................................... 440 421
Deferred revenue............................................ 69 83
Other liabilities........................................... 404 467
------ ------
TOTAL NONCURRENT LIABILITIES................................ 1,613 1,684
------ ------
Commitments and contingencies
Series B convertible participating preferred stock, par
value $1.00 per share, 4 million shares authorized, issued
and outstanding........................................... 375 --
------ ------
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, 282,666,636 and 282,027,675 issued and
outstanding as of December 31, 2000 and September 30,
2000, respectively........................................ 3 3
Additional paid-in capital.................................. 865 825
Retained earnings........................................... 9 --
Accumulated other comprehensive loss........................ (25) (64)
------ ------
TOTAL STOCKHOLDERS' EQUITY.................................. 852 764
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $5,271 $5,037
====== ======
See Notes to Consolidated Financial Statements.
4
AVAYA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
-------------------------
2000 1999
-------- --------
OPERATING ACTIVITIES:
Net income................................................ $ 16 $ 69
Adjustments to reconcile net income to net cash provided
by
(used for) operating activities:
Depreciation and amortization........................... 66 50
Provision for uncollectible receivables................. 16 18
Deferred income taxes................................... 52 (3)
Changes in operating assets and liabilities:
Receivables........................................... 141 211
Inventory............................................. (39) (12)
Accounts payable...................................... (44) (34)
Other assets and liabilities.......................... (150) (373)
----- -----
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES........ 58 (74)
----- -----
INVESTING ACTIVITIES:
Capital expenditures...................................... (92) (79)
Proceeds from the sale of property, plant and equipment... 2 3
Other investing activities, net........................... (26) 4
----- -----
NET CASH USED FOR INVESTING ACTIVITIES...................... (116) (72)
----- -----
FINANCING ACTIVITIES:
Issuance of convertible participating preferred stock..... 368 --
Issuance of warrants...................................... 32 --
Issuance of common stock.................................. 6 --
Transfers (to) from Lucent................................ -- 77
Increase in long term debt................................ -- 4
Decrease in long term debt................................ (80) --
Other..................................................... 3 (7)
----- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 329 74
----- -----
Effect of exchange rate changes on cash and cash
equivalents............................................... 18 --
----- -----
Net increase (decrease) in cash and cash equivalents........ 289 (72)
Cash and cash equivalents at beginning of fiscal year....... 271 194
----- -----
Cash and cash equivalents at end of period.................. $ 560 $ 122
===== =====
See Notes to Consolidated Financial Statements.
5
AVAYA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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") pursuant to a distribution of all
outstanding shares of the Company's common stock to Lucent shareowners (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.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company
as of December 31, 2000 and for the three months ended December 31, 2000 and
1999, have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial statements and
the rules and regulations of the Securities and Exchange Commission for interim
financial statements, and should be read in conjunction with the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 2000. In the
Company's opinion, the unaudited interim consolidated financial statements
reflect all adjustments, consisting of normal and recurring adjustments,
necessary for a fair presentation of the financial condition, results of
operations and cash flows for the periods indicated. Certain prior year amounts
have been reclassified to conform to the current period presentation. The
consolidated results of operations for the interim periods reported are not
necessarily indicative of the results to be experienced for the entire fiscal
year.
The unaudited consolidated financial statements for the three months ended
December 31, 1999 represent the results of operations and cash flows of the
Company as if it were a separate entity. These consolidated financial statements
include allocations of certain Lucent corporate headquarters' assets,
liabilities, and expenses relating to the Company's businesses that were
transferred to the Company from Lucent as well as an allocation of costs of
basic research and development activities. Management believes the costs of
these 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 company. The Company currently
performs these functions and basic research requirements using its own resources
or purchased services.
2. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 133
Effective October 1, 2000, the Company adopted Financial Accounting
Standards Board ("FASB") No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133), as amended by SFAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." SFAS 133 requires the
Company to recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. SFAS 133 also allows
special accounting treatment, or hedge accounting, for derivatives and hedged
exposures when certain conditions are met.
If hedge accounting is elected, changes in the fair value of derivatives
would be either recognized in earnings as offsets to the changes in the fair
value of related hedged assets, liabilities and firm commitments or, for
forecasted transactions, deferred and recorded as a component of accumulated
other comprehensive income until the hedged transactions occur and are
recognized in earnings. The ineffective
6
portion, if any, of a hedging derivative's change in the fair value would be
immediately recognized in earnings.
While it is the Company's objective to achieve economic hedges through its
use of derivative instruments, the Company did not elect hedge accounting as
defined by SFAS 133. Adoption of SFAS 133 did not have a material impact on the
Company's results of operations, financial position, or cash flows.
SFAS 140
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." This
Standard replaced SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," and provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. This Standard will be applied
prospectively, with certain exceptions, and is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. The adoption of this Standard is not expected to have a material
impact on the Company's results of operations, financial position or cash flows.
3. COMPREHENSIVE INCOME
Comprehensive income includes, in addition to net income, unrealized gains
and losses excluded from the Consolidated Statements of Income that are recorded
directly to a separate section of stockholders' equity in "Accumulated other
comprehensive income." These unrealized gains and losses are referred to as
other comprehensive income and primarily consist of foreign currency translation
adjustments, which are not adjusted for income taxes since they relate to
indefinite investments in non-U.S. subsidiaries.
THREE MONTHS ENDED
DECEMBER 31,
---------------------------
2000 1999
-------- --------
(DOLLARS IN MILLIONS)
Net income................................................ $16 $69
Other comprehensive income................................ 39 28
--- ---
Total comprehensive income................................ $55 $97
=== ===
4. SUPPLEMENTARY FINANCIAL INFORMATION
STATEMENT OF INCOME INFORMATION
THREE MONTHS ENDED
DECEMBER 31,
---------------------------
2000 1999
-------- --------
(DOLLARS IN MILLIONS)
OTHER INCOME, NET
Gain (loss) on foreign currency transactions.............. $(3) $2
Gain on businesses sold................................... 2 --
Interest income........................................... 7 --
Miscellaneous, net........................................ 3 2
--- --
Total other income, net............................... $ 9 $4
=== ==
7
BALANCE SHEET INFORMATION
DECEMBER 31, SEPTEMBER 30,
2000 2000
------------ -------------
(DOLLARS IN MILLIONS)
INVENTORY
Completed goods..................................... $476 $472
Work in process and raw materials................... 212 167
---- ----
Total inventory................................... $688 $639
==== ====
5. BUSINESS RESTRUCTURING AND RELATED CHARGES
In September 2000, the Company adopted a restructuring plan to improve
profitability and business performance as a stand-alone company and recorded a
pretax charge of $520 million. Components of the business restructuring costs
and amounts recorded against the related reserve as of December 31, 2000, were
as follows:
EXPENDITURES
MADE DURING
COSTS EXPENDITURES RESERVE THE THREE RESERVE
ACCRUED MADE BALANCE AS OF MONTHS ENDED BALANCE AS OF
DURING DURING SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
FISCAL 2000 FISCAL 2000 2000 2000 2000
----------- ------------ -------------- ------------- -------------
(DOLLARS IN MILLIONS)
Employee separation costs........ $365 $(20) $345 $(123) $222
Lease obligations................ 127 -- 127 (15) 112
Other related exit costs......... 28 (1) 27 -- 27
---- ---- ---- ----- ----
Total.......................... $520 $(21) $499 $(138) $361
==== ==== ==== ===== ====
Accrued business restructuring costs for employee separations of
$365 million related to approximately 4,900 occupational and management
employees, of which 3,430 employees worldwide have departed as of December 31,
2000, predominately located in the United States. These costs include severance,
medical and other benefits. Employee separation payments will be made either
through a lump sum or series of payments extending over a period of up to two
years from the date of departure. The employee separations are primarily
attributed to redesigning the services organization by reducing field
technicians to a level needed for non-peak work loads, consolidating and closing
certain U.S. and European manufacturing facilities and realigning the sales
effort towards a direct focus on strategic accounts and an indirect focus on
smaller accounts.
Accrued costs for lease obligations of $127 million are comprised of
$100 million to terminate real estate leases related to approximately two
million square feet of excess manufacturing, distribution and administrative
space and $27 million to cancel equipment leases related to the Company's
information systems infrastructure. 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 will extend
through 2003 on the terminated leases. Other related exit costs of $28 million
primarily consist of decommissioning legacy computer systems in connection with
the Company's separation from Lucent and terminating other contractual
obligations.
In the first quarter of fiscal 2001, the Company recorded incremental period
costs of $23 million, which are included in business restructuring and related
charges in the Consolidated Statement of Income, associated with the Company's
separation from Lucent related primarily to computer system transition costs
such as data conversion activities, asset transfers, and training. The Company
also recorded $36 million in selling, general and administrative expenses for
additional start-up activities largely resulting from marketing costs associated
with continuing to establish the Avaya brand.
8
During the remainder of fiscal 2001, the Company expects to incur additional
period costs of approximately $140 million as a result of the Company's
separation from Lucent and establishment as an independent company. The Company
expects to fund its restructuring and start-up activities through a combination
of debt and internally generated funds.
6. EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per common share are calculated by dividing net income
available to common shareowners by the weighted average number of common shares
outstanding during the period. Diluted earnings per common share are calculated
by adjusting net income available to common shareowners and weighted average
outstanding shares, assuming conversion of all potentially dilutive securities
including stock options, warrants and convertible participating preferred stock.
THREE MONTHS ENDED
DECEMBER 31,
---------------------------
2000 1999
-------- --------
(DOLLARS AND SHARES IN
MILLIONS, EXCEPT PER
SHARE AMOUNTS)
Net income.............................................. $ 16 $ 69
Accretion of Series B preferred stock................... (7) --
---- ----
Net income available to common shareowners.............. $ 9 $ 69
---- ----
SHARES USED IN COMPUTING EARNINGS PER COMMON SHARE:
Basic................................................. 282 263
==== ====
Diluted............................................... 282 280
==== ====
EARNINGS PER COMMON SHARE:
Basic................................................ $0.03 $0.26
===== =====
Diluted.............................................. $0.03 $0.25
===== =====
SECURITIES EXCLUDED FROM THE COMPUTATION OF DILUTED
EARNINGS
PER SHARE:
Options(a)........................................... 72 3
Series B preferred stock(b).......................... 15 --
Warrants(a).......................................... 12 --
----- -----
Total.............................................. 99 3
===== =====
- ------------------------
(a) These securities have been excluded from the diluted earnings per common
share calculation since their inclusion would be anti-dilutive because
the option and warrant exercise prices are greater than the average
market value of the underlying stock.
(b) In applying the "if-converted" method, the Series B convertible
participating preferred stock was excluded from the diluted earnings per
common share calculation since the effect of its inclusion would have
been anti-dilutive.
7. CONVERTIBLE PARTICIPATING PREFERRED STOCK
On October 2, 2000, the Company sold to Warburg, Pincus Equity Partners,
L.P. and related investment funds 4 million shares of the Company's Series B
convertible participating preferred stock and warrants to purchase the Company's
common stock for an aggregate purchase price of $400 million. Based on a
conversion price of $26.71, the Series B preferred stock is initially
convertible into 15,219,019 shares of the Company's common stock as of
December 31, 2000.
9
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 and
warrants exercisable for 5,507,146 shares of common stock have a five-year term.
During a period commencing no later than June 30, 2001, until the second
anniversary of their issuance, if the market price of the Company's 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, the Company can force the exercise of up to 50% of the four-year
warrants 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 ten 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
the Company's option. After the fifth anniversary of the issue date through the
tenth anniversary, the Company 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, the Company 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 the Company's common stock. For the first quarter in fiscal
2001, accretion of the Series B preferred stock was $6.5 million, resulting in a
liquidation value of $406,500,000 as of December 31, 2000. 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.
The $400 million proceeds from the Warburg Pincus investment was initially
allocated between the Series B preferred stock and warrants based upon the
relative fair market value of each security, with $368 million allocated to the
Series B preferred stock and $32 million to the warrants. The fair value
allocated to the Series B preferred stock including the amount accreted for the
three months ended December 31, 2000 was recorded in the mezzanine section of
the Consolidated Balance Sheet because the investors may require the Company,
upon the occurrence of any change-of-control in the Company during the first
five years from the investment, to redeem the Series B preferred stock. As of
December 31, 2000, the Company recorded a $6.5 million reduction in retained
earnings representing the amount accreted for the dividend period. The fair
value allocated to the warrants was included in additional paid-in capital.
The Emerging Issues Task Force of the Financial Accounting Standards Board
recently deliberated the accounting for convertible securities with beneficial
conversion features. A beneficial conversion feature would exist if the
conversion price (accounting basis) for the Series B preferred stock or warrants
was less than the fair value of the Company's common stock at the commitment
date. The Company has determined that no beneficial conversion features
currently exist and therefore there is no impact on its results of operations
associated with the Series B preferred stock or the warrants to purchase shares
of the Company's common stock. The beneficial conversion features, if any,
associated with dividends paid in kind, where it is the Company's 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
attributable to common shareowners.
8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company conducts its business on a multinational basis in a wide variety
of foreign currencies, and, as such, uses derivative financial instruments to
reduce earnings and cash flow volatility associated with foreign exchange rate
changes. The Company uses foreign currency forward contracts, and to a lesser
extent, foreign currency options, to mitigate the effects of fluctuations of
exchange rates on intercompany loans which are denominated in currencies other
than the entity's functional currency, and to reduce exposure to the risk that
the eventual net cash flows resulting from the purchase or sale of products to
or
10
from non-U.S. customers will be adversely affected by changes in exchange rates.
The Company uses derivative financial instruments 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 Statement of Income.
RECORDED TRANSACTIONS
Foreign currency forward contracts are used primarily to manage exchange
rate exposures on intercompany loans residing on foreign subsidiaries' books
which are denominated in currencies other than the entities' functional
currency. When these loans are translated into the entities' 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 non-functional currency denominated loans. For the three
months ended December 31, 2000, the net effect of the gains and losses from 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 the Company's results of operations.
FORECASTED TRANSACTIONS
Foreign currency forward and option contracts are used 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
three months ended December 31, 2000, these gains and losses were not material
to the Company's results of operations.
Electing to not use hedge accounting could result in a gain or loss from
fluctuations in exchange rates related to a derivative contract being recognized
in a period 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.
9. OPERATING SEGMENTS
The Company reports its operations in three segments: Communications
Solutions, Services and Connectivity Solutions. The Communications Solutions
segment represents the Company's core business, comprised of enterprise voice
communications systems and software, communications applications, professional
services for customer and enterprise relationship management, multi-service
networking products and product installation services. The purchase prices of
the Company's products typically include installation costs, which are included
in the Communications Solutions segment. The Services segment represents
maintenance, value-added and data services. The Connectivity Solutions segment
represents structured cabling systems and 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, the Company 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.
11
REPORTABLE SEGMENTS
THREE MONTHS ENDED
DECEMBER 31,
-------------------------
2000 1999
-------- --------
(DOLLARS IN MILLIONS)
COMMUNICATIONS SOLUTIONS:
External revenue........................................ $928 $1,108
Intersegment revenue.................................... -- 5
Total Revenue......................................... 928 1,113
Operating income........................................ 249 429
SERVICES:
External revenue........................................ $499 $ 470
Intersegment revenue.................................... -- --
Total Revenue......................................... 499 470
Operating income........................................ 253 196
CONNECTIVITY SOLUTIONS:
External revenue........................................ $356 $ 271
Intersegment revenue.................................... -- 1
Total Revenue......................................... 356 272
Operating income........................................ 88 33
RECONCILING ITEMS
A reconciliation of the totals reported for the operating segments to the
corresponding line items in the consolidated financial statements is as follows:
THREE MONTHS ENDED
DECEMBER 31,
----------------------
2000 1999
-------- --------
(DOLLARS IN MILLIONS)
EXTERNAL REVENUE
Total reportable segments............................... $1,783 $1,849
Corporate and other..................................... 2 1
------ ------
Total External Revenue.............................. $1,785 $1,850
====== ======
OPERATING INCOME
Total reportable segments............................... $ 590 $ 658
Corporate and other:
Business restructuring related charges and start-up
expenses............................................ (59) --
Corporate and unallocated shared expenses............. (505) (526)
------ ------
Total Operating Income.............................. $ 26 $ 132
====== ======
Corporate and unallocated shared expenses include costs such as selling,
research and development, marketing, information technology and finance that are
not directly managed by or identified with the reportable operating segments.
12
GEOGRAPHIC INFORMATION
THREE MONTHS ENDED
DECEMBER 31,
----------------------
2000 1999
-------- --------
(DOLLARS IN MILLIONS)
EXTERNAL REVENUE(1)
U.S..................................................... $1,349 $1,485
Foreign countries....................................... 436 365
------ ------
Totals................................................ $1,785 $1,850
====== ======
- ------------------------
(1) Revenue is attributed to geographic areas based on the location of
customers.
CONCENTRATIONS
For the three months ended December 31, 2000, sales to the Company's largest
distributor were approximately 11% of revenue. No single customer accounted for
more than 10% of the Company's consolidated revenue for the three months ended
December 31, 1999.
The Company is not aware of any significant concentration of business
transacted with a particular supplier that could, if suddenly eliminated have a
material adverse affect on the Company's financial position, results of
operations or cash flows. The Company intends to outsource the majority of its
manufacturing operations and if successful, this initiative could result in a
concentration that, if suddenly eliminated, could have an adverse effect on the
Company's operations. While the Company believes that alternative sources of
supply would be available, disruption of its primary source of supply could
create a temporary, adverse effect on product shipments.
10. TRANSACTIONS WITH LUCENT
In connection with the Distribution, the Company and Lucent executed and
delivered the Contribution and Distribution Agreement and certain related
agreements.
Pursuant to the Contribution and Distribution Agreement, Lucent contributed
(the "Contribution") to the Company substantially all of the assets, liabilities
and operations associated with its enterprise networking businesses (the
"Company's Businesses"). The Contribution and Distribution Agreement, among
other things, provides that, in general, the Company will indemnify Lucent for
all liabilities relating to the Company's Businesses and for all contingent
liabilities primarily relating to the Company's Businesses or otherwise assigned
to the Company. In addition, the Contribution and Distribution Agreement
provides that certain contingent liabilities not allocated to one of the parties
will be shared by Lucent and the Company in prescribed percentages. The
Contribution and Distribution Agreement also provides that each party will share
specified portions of contingent liabilities based upon agreed percentages
related to the business of the other party that exceed $50 million.
The Company and Lucent are in discussions regarding certain matters
associated with the Contribution and Distribution. The items in question relate
primarily to the settlement of certain obligations with respect to the employees
transferred to the Company by Lucent, receivables related to the Company's
Businesses and other items related to the transfer of certain assets and
liabilities by Lucent to the Company upon the Distribution. While the Company
does not believe that the resolution of these open items will have a material
adverse effect on the Company's results of operations, there can be no assurance
that such resolution will not have a material adverse effect on the Company's
financial position or cash flows.
13
11. COMMITMENTS AND CONTINGENCIES
RISKS AND UNCERTAINTIES
The Company has limited history operating as an independent company, and it
may be unable to make the changes necessary to operate as a stand-alone
business, or it may incur greater costs as a stand-alone company that may cause
its profitability to decline. Prior to the Distribution, the Company's business
was operated by Lucent as a segment of its broader corporate organization rather
than as a separate stand-alone company. Lucent assisted the Company by providing
financing, particularly of acquisitions, as well as providing corporate
functions such as identifying and negotiating acquisitions, and legal and tax
functions. Following the Distribution, Lucent has no obligation to provide
assistance to the Company other than certain interim and transitional services.
LEGAL PROCEEDINGS
From time to time the Company is involved in legal proceedings arising in
the ordinary course of business. Other than as described below, the Company
believes there is no litigation pending that should have, individually or in the
aggregate, a material adverse effect on its financial position, results of
operations or cash flows.
Three separate purported class action lawsuits are pending against Lucent in
state court in New York and West Virginia and in federal court in 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. The Company may be named a
party to these actions and has assumed the obligations of Lucent for 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, the Company expects 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 the Company believes that the
outcome of these actions will not adversely affect its 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.
From time to time the Company is subject to unfair labor charges filed by
the unions representing its employees with the National Labor Relations Board.
For example, Region 6 of the National Labor Relations Board, which is located in
Pittsburgh, Pennsylvania, has issued a complaint alleging that Lucent has
refused to bargain over the outsourcing of certain of its manufacturing
activities. In that proceeding, which will be held before an administrative law
judge in Region 6 of the National Labor Relations Board, the General Counsel of
the National Labor Relations Board will act as prosecutor and the charging
party, the International Brotherhood of Electrical Workers System Council EM-3,
which is the union representing the workers at the manufacturing facilities in
question, will be an interested party entitled to participate in the proceeding.
Because the complaint relates to some of the manufacturing facilities that were
transferred to the Company as part of the Distribution, the Company may be named
a party to this action.
The union alleges that Lucent did not provide relevant information relating
to the outsourcing of bargaining unit work, specifically the outsourcing of
circuit packs. The union also claims that Lucent bargained in bad faith during
1998 by withholding its intention to outsource the circuit pack production.
Moreover, the union alleges that Lucent has failed to bargain in good faith over
its decision to outsource certain of its manufacturing operations.
14
The complaint seeks as remedies for the alleged unlawful conduct, which
Lucent denies in its entirety, a possible return of the outsourced work to the
bargaining unit and/or back pay for affected employees. The amount of back pay
sought, if any, is not determinable at this time. The complaint also provides
that the National Labor Relations Board may potentially seek injunctive relief
if Lucent pursues its current plans to outsource additional bargaining unit
work. If the Company is unsuccessful in resolving these charges, as they relate
to the Company, the Company's operations may be disrupted, the initiative to
outsource substantially all manufacturing may be delayed or prohibited, or the
Company may incur additional costs that may decrease profitability.
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. The Company has 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 state court has
recently certified a class in this action. There can be no assurance that this
case will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
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 its
financial results) through November 21, 2000.
The above actions will most likely be consolidated with other purported
class actions filed against Lucent on behalf of shareholders in January 2000.
Those January 2000 actions have been consolidated and are pending in the Federal
District Court for the District of New Jersey. The Company understands that
Lucent has filed its Answer to the Fourth 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 shareholders 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 shareholder class actions seek
compensatory damages plus interest and attorneys' fees.
Any liability incurred by Lucent in connection with these shareholder class
action lawsuits may be deemed a shared contingent liability under the
Contribution and Distribution Agreement and as a result, the Company 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, there can be no assurance that these cases will not
have a material adverse effect on the Company's financial position, results of
operations or cash flows.
ENVIRONMENTAL MATTERS
The Company is 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 its operations. The Company is subject
to certain provisions of environmental laws, particularly in the United States,
governing the cleanup of soil and groundwater contamination. Such provisions
impose liability for the costs of investigating and remediating releases of
hazardous materials at currently or formerly owned or operated sites of the
Company. In certain circumstances, this liability may also include the cost of
cleaning up historical contamination, whether or not caused by the Company. The
Company is currently
15
conducting investigation and/or cleanup of known contamination at approximately
five of the Company's facilities either voluntarily or pursuant to government
directives.
It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. The Company has established financial
reserves to cover environmental liabilities where they are probable and
reasonably estimable. 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 the Company believes that its 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 the Company's
financial position, results of operations or cash flows.
12. SUBSEQUENT EVENTS
On February 6, 2001, the Company acquired VPNet Technologies, Inc., a
privately held developer of virtual private network solutions and devices, for
an aggregate purchase price of approximately $120 million in cash and stock
options. The Company expects to account for the acquisition under the purchase
method of accounting. The Company is in the process of obtaining an independent
third party appraisal of the intangible assets acquired and expects a
substantial portion of the purchase price to be allocated to goodwill and
purchased in-process research and development. In the second quarter of fiscal
2001, the Company expects to record a charge for the purchased in-process
research and development.
16
ITEM 2. 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 Quarterly
Report on Form 10-Q. 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 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 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 international economic conditions including interest rate and currency
exchange rate fluctuations.
Our accompanying unaudited consolidated financial statements as of
December 31, 2000 and for the three months ended December 31, 2000 and 1999,
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial statements and the rules
and regulations of the Securities and Exchange Commission for interim financial
statements, and should be read in conjunction our Annual Report on Form 10-K for
the fiscal year ended September 30, 2000. In our opinion, the unaudited interim
consolidated financial statements reflect all adjustments, consisting only of
normal and recurring adjustments, necessary for a fair presentation of the
financial condition, results of operations and cash flows for the periods
indicated. Certain prior year amounts have been reclassified to conform to the
current year period presentation. The consolidated results of operations for the
interim periods reported are not necessarily indicative of the results to be
experienced for the entire fiscal year.
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 United States leader in sales of enterprise voice
communications and call center systems. We are not a leader in multi-service
networking products or in converged voice and data products. We have entered
these product areas relatively recently, and our multi-service networking
product portfolio is less complete than the portfolios of some of our
competitors. We are implementing a strategy focused on these products.
We report our operations in three segments: Communications Solutions,
Services and Connectivity Solutions. The Communications Solutions segment
represents our core business, comprised of our enterprise voice communications
systems and software, communications applications, professional services for
customer and enterprise relationship management, multi-service networking
products and product installation services. The purchase prices of our products
typically include installation costs, which are included in the Communications
Solutions segment. The Services segment represents our maintenance, value-added
and data services. The Connectivity Solutions segment represents our structured
cabling
17
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.
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:
THREE MONTHS ENDED
DECEMBER 31,
---------------------------
2000 1999
-------- --------
(PERCENTAGES)
OPERATING SEGMENT:
Communications Solutions............................... 52.0% 59.9%
Services............................................... 28.0 25.4
Connectivity Solutions................................. 20.0 14.7
----- -----
Total................................................ 100.0% 100.0%
===== =====
SEPARATION FROM LUCENT
We were incorporated under the laws of the State of Delaware on
February 16, 2000, as a wholly owned subsidiary of Lucent Technologies Inc. On
September 30, 2000, under the terms of a Contribution and Distribution Agreement
between us and Lucent, 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 herein as the contribution and the
distribution. We had no material assets or activities until the contribution to
us by Lucent of its enterprise networking businesses, 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 sets forth charges generally
intended to allow the providing company to fully recover the allocated direct
costs of providing the services, plus all out-of-pocket costs and expenses, but
without any profit. With limited exceptions, these interim services are not
expected to extend beyond March 31, 2001. The pricing terms for goods and
services covered by the commercial agreements reflect negotiated prices.
We are in discussions with Lucent regarding certain matters associated with
the contribution and distribution. The items in question relate primarily to the
settlement of certain obligations with respect to the employees transferred to
us by Lucent, receivables related to our businesses and other items related to
the transfer of certain assets and liabilities by Lucent to us upon the
distribution. While we do not believe that the resolution of these open items
will have a material adverse effect on our results of operations, there can be
no assurance that such resolution will not have a material adverse effect on our
financial position or cash flows.
Our unaudited consolidated financial statements for the three months ended
December 31, 1999 reflect the historical results of operations and cash flows of
the businesses transferred to us from Lucent as part of the contribution. These
consolidated financial statements may not necessarily reflect our results of
operations and cash flows in the future or what our results of operations and
cash flows would have been had we been a stand-alone company during this period.
BUSINESS RESTRUCTURING AND RELATED CHARGES
In September 2000, we adopted a restructuring plan to improve profitability
and business performance as a stand-alone company and recorded a pretax charge
of $520 million. Components of the business
18
restructuring costs and amounts recorded against the related reserve as of
December 31, 2000, were as follows:
EXPENDITURES
MADE DURING
COSTS EXPENDITURES RESERVE THE THREE RESERVE
ACCRUED MADE BALANCE AS OF MONTHS ENDED BALANCE AS OF
DURING DURING SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
FISCAL 2000 FISCAL 2000 2000 2000 2000
----------- ------------ -------------- ------------- -------------
(DOLLARS IN MILLIONS)
Employee separation costs........ $365 $(20) $345 $(123) $222
Lease obligations................ 127 -- 127 (15) 112
Other related exit costs......... 28 (1) 27 -- 27
---- ---- ---- ----- ----
Total.......................... $520 $(21) $499 $(138) $361
==== ==== ==== ===== ====
Accrued business restructuring costs for employee separations of
$365 million related to approximately 4,900 occupational and management
employees, of which 3,430 employees worldwide have departed as of December 31,
2000, predominately located in the United States. These costs include severance,
medical and other benefits. Employee separation payments will be made either
through a lump sum or series of payments extending over a period of up to two
years from the date of departure. The employee separations are primarily
attributed to redesigning the services organization by reducing field
technicians to a level needed for non-peak work loads, consolidating and closing
certain U.S. and European manufacturing facilities and realigning the sales
effort towards a direct focus on strategic accounts and an indirect focus on
smaller accounts.
Accrued costs for lease obligations of $127 million are comprised of
$100 million to terminate real estate leases related to approximately two
million square feet of excess manufacturing, distribution and administrative
space and $27 million to cancel equipment leases related to our information
systems infrastructure. Real estate lease termination costs are being incurred
primarily in the U.S., Europe and Asia, and have been reduced for sublease
income that we believe is probable. Payments will extend through 2003 on the
terminated leases. Other related exit costs of $28 million primarily consist of
decommissioning legacy computer systems in connection with our separation from
Lucent and terminating other contractual obligations.
In the first quarter of fiscal 2001, we recorded incremental period costs of
$23 million, which are included in business restructuring and related charges in
our consolidated statement of income, associated with our separation from Lucent
related primarily to computer system transition costs such as data conversion
activities, asset transfers, and training. We also recorded $36 million in
selling, general and administrative expenses for additional start-up activities
largely resulting from marketing costs associated with continuing to establish
the Avaya brand.
During the remainder of fiscal 2001, we expect to incur additional period
costs of approximately $140 million as a result of our separation from Lucent
and establishment as an independent company. We expect to fund our restructuring
and start-up activities through a combination of debt and internally generated
funds.
In addition to the actions already taken as part of the restructuring, we
are pursuing a contract manufacturing initiative which is not included in the
charges above. If we are successful in this initiative, we may incur additional
charges in the future. We intend that our contract manufacturing initiative will
involve the outsourcing of substantially all of our manufacturing other than the
manufacturing of our structured cabling systems. 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. We cannot
assure you that we will be able to implement this manufacturing initiative or
that, if implemented, we will achieve these anticipated benefits. Our
manufacturing initiative may be delayed or prohibited by a
19
legal proceeding described in "Legal Proceedings" brought by a governmental
agency, which may disrupt our operations or result in unanticipated costs.
RESULTS OF OPERATIONS
The following table sets forth line items from our consolidated statements
of income as a percentage of revenue for the periods indicated:
THREE MONTHS ENDED
DECEMBER 31,
---------------------------
2000 1999
-------- --------
Revenue................................................ 100.0% 100.0%
Costs.................................................. 55.3 52.8
----- -----
Gross margin......................................... 44.7 47.2
----- -----
Operating expenses
Selling, general and administrative.................. 34.1 34.4
Business restructuring and related charges........... 1.3 --
Research and development............................. 7.8 5.7
----- -----
Total operating expenses............................... 43.2 40.1
----- -----
Operating income....................................... 1.5 7.1
Other income, net...................................... 0.5 0.2
Interest expense....................................... (0.6) (1.1)
Provision for income taxes........................... 0.5 2.5
----- -----
Net income............................................. 0.9% 3.7%
===== =====
THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1999
The following table shows the change in external revenue, both in dollars
and in percentage terms:
THREE MONTHS ENDED
DECEMBER 31, CHANGE
---------------------- -------------------
2000 1999 $ %
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
OPERATING SEGMENT:
Communication Solutions..................... $ 928 $1,108 $(180) (16.2)%
Services.................................... 499 470 29 6.2
Connectivity Solutions...................... 356 271 85 31.4
Corporate and other......................... 2 1 1 100.0
------ ------ ----- -----
Total..................................... $1,785 $1,850 $ (65) (3.5)%
====== ====== ===== =====
REVENUE. Revenue decreased 3.5% or $65 million, from $1,850 million for the
first quarter in fiscal 2000, to $1,785 million for the same period in fiscal
2001, 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 largely attributed to an
overall sales reduction in enterprise voice communications systems and
communications applications products predominately in the United States
partially offset by strong growth worldwide in the multi-service networking
business. The revenue decline in the Communications Solutions segment was
primarily due to our move to a more indirect sales channel, product mix, and the
effect of customers having purchased systems last year in anticipation of year
2000 concerns, as well as the effect of slowing overall United States economic
conditions. In addition, the Communications Solutions segment experienced a
decrease in installation
20
revenue as a result of the reduction in product sales. The Connectivity
Solutions segment increase was the result of strong customer demand for the
SYSTIMAX and ExchangeMax structured cabling systems and electronic cabinets. The
increase in the Services segment was mainly the result of growth in the United
States in data and value-added services partially offset by a decrease in
maintenance services.
Revenue within the United States decreased 9.2% or $136 million, from
$1,485 million for the first quarter in fiscal 2000, to $1,349 million for the
same period in fiscal 2001. Revenue outside the United States increased 19.5% or
$71 million, from $365 million for the first quarter in fiscal 2000, to
$436 million for the same period in fiscal 2001. Revenue outside the United
States in the first quarter in fiscal 2001 represented 24.4% of revenue compared
with 19.7% in the same period in fiscal 2000. We continued to expand our
business outside of the United States with growth across all regions.
COSTS AND GROSS MARGIN. Total costs increased 1.1% or $11 million, from
$977 million for first quarter in fiscal 2000, to $988 million for the same
period in fiscal 2001. Gross margin percentage decreased 2.5% from 47.2% in the
first quarter in fiscal 2000 as compared with 44.7% in the same period in fiscal
2001. The decrease was primarily due to a shift from a direct retail market to
an indirect distribution channel resulting from our sale of this distribution
function and a less favorable mix of products. This decrease was partially
offset by savings resulting from our business restructuring, including realizing
benefits from reducing the permanent services organization.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
(SG&A) expenses decreased 4.4% or $28 million, from $636 million for the first
quarter in fiscal 2000, to $608 million for the same period in fiscal 2001. The
decrease is primarily due to savings associated with our business restructuring
plan, including lower staffing levels and terminated real estate lease
obligations. The reduction in SG&A expenses was partially offset by planned
increases in incentive compensation expense and additional charges for start-up
activities related to establishing independent operations, which are primarily
comprised of marketing costs associated with establishing our brand.
BUSINESS RESTRUCTURING AND RELATED CHARGES. Business restructuring and
related charges of $23 million for the first quarter in fiscal 2001 represent
costs associated with our restructuring plan to improve profitability and
business performance as a stand-alone company. This charge represents
incremental period costs associated with our separation from Lucent related
primarily to computer system transition costs such as data conversion
activities, asset transfers, and training.
RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses increased
33.3% or $35 million, from $105 million for first quarter in fiscal 2000, to
$140 million for the same period in fiscal 2001. This planned increase in R&D is
primarily due to higher expenditures in support of new products, which was
partially offset by reduced spending on more mature product lines. Our
investment in R&D represented 7.8% of revenue in the first quarter of fiscal
2001 as compared with 5.7% in the prior period, which is consistent with our
plan to increase R&D spending in high growth markets.
We intend to invest an amount equal to approximately 9% of our total revenue
in fiscal 2001 in R&D. These investments represent a significant increase over
our investments in R&D 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. In the future, our investments in R&D will have a greater focus on
our products.
OTHER INCOME, NET. Other income, net increased from $4 million for the
first quarter in fiscal 2000 to $9 million for the same period in fiscal 2001.
This increase was primarily due to interest income earned on higher cash
balances.
PROVISION FOR INCOME TAXES. The effective tax rates for first quarter in
fiscal 2001 and 2000 were 38.0% and 40.0%, respectively. The reduction in the
provision for taxes in fiscal 2001 is primarily due to increased
21
research and development spending which is expected to generate more tax
credits, as well as increased earnings from outside the United States in
jurisdictions that have a lower income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Avaya's cash and cash equivalents increased to $560 million at December 31,
2000, from $271 million at September 30, 2000. The increase primarily resulted
from $329 million of net cash provided by financing activities, offset in part
by $116 million of net cash used in investing activities.
For the first quarter in fiscal 2001, net cash provided by operating
activities of $58 million was comprised of net income adjusted for non-cash
charges of $134 million, and net cash used for changes in operating assets and
liabilities of $92 million. Net cash used for operating assets and liabilities
is primarily attributed to cash receipts for accounts receivable offset by a
reduction in advance billings and deposits, cash payments for accounts payable,
business restructuring and start-up activities, and an increase in work in
process and raw materials inventory. Days sales outstanding in accounts
receivable for the first quarter of fiscal 2001 was 86 days versus 74 days for
the fourth quarter of fiscal 2000. This increase is primarily attributed to
extended payment terms with Lucent regarding settlement of third party
receivables pursuant to the Contribution and Distribution Agreement. Days sales
of inventory on-hand for the first quarter of fiscal 2001 were 60 days versus 52
days for the fourth quarter of fiscal 2000. The increase in days sales in
inventory is primarily due to lower sales volumes.
Net cash of $116 million used in investing activities resulted primarily
from cash paid for capital expenditures in the first quarter of fiscal 2001 due
mainly to Avaya establishing itself as a stand-alone entity, including
information technology upgrades and corporate infrastructure expenditures.
Net cash provided by financing activities of $329 million in the first
quarter in fiscal 2001 was mainly due to the receipt of $400 million in proceeds
from the sale of Series B convertible participating preferred stock and warrants
to purchase our common stock described below, which was partially offset by
$80 million in payments primarily for the retirement of commercial paper.
Our commercial paper program is comprised 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. As of
December 31, 2000, $700 million in commercial paper was classified as long term
debt in the consolidated balance sheet since it is supported by the five-year
credit facility described below and management intends to reissue the commercial
paper on a long term basis. The weighted average interest rate and maturity
period for the commercial paper outstanding as of December 31, 2000 was
approximately 7.32% and 75 days, respectively.
We have two unsecured revolving credit facilities with third party financial
institutions consisting of an $850 million 364-day credit facility that expires
in September 2001 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.
On October 2, 2000, we sold to Warburg, Pincus Equity Partners, L.P. and
related investment funds 4 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 initially convertible into 15,219,019 shares of
our common stock as of December 31, 2000.
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 and
warrants exercisable for 5,507,146 shares of common stock have a five-year term.
During a period commencing no later than June 30, 2001, until the second
anniversary of their issuance, 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
22
days, we can force the exercise of up to 50% of the four-year warrants 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 ten 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 the first quarter in fiscal 2001, accretion of the Series B preferred stock
was $6.5 million, resulting in a liquidation value of $406,500,000 as of
December 31, 2000. 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.
The Emerging Issues Task Force of the Financial Accounting Standards Board
recently deliberated the accounting for convertible securities with beneficial
conversion features. A beneficial conversion feature would exist if the
conversion price (accounting basis) 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 currently exist and therefore
there is no impact on the results of operations associated with the Series B
preferred stock or with the warrants to purchase shares of our common stock. The
beneficial conversion features, if any, associated with dividends paid in kind
on the Series B preferred stock, 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 attributable to common
shareowners.
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 that is a business combination involving solely the issuance of
common stock, the accretion of some or all 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 is 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.
Our ability to issue additional equity is constrained because certain
issuances of additional common stock 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.
Our primary future cash needs on a recurring basis will be to fund working
capital, capital expenditures and debt service, and we believe that our cash
flows from operations will be sufficient to meet these needs. We expect to fund
our business restructuring and separation costs through a combination of debt
23
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 $361 million for business restructuring and approximately
$140 million for additional expenditures resulting from our continuing
establishment as an independent company. In order to meet our cash needs, we may
from time to time issue additional commercial paper, if the market permits such
borrowings, or issue 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, although it is our intention to reissue the
commercial paper on a long-term basis as and when favorable market conditions
exist. We intend to file a debt registration statement to have the flexibility
to access the capital markets from time to time.
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 contain,
and any future debt agreements we may enter into may contain, 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.
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 United States, 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 should have, individually or in the aggregate, a
material adverse effect on our financial position, results of operations or cash
flows.
Three separate purported class action lawsuits are pending against Lucent in
state court in New York and West Virginia and in federal court in 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. We may be named a party to
these actions and have assumed the obligations of Lucent for 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
24
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.
From time to time we are subject to unfair labor charges filed by the unions
representing our employees with the National Labor Relations Board. For example,
Region 6 of the National Labor Relations Board, which is located in Pittsburgh,
Pennsylvania, has issued a complaint alleging that Lucent has refused to bargain
over the outsourcing of certain of its manufacturing activities. In that
proceeding, which will be held before an administrative law judge in Region 6 of
the National Labor Relations Board, the General Counsel of the National Labor
Relations Board will act as prosecutor and the charging party, International
Brotherhood of Electrical Workers System Council EM-3, which is the union
representing the workers at the manufacturing facilities in question, will be an
interested party entitled to participate in the proceeding. Because the
complaint relates to some of the manufacturing facilities that were transferred
to us as part of the distribution, we may be named a party to this action.
The union alleges that Lucent did not provide relevant information relating
to the outsourcing of bargaining unit work, specifically the outsourcing of
circuit packs. The union also claims that Lucent bargained in bad faith during
1998 by withholding its intention to outsource the circuit pack production.
Moreover, the union alleges that Lucent has failed to bargain in good faith over
its decision to outsource certain of its manufacturing operations.
The complaint seeks as remedies for the alleged unlawful conduct, which
Lucent denies in its entirety, a possible return of the outsourced work to the
bargaining unit and/or back pay for affected employees. The amount of back pay
sought, if any, is not determinable at this time. The complaint also provides
that the National Labor Relations Board may potentially seek injunctive relief
if Lucent pursues its current plans to outsource additional bargaining unit
work. If we are unsuccessful in resolving these charges, as they relate to us,
our operations may be disrupted, our initiative to outsource substantially all
of our manufacturing may be delayed or prohibited, or we may incur additional
costs that may decrease our profitability.
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 state court has
recently certified a class in this action. We cannot assure you that this case
will not have a material adverse effect on our financial position, results of
operations or cash flows.
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 its
financial results) through November 21, 2000.
The above actions will most likely be consolidated with other purported
class actions filed against Lucent on behalf of shareholders in January 2000.
Those January 2000 actions have been consolidated and are pending in the Federal
District Court for the District of New Jersey. We understand that Lucent has
25
filed its Answer to the Fourth Consolidated Amended and Supplemental 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 shareholders 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 shareholder class actions seek
compensatory damages plus interest and attorneys' fees.
Any liability incurred by Lucent in connection with these shareholder 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.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 133
Effective October 1, 2000, we adopted Financial Accounting Standards Board
("FASB") No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133), as amended by SFAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." SFAS 133 requires us to recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS 133 also allows special accounting
treatment, or hedge accounting, for derivatives and hedged exposures when
certain conditions are met.
If hedge accounting is elected, changes in the fair value of derivatives
would be either recognized in earnings as offsets to the changes in the fair
value of related hedged assets, liabilities and firm commitments or, for
forecasted transactions, deferred and recorded as a component of accumulated
other comprehensive income until the hedged transactions occur and are
recognized in earnings. The ineffective portion, if any, of a hedging
derivative's change in fair value would be immediately recognized in earnings.
While it is our objective to achieve economic hedges through our use of
derivative instruments, we did not elect hedge accounting as defined by
SFAS 133. Adoption of SFAS 133 did not have a material impact on our results of
operations, financial position, or cash flows.
SFAS 140
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." This
Standard replaced SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," and provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. This Standard will be applied
prospectively, with certain exceptions, and is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. The adoption of this Standard is not expected to have a material
impact on our results of operations, financial position or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to risk from changes in foreign currency exchange rates and
interest rates that could impact 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 multinational
basis in a wide variety
26
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 which are denominated in currencies other than the
entity'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
which are denominated in currencies other than the entities' functional
currency. When these loans are translated into the entities' 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 non-functional currency denominated loans. For the three
months ended December 31, 2000, 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.
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
three months ended December 31, 2000, these gains and losses were not material
to our results of operations.
Electing to not use hedge accounting under SFAS 133 could result in a gain
or loss from fluctuations in exchange rates related to a derivative contract
being recognized in a period which 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.
We may enter into interest rate swap agreements to manage the risk between
fixed, floating and variable interest rates and long-term and short-term
maturity debt instruments. There were no interest rate swap agreements in effect
during the first quarter of fiscal 2001.
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 nonperformance 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.
27
PART II
ITEM 1. LEGAL PROCEEDINGS.
See Note 11--"Commitments and Contingencies" to the unaudited interim
consolidated financial statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On October 2, 2000, we sold to Warburg, Pincus Equity Partners, L.P. and
related investment funds, 4 million shares of its Series B convertible
participating preferred stock and warrants to purchase its common stock for an
aggregate purchase price of $400 million. The issuance of the preferred stock
and warrants was exempt from registration under Section 4(2) of the Securities
Act of 1933 because the transaction did not involve a public offering of
securities by us. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" for a
description of the terms governing the conversion of the preferred stock into,
or the exercise of the warrants for, shares of our common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed by us during the fiscal
quarter ended December 31, 2000:
1. October 2, 2000--Item 5. Other Events--Announcement of our plans to
pay a dividend on our common stock at a future date.
2. October 23, 2000--Item 5. Other Events--Resignation of Henry Schacht
as our Chairman of the Board of Directors.
3. October 27, 2000--Item 9. Regulation FD Disclosure--Avaya furnished a
transcript of its earnings conference call.
4. November 13, 2000--Item 9. Regulation FD Disclosure--Avaya furnished
certain information in connection with a presentation to an investor
conference by Donald K. Peterson, its President and Chief Executive
Officer.
No financial statements were included in any of these Current Reports.
28
SIGNATURES
Pursuant to the requirements 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.
AVAYA INC.
By: /s/ CHARLES D. PEIFFER
-----------------------------------------
Charles D. Peiffer
CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
February 14, 2001
29