Following is a brochure first being made available to Agere Systems employees
on December 13, 2004, in connection with Agere Systems' proposed
reclassification and reverse stock split.
A REVERSE STOCK SPLIT AND RECLASSIFICATION OF AGERE CLASSES OF STOCK:
WHAT THE CHANGES WOULD MEAN FOR YOU
Dated: December 13, 2004
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This information is being provided before delivery to you
of our proxy statement. You should read the proxy statement
when it becomes available because it contains important
information. You can get a copy of the proxy statement free
of charge at the Securities and Exchange Commission's web
site at www.sec.gov or by contacting Agere Systems, c/o
The Bank of New York, P.O. Box 11082, Church Street Station,
New York, NY 10286, or by calling Agere Systems at
1-866-AGEREIR and pressing prompt 1.
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As announced, Agere's Board of Directors is asking shareholders to approve
amendments to our certificate of incorporation that will affect Agere stock: a
reverse stock split and a reclassification of Agere's Class A common stock and
Class B common stock into a new, single class of common stock.
Both of these changes, if approved by shareholders, are intended to make the
stock more attractive to prospective investors. If both changes are approved
and the company moves forward with them, our current intention is to implement
both together, although we reserve the right to effect the approved proposals
at different times or to effect one or neither of them.
This brochure is intended to explain to you - as an Agere employee and
investor - the reasons for these proposed changes and what will be involved if
they are approved, as well as the impact to our stock-related plans, such as
the Employee Stock Purchase Plan (ESPP), stock options, and, in the U.S., the
Agere 401(k) plan.
WHY AGERE IS CONSIDERING A REVERSE SPLIT
A reverse split reduces the number of shares outstanding, resulting in a
change in the price per share because the total value of the company is spread
among fewer shares. It's really like exchanging 20 $1 bills for one $20 bill.
There are several sound reasons to do a reverse stock split. Currently, we
believe that a number of institutional investors and investment funds are
reluctant to invest in lower-priced stocks and that brokerage firms are
reluctant to recommend lower-priced stocks to their clients. By implementing a
reverse stock split, we may be able to raise our stock price to a level where
our stock is viewed more favorably by potential investors. Other investors may
also be dissuaded from purchasing lower-priced stocks because the brokerage
commissions, as a percentage of the total transaction, tend to be higher for
such stocks. A higher stock price after a reverse stock split should reduce
this concern.
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Other reasons for conducting a reverse stock split are as follows:
o REDUCED COSTS FOR INVESTORS. When investors buy or sell Agere
Systems stock, many pay commissions based on the number of shares
bought or sold. Because of our relatively low stock price, an
investor desiring to invest a fixed amount of money in Agere Systems
stock will buy more shares, and thus may pay more in commissions,
than if our stock price were higher. Following a reverse stock split
using any one of the proposed reverse split ratios, we believe our
shareholders may pay significantly lower total commissions when they
pay commissions based on the number of shares bought or sold. Lower
commissions may also make our stock an attractive investment to
additional investors.
o REDUCED COSTS FOR AGERE SYSTEMS. We would reduce the number of
shareholders because holders who would own less than one share of
stock after the reverse stock split will receive cash in lieu of a
fractional share. This would reduce our shareholder servicing costs,
such as proxy statement printing and mailing, and should provide
some shareholders with a more economical way to dispose of their
interest in Agere Systems.
RECLASSIFICATION OF CLASS A AND CLASS B COMMON STOCK
Should shareholders approve an amendment to reclassify our Class A common
stock and Class B common stock into a new, single class of common stock each
outstanding share of Class A common stock and each outstanding share of Class
B common stock would become one share of a new, single class of common stock.
The share-conversion ratio would be one share of Class A common stock and/or
one share of Class B common stock for one share of the new class of common
stock.
Before we begin to explain the reasons for reclassifying the Class A and Class
B shares, it may help to understand the differences and similarities between
them. Currently, the Class A common stock and Class B common stock are
identical in all respects except that, in voting for the election and removal
of directors, the Class A common stock has one vote per share and the Class B
common stock has four votes per share.
So why do we have the present two-class common stock structure in the first
place? The two-class structure dates back to the earliest days of Agere and
was created to enable Lucent to complete our initial public offering and still
distribute its remaining shares of our common stock to its shareholders in a
tax-free spin-off.
Here are some of the major considerations the Board of Directors took into
account regarding the reclassification:
o IMPROVED LIQUIDITY. We believe that combining our two classes of
common stock into a new, single class will provide investors with
greater liquidity and enhanced quality of trade execution. Our Class
A common stock tends to trade at a premium to the Class B common
stock, notwithstanding that the Class B common stock has superior
voting rights in the election and removal of directors
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and that the two classes are otherwise equivalent. We believe that
the trading premium, to a significant degree, may result from the
higher liquidity, or trading volume, of the Class A common stock. At
least recently, this higher liquidity has resulted in a narrower
spread between bid and ask prices for the Class A common stock than
for the Class B common stock. The greater liquidity therefore
provides enhanced trading efficiency. The greater liquidity in the
Class A common stock may also allow institutional investors to buy
and sell larger positions in that class without affecting the stock
price. By combining the Class A common stock and the Class B common
stock, we hope to facilitate enhanced liquidity for all our
shareholders by aggregating the volume of shares of common stock
that are traded and thereby removing a possible impediment to
efficient trading of our common stock.
o INVESTOR CONFUSION. We believe that some investors may not
understand the difference between our two classes of common stock.
Reclassifying the two classes of common stock into a single class of
common stock would eliminate this potential confusion.
o CORPORATE GOVERNANCE CONSIDERATIONS. Companies create two-class
capital structures for a number of reasons. In cases like ours, this
structure is used to facilitate a tax-free spin-off. In other cases,
these structures vest voting control in a small group of holders who
have less of an economic interest. We believe that investors would
generally prefer to see shareholders' voting interests match their
economic interests. We believe that a two-class capital structure is
no longer needed in order for our spin-off to be tax-free.
Reclassifying the two classes of common stock into a single class of
common stock would eliminate the disparity between voting interests
and economic interests and may make our common stock a more
attractive investment.
o COST SAVINGS. Our two-class capital structure adds over $1 million
of costs related to our proxy mailing each year. By reclassifying
the two classes of common stock into a single class of common stock,
we can reduce the amount of processing costs, expenses to
consolidate mailings, printing costs, postage costs and vote
tabulation costs we incur each year.
HOW A REVERSE STOCK SPLIT WOULD WORK
We are asking shareholders to approve reverse splits at each of the following
ratios: 1-for-10, 1-for-20, 1-for-30 and 1-for-40. If any of the proposals is
approved by shareholders, the Board may effect a reverse stock split using the
ratio included in one of the approved proposals, in which case the Board would
abandon any other approved proposal. The Board will also have the discretion
not to conduct a reverse stock split.
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We will communicate the outcome of the shareholder vote, and should a reverse
split occur, you will receive information regarding actual numbers at that
time. In the meantime, we want to acquaint you with the specific mechanics of
a reverse stock split and how it would affect you as an Agere shareholder and
optionholder, in the event we should implement one.
The examples used in the next sections are based upon a hypothetical reverse
split ratio of 1-for-20 and an Agere stock price of US$1.37, the closing price
of Agere's Class A common stock on Nov. 30, 2004.
In a reverse stock split, Agere shares held by our shareholders would be
combined into a smaller number according to the reverse split ratio, which in
our example is 1-for-20, expressed as follows:
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| |
| 1-FOR-20 |
| | | |
----|----|----
| |
| |
----------------------------- | | ----------------------------
| This is the number of | | | | ...for this number of |
| post-split shares that /_______| |________\ pre-split shares |
| would be received... \ | | / owned |
----------------------------- ---------------------------
According to the ratio, after the reverse split, each shareholder would hold
one share of Agere stock for every 20 shares held before the reverse split. At
the same time, we would expect the stock price initially to increase by a
factor of about 20 (fn1). Using Agere's Class A common stock closing price of
US$1.37 on Nov. 30, here's how this would work:
o OUTSTANDING SHARES: Shares are combined according to the ratio, so
the number decreases from about 1.73 billion to about 86.5 million:
1,730,000,000 / 20 = 86,500,000.
o SHARE PRICE: Ownership of the company is spread among fewer shares,
so the price of each share would initially increase proportionally
by a factor of 20: from $1.37 on Nov. 30 to $27.40: $1.37 x 20 =
$27.40.
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1 Obviously stock prices fluctuate due to factors like perception about the
prospects of a company or its industry, changes in the general economic
environment and political events. For purposes of simplicity in this brochure,
we are ignoring the impact of these factors and are assuming that the stock
price will increase proportionately with the decrease in the number of shares
outstanding.
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The following would not change: each shareholder's PERCENTAGE OWNERSHIP,
except to the extent the shareholder receives cash in lieu of fractional
shares in the company; and relative value owned. Here's why:
o PERCENTAGE OF OWNERSHIP: Because the number of shares owned
decreases by the same factor as the total shares outstanding, each
shareholder's percentage of ownership remains the same.
o VALUE: The total value of an individual's holdings is calculated as
follows: number of shares x share price. The number of shares would
decrease by a factor of 20 while the share price would increase by
the same factor. There is no change in total value.
Continuing with our example:
Let's say a shareholder owns 1,500 shares of Agere stock worth US$1.37 per
share immediately prior to a 1-for-20 reverse split. He/she would own 75
shares (1,500 shares / 20 = 75 shares) worth US$27.40 per share immediately
after the reverse split. Both before and immediately after the reverse split,
these shares would be worth a total of US$2,055: 1,500 shares x US$1.37=
US$2,055, just as 75 shares x US$27.40 = US$2,055.
THE VALUE OF YOUR AGERE STOCK -----------------------------
Two of our competitors' stock
As an employee, you know intuitively that prices recently have made
the TOTAL VALUE of the Agere stock significant gains. From Aug.
you own or have the opportunity to own 13 through Dec. 1, 2004,
would be the same after a reverse stock Marvell's stock rose from
split, but you may wonder if the higher $19.77 to $33.13 per share -
post-split stock price means that it a 68 percent increase.
is more difficult for the stock Similarly, From Oct. 26
price to rise. through Dec. 1, 2004,
Broadcom's stock jumped 29
For example, many employees have been percent from $26.01 to $33.62
granted a stock option with an exercise per share. Obviously, we
price of US$6. After the 1-for-20 cannot guarantee that Agere's
reverse split in our example, this exercise stock price will rise.
price would be US$120. Employees may think ------------------------------
it's easier for a US$1.37 stock to
increase to $6 than it is for a US$27.40 stock to increase to $120. However,
the reality is that our financial performance drives stock price, not the
"numbers" associated with the reverse split. It's no easier for a US$1.37
stock to rise to US$6 than it is for a US$27.40 stock to rise to US$120
because -- in either case -- the dollar increase
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translates to the same percentage increase: 338 percent to be exact. In either
case, the company's market capitalization (total value of shares outstanding)
changes by the exact same amount whether a reverse split has taken place or
not.
THE BOTTOM LINE IS THIS: WHAT MAKES ANY GROWTH ACHIEVABLE IS OUR FINANCIAL
PERFORMANCE, NOT THE STARTING POINT OF THE STOCK PRICE. For example:
Company X has 2 billion shares outstanding. Let's look at two scenarios
under which Company X undergoes a 1-for-20 reverse stock split. In the
first scenario, Company X reports annual earnings of $200 million, and
in the second, it reports earnings of $600 million. Assume that at all
times the company's price/earnings ratio (P/E) remains constant at 40,
and that investors are willing to pay the same price/earnings ratio
(price per share divided by earnings per share) for the company's stock.
With earnings of $200 million, key measures are impacted by the 1-for-20
reverse split as follows:
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PRE-SPLIT POST-SPLIT (1 FOR 20)
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EPS $200 million / 2 billion $200 million / 100 million
Earnings / Total Shares = $0.10 per share = $2.00 per share
Outstanding
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SHARE PRICE
EPS x P/E ratio $0.10 x 40 = $4.00 share $2.00 x 40 = $80 share
price price
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Let's say a shareholder owns 1,200 shares of Company X before the
reverse split. After the reverse split, he/she would hold 60 SHARES
(1,200 / 20 = 60 SHARES). What would the total value of his/her shares
be? Both before and after the reverse split, he/she would own $4,800
worth of Company X stock: 1,200 SHARES X $4.00= $4,800 AND 60 SHARES X
$80 = $4,800.
With earnings of $600 million, key measures are impacted by the 1-for-20
reverse split as follows:
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PRE-SPLIT POST-SPLIT (1 FOR 20)
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$600 million / 2 billion $600 million / 100 million
EPS = $0.30 per share = $6.00 per share
Earnings / Total
Shares Outstanding
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SHARE PRICE $0.30 x 40 = $12.00 share $6.00 x 40 = $240.00 share
EPS x P/E ratio price price
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What would the value of our shareholder's stock be under this scenario?
With three times the earnings performance, the 1,200 original shares of
Company X, both pre-split and post-
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split would have the following values: 1,200 x $12.00 = $14,400; 60
SHARES x $240.00 = $14,400.
It's important to keep in mind those factors that impact our stock price --
business prospects, including earnings and profit growth; cash flow;
operations and competitive position; our industry, its outlook and the
economy. Clearly, though, all other things being equal, investors will pay
more for a company with higher earnings.
IMPACT ON AGERE'S PLANS
Most Agere employees have the opportunity to own Agere stock, through the
ESPP, stock options, and in the United States, the 401(k) plans. This section
details the changes you would see in these plans after a reverse stock split.
PLEASE NOTE THAT THE EXAMPLES USED IN THE NEXT SECTIONS ARE BASED UPON A
HYPOTHETICAL 1-FOR-20 REVERSE SPLIT.
STOCK OPTIONS
If a reverse stock split takes place, you would retain your options to
purchase Agere stock and they would be adjusted as follows:
-- The NUMBER OF SHARES each option grant gives you the right to
purchase would change per the terms of the reverse stock split. For
example, if you have been granted the right to purchase 300 shares
of Agere stock, according to the reverse split ratio, you would have
the right, after the reverse stock split, to purchase 15 shares of
Agere stock: 300 shares pre-split / 20 = 15 shares post-split.
-- The EXERCISE PRICE would change per the terms of the reverse stock
split. For example, if the pre-split exercise price is US$6 per
share, the exercise price would change to US$120 per share: $6
exercise price pre-split x 20 = $120 exercise price post-split.
-- The TOTAL VALUE of your options: the extent to which your options
are "in" or "out" of the money would remain the same. For example,
if you have been given the right to purchase 300 shares of Agere
stock at a pre-split exercise price of US$6 per share, and the stock
was trading at US$1, you would have a total option value of US
-$1,500 before the split:
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($1 share price - $6 exercise price pre-split) x 300 shares
pre-split = -$1,500. After the split, you would have an option for
15 shares with a US$120 exercise price per share. If the stock is
trading at US$20, your total option value would be the same at
-$1,500: ($20 share price - $120 exercise price post-split) x 15
shares post-split = -$1,500.
-- VESTING of your grant would remain the same, per the terms of the
grant.
-- The EXPIRATION DATE of your grant would remain the same, per the
terms of the grant.
THE EMPLOYEE STOCK PURCHASE PLAN
If a reverse stock split takes place, you would continue to own the shares of
Agere stock you have already purchased through the ESPP:
-- The NUMBER OF SHARES you already own would decrease per the terms of
the reverse split and the share price would increase, as described
earlier.
-- The OFFERING PERIOD for the purchase of Agere stock through this
plan would remain the same.
-- The PURCHASE PERIODS in the plan would remain the same.
-- Your CURRENT CONTRIBUTION LEVEL (from 1 percent to 10 percent, in 1
percent increments) would continue uninterrupted.
-- You would continue to receive a DISCOUNT on the purchase price of
the Agere stock, per the provisions of the ESPP.
-- If you have an ENTRY DATE that is prior to the effective date of the
reverse stock split, your entry date price would be adjusted to take
into account the reverse split. Using the May 1, 2003, entry date
price of US$1.835 to illustrate, according to the reverse split
ratio, that entry date price would increase to US$36.70.
-- The SHARE LIMIT would be adjusted to take into account the reverse
split. So, the current limit of 5,000 shares that you can buy in any
purchase period would decrease to 250 shares. The following
limitations WOULD NOT change: the limit of 10 percent of your salary
that can be used to make plan purchases and the $12,500 maximum
market value
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of stock, as of your entry date price (adjusted for the reverse
split) that you can purchase in each purchase period.
THE AGERE 401(K) PLANS (FOR U.S. MANAGEMENT EMPLOYEES ONLY)
Keep in mind that the Agere Stock Funds are unitized, which means that the
funds express value in units instead of shares, because they are made up of
stock plus a percentage of short-term investments in cash. The price of a unit
depends on the number of units the fund has and the total value of the fund's
assets, and generally is not the same as the actual stock price.
A reverse stock split would not change the total value or the number of units
in your account. Therefore, if you have a balance in an Agere Stock Fund in
your 401(k) account, you would continue to have that balance, and neither the
total value nor the number of units in the fund would change.
EFFECT OF THE RECLASSIFICATION
Your outstanding options to purchase Class A common stock and other awards
with respect to Class A common stock issued under Agere's stock-based plans
will become options and awards for the same number of shares of new common
stock upon the same terms as in effect before the proposed reclassification
becomes effective, with no change in the exercise price of stock options.
With regard to the U.S. 401(k) plan, funds in the Agere Class A Stock Fund and
the Agere Class B Stock fund will be combined into one Agere Stock Fund and
the total value of your investment should not change as a result of the
reclassification.
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The plans discussed in this document are subject to all the terms of the
official plan documents that legally govern all aspects of the plans. If there
are any discrepancies or inconsistencies between the information presented
here and the plan documents or policies, the plan documents or policies will
control.
Agere Systems reserves the right to modify, amend, or terminate, at any time,
the plans or any part of the benefits described here, as described by law.
Agere will, however, continue to abide by the terms of applicable collective
bargaining agreements.
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